Jazz Pharmaceuticals PLC (JAZZ) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jazz Pharmaceuticals second-quarter 2014 earnings conference call. Following an introduction from the Company we will open the call to questions.

I will now turn the call over to Kathee Littrell, Head of Investor Relations at Jazz Pharmaceuticals.

Thank you Sara, and thanks to each of you for joining our investor call. Today we reported our second-quarter financial results and updated our 2014 financial guidance in a press release. The release and a slide presentation accompanying this call are available in the News and Event section of our website.

With me for today's call our Bruce Cozadd, CEO; Matt Young, CFO; Russ Cox, COO; Jeff Tobias, CMO; and Mike Miller, head of US commercial. Following some remarks we will open the call for your questions.

I'd like to remind you that some of the statements we will make on this call relate to future events in our future performance rather than historical facts and are forward-looking statements. These statements include future financial results and commercial development and regulatory plans, expectations, and projections, and the potential timing of future events.

Examples of forward-looking statements include our 2014 financial guidance, anticipated growth prospects for our products, planned commercial efforts, including the rolling launch of Defitelio in Europe, and related pricing and reimbursement approvals, expected and potential interactions with regulatory agencies regarding Xyrem and other products and product candidates, anticipated regulatory submissions, anticipated litigation related events and the timing thereof, and the timing and other matters related to planned and ongoing clinical trials including enrollment in and the results from and costs associated with those clinical trials.

These forward-looking statements involve numerous risks and uncertainties that could cause actual results, performance, and results to differ materially. These risks and uncertainties are identified and described in today's press release, the slide presentation accompanying this call, and under risk factors in our form 10-Q for the quarter ended March 31, 2014 and our form 10-Q for the quarter ended June 30, 2014 that we expect to file shortly. We undertake no duty or obligation to update any forward-looking statements we make today.

On this call we will discuss several non-GAAP financial measures, including historical and expected 2014 adjusted net income attributable to Jazz, and the related per-share measures, and historical and expected 2014 adjusted SG&A and R&D expenses. We believe that these non-GAAP financial measures are helpful in understanding our past financial performance and potential future results. They are not meant to be considered in isolation or as a substitute for comparable reported GAAP measures.

Reconciliations of GAAP to non-GAAP financial measures discussed on this call are included in today's press release and the slide presentation accompanying this call. Both are posted in the News and Event section of our website.

I'll now turn the call over to Bruce.

Good afternoon everyone and thank you for joining us.

We are pleased with our strong performance in the second quarter and the significant progress we've made year to date. This year we acquired Gentium and commenced our launch of Defitelio in the European Union, acquired the rights of defibrotide in the US and the rest of the Americas from Sigma-Tau in a transaction that close yesterday, scheduled 2 pre-NDA meetings with the FDA in the third quarter to further our understanding of the regulatory pathway forward for defibrotide in the US, acquired rights to JZP-110, presented JZP-110 Phase 2b data at the 2014 sleep meeting in June, met with the FDA and defined our Phase II program for JZP-110, and receive notification of issuance of a new patent related to Xyrem with an expiry in 2033.

Our financial performance in the second quarter included revenues of $291 million, up 40% compared to the second quarter of 2013 driven by increased sales of our key products Xyrem and Erwinaze and the addition of sales of Defitelio. We realized adjusted net income attributable to Jazz of $128 million in the second quarter, reflecting the attractive margins in our business. GAAP income attributable to Jazz was $44 million.

I'll now update you on our sleep and hematology oncology franchises, including information on key commercial, legal regulatory, and clinical development activity during the quarter and then end my section with a few comments about our new board member and the members of the senior management team at Jazz. Matt will then review our financial results for the quarter and provide comments on our guidance.

I'll start my comments with our sleep franchise and our lead product Xyrem. In the second quarter market demand was strong and the average number of active Xyrem patients grew to approximately 11,750 from 10,700 in the same period of 2013. During the second quarter we were very pleased with our strong volume growth of 11% year over year.

There was significant improvement in the operations of our central pharmacy partner STS following the problems in the first part of the year previously discussed during our first quarter call. We have made substantial progress, but we remain focused on ensuring timely prescription fills and refills for Xyrem patients, and will continue to work closely with STS to meet patients' and providers' needs.

Efforts to expand Xyrem prescription written by our low to mid decile physicians has contributed to our sales growth year over year. Our 20 new sales representatives got off to a solid start in the first half of 2014 and are delivering strong results in their territories. We also continue to refine and identify new physicians that have not previously been part of the Xyrem call universe. These positions are diagnosing and treating narcolepsy patients and offer new opportunities for education by our sales representatives on treatment with Xylem.

In late May we implemented a narcolepsy disease awareness initiative in eight US cities. We believe that the disease awareness initiative over time will increase the number of patients diagnosed with narcolepsy and may help reduce the time from disease onset to diagnosis.

Early data demonstrate that there been over 200,000 hits through the TV web link known as More Than Tired.com since the launch of this campaign with roughly 75% of those hits from the eight targeted markets during the first month. There have been approximately 4900 completions of the narcolepsy Epworth Sleepiness Scale with a score total greater than 10 with approximately 70% of those in the eight targeted markets.

Finally, over 4100 hits have occurred on the physician finder page with approximately 70% of these lookups occurring in the targeted markets. We'll be able to provide an updated report next quarter. Finally, we remain on track to initiate a pediatric narcolepsy study of Xyrem during the second half of 2014.

Turning to a brief legal update on Xyrem. Patent litigation against 4 ANDA filers referencing Xyrem continues in the District Court in New Jersey. We've sued Roxanne Amneal Anpar, and as of last month Ranbaxy for infringement of our patents related to Xyrem. No trial dates have been set in any of the cases, although we anticipate the trial of a portion of the case against the first filer, Roxane, could occur as early as the first quarter of 2015.

Between late June and early August Roxane Amneal Anpar initiated petitions with the patent office for covered business method or CBM post-grant patent review of our patents covering the Xyrem restricted distribution system. The first step in this process is an opportunity for the patent owner to file a preliminary response petition addressing whether the petition meets the requirements for CBM review. We do plan to file responses.

The patent office then decides whether to institute the review. We expect the patent office to rule on whether review will be instituted for any of the patents subject to the CBM petitions during the first quarter of 2015.

Turning to a brief regulatory update on the Xyrem REMS, as previously disclosed we initiated dispute resolution procedures with FDA at the end of February regarding modifications to our deemed REMS that FDA was seeking to impose and received FDA's denial of our initial dispute resolution request during the second quarter.

We have submitted a request for further supervisory review to the next administrative level of FDA and expect to receive the agency's response this level of appeal in this quarter. Next steps will depend on the response from FDA.

Now I'll briefly discussed Xyrem intellectual property. Our current patents on Xyrem expire between 2019 and 2033. On July 8 we were awarded a patent on a new method of administration of Xyrem when a patient is also being administered Valproate.

The new patent expires in 2033, has been lifted in the Orange Book, and is related to safety information that has been incorporated into the dosing and administration so some of the Xyrem label. Valproate is commonly administered in mood disorders, seizures, and migraines. Studies show tha patients with narcolepsy use more psychiatric medications than the non-narcoleptic population. This new patent is a result of our continuing investment in research to further understand the safe and effective treatment of narcolepsy patients with Xyrem.

On JZP-110 we were pleased to present the JZP-110 Phase 2b data of Sleep 2014. The Phase 2b study was a 12-week study with patients exposed to 150 mg per day for four weeks followed by 300 mg per day for eight weeks. The responses observed in the Phase 2b trial were robust on measures of daytime sleepiness; including the maintenance wakefulness test, and the Epworth Sleepiness Scale, and were similar to those observed in the previous Phase 2a study.

Adverse events were similar to those observed with other wake-promoting agents. Physicians attending the meeting expressed strong interest in participating in the future development of JZP-110.

The end of phase 2 FDA meetings went well from our perspective. We discussed the proposed Phase 3 study designs and potential regulatory pathways for patients experiencing excessive daytime sleepiness associated with narcolepsy, and, separately, with obstructive sleep apnea. Early next year we anticipate initiating one Phase 3 study in narcolepsy and two Phase 3 studies in OSA. We plan to use excepted 12 week efficacy endpoints such as the epworth sleepiness scale and the maintenance of wakefulness test.

Long-term safety data will also be collected. As we have previously communicated we expect of the program cost will be approximately $100 million and that the majority of that spend will occur in 2015 and 2016 with the goal of an NDA submission in the 2017 time frame.

As to JZP-386, our deuterium-modified sodium oxybate compound license from Concert, enrollment of patients has begun in the first in human trial that is evaluating the safety, pharmacokinetics and pharmacodynamics of JZP-386 in order to identify a safe and tolerable dose or doses for subsequent study and determine whether JZP-386 is potentially suitable for once-nightly dosing. We expect to complete enrollment later this year and to provide an update on the outcome of the study once we and our partner, Concert, have evaluated the data and determined next steps.

Now on to the hematology/oncology franchise. First let's turn to Erwinaze which continues to perform well. We continue to educate healthcare providers and centers on identifying hypersensitivity reactions to E. coli asparaginaze and acute lymphoblastic leukemia.

At the recent American Society of pediatric hematology and oncology meeting we hosted a very well attended medical-education program focused on building on asparaginaze therapy to improve outcomes. Our clinical study of Erwinaze in young adults initiated during the second quarter. We are continuing to add study sites both in the US and EU and plan to enroll approximately 30 patients in the study.

As to JZP-416, formally known as aspirate, this molecule is a recombinent pegylated Erwinia chrysanthemi asparaginaze that is administered intravenously. We're working with the children's oncology group on the first US study of JZP-416 and expect to initiate the does confirmation phase of the study in children later this year.

The Defitelio launch in Europe is progressing well. Since March we have launched the product in Germany, Austria and the UK, as well as in Italy under a special reimbursement law. We're on track to launch Defitelio in several Nordic countries this month.

During the rest of 2014 and in 2015 we anticipate launches in France, Ireland, the Netherlands, Italy under final pricing and reimbursement approval, and many of the largest Eastern European countries. Our key focus in Europe remains establishing solid pricing and reimbursement in order to maximize access for patients in need. And we continue to engage in pricing and reimbursement submissions throughout the EU.

Now a brief US regulatory update on defibrotide. We're continuing to seek to address FDA's comments and questions with respect to a potential NDA filing and have 2 pre-NDA meetings, a CMC and a clinical meeting scheduled with FDA this quarter prior to finalizing our submission strategy.

At the clinical meeting we plan to discuss among other things the final data package that would be part of our submission for defibrotide for the treatment of severe VOD. If our FDA meetings are successful we anticipate that NDA submission could occur in the first half of 2015, depending on our ability to acquire and remediate key information in the data package, and of course assuming we will not be required to complete any additional clinical trials prior to the submission. Although the NDA submission remains our priority, our defibrotide develop team is also evaluating the potential to study defibrotide in other indications such as early treatment of VOD, prevention of VOD, and prevention of acute graft versus host disease.

Now a few words on our board and management team, Elmar Schnee joined the Board of Directors on August 1. He previously served as a director of Gentium from May 2012 through April 2014 and brings to our Board of Directors over 30 years of international commercial and general management expertise in pharmaceutical and healthcare industries, as well as detailed knowledge of the Gentium business.

We continue to build bench strength in our leadership team as we grow and expand our global operations. In addition to the promotion of Matt Young to CFO, and the addition of Mike Miller as head of US commercial, we promoted Russ Cox to COO, and hired Paul Treacy as our head of technical operations, replacing Fintan Keegan, who is retiring this month.

Paul has a long tenure within the industry and most recently held positions within Johnson & Johnson subsidiary companies, including; head of CMC manufacturing and supply chain for Janssen Alzheimer immunotherapy and general manager Centocor Biologics. We also recently added Frederic Pederes in the role of global head of R&D operations. Frederick brings nearly 20 years of industry experience including leadership roles in project management and R&D operations, and was most recently at Johnson & Johnson and Janssen Alzheimer immunotherapy.

Finally, we recently hired Craig Parker as our new head of corporate development. Greg brings more than 20 years experience to Jazz with a strong track record of accomplishments in planning, strategic analysis and corporate development, as well as 12 years of biotechnology sell side analyst. I look forward to him joining Jazz later this month.

Matt, let me now turn the call over to you.

Thanks Bruce and good afternoon everyone.

We are pleased with our strong performance in the second quarter as we saw adjusted EPS attributable to Jazz increased by 43% year over year. We expect continued strong top line growth for 2014 driven by growth in the sales of Xyrem, Erwinaze and Defitelio. We are increasing our total revenue guidance to be in the range of $1.125 billion to $1.165 billion and maintaining our adjusted EPS guidance to be in the range of $8 to $8.25.

Net sales of Xyrem for the quarter were $191 million, up 43% from $134 million in the second quarter last year. We're increasing our guidance for Xyrem net-product sales to a range of $765 million to $780 million for 2014 based on three factors: improvement in bottle-volume growth during Q2 to the low double digits versus mid-single-digit growth during the first quarter, a price increase of 8% on August 1 and improving gross to net resulting from lower than expected coupon utilization. We continue to expect high single to low double-digit bottle-volume growth in 2014.

Turning to Erwinaze, second quarter worldwide net sales were $48 million up 7% from the same period in 2013. We are reaffirming our guidance for Erinaze net-product sales in the range of $185 million to $200 million for 2014. This reflects a 3% price increase in the US in early July.

For Defitelio defibrotide second quarter worldwide net sales were $20 million compared to pro forma net product sales of $10 million in the second quarter of 2013. During the second quarter sales benefited from an increase in shipments to distributors.

In early July we made the decision to discontinue the cost recovery program in the US, so that patients in the expanded access program will now receive free drug. As you know, the US program constituted only a small percentage of revenue.

We're increasing our previous defibrotide net sales guidance to a range of $60 million to $65 million. We announced today that we have closed our transaction with Sigma-Tau to acquire the right to defibrotide in the Americas.

The $75 million payment that was due to Sigma-Tau on closing was paid from cash on hand and will be recorded under GAAP expenses as acquired in process research and development in the third quarter of 2014. In the second quarter pre-op net sales were $6 million compared to $5 million in the same period in 2013.

Returning to operating expenses adjusted SG&A expenses for the second quarter were $80 million, or 28% of total revenue compared to $63 million or 30% of total revenue for the second quarter of 2013. The increase in adjusted SG&A expenses reflected the inclusion of expenses from the acquired Gentium business, higher headcount, our narcolepsy disease awareness initiative, and other expenses arising from the expansion of our Business.

Adjusted R&D expenses for the second quarter were $17 million or 6% of total revenues, compared to $8 million or 4% of total revenues for the second quarter of 2013. The increase was primarily related to increased costs associated with development of our sleep and hematology oncology product candidates. We anticipate higher R&D expenses as we advance our clinical development programs and regulatory efforts including the full spend associated with defibrotide following the completion of our transaction with Sigma-Tau. We are maintaining our 2014 guidance on adjusted SG&A in the range of $315 million to $325 million and increasing our guidance on adjusted R&D to a range of $65 million to $75 million.

As of June 30, 2014 we cash and cash equivalents of $268 million, current and long-term debt of $1.2 billion, and available capacity under our existing revolving credit facility of $125 million. We are continuing to pursue attractive opportunities to expand our Business through our corporative development initiatives.

During the second quarter the main uses of cash were the repurchase of our ordinary shares, the purchase of most of the remaining outstanding shares of Gentium, transaction related payments, estimated tax payments and capital expenditures. We repurchased approximately 184,000 of our shares at an average cost of $127.96 per share during the quarter, leaving us with $40 million remaining in our previously announced 200 million-share repurchase program.

In closing we are pleased with our progress year to date including integrating Gentium, launching Defitelio in the European Union, acquiring rights to JZP-110, completing the transaction with Sigma-Tau for rights to defibrotide in the Americas and executing on important commercial R&D and regulatory milestones, all of which we believe continue to support our short and long-term growth strategy.

Thank you for joining us on the call today. I'll now as Kathee to make a brief comment about our Q&A session.

Thanks. We request that you limit your questions to a maximum of two at a time and then feel free to reenter the queue if you have further questions. With that said I'll turn the call back to the operator to open the lines for your questions.

(Operator Instructions)

Louise Chen, Guggenheim

Hi thanks for taking my questions. My two questions are; first one is on your capacity to do another M&A deal before the end of the year, is that something that we could potentially look forward to?

And then secondly, how should we think about R&D cost for 2015? You had mentioned the $100 million in clinical trial cost for JZP-110 in 2015 and 2016 but I wondered what else should we think about it? How should we think to grow it year over year between 2014 at 2015? Thanks

Thanks Louise. With respect to corporate development as we have often articulated we will continue to be active. We're happy that we been able to complete three transactions this year so far. And excited about continuing to build on the already well-established team here.

That said, it's as you know difficult for us to predict the timing of when we will actually get a transaction done. We remain proactive and we continue to believe we see a significant number of opportunities, both in our existing business areas and beyond that. So we'll keep at it and hopefully be able to do something but we can't say exactly when.

With respect to R&D expenses we've specifically talked about the cost of the overall JZP-110 program being consistent with our previous comments in the neighborhood of $100 million. The majority of that spend being in 2015 and 2016. We do expect overall R&D expenditures as a percentage of sales in dollar terms to go up. We again provide guidance just for 2014 so while we expect the guidance range we said this year, I think with other programs maturing across our sleep and hematology franchises with respect to both new products and lifecycle management we would anticipate summarize in R&D expenses going forward.

David Amsellem, Piper Jaffray

Thanks for taking the question. So my two are as follows.

Bruce, I guess you sound a little bit cautious on the central pharmacy issues going forward. I guess maybe I'm reading too much into the commentary but is there a risk that there could be bottlenecks again regarding the central pharmacy on Xyrem?

The second question is on Defitelio. At the risk of putting the cart before the horse, I just want to get it how you we think about pricing in the US. Maybe give us sort of a set of benchmark comparator products, if you will, or just help us think about pricing vis a vis Europe. Thanks.

Thanks, David, for the questions. On SDS you know the caution in my voice I think will go back to the comments I made on the first quarter call that I think Russ and Mike also made, which is our goal is to get to a point where we are on top of current operations, the metrics are all good, but we also feel confident that we won't see a recurrence of problems. In other words that we build in surge capacity and flexibility to deal with any issues that arise in the future.

And while I think we're pleased with the progress that's been made over the last several months, and I think you certainly saw that the pull through of the demand we've been generating in the second quarter was good, I think a couple months performance is too short for us to be able to say problem definitely in the rear view mirror. So I don't mean to sound overly cautious other than to us it was not a couple month exercise. This is really about building excellence in terms of how we service patients and physicians that we have high confidence in for the long term.

On your second question, Defitelio pricing in the US. I think it's probably too early for us to be commenting on that. You know, as I said, our real focus right now is defining a regulatory pathway and seeing if there's an opportunity to get this in the hands of physicians and patients sooner rather than later.

Marc Goodman, UBS

Bruce, maybe you can talk about Defitelio and the pricing in Europe and as these conversations you're having and you're rolling out you mentioned some of the Nordic countries, so how is pricing there? How should we think about the pricing in Italy now versus what it will be, and how Ireland, Netherlands -- are all these prices generally the same or relative to where you are?

And then just on Xyrem can you talk about these eight cities that you've rolled this program out into? Are you seeing sales yet? I understand the metrics you were talking about before, how much lead time on the sales and are we going to see those sales?

And then just so I understand as a follow-up to the previous question. On this quarter there was a lot of nervousness obviously going into this quarter because of what happened with the call center, so did the call center just work as we thought this quarter? Everything was just ticking along because obviously the volume growth was generally in line with what we would have been expecting even last quarter.

Yes, so, I'm trying to figure out how that was two questions, Marc, but you're good. So pricing in Europe. I think we will try to avoid going literally country by country in our commentary but in general I would say we have been pleased by the responses we've had to our pricing and reimbursement submissions relative to our expectations when we announced and closed the Gentium transaction earlier this year. Russ, do you want to add anything on that before I go to the other questions?

I would just say if you look at where we are referenced in Germany and Austria at EU426, that was a good basis point to start, and then as new countries come online we'll continue to give you information as we go.

On the disease awareness initiative for narcolepsy, the real goal there is to make a dent in the very large undiagnosed narcolepsy population, which in the US is estimated to be larger than the currently diagnosed and treated market. And we know that many patients do go years before they get to the right diagnosis.

There's still some time that happens between a diagnosis and treatment, and treatment can include but is not limited to Xyrem. So in terms of seeing a flow through to sales, that's not something we're expecting in the near term. But obviously we'd love to over time see a larger pool of patients being treated for their disease.

On the comment about nervousness, you know I understand there may have been some nervousness out there. If you go back to our comments in the first quarter I think we were pretty clear that we reiterated our Xyrem guidance for the year. We said we obviously couldn't undo the first quarter and get that business back but that we're pretty confident about our business going forward. You know we are pleased to see that confidence was well placed in terms of our second-quarter reported results and we don't take the rest of the year for granted either.

We have to get out there and do our jobs everyday and I wouldn't say around our table there was nervousness. There was honestly disappointment in ourselves and in the central pharmacy that we didn't do what we were supposed to do, which is make sure that those descriptions are timely filled or refilled. And we obviously took that seriously and wanted to do everything we could to fix that as quickly and as well as we could.

Michael Faerm, Wells Fargo

Thanks for taking the question, I have two. First one on M&A. Your deals are generally showing a consistency in terms of being orphan or orphan-like products and all the commercial characteristics that come with that. I'm wondering to what extent you would be willing to look at things that are outside that range of characteristics that you've looked at so far, whether it's commercially or in terms of size of deal?

And then my second question is on Xyrem pricing. You've taken your second increase this year. I just wonder as we look out down the road as the product gets bigger how do you feel about your flexibility to continue to take the types of increases that you've been taking? Thank you.

Okay, Mike, on your first question in terms of the consistency of the types of transactions we've done, I don't think we necessarily define our target opportunity space as being solely limited to orphan. We definitely look for products that make a significant difference to the patients who would use them that are differentiated, that have good exclusivity.

But the other thing we're specifically looking for are that those patients would be treated by a specialist group of physicians that we could target with an efficient sales force. So in many ways our lens that we're sorting opportunities through has more to do with the effectiveness of our commercial activities rather than just a count of the raw number of patients out there. It's some combination of the number of patients out there and how efficiently we can get to those patients. Matt, anything else you want to add on our targeting?

No, I think that's it, Bruce.

And then the second part of the question on price increase maybe I'll hand over to Mike.

Yes Bruce. Thanks. On the pricing we don't comment on forward-going pricing actions but I think the trend of our price increases is there to see. I will say that the reimbursement levels for Xyrem remain high. Meaning in a very good place.

As with all specialty products we've seen rises in PAs and step edits and Xyrem is no different in that regard. But I think payers are ensuring that these patients are adequately diagnosed with narcolepsy. So we have not seen any overall changes in the reimbursement landscape for Xyrem.

Jason Gerberry, Leerink Partners

Hi, thanks for taking the question. First, just could you just comment at all exactly with respect to Xyrem legal regulatory front, what level of the FDA you are currently submitting your appeal, and how many appeals do you think you have with the agency? Figured I'd give that one a shot.

And then secondly on Defitelio. Can you just comment at all on the quarter to the extent there was any launch stocking, as I look at the second half what's implied by the guidance, it looks like a little bit of a slow down relative to the 2Q run rate. I'm just wondering ahead of a few country launches why that might be? Thanks.

Jason on the formal dispute resolution process with FDA, our initial formal dispute resolution filing went back to the people who had made the original decision with respect to our deems REMS to final REMS conversion. We're now at sort of the first level up from that. There are several potential layers above this.

A little too early for us to say what will happen. It very much depends on the response we get from FDA and it depends on who at FDA has been actively involved in the responses we do get.

But I think we've been pretty consistent in our commentary that we sort of thought we needed to get at least one level up within FDA before we get a different set of eyes looking at issues that we think are very important to patient and public safety. On the Defitelio guidance and what that implies about second half versus first half, I will have Russ comment on that.

I would just comment that I wouldn't look at this is really stocking per se. I would think of this as thinking about as countries come online and ultimately determining the timing of when they go from a named program to a full on launch and just building in the modeling to be conservative there. So I think that if you think about how those respective countries come online reflecting the timing of that.

Okay. Thank you.

That said, I do think we had a couple of distribution partners in markets we're not commercializing in directly ourselves who had some orders filled during the second quarter and a little uncertain on our part as to how quickly those orders would recur.

Got it. Thank you.

Oren Livnat, JMP Securities

Thanks guys, tremendous quarter. If I could just shift to the pipeline a little bit. I have conversations around JZP-110 and there seems to be a pretty big disconnect out there about, if successful, where you see this thing potentially positioned.

Can you maybe help us frame it on the spectrum of, on one end competing directly with Provigil Nuvigil at somewhat comparable brand pricing with better efficacy, and at the other end you've got Xyrem life cycle extension and there's obviously a lot of room in between with regard to pricing and who you're targeting. So can you maybe help us understand what you envision this pie being?

Oren, thanks for the question. You know in terms of how we think about JZP-110, a couple comments.

The first is as we've described the market opportunity to you and in some of the slides we've shown historically you'll note that we start by looking at those patients with narcolepsy or OSA who experience excessive daytime sleepiness that is not adequately addressed by other available agents. So, we haven't done our phase 3. We haven't got a regulatory approval. We're not out there selling the product so there's lots of time between here and there. But I would say in general we're looking at addressing a patient population that is unable to tolerate or doesn't get adequate efficacy from the other agents, rather than necessarily going right at them for competing to get the patients in the first instance.

To the sort of second part of your question we don't see this as a Xyrem lifecycle management opportunity. Xyrem obviously has a different indication for the treatment of cataplexy and EDS in narcolepsy patients and you probably remember that the majority of Xyrem patients, certainly in our clinical trials, also do take a stimulant as well. So they are taking Xyrem at night and then they are taking stimulants during the day and getting additive benefit of those two agents. So I wouldn't think of JZP-110 in the same category as Xyrem.

If I can just follow-up with a simple tax rate question, too. I think the last time we heard from you guys on guidance for this year were maybe high teens, similar to 2013. I think your trending for the first couple quarters slightly ahead of last year. I'm just wondering going forward through the rest of the year where you see it shaking out and what's the trend directionality look like?

Thanks, with respect to our cash ETR I would expect still high teens is the right thing to think about, Oren. We have seen it turned up slightly with respect to basically mix, where that occurred geographically, what products, and then also with some of our R&D expenses it had pushed the tax rate up slightly, but we don't anticipate a significant deviation from where we are.

Thank you.

Gregg Gilbert, Deutsche Bank.

Thank you, I have two. First on JZP-110. I don't when we're going to see the final details of trial design but maybe you could share some of the goals you are trying to achieve in Phase III that go beyond simple approvability in light of the particularly robust results that we're seeing in Phase II.

And my second question for Bruce is on BD. Your strategy is been well articulated. My question is whether or not you're seeing any possible deals that would materially diversify your cash flows in one fell swoop while still honoring your core criteria that you've laid out. Thanks.

Okay Gregg, let me have Jeff take your first question on goals of the Phase III program for JZP-110.

So for JZP-110 you're right to point out that there are the approvable endpoints which Bruce has already talked about; an objective MWT and subjective epworth sleepiness scale. But we certainly intend to look at other potential outcomes -- beneficial outcomes that would add to the overall profile of the product.

And we have a few things that we're exploring right now the might be pretty interesting. Some of which is not been done before. But as we start finalizing these protocols we'll share more of that but that is certainly part of our thinking as the trials move forward.

And I'll let Matt take her second question.

Thanks, Gregg. I would say as we said before, we are certainly willing to consider transactions from the business development perspective that are very big or continue with the strategy of some smaller deals. I think one large transaction that might immediately diversify us is one solution to a particular objective.

You know we believe through the course of, again, doing three deals this year, adding some development programs, the sales of which can also be a substantial diversification of our revenue and add to our growth in the out years is also an important strategy. So we're going to continue to look at all of those things and so we obviously can't comment on any specific activity but certainly any and all of that is on the table for us.

Thank you.

Ken Cacciatore, Cowen & Company

Hi guys thanks I had a question on the Flamel sodium oxybate reformulation just want to know if this progresses through the clinic would they need to eventually certify to your distribution patents? At what point would they need to do that and at what point could you enter into litigation to maybe enact a 30 month stay? Would you have to wait for an approval and so could your patents end up tying them up well beyond any time frame in which you are working on your reformulation?

And then secondly on the discussion around BD, just wondering as we go forward here has there been any change in the value of potential assets? Are they becoming more expensive, less, just a little bit of commentary on what you're seeing around valuations as you look at potential acquisitions? Thank you.

Yes, Ken, in terms of your first question I don't think we're going to comment on other people's products or programs specifically. I will say anyone wanting to either [ANDA] Xyrem or 505(b)(2) Xyrem data is going to need to certify to all Orange Book-listed patents. That's just the way it works.

And yes we would have the opportunity to litigate if there's a basis for litigation and yes that would trigger a 30 month stay. On the second part asset values and how their changing maybe I'll have Matt comment on that.

Sure. Thanks, Ken. With respect to asset values we continue to see opportunities out there that we proactively have been evaluating where hopefully value and risk align. I think there's always more than the dimension of value when you are looking at various product opportunities or product development opportunities.

That said, in certain spaces with a very well-characterized and understood asset in the public domain it certainly in some cases has been fully valued and I think you and others have commented on that. But there are always opportunities where that isn't the case from our point of view and that's why we say it's very difficult for us to predict the timing associated with trying to get a transaction done for what we're looking at. But we continue to believe, again, that value and risk will align and we'll be able to continue to pursue activities that will bring new products.

Thank you.

David Buck, Buckingham Research Group.

Thanks for taking the questions, just a couple quick ones. For Xyrem, if we look at the 11% volume growth that you saw on the second quarter how much of that would you say is potentially some catch-up from lost sales in the first quarter and would you expect to sustain that type of level of growth at least for this quarter or somewhere somewhat less?

Secondly on the Erwinaze product growth is a little bit slower year over year. Can you touch base on whether there's anything in terms of inventory supply that affected the quarter?

And finally just to clarify on the answer to the question on 505(b)(2) applications. My understanding is the gating factor is basically a filing of the 505(b)(2) that would lead to certification, is that true? And that's it, thanks.

Yes I'll take that last one first, David. I think I didn't fully answer Ken's question so thanks for giving me that opportunity. Yes, that's the trigger for litigation, not product approval, correct.

On the Xyrem question on volumes. I think as we said at the end of the first quarter on our call, we can't really go back and recapture lost volume for the first quarter, meaning that a patient who didn't receive a timely refill and went without drug for a week doesn't take twice as much drug the next week and shouldn't, if any patients are listening. So there's no catch-up in that sense.

Were we coming out of a period where shipments were low where we had some higher shipment days coming into the quarter? Maybe there could be a little bit of that but essentially what you saw in the second quarter was our shipment volumes very closely tracking the growth in patients and underlying demand.

What exactly that means for the second half, I can't tell you anything more than the guidance we've given you in terms of Xyrem revenues and the guidance that we expect full-year volume growth will be high single or low double-digit. So that probably is enough on that one.

On Erwinaze I think we've tried to condition people over the course of the past seven or eight quarters that percentage growth in Erwinaze tends to be pretty lumpy. We're talking about a very small number of patients being treated with the disease.

I don't think there's a meaningful quote unquote inventory effect with this product. Again some of our international Erwinaze sales do go through distributors and there is different timing of shipments but we don't really see much of an impact on that on the total reported sales.

Gary Nachman, Goldman Sachs

Hi, Bruce, could you talk about the increase call volume at SDS in getting Xyrem filled. Has that changed at all or is it starting to come down? It seems like you're managing the process better but I'm curious on the actual volumes if that's changed.

And then secondly where exactly is the additional R&D spend going this year? It seems that more of the heavy spending really hits next year and you guys took up the revenue guidance but not EPS, so I'm curious if that's just you guys being conservative? Thanks.

Yes, let me take the second question and I'll have Mike comment on call volume at SDS. You know we took up the R&D spend guidance in part for a structural reason. Which is we just closed a transaction with Sigma-Tau concerning Defibrotide and prior to that transaction closing Sigma-Tau was sharing development expenses with respect to defibrotide with us. So, a piece of what you are seeing in the changed guidance is just we're on the hook for 100% rather than 50% of that spend.

In terms of where we're spending the money, we are in clinical trials we weren't in last year and getting ready to initiate clinical trials end of this year or early next year that our new for us, so the level of activity has gone up substantially. Remember JZP-110 was a transaction we closed in January of this year and if you look at the range of clinical activities we have across getting started on the pediatric side with narcolepsy, with Xyrem as well as JZP-110, and then what we're doing with Erwinaze in the young adult population as well as the follow-on JZP-416 and defibrotide and a registry trial with PRIALT, there's just a lot more activity than there was last year. Mike, maybe you could talk about call volume at SDS?

Sure, Bruce. On call volume, remember that Q1 had sort of a constellation of events. You had the Affordable Care Act, you had people re-upping in terms of the seasonality of the year. And weather.

And when service levels began to falter that actually generated more calls. And what we've seen in Q2 has been a step up in all operational metrics including timely fills, refills, answering the phone, drops and abandonment, things of that nature. So we're very pleased around the operational metrics. And it's not necessarily the call volume but how the operational metrics are actually directionally headed and we're very pleased with the way they are headed.

Okay. Thank you.

Annabel Samimy, Stifel

Hi, thanks for taking my question. I have a couple. First on JZP 386, I was glad to see you just initiated the Phase 1 studies. Can you give us an idea of when you expect to see some data from that and what you're looking for in terms of determining whether you can move straight into Phase III?

And the regarding the Xyrem patent, it seems like it's a bit of a carve-out of the population who takes valproate. What percent of the population actually takes that and can you carve out something? And was that the patent that you were waiting for or is there additional family of patents that you are still waiting for? Thank you.

So, let me have Jeff take the first part of your question which is expectations for what we're looking in the 386 data.

So just as a recap, we have initiated the trial, we expect it to conclude this year. We'll be working with Concert in the evaluation of those data.

It's not a straightforward although we have certain criteria we expect to see in the performance of the product. There a lot of different pieces you need to look at. Not just PK but also PD issues. And looking for what would provide the potential for a product that could have once nightly dosing, not have too long of a half-life because you don't want to lasting all day long, and then something that could be evaluated in additional studies. So there's going to be a fair amount of work to be done and certainly a valuation of the data once it's available to us.

And then, Annabel, on the second part of your question on the use of Xyrem and Valproate together. We certainly know it happens. It's not uncommon. We don't have perfect data on every script that's filled on that, that we can give out.

But it is important in the population to recognize the interaction between the drugs and lower the dose of Xyrem, and I think for safety reasons that's important for these patients so we do believe that's important information for them. And their treaters.

And then is there another family of patents out there? We're not going to comment on that specifically but I will say you notice that this one had an expiration date later than the 2024 date that had previously been our latest to expire patent, and we certainly had told people that there were patents working their way through the system that could have new expiration dates beyond 2024. This certainly is such a patent.

We do continue to have additional Xyrem-related patents working their way through the PTO. I can't say with confidence exactly when they will issue or if they will issue but there are others in process.

Thank you.

Douglas Tsao, Barclays.

Hi, good afternoon. Bruce, maybe looking ahead on the hematology oncology franchises, you could talk a little bit about Asparec and how you see that sort of changing the dynamic for the ALL franchise?

Yes so, Doug, on JZP 416 a couple things about that product that we think are interesting. One, from a patient perspective is it's a pegylated product which we believe would offer the opportunity for less frequent dosing. So Erwinaze, given IM or even given IV, which it is in Europe on label, and of course we have a PDUFA date at the very end of this year on potential for IV use in the US is dosed Monday Wednesday Friday, Monday Wednesday Friday. JZP-416 would offer the possibility of less frequent administration and more convenience to patients.

Beyond improvements that would be visible to the patients we also like the fact that recombinant production technology might give us a means to a more flexible supply chain. We've highlighted that historically we're somewhat capacity constrained with respect to Erwinaze production and this would have a meaningful difference on production. So obviously we need to get through the clinical trials and get something to FDA and European regulators to consider, but we view this as being a potentially a very good product for the patients with ALL.

And do you see the potential opportunity, because given the dosing advantages of [Officebar] far do you see this as potentially sort of moving Asparec up in terms of the treatment chrysanthemum-derived asparaginase as sort of moving up in the treatment paradigm?

Yes, you know it's conceivable but I think we've been cautious to tell people that unless we saw a meaningful advantage to JZP-416 to patients, our expectation is that physicians would probably go with the coli derived asparaginase that's got more history, more data and reserve the erwinia derived asparaginase for those patients who can't tolerate or developed a hyper sensitivity reaction to the E. coli asparaginase. So it's not completely out of the question but we're certainly not trying to guide people to expect that it would move up in the treatment paradigm.

And okay and if I can jump on one final question on Erwinaze. As you said sort of growth tends to be a little lumpy. I know you sort of went through a period where you had some initial initiatives that really reaped a lot of benefits in terms of volume improvements. Are we sort of now waiting for some of the data and the AYA population to mature before we sort of see another step up in growth rates there?

Yes, you know I would say something that I've said before so it's not intended to be new information, but I sort of feel as though we've penetrated the pediatric hypersensitivity opportunity fairly well. That's not to say there's no potential growth left there, but we've made great strides in making sure that most of the centers that would logically use the product are aware of how to use it and when to use it. I think we still have some work to do on educating treaters on appropriately recognizing hypersensitivity reactions and knowing when to use the product. But we think we've made great strides in the pediatric hypersensitivity opportunity.

The other growth opportunities we see, including the adolescent and young adult population and the potential for greater use of therapeutic drug monitoring are essentially changes in behavior. That's not the way things are done now and predicting when changes in behavior will occur is a little bit trickier from our perspective, so I think there is that growth opportunity out in front of us, but how quickly it occurs is not as easy for us to predict. Mike or Russ, do you want to add anything to that?

No, the only other thing I would add is we have a number of accounts that continue to come online and we've seen good growth from that historically. And we're seeing that some of the accounts that we've seen come online are not necessarily just pediatric, but also adult and that is something to watch for going forward.

And also I would add that some of the treatment sites are using therapeutic drug monitoring but it has not been broadly incorporated into protocols. So they remain good growth opportunities for us but they need to develop.

Okay. Great. Thank you very much.

Bill Tanner, FBR Capital Markets.

Thanks for taking the questions and congrats, Bruce, on a great quarter. Have a question for you looks like you have a second CBM patent review filed for the 730 patent.

I think in your prepared remarks you mentioned that you were preparing a response and being unfamiliar with the process, is this something the response would pertain to the first review request? Would it be something that would pertain to both or are these going to play out potentially in parallel or sequentially? And then I had a question for Russ.

So there have been a couple requests on the part of the ANDA filers for CBM-related review and essentially you can think of us as responding to each of those requests so they are separate. It's going to feel like a clump to all of you because they were all submitted in roughly the same time frame and I would suspect our response would be roughly in the same timeframe.

And I would expect early next year the decision on whether the PTO will review these under that CBM procedure would also come out in roughly the same timeframe. So technically separate but not a big difference in the time periods.

It may be an unfair question to ask, but would there necessarily be the contemplation that you might have a different outcome from the review? I mean granted these are business method patents but do you believe it's possible that one of the reviews might succeed and the other might not, or is that unknown at this point?

Unknown at this point Bill. I think the important thing for people to understand right now is this is a separate and distinct process from the litigation in the court.

Remember that given the bifurcation that litigation the distribution system related patents at least in the Roxane situation were stayed and were not moving forward and now there is a process that has at least kicked off although it itself is a long process. To take a look at those patents in a different jurisdiction.

Got it and then just, Russ, as it relates to the numbers of patients I think the average numbers increased by about 150 Q over Q in the first quarter. About 350 in this quarter. I'm just trying to understand a little bit better, is it a little bit more of a rebound from the first quarter in terms of numbers of patients? And then I don't recall the company ever actually mentioning it but I'm just curious on the average number of patients. Is that just the beginning -- average at the beginning or the end or how is that actually calculated?

I'll take the second part of the question first. It's a pretty crude measure sort of averaging the beginning and ending active patient number. That active patient number doesn't always translate into exactly when people get prescriptions filled in each month and most of them are getting it monthly.

It doesn't track perfectly to commercial bottles because it includes patients who are not -- it includes patients who get free drug under our patient assistance program, so they're not going to track perfectly. We give that number more to give you guys some transparency into what fraction of the diagnosed and treated narcolepsy patients out there are active on Xyrem to give people a sense for the number of patients getting Xyrem therapy as it might relate to your view as to the impact on payers or the health care system and sort of the rare nature of this important disease. But again it's a relatively crude number.

On the specific pattern of growth in this, we emphasized in the first quarter a little more than we usually do the growth and number of patients just to show you the disconnect we had in the first quarter between the growth in patients versus what we actually shipped in drug in the first quarter. But I think we've seen any major change in that growth in patients which has continued to be fairly steady.

Okay. Thank you.

John Newman, Canaccord.

Hi, thanks for taking the question. Just two quick ones. Bruce, I may have misheard you but I thought that when you were talking about the meetings with the FDA you may have mentioned that one of the things that they may have asked you to do and you'll be looking to do is finding some of the data on the studies that have already been completed. I just wondered if that's the case and if you could talk a little bit more about it?

And the second question is a broad general question. I'm just curious. This is more of a longer-term issue but it seems like at some point in time, third quarter next year at the latest, we'll be switching over to ICD-10. I'm just wondering if you think that may have any impact at all on your business. I know it's been pushed off a couple times but I'm just curious. Thanks.

Yes, so on the first question which related to Defibrotide and our efforts to see whether we've got a fileable package. I did mention that we needed to get some data and let me have Jeff talk about that for a second.

Sure. So when the original data package was compiled, it utilized CRF information that covered only sometimes high level assessments. For example, did something resolve or did something not resolve?

There were also some processes that were done again with high-level documentation that FDA wanted to see more detailed documentation on. And so those are some examples of things that we're going out now to be able to satisfy that request.

And John, on your second question ICD-9 to ICD-10 conversion process. Well, I know that will be a big process for healthcare providers and much of the health care system. I don't think has any particular differential impact on Jazz Pharmaceuticals.

Great thank you for taking the questions.

Irina Koffler, Cantor Fitzgerald.

Hi thanks for taking the questions. I just wanted to follow up on the covered business method patent issue since I'm not familiar with this process. But what is the end goal of the generic filers in submitting these?

What are they hoping to achieve if it doesn't color your litigation at all? Can you help us understand the downside risk of what happens if they prevail in this discussion at all?

And then the second question is if the FDA wants you to conduct additional clinical work and defibrotide for VOD is that something that you contemplated and would go on and invest in or would you skip that and just develop it for the other indications? Thanks.

Yes, Irina, good questions. On the first one, the covered business method patents. I think the import here is it's a way for the ANDA filers to contest whether these patents should have been issued. In other words are they valid patents?

This isn't specifically about do their products infringe these patents. It's just should the patents have been issued. This is sort of a novel situation you know challenging the Xyrem success program and our controlled distribution system under the covered business method review process which, at least if you go back and look at the history of how this came into being, was specifically set up to address patents relating to financial transactions and the question of how broadly you define that and what ought to fall within that is an interesting question. But the import just so all the investors, potential investors out there understand it, is essentially the ANDA filers asking whether these patents are valid patents or should be invalidated.

On defibrotide you know [were] FDA to suggest that additional clinical work needed to be completed before bring the product to market. Would we do that? I think we said when we acquired Gentium and even before the recently closed transaction where we got the rights to defibrotide in the Americas, we said that was a potential outcome. In fact I think we said at the time we announced the Gentium deal and closed it that might be the more likely outcome. That was prior to our type a meeting that we had in April of this year.

So yes that is a possibility for us. We still think the investment we made in this product would be a great investment for our investors, but right now we're very focused on whether we can get the product to market a little bit sooner based on existing data as was the case in Europe.

Thanks.

Chris Hamilton, RF Lafferty.

Sorry, my questions have already been answered. Thank you.

John Boris, SunTrust.

Thanks for taking the question and congratulations on the quarter. First question has to do with JZP-386. If you look at the I guess slowing of the metabolism of the product and the potential for accumulation with deuterium, just your thoughts around how do you ensure that you get an adequate or ideal or optimal PK PD curve? I think you mentioned on the call that you obviously want to fetter out any issues that could potentially be related to that.

And then I think you're conducting the clinical in Europe. Just the rationale for doing it in Europe versus US, get the FDA's blessing on conducting the trial there. And then also on the clinical relative to the [Aspec] trial that's ongoing which also uses a similar substance on the product to extend the half-life, You are required to conduct a 58 week safety study. Can you maybe give some insight into how you think the FDA might view some of the longer-term safety studies that might be required for that molecule?

And then a second question just related to JZP-110. I know you mentioned that physicians are very excited about the profile but just any thoughts you have from the Phase 2 data that you presented. Did you have an opportunity to take that to managed care, present the profile to managed care and any thoughts on how they responded to the profile? Thanks for the questions.

John, could you repeat your question? We got cut off somehow.

Okay. The JZP 386 question -- can you hear me okay?

We can hear you, John.

So on JZP 386, the question just has to do with the extension of the half-life of the drug to optimize once-daily dosing. You indicated that you certainly want to feather out in the Phase 1 clinical trial, the PK PD issues that could be associated with the formulation.

John let me jump in. I heard the first two parts of your question and when you hit Aspecs we lost you. On the two parts of the question and then I'll let you jump in if I missed anything.

On the difference in metabolism and what we're looking for, you know this is the first trial in humans. We want to see what data we get. I'll remind you that in terms of what the perfect profile would be, I don't think anyone knows the answer to that question because it hasn't been studied. So Xyrem with its relatively short half-life and it's twice nightly dosing has been extensively studied. There's good data out there.

What would happen if you gave different profiles of sodium oxybate, regardless of how you achieve that through [deuteration] drug delivery technologies, completely different compound exactly what that would do to efficacy to safety no one knows, I think, and we're certainly talking to all the experts, so I can't really comment on what the ideal profile would be. We certainly have some ideas of what we think ought to work and ought to be beneficial to patients and let's see what profile we actually get and whether the early data, including the PD data, would suggest that we've got something interesting.

In terms of the decision to do the first trial in Europe really that was just expedience. That was our goal and Concert's goal was to generate data sooner rather than later. That was the quickest path we saw to do it and so that's what we're doing. It to not reflect any particular feedback positive or negative from FDA. It was just the path we saw to get there fastest.

The trial didn't appear on clinical trials.gov, so did the FDA review it or not review it?

So we have not submitted the US IND at this point.

Okay. That's great. Thanks and then just JZP-110?

On JZP-110 what did you want to know?

So the question has to do with you certainly indicated that the profile from the Phase 2 clinical trial data that you presented that physicians have certainly embraced it and see it highly differentiated versus Provigil and Nuvigil. Have you had an opportunity to take that profile since a lot of physicians are [hosting] their facility to prescribe through tiered structures take that to managed care and what kind of feedback, if you have, has managed care given you about the profile on JZP-110, as you're about to spend $100 million on clinical development of the compound?

So certainly before we close the deal with Ariel we did significant market research. Sorry for the sound of the re-dialing in the background. We certainly did market research to understand what the needs were out there from a patient perspective, a treater perspective both in the narcolepsy and the OSA populations.

And we believe that bringing out a product, if successful, that would meet the needs of the roughly half of the diagnosed and treated narcolepsy patients who can't tolerate other stimulants or don't get the benefit they need in reducing their EDS symptoms, you know particularly if they've tried and failed other available agents, is a pretty compelling value proposition. I think the same thing could be said of OSA patients who despite being on CPAP therapy, and trying other drug therapy, similarly aren't getting the relief from the excessive daytime sleepiness that they need.

Thanks a lot for answering the questions.

No problem.

Looks like there are no further questions in queue. So, I'll turn it back to Kathee for closing remarks.

Let me hand it back over to Kathee.

Thank you. Thank you all for joining us today. Were planning to attend the Canaccord Genuity and FBR healthcare conferences in the third quarter and we look forward to seeing many of you there. Thanks and have a good evening.

This concludes today's conference. Thanks for your participation. You can disconnect and have a wonderful day.