Jazz Pharmaceuticals PLC (JAZZ) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jazz Pharmaceuticals full-year and fourth-quarter 2011 financial results conference call. Following an introduction from the Company, we will open the call for questions. I would now like to turn the call over to Ms. Ami Knoefler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals. Please proceed.

Welcome to the Jazz Pharmaceuticals 2011 financial results conference call. We reported detailed financial results for Jazz Pharmaceuticals, Inc, and selected financial results for the historic Azur Pharma business in a press release issued earlier today. The release is available in the news and events section on our Company website. Among other things, the press release includes a reconciliation of GAAP net income to adjusted net income of Jazz Pharmaceuticals for 2011, along with the related per-share amount. With me for today's call are Bruce Cozadd, Chairman and CEO; Kate Falberg, CFO; Russ Cox, Chief Commercial Officer; and Jeff Tobias, Head of R&D and Chief Medical Officer. Following some prepared comments, we will open the call for your questions.

Certain remarks we make on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to future events, future financial performance and position, growth potential, planned product launches, future tax position and guidance. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risk and uncertainties, including risks detailed from time to time under the caption Risk Factors and elsewhere in SEC filings and reports, including in Jazz Pharmaceutical, Inc.'s definitive proxy statement related to its stockholders meeting held on December 12, 2011 and in Jazz Pharmaceutical's plc's future filings. Jazz Pharmaceuticals undertakes no duty or obligation to update any forward-looking statements stated on this call as a result of new information, future events, or changes in its expectations.

Please note that we expect to file shortly the Form 10-K for 2011 on behalf of Jazz Pharmaceuticals Inc., including its standalone pre-merger audited financial statements for 2011. In addition, as required by the SEC rules, we will also file a separate Form 10-K on behalf of the former Azur Pharma for 2011, including its standalone pre-merger 2011 audited financial statements. Finally, we will file a form 8-K that includes pro forma financial statements for 2011 for the combined entity. Following some brief introductory remarks, we will open the call to questions. And now I will hand the call over to Bruce.

Thanks, Ami, and thanks, everyone, for joining our call today. I am pleased to report that 2011 was an exceptional year for Jazz Pharmaceuticals, Inc., highlighted by a substantial increase in both sales and earnings. Revenues grew by 57%, while adjusted net income per share grew by 127%. We also established a broader platform for future growth in Jazz Pharmaceuticals PLC through the transaction with Azur Pharma that closed last month. Kate will discuss the financial results in a few minutes, but first, I would like to talk about some of our products and how we are positioning the Company for future growth.

With the merger completed, we now have a portfolio of specialty products and a strengthened commercial organization that includes approximately 200 sales representatives, as well as shared services that provide distribution, reimbursement, and patient support. Earlier this month, our combined commercial team gathered for our national sales meeting where we rolled out a new organizational structure and reviewed our sales and marketing plans and growth strategies for the year. Coming out of this meeting, our commercial team is highly energized and now organized around four product lines, each with dedicated sales and marketing teams. I will make a few comments about each of the four product lines.

Let's begin with Xyrem. We continue to be extremely pleased by Xyrem's strong performance, including impressive 11% volume growth in 2011, reflecting it's unique and important role in the treatment of two key symptoms of narcolepsy. As mentioned in our January 5 guidance call, our expectation for Xyrem this year is continued growth from both price and volume. We expect high single-digit to low double-digit volume growth, driven primarily by increasing the number of active patients. That number grew to approximately 9,300 in the fourth quarter of 2011 from approximately 8,600 in the fourth quarter of 2010. This increase was the result of a number of initiatives implemented during 2011 under the leadership of Russ Cox, who assumed his responsibilities just over a year ago.

Among other initiatives, we increased our call audience by identifying a number of prescribers who were treating narcolepsy patients, but were not being called on by our sales team. We started calling on these new potential customers in three waves during the year, most recently in November, and we are seeing results that are exceeding our initial expectations. This includes growing numbers of first-time prescription fills, which we watch as a leading indicator. We are also seeing improvements in persistency, which we attribute to positive results from our efforts to improve expectation setting and patient support services during the critical first few months of therapy.

This year, we have decided to further sharpen our focus on Xyrem by dedicating approximately 80 highly skilled specialty sales consultants 100% to this product. In the past, we had approximately 110 representatives detailing both Xyrem and Luvox CR. We believe that having a completely focused team for Xyrem will tighten the alignment between our marketing and sales leaders. We also believe that this focus will allow us to further increase disease-specific training and education, and it will make it easier to roll out new initiatives in the future aimed at increasing uptake in our labeled indications. In 2012, we will continue our focus on the initiatives that are working well. We also have a couple of new things planned, including additional patient support activities and peer-to-peer training on the best practices for the use of Xyrem.

Turning to Prialt, we were pleased to see an uptick in fourth-quarter sales. As a reminder, Prialt is the only non-opioid indicated for the management of severe chronic pain in adult patients for whom intrathecal therapy is warranted and who are intolerant or refractory to other treatment, such as systemic analgesics, adjunctive therapies, or intrathecal morphine. Prialt is currently used in less than 3% of the implanted pain pumps in the US, and we think this represents a significant growth opportunity over time. We believe that investments we make behind this product will provide an attractive return in the years to come. Accordingly, we are increasing the dedicated sales force from approximately 20 reps to approximately 30. We also plan to invest further in physician education and to continue to enhance patient and physician support services.

Regarding our psychiatry products, the FazaClo franchise and Luvox CR, we are combining those products under another focused sales and marketing team to take advantage of some overlap in call points and leverage the existing skill sets of this team, including the strong psychiatry background of some. These products will be promoted by approximately 40 sales representatives. Our goal this year for Luvox CR is to maintain the product through continued targeted promotions to prescribers who treat OCD patients. Regarding FazaClo LD and HD, the focus is to continue educating physicians about the available higher dose offerings, which offer greater patient convenience. At the end of 2011, approximately 30% of the shipped volume by milligrams was represented by the higher dosage strengths of FazaClo. We also hope to strengthen our offering for FazaClo with the potential new oral solution of clozapine, for which an NDA was submitted at the end of 2011.

Our fourth sales and marketing team will focus on our women's health and other products, including Elestrin, a topical gel for estrogen replacement therapy, along with our line of prenatal vitamins. In this area, we have a dedicated sales force of about 50 people. Full prescribing information for our products is available on their respective websites.

On the R&D front, we have been highly focused on strengthening our drug safety and pharmaco vigilance capabilities and compliance focus, with three executives joining us in the fourth quarter to further these efforts. During 2012, we will look forward to beginning our efforts to invest selectively in R&D programs that are a good fit with our commercial strategy under the leadership of Jeff Tobias and his team. We are very pleased with the results of Jazz Pharmaceuticals, Inc. for 2011, and we believe we have set the stage for a tremendous year ahead for Jazz Pharmaceuticals plc. Our Company's commitment to patients is stronger than ever, and we continue to strengthen relationships with the medical community.

Our executive team has also been bolstered by recent additions from Azur, with Seamus Mulligan, Fintan Keegan, Eunan Maguire, David Brabazon, and Mike Kelly joining us. And we are also pleased to welcome Suzanne Hooper, who joins us as General Counsel in two weeks. The bottom line is that we believe we are in great position to drive future growth of the Company. At this time, I would like to turn the call over to Kate for more specifics on 2011 financial results.

Thanks, Bruce. For the full year 2011, we reported total revenues of $272 million for Jazz Pharmaceuticals, Inc., reflecting very strong growth of 57%, driven primarily by Xyrem. Total Xyrem net sales were $233 million for 2011, a 64% increase over the prior year, reflecting both price and volume growth. Fourth-quarter net sales of Xyrem were $72 million, an increase of 67% over the fourth quarter of 2010. Net sales of Luvox CR for the full-year 2011 were for $33 million, a 21% increase over 2010. Note that sales of Luvox CR in the fourth quarter of 2010 included $2 million due to a change in revenue recognition.

Total SG&A and R&D expenses were $123 million, compared to $95 million in 2010. Two-thirds of the increase was due to nonrecurring expenses related to the Azur Pharma transaction, including $11 million of transaction and integration costs, and $7 million of stock -based compensation charges resulting from modification of stock options. Excluding these costs, our combined operating expenses increased by $10 million, or 11%. Half of that increase was due to higher stock-based compensation expenses, driven primarily by a higher stock price applied to 2011 option grants. Adjusted net income for the year was $165 million, or $3.52 per share, which exceeded our prior guidance and was more than double our 2010 performance, reflecting the significant operating leverage in our business model. Adjusted net income and net income per share exclude intangible amortization, stock-based compensation, transaction and integration costs associated with the Azur Pharma transaction, and other adjustments.

The press release issued earlier today and posted to our website details the GAAP results and also contains the reconciliation of GAAP and adjusted financial measures. We also ended the year with a very strong balance sheet, including $158 million in cash and no debt. The former Azur Pharma ended the year with $80 million in cash and no debt, so the pro forma combined cash and marketable securities balance was $238 million.

Now I will make a few comments on selected 2011 results for the historic Azur Pharma business. Azur Pharma's 2011 net sales were $94 million, slightly under the range predicted in September due to a difference in the reclassification of certain items from operating expense to gross to nets. EBITDA, excluding transaction costs related to the merger, was $29 million, within the predicted range. 2011 sales of FazaClo for the high and low doses combined were $39 million, compared to $37 million in 2010. As Bruce indicated, Azur Pharma made progress in 2011 at growing the higher dosage strengths for FazaClo, and we believe that we will continue to make progress on this front in 2012. Azur Pharma's net sales of Prialt were $21 million for 2011, with fourth-quarter net sales of $6 million, up 20% from the year-ago fourth quarter. We were pleased to see the increase in fourth-quarter sales following Azur's implementation of new promotional materials and reimbursement support service in the third quarter. Azur Pharma's net sales for the women's health and other products were $35 million for the full year, reflecting significant growth of Elestrin.

As a final note, our post-merger corporate development team is working well together under the leadership of Eunan Maguire, the former President of Azur Pharma, who is now our SVP, Strategy and Corporate Development. Our priority continues to be looking to leverage our commercial platform by acquiring products that are on the market or close to market targeted to specialty physician audiences that address important unmet medical needs and with a number of years of exclusivity. We believe we are well positioned as an acquirer with our demonstrated commercial capabilities, strong financial position, and Irish corporate structure. And we will continue to maintain financial discipline as we evaluate potential opportunities and seek to create additional shareholder value. At this time, we'd like to open the call for your questions.

(Operator Instructions) Our first question will be coming from the line of Gene Mack from Mizuho. Please proceed.

Wondering, Kate, if you can comment a little bit on what we might expect for gross to net going into the first quarter, given the fact that you guys have recently taken another price increase. And then should we expect that there has been any change to the maximum allowable monthly coupon? I think the level that was previously provided by you guys was about $1200 per month. Has had adjusted at all, and can you just maybe comment on how the impact of pricing might be felt in the first quarter and in second quarter? Thanks.

Gene, as you -- I think what you are getting at is that historically in the first quarter, we have had a bit of a volume dip related to patients needing to meet their deductibles again and a certain amount of insurance churn. And so there's no reason to think that we wouldn't have a similar type of dynamic. And when the deductibles are higher, then there tends to be higher utilization of our coupon program. And that can lead to a little bit higher gross to net for Xyrem in the first quarter. With the price increase that we implemented on Friday, we did also make the coupon program more generous. We adjusted the upper end to a maximum of $3,300 a month.

Your next question is coming from the line of David Amsellem from Piper Jaffray. Please proceed.

Just a couple, first of Xyrem, I just want to get more color on the reallocation. So you are going from 110 reps promoting Xyrem and Luvox down to 80 reps exclusively detailing Xyrem. So is there any risk in that sense of any disruption and cost to physician accounts during that transition? Does that stand to reason that the 80 reps are going to have more call volumes into Xyrem-focused accounts? Just give me a sense of how I should think about that.

Yes, let's let Russ take that question.

Thanks, David. As you knew, we were at 110. We brought it to 80. One of the things that we did was we really looked at the skill sets that exist in both of our psychology group and our Xyrem group. And we looked at those who we believe have a better skill set focused on Xyrem to continue on Xyrem. As you will see, we have basically kept the Xyrem at what I would say a minimum disruption rate. So there is some disruption that obviously takes place. If you look at the 3,000 physicians that exist, about 700 of which who represent about 70% of the business. There is only a handful of key though leaders who actually will have a change in their existing reps, so we think the disruption is minimal, and we think we actually upgraded based on skill set.

Okay. That's helpful. Switching gears to Prialt, a couple of questions there. One, it seems like the biggest issue for doctors, at least what I have been hearing is titrating to a safe dose. To that end, can you comment on some of the things you are specifically doing to help doctors get more comfortable with dosing and minimizing adverse events through titration?

Yes, so you nailed it. When the product was launched, the perceived dose was about three times higher than what is currently being used today. So they've adopted a go-slow and continue to stay low. So what ultimately happens over time is that those who use a lot of Prialt have learned how to do that in a comfortable way. So some of the things that are happening is the [pack] guidelines were recently released where they actually talked about what is the right dosing schedule. There was a tremendous amount of physician education on a peer-to-peer basis talking about how to best do that.

Okay. One last one on Prialt. What gross margin does the product have right now? And what do you think margins would look like at current pricing if you set up a specialty pharmacy distribution model for the product?

We haven't dived in yet to product-level gross margins. They are attractive pharmaceutical product margins. It is too early to talk about what those margins might look like under a different distribution model.

Your next question is coming from the line of Douglas Tsao from Barclays Capital.

I was hoping sticking to the topic of Prialt, with the increase in reps from 20 to 30, do you anticipate expanding the call universe? Or is this intended to increase the intensity or frequency, if you will, of the detailing?

Yes. So we are focused on maintaining the existing business but also expanding call universe. So if you look at the existing business, it is pretty clear that there was room for expansion. The analysis will tell you that a minimum of 8 additional reps was required to get to a universe that we think is more appropriate for Prialt.

Okay. In terms of -- also on Prialt, have you implemented any changes in terms of the reimbursement of the product or means of facilitating reimbursement for physicians, or has it simply been too early?

We have not done that at this time, although when Azur took over the product, they did actually put a epic reimbursement group in place that is run by Covance. Basically, it is running assignment of benefits and nothing beyond that, so that's essentially what is currently in place, and we are evaluating what else we can do.

Okay, great. Bruce, if you could provide some perspective in terms of your thoughts for research and development into this year. You've obviously significantly expanded the team there, in particular with the addition of Jeff. In terms of is this going to be programs targeted on your existing products, or is this going to be working in terms of a focus on the business development side of things?

I would say we definitely recruited new leadership. I would hesitate to say we substantially expanded the group, because the group hasn't really gotten bigger. In terms of where the focus of our efforts will be in 2012 and beyond, as you know, we are not starting with a robust pipeline of ongoing development projects, quite the opposite. So as we look for the best places to selectively invest in R&D programs, I think it's reasonable to say we will be looking to the outside world, in addition to taking a close look at the clozapine once-daily program for potential advancement. We think there are going to be opportunities that are a good fit with our commercial focus, so would be detailed through highly focused specialty physician groups, where you've got differentiated products and good exclusivity. And those are the characteristics we will be looking for as we evaluate external opportunities.

Okay great. Finally, on the price increase for Xyrem, I believe it was a little earlier than has been the practice over the last couple years in terms of the calendar year. Is there any reason for that, or is it just how things shook out this year?

March 1 would have been six months from our last price increase, so I think the timing wasn't intended to be, nor was it, substantially different from what has been the pattern historically.

Your next question is coming from the line of Difei Yang from Auriga. Please proceed. Please proceed.

I have a couple of questions. The first question is related to the stock-based compensation. And I see for Q4, that expense line has gone up significantly from the previous few quarters. Could you give us a little bit color, is it a one-time deal primarily associated with the Azur Pharma acquisition? Or we would be expecting that number to go down in Q1 of this year?

Yes. So, there was a one-time expense of $7 million in that line item in the fourth quarter related to a modification of stock options due to the Azur Pharma transaction. So that was a one-time charge. As you know, we back that out of our adjusted net income and EPS.

Yes. Thank you. Second question I have is related to the FDA warning letter or that I think the last time we spoke about it, it is an ongoing process. Would you give us an update on where things are on that front?

Yes. So, not a tremendous amount to report. You will recall we got the warning letter in October. We responded November 1, with what we viewed was a very comprehensive review of all of our ongoing activities dating back to April and May of 2011 to strengthen our policies, procedures, personnel, systems, to holistically strengthen our adverse-event reporting system and its robustness both here inside the Company and with our collaborators including SDS. Since that time, we have provided additional information to FDA, as we have completed various actions that we had committed to as scheduled. We look forward to bringing this through to full resolution and a formal close out. As I've said to a number of you on several occasions, it may be a while before we get there, just because our commitments to FDA include not only taking all the actions that we have ready taken, but then ongoing monitoring to ensure that the effectiveness of all the actions we took is exactly what we would expect, again, both here and at SDS. So there is an element of ongoing auditing and monitoring in the future, and I can't really predict how much FDA will want to see us complete some of those future activities before moving to a formal close out of this warning letter.

Thank you. That's very helpful. My last question is with regards to Xyrem price increase, could you let us know what was the magnitude of the most recent price increase?

It was 19% taken last Friday.

(Operator Instructions) Your next question will be coming from the line of Bill Tanner. You may proceed.

I have a couple of them. Maybe, Russ, just for you, it seems like the new patient ads have been pretty consistent over the last year or so in terms of each quarter. I'm wondering if that's a reasonable metronomic increase to expect. Is there any sense that you have in terms of what is a reasonable peak penetration at least in the diagnosed narcolepsy patient population? I've got a couple of follow-ups too.

Bill, I think we're at about 19% now given the 50,000 diagnosed narcolepsy patients that are out there. Now being it approximately 9,300 patients as reported, but having said that, the consistent add is at what we believe a really nice, consistent level. There's nothing that has really changed dramatically in the course of the last six months. There's a few programs that we have in place that we think are actually helping grow that. One of them is actually the new prospects that we put in place in the middle of last year that are now starting to pay off. As we look at it going forward, we think that that's a number that you should probably be able to continue to count on.

Okay. Maybe Bruce, a couple questions on the BD front. Wondered if you wanted to comment on the probability of the prospects that a transaction might be done this year, and curious if you could comment on your sensitivity to something being dilutive? It looks like most of the expectations would be for EPS potentially to be lower next year, I guess as you pay tax on the full year.

Let me take the first part of that, and I will take the EPS question and hand that over to Kate. In terms of our appetite to do a deal, we certainly think we are well-positioned. We think we've got a strong balance sheet, a good corporate platform, a commercial organization that has proven its ability to handle specialty products, particularly that require high touch. So we certainly feel like we are ready, and we've got great leadership, as Kate mentioned, in Eunan Maguire for this function. I think, amongst the team here, we would be disappointed if we didn't get something done this year, but, honestly, in the end, we are more concerned about doing a good deal than a quick deal. So we are not going to get pinned down that we will definitely do one, because we are only going to do one if it makes sense. Let me hand the second part over to Kate.

Bill, I think we've commented in the past that we are committed to delivering continuing growth in sales and earnings. And if you look at the amount of cash that we have on the balance sheet and the amount of cash flow, the amount of debt capacity, I think our preference remains to use cash for the next transaction and to the extent that we are looking at acquiring products that are on market or close to market, those would be likely to deliver earnings in excess of the cost of debt. The way I look at things I think that it would be reasonable to think we could be able to continue to deliver earnings growth.

So as it relates to something that's in market, then the contemplation would be either that it would be a tuck in, that it would utilize the existing sales force, or the revenues that it would contribute would outstrip, if you will, the incrementals OpEx spend that might be necessary to support it? Is that a fair way to look at it?

Yes. And I think and particularly with our new tax structure that we have, as we model potential opportunities with the low cost of debt capital these days and the fact that cash on the balance sheet doesn't return anything, it's very easy to get to earnings accretion.

Maybe if I could just ask one last one, Bruce, or for Russell, on the Prialt. Obviously, the year-over-year was up substantially, 2010 versus 2011 -- or 2011 versus 2010, the Company having acquired it midyear. But as you look at the fourth quarter then, is that -- how should we think about the growth run rate going forward off of fourth-quarter '11?

We haven't given product-by-product guidance for 2012 other than for Xyrem, given it's materiality. So I can't give a specific comment, other than we continue to think that there are initiatives that Azur has begun to rollout, and we are now going to continue together to roll out, together with the increase in the size of the sales force promoting the product, some improved medical education, and other efforts we are going to roll out. We think all of that put together is going to yield attractive growth of this product. But I'd caution you that we are just rolling those things out now, and I think that is consistent, Bill, you been following the Company for a while. When we've rolled out some of the Xyrem-related initiatives, we have always cautioned that we don't see the result immediately, we see it over time. So a little too early to tell exactly when we will see it, but we are confident we will see it in the future.

You have a follow-up question coming from the line of Gene Mack. Please proceed.

Thanks for taking the follow-up. On Prialt, go back a little bit. Can you give a sense of where practice guidelines are for the product right now, and for if there's anything that exists for morphine-resistant patients that physicians are supposed to look towards? And do you have any ability to improve those or expand upon those, in order to help reimbursement? Thanks.

Yes. Thanks for the question. So, if you were to compare existing guidelines, meaning that new tax guidelines that were actually released in December of last year, it really is a step forward for Prialt in terms of being first in pump, both for nociceptive and for neuropathic pain. As it relates to other possible non-opioid options and intrathecal therapy, they just frankly don't exist. This allows Prialt to be in a position where we do think that given the right education around how to use it, getting comfortable with the titration, and then overcoming some future reimbursement obstacles, that there is potential for growth.

At this time, I am showing no further questions in queue. I would like to turn the call back over to Jazz Pharmaceuticals' management for any closing remarks.

Thank you for joining our call today. We also want to remind you that we will be attending several upcoming investor conferences, including the Citi 2012 Global Healthcare Conference in New York this week, and the Barclays Global Healthcare Conference in Miami in mid-March. Jazz Pharmaceuticals will also be participating in the National Sleep Foundation's Annual Sleep Health and Safety Conference in Washington DC, which kicks off National Sleep Awareness week on March 5 to 11, and National Narcolepsy Awareness Day on March 10. We look forward to seeing those of you who will be attending these events. Thanks, and good evening.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.