Jazz Pharmaceuticals PLC (JAZZ) 2012 Q1 法說會逐字稿

Welcome to the Jazz Pharmaceuticals first quarter 2012 financial results conference call. Following an introduction from the Company, we will open the call to questions. I will turn the call over to Ami Knoefler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals.

Welcome to the Jazz Pharmaceuticals first quarter 2012 financial results conference call. We reported financial results in a press release issued earlier today. The release is available in the news and events section of our Company website. Among other things, press release include the reconciliation of GAAP net income to adjusted net income for Jazz Pharmaceuticals PLC, along with related per-share amounts.

With me for today's call are Bruce Cozadd, Chairman and CEO; Kate Falberg, CFO; Russ Cox, Chief Commercial Officer; Jeff Tobias, Head of R&D and Chief Medical Officer. Following some prepared comments, we'll open the call for your questions.

Certain remarks we may make on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to the future events, future financial results, growth potential, 2012 effective tax rate, financial guidance, and the anticipated confirmation of the proposed transaction between Jazz Pharmaceuticals and EUSA Pharma, and the timing and benefits of the transaction.

These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to differ significantly from those projected, including risks and uncertainties associated with the completion of the proposed acquisition of EUSA Pharma, including the timing and financing of the acquisition, and risks related to disruption from the observed pharma merger and proposed acquisition of EUSA Pharma and related to integration efforts, as well as uncertainty related to Jazz Pharmaceuticals business generally, including our dependence on sales of Xyrem, competition, including potential generic competition, our ability to increase product sales, dependence on single-source suppliers and manufacturers, our ability to protect our intellectual property and defend our patent, and regulatory obligations and oversight.

These and other risks related to our Business are detailed in our SEC filings, including under the risk factors heading in our annual report on Form 10-K for the year ended December 31, 2011 that we filed on behalf of, and as successor to Jazz Pharmaceuticals, Inc. Our SEC filings and reports are available on our website. 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-Q for the first quarter on behalf of Jazz Pharmaceuticals PLC.

Following some brief introductory remarks, we will open the call to questions. Now I'll hand the call over to Bruce.

Thanks, everyone.

First quarter was a dynamic time at Jazz Pharmaceuticals. We achieved record total revenues of $108 million, fueled by the continued strong growth of Xyrem, and the addition of new products in our portfolio from our merger with Azur. During the quarter, we completed the initial phase of integration of the Azur business, including the reorganization of our combined sales and marketing teams into four different product lines, focused on narcolepsy, pain, psychiatry, and women's health.

We're pleased with the momentum of these new highly focused teams and continue to believe that increased specialization and focus will lead to better results. I would like to thank our employees for their dedication during the merger process, as many embraced new responsibilities, while maintaining our commitment to patients and to our Company's values.

Now, I'll make some comments about results and strategies for Xyrem and Prialt, that these are the current products we see as long-term growth drivers of our business. And then Kate will provide more details and summarize our updated financial guidance.

Starting with Xyrem, as previously announced, we achieved 10% volume growth during the first quarter of 2012 over the prior year's first quarter, and the number of patients on active therapy reached a new high of over 9,500 during the quarter. This reflects focused efforts to maintain new patient growth and the results of ongoing programs to support both compliance and persistency. We continue to work with our exclusive central pharmacy to optimize its interactions with both patients and physicians, and we continue to roll out new programs to support the Xyrem brand.

Most recently, effective March 1, we identified and rolled out to our sales force another wave of additional target physicians who treat narcolepsy patients, further increasing our target audience. Since we began this initiative to identify additional narcolepsy prescribers last year, we've increased our call audience by approximately 25%, or about 1,000 new physicians, over 100 of whom who since have enrolled in the Xyrem Success program. These additional potential subscribers have resulted in meaningful increases in new patients on Xyrem therapy, with at least 50 new patients directly linked to this effort.

We have also recently implemented new patient support program, called the Xyrem Patient Connection program. This program provides new patients with the option to speak with someone who also has a diagnosis of narcolepsy and has personal experience with Xyrem therapy, yet another example of our commitment to the narcolepsy community. We are also increasing our work with the scientific and medical community related to narcolepsy and its impact on patients.

We are increasing our investments in support of Xyrem across the Company, as we expand our support of medical education initiatives, and increase our corporate commitment to serving patients with narcolepsy. We're hiring additional medical sciences, funding additional speaker programs and symposia with KOLs, pursuing additional publications, and funding narcolepsy patient support groups, and a charitable organization that supports narcolepsy patients. We will have our largest presence to date at the upcoming APSF fleet meeting in Boston this June, where in addition to our commercial and medical affairs activities we are sponsoring a physician education symposium on narcolepsy.

Now, turning to Prialt, our product for severe chronic pain, we continue to focus on growing the existing business, while we develop a broader strategy to maximize the longer-term opportunities for the product. Prialt sales volumes in the US were up 8% year-over-year in the first quarter, which was in line with our expectation. Given that Prialt is the only non-opioid approved for intrathecal administration, its strong efficacy profile, and the current very low penetration of the available pump market, we see significant potential to grow this product over time.

We think that the optimal strategy for this product may include both changes to the existing, highly fragmented distribution system, and possibly generating new data. We have concluded that a more focused specialty pharmacy model may have advantages for patients and physicians, and we are in the process of planning for a possible change late this year. Under Jeff Tobias' leadership, we are also evaluating whether additional clinical data might be useful to physicians and obtainable at a cost that makes sense. We expect to have more to say about our Prialt strategy later this year.

Finally, we are pleased with signing the agreement late last month to acquire EUSA Pharma, which we expect to contribute further to our top and bottom line growth going forward. The EUSA Pharma business would add a significant growth product, Erwinaze, to our portfolio and bring some interesting research and development opportunities into our Company. The transaction meets our corporate development objectives and aligns with our commercial strength in delivering highly specialized products that require an expertise with targeted physician customers and a strong patient service capability.

The transaction would leverage our existing commercial expertise and corporate structure, and would be expected to generate a highly positive return for our shareholders, with immediate accretion to our adjusted EPS. We have begun working with EUSA's management team to ensure a smooth transition and continue to expect to close the transaction in June.

Now, let me turn the call over to Kate.

Thanks, Bruce, and good afternoon, everyone.

The year is off to a strong start, and today we are increasing our sales and earnings guidance based on strong Xyrem performance. Net sales for the first quarter of 2012 were $107 million, including contributions from the acquisition of Azur. Note that contributions from the former Azur business are included from January 18, so they were for only a partial quarter. For reference, we have provided the prior year's full quarter results for each of the former Azur products in a footnote in the financial tables accompanying our press release.

We were very pleased with the strong Xyrem sales of $73 million in the first quarter of 2012. Year-over-year volume growth of 10% was in line with our expectation for high single to low double-digit growth this year. For the past few years, we have seen a sequential decrease in volumes from Q4 to Q1 that we have attributed to the impact of changes in patient insurance plans and new deductibles. This year, we were pleased to see only a slight volume drop from the fourth quarter of 2011 to the first quarter of 2012. We attribute this to improved efforts through our pharmacies to address any changes in patient insurance plans and to ensure timely shipments to patients.

Our psychiatry products, which include Luvox CR, FazaClo LD and FazaClo HD, reached approximately $18 million in sales. Luvox CR sales were up 34% year-over-year, while the FazaClo products were relatively flat overall. As a reminder, the lower dosage strength of FazaClo are subject to potential generic competition as soon as July of this year, as a result of a settlement with Teva.

First quarter 2012 Prialt sales of $9.5 million included $4.6 million due to our product supply agreement with Eisai for Europe, where Prialt is sold in about 10 countries. We think that the shipment to Eisai is likely to satisfy their needs for at least the balance of this year. Sales of the women's health and other products were $6.7 million, compared to $8.6 million in the first quarter last year, as growth of Elestrin was offset by declines in other products.

Total gross margin for the quarter was 90%, which was impacted by $2 million of non-cash expense due to purchase accounting inventory fair value step up. There is an additional $7 million of this non-cash expense to be reflected over the next several quarters, as the inventory is sold. R&D and SG&A combined for the quarter were $51 million, which reflects the combination with Azur, including an additional 170 employees. It also includes $6 million of transaction-related expenses, most of which are related to the Azur merger, and $3 million of stock-based compensation expenses, both of which are added back to adjusted net income. We also recorded a provision for income taxes of $5.5 million, which reflects our mid teens estimated 2012 effective tax rate.

Turning to the bottom line, we are very pleased to report GAAP net income of $28 million, or $0.48 per diluted share for the first quarter of 2012, compared to $22 million, or $0.48 per diluted share for the first quarter of 2011. Adjusted net income for the quarter was $53 million, or $0.91 per share, an increase of 54% over the prior year. Our press release issued earlier today has further results and a full reconciliation of GAAP and non-GAAP financial measures.

We ended the quarter with $244 million in cash and investments and no debt. During the quarter, we used $25 million in cash to pay withholding taxes related to certain exercises of employee stock options in connection with the Azur merger. This net exercise transaction was priced at $48.60 per share and resulted in about 500,000 fewer shares outstanding.

We are updating guidance today based on our current business, not yet reflecting the impact of our potential acquisition of EUSA Pharma. The increase in sales guidance of $20 million to $35 million reflects the anticipated strong performance of Xyrem. We've also narrowed the guidance range significantly, as we are further along in the year and the commercial integration of Azur is complete. The increase in operating expense guidance of $15 million to $20 million reflects increased investments we plan to make in support of Xyrem and Prialt, increases in hiring across the Company to support current and planned growth, higher charitable contributions to a narcolepsy-specific organization, and higher stock-based compensation expense due to the increase in our stock price this year.

On the bottom line, we have increased our guidance for adjusted net income by $15 million, resulting in a $0.25 increase in adjusted EPS to a new range of $4.25 to $4.40, before including the expected accretive impact of the EUSA transaction. On a GAAP basis, we expect net income in the range of $165 million to $177 million, or $2.75 to $2.95 per diluted share.

These are very exciting times for Jazz, as we execute on our strategy to grow our existing product portfolio, while leveraging our expertise and financial strength to add additional marketed or close to approval products. We believe we can continue to create shareholder value as we pursue our mission of improving patients' lives.

Thank you for joining us on the call today. I'll now ask the operator to open the line for your questions.

(Operator Instructions). David Amsellem, Piper Jaffray.

First, on the Xyrem patient growth, do you think that a lot of the patient growth is a function of finding these new doctors who are new to the product, or are you still getting traction from existing prescribers who are using the drug in more patients? How should we think about that?

I think you should think about it as a combination, but I think what you'll notice from the additional patient growth is that we've mentioned that approximately 10% of the new physicians are actually enrolled and about 50 of those have actually engaged in some type of prescription. That's a part of it. The bigger part of it is that we're seeing more and more growth from what I would say less high tiered physicians, so we're doing a better job. Those who didn't have as much experience with Xyrem historically. In addition, our compliance specific programs continue (Inaudible) so the combination.

Another question on Xyrem, how should we think about the gross connect spread on the product as 2012 progresses? In other words, should the spread narrow in the second quarter and the rest of the year, as it did last year, or will you have a higher spread going forward due to the higher price points?

As is typical, the gross to net spread was a little bit wider in the first quarter, and we would expect, just like in prior years, that to narrow a little bit. Although we're not talking about big differences quarter-to-quarter and, we remain in the low double digits.

On Prialt, can you give us a little color on what kind of traction you're getting in the field and maybe quantify how many new starts you're getting on the product now that you've taken it over and maybe as just a follow-up to that, when you think you'll complete the changes to the distribution model that you're contemplating?

David, I think we're still very much in the early stage as it relates to implementation programs of Prialt. Keep in mind, the additional heads that we just put against Prialt actually are functional in their new territory as of one month of the first quarter. We didn't expect to see anything from that. We also have data that would tell us that it takes about six months from the time that somebody starts on Prialt to actually have some meaningful impact in the field. It's still very early stage in terms of when we would expect to see some return there. We're doing the analysis currently on what is the appropriate timing for looking at changes in distribution. We'll talk about that more later.

Corey Davis, Jefferies.

Maybe I'll stick with Prialt and curious that you mentioned possibility of new data. Any elaboration there? Is this something that you need more for promotion to the doctors using it, or is it more for justifying the price to payers? Is it something about the correct dosing of Prialt, or is it more on the efficacy of the drug that needs further clarification?

It's really some of a number of different areas. There are remaining questions regarding dosing. I think that additional clarity in that area could potentially have an impact on the ability to increase the use of the product. Other things that we're looking at are potential patient selection issues, as well as the role of how Prialt fits in with the other intrathecal therapies at this time. There are a number of different areas that we think we could have impact in.

Are these trials that would take months or years to complete, in the single-digit millions or tens of millions?

Really a range of options that we're looking at. Some of the questions can be answered by even retrospective chart reviews and could range up to a randomized trial, so really it covers the gamut.

One thing I would remind you of is the number of patients on intrathecal pump therapy is limited. Most trials in this area, you would expect to not be particularly large from a patient perspective.

That's correct. Some of these questions we're not necessarily looking at pivotal-type trials.

I would just add that from a payer perspective, we don't feel we need additional data to convince payers at this point.

Wanted to ask about how you felt coming out of the Markman hearing and how important overall you feel the outcome there is to the success of your case and do you have any idea when the judge might offer his ruling on those claims constructions?

I would say in general, we're not doing a detailed commentary around progress in the litigation. We're still at a fairly early stage in litigation that involves a number of patents, a number of claims, a number of terms. We don't know when the judge will rule. Typically measured in weeks to months, but don't know whether that will apply in this case.

This was one step along the way in litigation surrounding intellectual property. Of course overall, we think this is a pretty unique situation involving both legal and regulatory matters. We've got a proprietary and well-honed distribution system that's been in place for almost 10 years that we think does a very nice job of protecting both public safety, as well as safety of patients using the product. We certainly think that's serving everyone well and when it comes to litigation, we're going to be very aggressive in defending our rights.

Gene Mack, Mizuho.

Bruce, I wonder if I could follow up on Corey's point. Let's assume worst case scenario the judge interpreted everything in favor of the challenger in this case. Would then the FDA still need to rule -- in other words, the FDA would still then need to rule on its view regarding a duplicate distribution network, or duplicate central pharmacy, in essence, in another RIMS program. Does that sound reasonable?

Again, I won't do detailed commentary, Gene, other than to say you're correctly pointing out there are a couple of separate prophecies here. One is potential outcome of litigation and the other is regulatory pathway, and those in some cases are related, but they are not one in the same.

The patents really wouldn't have any bearing on how the FDA viewed the creation of another central pharmacy?

I would say they are separate prospects.

Also, just on Prialt, before you mentioned that the intrathecal pump market itself was slightly limited. I'm wondering, do you see a potential of maybe growing the implantable pump market at all, or are we at steady state with the 70,000 that are deployed right now?

No, we don't see tremendous growth there. You see models that have been growing anywhere from 1% to 3%.

Difei Yang, Auriga.

First of all, congratulations for a great quarter. Couple questions. The first one is related to Prialt. There's $4.6 million sales related to Eisai for sales in Europe. Could you comment a little bit more? Moving forward, are we expecting this kind of revenue to be a repeatable event?

Yes, we're expecting it to be a repeatable event, in that once they have exhausted their supply, we'll expect that they will reorder and we'll supply more. Our expectation is that this shipment, for which we haven't reported the revenues, should satisfy their demand for this year. We're not expecting additional revenues from this source until next year.

My second question is on Xyrem. After the price increase, what is the current price on Xyrem right now?

The current price on Xyrem is approximately $30,000 to $55,000, depending on what your dose is. I would also say that our current bottle price is $16.35.

Bill Tanner, Lazard Capital Markets.

Number one, could you tell us how many physicians are currently prescribing Xyrem?

Yes, we have a current poll universe of about 4,000 that we just characterized. Previously, that was about 3,000. If you really look at unique users, you can get anywhere from about 3,000 to about 3,200, and the majority of the volume comes from about 750 physicians. That represents about 70% of the total.

Thinking about if you've gone to a thousand new physicians, you've got 100 that have enrolled and 50 have actually started treating patients with Xyrem. What's a reasonable hit rate or conversion rate, do you think, out of that 1,000? Is it something that you've got 100 out of 1,000, that's kind of it? Or, do you think you'll build on that 100 out of those 1,000 over time?

I would expect it to build. What I would say is that it's a very long process. Historically, we've seen that from the first time you call on a physician to the first time they actually start prescribing, takes about six months. Even with somebody who is fairly receptive. I will say that we're having some good success, though, in getting physicians who have used the product three, four, five times to now use it significantly more. Our real goal with those folks is not for them to use it once or twice. It's for them to use it four or five times and then become a more meaningful user.

Is it just a matter that the physicians are dipping their toe in the water and treating a few patients and seeing how well they do before expanding it?

Just getting rolling. Typically, after they have used it four and five times, they have at least that one patient that's dramatic and then they get it. Our goal is to continue to push them to getting to four or five.

Do you have a sense out of that 1,000 physicians how many narcoleptics are under their care in aggregate? Or, you probably have a sense from --

It's a big range so I'm not sure it's going to help you much. You are going to see some that it is a handful and you are going to see some that are probably more like 8 to 10.

I think the last one is, Bruce mentioned something about APSS, presence there. I'm wondering if you could generally characterize what activities Jazz would be undertaking there and how that would be different from what the Company has done at APSS in years past.

In addition to the commercial dose and having a pretty robust medical affairs presence, a number of our MSLs there, as well as some of our medical affairs physicians, we're also supporting a symposium that's going to be on narcolepsy. Really good speakers set up for that, but of course we have nothing to do with that.

I think the point is we've got both a significant commercial and medical presence for the first time in several years.

A question, Bruce, and I don't know if you really want to answer it or not, but should we think that the Company is done this year in terms of acquisitions or in licensing with Azur closing and EUSA, or perhaps not?

Probably not a good question for me to answer, Bill. I'll say what I said post Azur and pre the EUSA announcement, which is we feel our business is in good shape. I think you can see that from our current period results and from our guidance from the year, even before a transaction. Obviously, we're very excited about the EUSA transaction and think that's additive on a number of different dimensions.

Coming out of that transaction, we'll again be in a position where I think the Company is in strong shape to continue to execute on a top line and bottom line growth strategy. We would be open to looking at additional transactions if they are a good fit with our strategy, affordable, good return, but we certainly aren't in need of doing something. It would be only if we see a really great opportunity.

Michael Schmidt, Leerink Swann.

I have a question on Erwinaze, as we trying to better forecast that product. Now that it has gone to market in the US for one quarter commercially, one full quarter, what's the average number of doses that you see per patient versus the compassion use program under which the product was available previously. I think the dose per patient was very widespread between 3 and 48 doses. Do you see your maintenance regimen as well, or mainly in induction therapy?

At this point, we've announced the pending transaction. We're expecting it to close next month. We certainly gave some information, including some financial highlights and some projections to give people a sense for the transaction, but I don't think we're going to start dissecting EUSA's results to date to that degree yet. I think we'll have more to say at closing and going forward, but let's wait until (Inaudible).

On Xyrem, I was just wondering, with the generic (Probituan) now on the market, do you see any impact on prescriber behavior or maybe payer scrutiny and reimbursement issues?

We haven't seen any such changes. I will remind you that most Xyrem patients are actually on a combination of both a stimulant and on Xyrem. We don't' see it as a direct --

Douglas Tsao, Barclays.

On Prialt, I might have missed it, but are you considering studies to refresh or update the label for the product? I know in certain instances, the drug is trialed not using an intrathecal pain pump. I was wondering if you are interested in perhaps pursuing those types of applications or getting approval for that use, in that setting.

Those are areas that we're looking to. As we look at how we want to proceed with additional studies, those are certainly two areas that are on the radar.

On Xyrem, obviously the ongoing IP litigation, I was just curious, is there IP or patents that you have access to that are not -- to protect the franchise, that are not in the Orange Book?

Yes.

Gene Mack.

With respect to EUSA and the integration into your guidance there, did I miss when you would expect to be able to give us some -- an idea of how it's going to impact your second, third and fourth quarters? Or, is it going to be some part of the second quarter, given that you're expecting to close in June? Can you just clarify that for me? I guess I missed it earlier.

What we said on today's call is that we continue to expect to close the deal next month and what we said on our announcement call was that our results, combined results for 2012 would depend in part on when we actually do close the deal. One of the slides we made available, including on our website, in conjunction with that announcement was our expected results for the EUSA business as separate from the Jazz business for the full year of 2012 and how much of that gets rolled through our results will depend on the timing of the close.

John Boris, Citi.

Can you characterize your thoughts around the Markman hearing, how that actually progressed? How you're thinking about different scenarios and/or outcomes going forward here during the (Inaudible)?

In general, we're not doing detailed commentary on the Markman. It's one step in complex litigation that could well go on for quite sometime. Lots of patents, lots of claims, lots of terms at issue and an overall situation that encompasses not only ongoing litigation, but a regulatory pathway and other considerations. Not probably worth time doing a complete deep dive into the Markman and something that we're not going to comment on, given the ongoing litigation.

On the (Sparagenasa) asset, some would argue that the -- the bears would argue that the 10% to 15% hyper sensitivity reaction sometimes occurs after patients have taken quite a few doses and it might be even potentially a lot smaller than that 10% to 15% mark. Can you provide us context that when you did due diligence around the asset, what gives you confidence that you're going to be able to grow volume with the asset going forward?

Let me just jump in at a top level and say that we did significant diligence. In this case, we also were relying on a lot of historical good information, whether that was compassionate use prior to FDA approval or in fact actual results for a number of months post approval. We're not just projecting based on no real information. I think we've got good information to do that. You're pointing out correctly that there's a pretty broad range of potential use for patient depending on a number of factors, including when that hyper sensitivity is evident and treatment with Erwinaze begins, but also depending on characteristics of that patient and their treatment.

Congrats on the results.

(Operator Instructions). At this time, there are no further questions appearing in queue.

Thank you for joining our call today. We also want to remind you that we'll be attending two upcoming conferences, the Jefferies conference in New York and we'll also be participating in the APSF fleet meeting in Boston next month. We look forward to seeing those of you who will be attending these events. Thank you, and have a good evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.