Jazz Pharmaceuticals PLC (JAZZ) 2011 Q2 法說會逐字稿

Welcome to the Jazz Pharmaceuticals conference call. Following an introduction from the Company, we will open the call to questions. I will now turn the call over to Ami Knoefler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals.

Welcome to the Jazz Pharmaceuticals' second quarter 2011 financial results and business update conference call. Our results for the quarter, including updated financial guidance for 2011, were reported in the press release issued earlier today. The press release is available on our Company website.

Joining us for today's call are Bruce Cozadd, Chairman and CEO; Kate Falberg, CFO; and Russ Cox, Senior Vice President of Sales and Marketing. Following some prepared comments, we'll open the call for your questions.

Remarks we make on this call about future expectations, plans and prospects for Jazz Pharmaceuticals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to our financial performance and position, growth potential and guidance and our products.

These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to differ significantly from those projected, including, without limitation, risks and uncertainties detailed in our SEC filings, including under the heading Risk Factors. Our SEC filings and reports are available on our website. We plan to file our Form 10-Q for the quarter ended June 30, 2011 with the SEC soon.

Now let me turn the call over to Bruce Cozadd, Chairman and CEO, for opening remarks.

Good afternoon, everyone, and thank you for joining our conference call today. I am extremely pleased to report our strong quarterly financial results today, which reflect the successful implementation of our strategy to grow Xyrem sales. Our results show continued top line and bottom line growth with total revenues for the quarter increasing by 59% over the second quarter of 2010, and adjusted net income growing at an even higher rate. This performance highlights, once again, the operating leverage in our model as well as our commitment to expense management and sound resource allocation to build shareholder value.

We are very pleased to see continued strong volume growth for Xyrem, which was up 11% versus the second quarter a year ago. We believe this growth reflects our targeted investments in new sales and marketing efforts, focused on improving the patient experience, including ongoing programs for physicians and patients as well as work with our central pharmacy.

During the quarter, the number of active patients grew to approximately 8,700, which was up from approximately 8,500 last quarter and approximately 8,000 in the year-ago quarter. The increase in patients treated is attributable to increasing number of new patients as well as modest improvements in persistence for existing patients. We were also pleased to see some improvement in the compliance rate.

Looking ahead, we hope to see future growth from new initiatives that are just now launching. For example, a recent change in our nursing program helps reach patients during the critical time after they have been prescribed Xyrem but have yet to fill their prescription. And a soon to be launched mentoring program provides additional patient support. The Xyrem Patient Connection program will offer new patients access to patients already on therapy so they may learn firsthand about their experiences on treatment.

Finally, we have made recent changes in our sales incentive plans to better align the focus of our sales representatives with our corporate commitment to increasing Xyrem penetration and its approved indications.

Reimbursement coverage for Xyrem remains excellent. We continue to see the majority of patients, approximately 80%, covered by commercial insurance. Our rate of prior authorizations is also stable at approximately one-third. The average monthly out-of-pocket payment for therapy is also consistent. Approximately 70% of patients have out-of-pocket expenses of less than $50 per month.

Now I would like to provide a brief update following the FDA Form 483 that we received in May. We have since discussed the previously unreported all-cause mortality cases in patients prescribed Xyrem with FDA, and we will continue the dialog with them and provide them additional information we gather. We continue to seek more information about these cases. However, this processes takes time.

We've also reviewed the available information with a number of physician experts and a letter to the editor of Sleep Journal this coming month will update information provided in the 2008 article to ensure it is complete. Importantly, as a result of our review to-date, we believe that the adjusted annual all-cause mortality rate has been consistent since launch and that it does not constitute a new safety signal for Xyrem.

Finally, we are on track with the transition to our new API supplier, Siegfried with FDA approval expected later this year. It's important to note that we have sufficient inventory from our previous supplier to meet our needs well into 2012. In addition, we now have material produced by Siegfried available if needed.

Let me close by making a comment about our Company's continued commitment to patients, in particular those with narcolepsy and obsessive compulsive disorder. The many stories of patients living with these complex diseases inspire our employees who are dedicated to make a difference to improve patients' lives.

Now, let me turn the call over to Kate.

Thanks, Bruce. And good afternoon, everyone. Detailed results are published in the press release issued earlier today, so I will focus my comments on a few notable items and then review our updated guidance for the year.

On the top line, product revenues this quarter grew to $63.5 million, largely driven by sales of Xyrem. Xyrem net sales increased to $56.2 million, 67% growth over the prior-year quarter, reflecting the impact of both pricing and volume growth.

Gross margin for the quarter was approximately 95% compared to 93% in the second quarter of 2010. This is primarily due to the impact of higher Xyrem sales as a percentage of total sales.

Turning to expenses, SG&A and R&D expense combined for the quarter was $25.5 million. This includes an increase in SG&A relative to the second quarter of 2010 largely due to head count related expenses including stock-based compensation and higher legal expenses. The increase was offset by reduced R&D expense during the quarter. Overall, SG&A and R&D expense combined was flat relative to the same period in 2010, reflecting the Company's continued operating leverage and expense management.

Bottom line growth continues to be very strong. Adjusted net income for the second quarter was $38.4 million compared to $10.5 million a year ago. This increase of 266% during the quarter is significantly greater than the growth in total revenues of 59%.

On the balance sheet, we ended the quarter with $102 million in cash. On July 1, we prepaid the full remaining balance of $33 million on our term loan and now have zero outstanding debt. We incurred a $300,000 prepayment penalty and will record a $1.1 million loss on extinguishment of debt in the third quarter reflecting the penalty and the write-off of $800,000 of non-cash unamortized debt discount and debt issuance cost. This charge will be reflected as an adjustment to our adjusted net income and EPS. The debt prepayment results in approximately $1.4 million of cash and true savings spread over the next two years.

Given our strong operating performance, driven largely by the continued success of Xyrem, we are also updating our product sales and earnings guidance for the year. Our new Xyrem sales guidance is $215 million to $225 million. Guidance on Luvox CR is unchanged, in the range of $32 million to $35 million, though we currently expect to come in near the bottom end of that range.

Total net sales are now expected to be $247 million to $260 million and we continue to anticipate gross margin of 93% to 95%, above 90% as anticipated in our prior guidance and consistent with our performance in the first half of this year.

Our combined SG&A and R&D expense guidance remains unchanged at $105 million to $110 million. As a result of our increased sales expectations, we are also updating our bottom line guidance for adjusted net income to be in the range of $145 million to $153 million and adjusted net income per share to be in the range of $315 million to $325 million. It's a very exciting time at the Company as we see continued growth in our lead product and enjoy strong growth in total revenues and earnings.

Thanks again for joining our call today. And I will now ask the operator to open up the call for your questions.

(Operator Instructions). And your first question comes from the line of David Amsellem of Piper Jaffray.

Hey, thanks. Just a couple. On the operating expense guidance, looks like you did about a little over $40 million in the first half of 2011. So I guess the guidance implies a meaningful bump in combined R&D and SG&A in the back half of the year. So, I guess, my question here is what is driving the growth in the spend?

Hi, David. So, as we look to the back half of the year, we are looking at potentially increasing some investments on Xyrem marketing. As we know, we've been running a variety of programs and looking for the ones that are working and clearly we are starting to see some positive evidence there. So, we are evaluating some potential increase in investments. There is also probably -- could be some higher legal expenses, those are always a little bit hard to predict, and then a little bit of trend towards higher compensation we are making some strategic net head count adds in the Company.

Okay. And then second question on the gross to net spread for Xyrem, looks like there was a good bit narrower in the second quarter versus the first quarter 2011. I guess, this is what we saw in the second quarter a good way to think about the gross to net going forward?

Yes, I think that we don't see anything that should significantly change the current gross to net view.

And one last question, if I may. You cited the 11% year-over-year patient growth. Any qualitative commentary on specific subgroups or type of patients you are particularly gaining traction with?

Yes, David, this is Bruce. Just a quick note about that statistic and then maybe I will let Russ comment on that. The 11% growth is volume growth, so that's actually measured as product shipped in bottles. The patient growth we gave you, the average patients treated during the quarter is a little bit different from that. But let me have Russ address your more general question.

Yes. So David the 11% volume growth is driven primarily by two thing, driven by improvements that we are seeing in compliance and also in duration of therapy for patient. So it's some of the programs that we implemented late last year, early this year that are now starting to pay off in terms of how patients are actually taking Xyrem. In addition to that, we see the patient pool continuing to grow. Meaning that patients who are on therapy at one time are coming back in a little bit of stronger fashion. So those are the main drivers behind the growth.

Okay. Thanks.

Your next question comes from the line of Corey Davis of Jefferies.

Thanks very much. Congratulations on the nice volume growth. I guess, what I would ask is, are all of these new programs and initiatives that you've implemented now, were they apparent years ago when you just didn't have the resources to implement them or was it just the experience with the drug and better focused of knowing that these things would have an effect on it and having had them paid off that makes the difference?

Good question, Corey. I think there are number of reasons that these programs are being rolled out more recently rather than years ago. You mentioned resources and that's clearly a piece of the puzzle here. If you go back to late 2008, early 2009, the Company clearly was not in a position to make some of these investments. A part of it is focus, making -- growing Xyrem in narcolepsy, the core of our strategy is a fairly recent development relative to launching other products or looking for new indications.

Part of it is leadership. Russ joined the Company a year ago this month and was put in charge of the entire sales and marketing organization just earlier this year. And part of it is I think a more analytic approach to really understanding all of the data we have available to us and getting new data to help inform our understanding of what is driving our business and can drive our business and then acting to, in some cases roll out, in some cases just pilot new efforts that we think directionally should help more patients with narcolepsy.

So now that there is pretty good evidence that your -- all of these things that you have done and increased investment has led to this acceleration in volume growth, do you think that -- and Kate kind of alluded to this even further investments in the coming quarters, but do you think now it's the case that the more money you put behind this year, you are going to get even more than that in return in terms of further acceleration in volume growth?

So I would say we are going to be driven by the data. We are going to make some investments and we are going to see which ones pay off. And I don't want to say that everything we do is going to turn out to be right. We are obviously making investments that we think will pay off, but we will measure. And those that are paying off we'll continue and those that aren't we'll scrap and try something else.

Will it lead to increasing rates of volume growth? We are nine years post-launch with this product and certainly the secular trend in volume growth had been that it was declining over time. We are very pleased I think by the increase in volume growth we saw over the four quarters of 2010 and the double-digit growth we have seen in each of the first and second quarters of 2011, and we would like to continue strong volume growth going forward. But I think it will be pretty ambitious to, at this point, project that growth rates will continue to increase.

Okay. I don't know I think you might be too modest on that point given the evidence of the past couple of quarters, but I'll leave it at that for now. Another question. So your partner ex-US, I think too many people pay attention to that royalty stream, but it is pure profit. Now that you've had these initiatives that have paid off, has there been any heightened dialog between you and UCB, to say, maybe you guys should try some of these things, how much of an effort are they putting behind it? And what are the chances that that royalty line could start to become more meaningful in the coming quarters?

So that's a meaty question, but I am afraid I am going to have to give a pretty insignificant answer, which is we can't really comment on what you see these efforts will be. That's really for them to do, not for us to do. I will remind you of the obvious, which is this is the core of our Company strategy. I am confident this is not the core of UCB's European strategy. But you are right that we are very focused on rolling out the best programs to ensure good use of this product to benefit narcolepsy patients. To the extent we do have learnings, you can bet that we are happy and as you would say financially motivated to share those with our partners, which are UCB in Europe and Valeant in Canada.

Last question. Kate, do you know what the free cash flow was in the quarter? And a corollary to that is now that you have this tightened cash flow, any change in what you plan on doing with the cash?

So the adjusted net is a pretty good proxy for cash so that was $38 million in the quarter. And you are right, we are continuing to build our financial flexibility. We have been pretty public about our desire to bring new products into the company over time and we are continuing to actively look at assets and evaluate things. And we are hopeful that we will find something that meets the criteria so that we can leverage our existing commercial capabilities.

Great. That's all I had. Thank you.

Your next question comes from the line of Bill Tanner from Lazard Capital Markets.

Thanks for taking the question. Bruce, it's either for you maybe or Russ. I know you talk about compliance having improved over the last year or so and I am just curious. By compliance, you are meaning it sort of in the stricter terms that patient that's been prescribed or that's been taking it is taking it as they should, the dose that they should or does that speak to maybe an increase in conversion from patients who have been prescribed to actually starting to take it?

No, so that was a specific comment to patients who are taking it -- are taking it on time as prescribed.

And any -- I know it's probably early days with programs, Bruce alluded to at the beginning, Russ any I guess progress made in getting more patients once they are actually written prescription to go on to the drug?

So, we are watching disenrollments very, very carefully. And as you know, that is another area that we are focused on in terms of being able to move the needle. And a little too early to call yet, so some of the programs that we have in place we're encouraged about. But nothing definitive in terms of the data yet.

Okay. And then Bruce, since you mentioned that -- the comment you made with the FDA recently just kind of in the headline world, would be interested in your thoughts on if you any inkling as to whether warning letter could subsequently follow the Form 483? And then as to whether there is likely to be an update to the [ARS] database with the new -- with the unreported deaths?

Yes, Bill. Those are both great questions and both things we raised pretty early on as possible outcomes coming out of that 483 observation. And I don't know that I have any better ability to predict that today than I had on May 6, when we got the 483 observation. We just raised those as risks factors. Those are things that certainly could happen, but I don't know that anyone here could tell you whether they are going to happen.

And then just as it relates to ARS update, I mean it seems like that's likely to happen, not necessarily newsworthy perhaps or incremental information?

Yes, it's tough to say. It depends how you think about the ARS system, the ARS system is, hey we've got new data and we need to analyze it and come to a conclusion. I would say there is no doubt, but that they new data. On the other hand, depending on how the dialogue goes, if they feel they have finished their analysis at the same time they would be putting it on the list maybe it doesn't go on the list because it's not an open question. So I think there is a little bit of a question of just what happens when within the FDA system which I can't tell I have complete visibility on.

And then maybe just one last question, what has the trend been for the average out-of-pocket payment? Because it seems like it's gone down per month. Is that not the case?

No, I don't think we have seen much change that statistic of about 70% of patients that's $50 or less that's -- I don't think that's much different from what we would have said six, nine months ago. I think we all know the backdrop of the general reimbursement of market, not specific to our drug is that, as people get to each new plan year, co-payments tend to go up, not down in general. So that if you went back over a multiyear period, I guess maybe it's gone up somewhat. But we just have to say I think overall for this drug -- and remember we are talking about 8,000 to 9,000 patients. So it's not a huge patient pool that they continue to enjoy good reimbursement for a drug that helps with this particular condition in that orphan population, I think is the right outcome for patients and we're happy to see it not changing.

Yes. And Bill, we spent a lot of time analyzing our current offering for patients making sure that we are maximizing the potential there in terms of making it available for those who need it, not who can pay for it.

Okay. Thanks very much.

(Operator Instructions). And your next question comes from the line of Difei Yang of Capstone Investments.

Your line is open. You may proceed with your question.

I am sorry. Hello.

Hey Difei, you can ask the question.

Yes, I have two questions. The first question is related to the Xyrem. I am wondering if you have any insight into the off-label usage of Xyrem. What are they being used for? And roughly what percent of the business are in this category?

Yes, so -- this is Bruce. We don't collect information on every prescription for what the diagnosis is, so we don't have a good quantitative way to measure that. We certainly have followed over time what types of physicians write Xyrem and we have not seen significant changes in that writing population that would indicate the different groups of doctors are starting to use the product. So essentially, we don't have much to say.

Yes, thank you. Then my second question is related to the R&D pipeline. Could you give us update on what's happening with JZP-6 and JZP-8?

Yes, not much change from what we said a quarter ago on our call. In the case of JZP-6, which is the potential to use sodium oxybate to treat fibromyalgia, we indicated on our last call that we did not intend to move forward with additional clinical trials until and unless we had a high degree of regulatory certainty that that would lead to a product approval. And to the extent we can put ourselves in a position where we have that clarity, we'd reconsider it, but no news.

And then on JZP-8, I think we said last quarter for the first time that we were reevaluating whether or not to move that program into later-stage clinical trials, with the focus on making sure that if we did invest in advancing that program that we were confident we had a development path that would get us to market relatively quickly with a very competitive product to treat Acute Repetitive Seizures and that that necessitated that we take another look at our development plan and the competitive landscape and we don't have enough data on that at this point.

Thank you.

And your next question comes from [Augur Yeung] of [IAVM].

Yes, congratulations for your performance. And I would like to -- or the question I have two is about your return earning -- negative return earning and you don't have to pay income tax. And I am a Canadian citizen. So I would like to know how long your return earning can be without tax -- can be negative? So I would like to know if your US law provide you to eliminate all the way the negative return earning?

Yes, so good question. It's true that at present we are not paying taxes, that's because of our accumulated net operating loss carry-forwards, which were very significant entering 2011 at over $300 million. With continued growth on the top and bottom line, we are starting to eat through those net operating loss carry-forwards. And when they are gone, we will of course be a tax payer, but clearly we are not going to pay taxes in 2011.

Okay. But is it possible that you have more than $300 million or more than $420 million after this quarterly report?

Yes. So the number I gave you was as of the beginning of 2011.

Okay. And when it will finish? When it will finish? If not that number, when the free income tax will end? You have $300 million or $460 million?

So under US law, as soon as have earned enough profit to offset all of the prior accumulated loses then we would begin to pay income taxes. And so we have not provided any forecast of our income beyond 2011 and we would expect to end 2011 still having accumulated retained losses.

Okay. Thank you very much.

You are welcome.

(Operator Instructions). There are no other questions at this time. I will turn the call back over to Ami Knoefler.

Thank you again for joining our conference call today. We look forward to seeing you all at upcoming investor conferences and meetings, including the UBS Global Healthcare conference in September. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.