Jazz Pharmaceuticals PLC (JAZZ) 2014 Q3 法說會逐字稿

Welcome to the Jazz Pharmaceuticals PLC third-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. Please proceed.

Thanks, Crystal, and thanks to each of you for joining our investor call. Today we reported our third-quarter financial results and updated 2014 financial guidance in a press release. The release and the slide presentation accompanying this call are available in the News and Events section of our website. With me for today's call are Bruce Cozadd, CEO; Matt Young, CFO; Russ Cox, our COO; Jeff Tobias, our CMO; and Mike Miller, our 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 and our future performance, rather than historical facts and are forward-looking statements. These statements include future financial results in 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 products, planned commercial efforts, including product supply efforts and future events related to the rolling launch of Defitelio in Europe, expected and potential submissions and interactions with our regulatory agencies, corporate development initiatives, anticipated litigation related events and expected future events related to planned and ongoing clinical trials.

These forward-looking statements involve numerous risks and uncertainties that could cause actual events, 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 form 10-Q for the quarter ended June 30, 2014 and form 10-Q for quarter ended September 30, 2014 and we expect to file shortly. We under take 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 our 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 include in today's press release and the slide presentation accompanying this call. Both are posted in the News and Events section of our website. I will now turn the call over to Bruce.

Good afternoon, everyone, and thank you for joining us. During the third quarter we achieved revenues of $307 million, an increase of 32% compared to the third quarter of 2013. It was driven by strong sales of our key products Xyrem, Erwinaze and Defitelio. We realized adjusted net income of $146 million in the third quarter, reflecting the attractive margins in our business. GAAP net income for quarter was $26 million.

During the third quarter we made significant progress toward our 2014 goals. We had two positive pre-NDA meetings with FDA, focused on plan to NDA submission for defibrotide in US and we advanced our clinical development pipeline by opening two new clinical trials for enrollment, one in pediatric narcolepsy and the other in children with acute lymphoblastic leukemia. Also, enrollment in the Phase 1 JZP-386 study was completed. We have made significant progress on maximizing value from the three transactions we completed earlier this year, launching Defitelio in four additional European countries in third quarter and advancing JZP-110 toward clinic.

In addition to advancing our US regulatory efforts with defibrotide, we remain focused on corporate development efforts as we look to add differentiated products that are meaningful in size to Jazz and will create additional shareholder value. We continue to prioritize corporate development activities aimed at products on the market or close to market while also continuing to assess development candidates that are complementary to current franchises.

I will now update on our sleep and hematology/oncology franchises, including information on key commercial, legal, regulatory and clinical development activity during the quarter. Finally, Matt will review our financial results for the quarter and provide comments on guidance. I will start my comments with our sleep franchise and our lead product, Xyrem. In the third quarter demand remains strong and the average number of active Xyrem patients grew to approximately 12,050 from 11,000 the same period of 2013. During the third quarter, we had bottle volume growth of 9% year over year.

Even in this increasingly restrictive reimbursement environment, where payers and managed care organizations are implementing more processes, such as prior authorizations to verify that appropriate patients receive therapy, we are pleased that we have not seen meaningful changes in our overall reimbursement coverage. We are committed to providing patients and healthcare providers with the appropriate level of support services to enable them to successfully navigate the complex payer environment.

In particular, we continue to work closely with FCS to improve the timeliness and effectiveness of the processes for filling and refilling Xyrem prescriptions while preparing to handle increases in reimbursement related activities, including typical first-quarter pressures. Efforts to increase Xyrem prescriptions written by our low- to mid-decile physicians continue to contribute to sales growth year over year. We are expanding the Xyrem call universe through identification of new opportunities for our sales representatives to educate additional physicians on treatment with Xyrem.

Another important initiative has been to grow the diagnosed population of narcolepsy patients who may be candidates for Xyrem therapy through education efforts with healthcare providers as well as an unbranded disease awareness program. During our narcolepsy disease awareness campaign in eight US cities, which concluded in August, there were approximately 300,000 unique visits to the morethantired.com website, over 7,500 physician finder tool hits and approximately 6,600 completions of the Epworth Sleepiness Scale with a total score greater than ten. Over 70% of the hits in each of these categories were attributed to the eight target 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. Our review of insurance claim databases to identify lagging indicators such as increased use of diagnostic tests, for example, the multiple sleep latency test, is encouraging. We will continue to monitor these data over time to identify whether there is an increase in the diagnosis of narcolepsy. In October, we enrolled the first patient in our Phase 3 study of Xyrem in pediatric narcolepsy patients with cataplexy. We expect the study to enroll 100 patients.

Turning to a brief intellectual property and legal update on Xyrem, patent litigation continues in the district court in New Jersey. 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 second quarter of 2015. We have also submitted preliminary responses to covered business method, or CBM, petitions that certain of the end of filers filed in the second quarter. The CBM petitions ask the patent trial and appeal board of the US PPO to review and cancel certain patents covering our restricted distribution system for Xyrem.

Our preliminary responses assert, among other things, that the challenged patents should not be subject to CBM review. We expect the board to rule on whether review will be instituted for any of the patents subject to the CBM petitions during first quarter of 2015. If the patent office decides to institute the CBM reviews, we expect that the board would issue its decision after review as early as the first quarter of 2016. And we recently received a Paragraph IV notification from another filer, Watson Pharmaceuticals.

Turning to a brief regulatory update on the Xyrem REMS, as discussed in prior calls we initiated dispute resolution with FDA earlier this year related to the Xyrem REMS. We met with FDA regarding our request for supervisory review during the third quarter and we are currently addressing FDA's interim request for additional data before it issues a response, which we expect to receive before year end.

Turning to JZP-110, we are currently working on final study designs for Phase 3 studies and are preparing to manufacture clinical trial materials for those studies. We anticipate initiating one Phase 3 study in excessive daytime sleepiness and narcolepsy and two Phase 3 studies in excessive daytime sleepiness and sleep apnea in the first half of next year. We are also planning an extension site to evaluate long-term safety data. Finally as to JZP-386, our deuterium-modified sodium oxybate compound license from concert, enrollment in a first-in-human trial evaluating the safety, pharmacokinetics and pharmacodynamics of JZP-386 is complete. We anticipate receiving initial data before year end and expect to provide an update on the outcome of the study after we and our partner, Concert, have evaluated the data and determined next steps.

Now on to the hematology/oncology franchise. We are pleased with the strong growth of Erwinaze this quarter. Our efforts continue to be focused on educating Healthcare providers and cancer centers on identifying hypersensitivity reactions to asparaginase in the treatment of acute lymphoblastic leukemia. We continue taking steps to expand production capacity and to improve the Erwinaze manufacturing process as we seek to build a higher level of inventory and increase Erwinaze supply over the longer term.

Our clinical study of Erwinaze in young adults is open for enrollment. We are continuing to add study sites in both the US and EU. As to JDP-416, the first patient was recently enrolled in the pivotal Phase 2 clinical study we are running in collaboration with The Children's Oncology Group in children who have experienced a hypersensitivity reaction to treatment with PEG-asparaginase therapy for their acute lymphoblastic leukemia.

The Defitelio launch in the European Union continues to progress well. Since March, Defitelio has been launched in Germany, Austria, the UK, Denmark, Finland, Norway, and Sweden as well as in Italy under a special reimbursement law. During the rest of 2014 we anticipate launches in Ireland, the Netherlands and Italy under final pricing and reimbursement approval. 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 and discussions throughout the EU.

Now a brief US regulatory update on defibrotide. We had two productive meeting pre-NDA meetings with FDA in August, a CMC and clinical/nonclinical meeting. During these meetings, FDA provided feedback with respect to our planned NDA submission and as a result of these discussions we do not anticipate needing to complete any additional clinical trials prior to NDA submission. We are pleased with the progress that we have made to date in collecting and remediating existing defibrotide clinical data. We are planning to initiate a rolling NDA submission by the end of the year and anticipate completing the submission in the first half of next year. Defibrotide has fast track designation in the US and we plan to work with FDA to gain regulatory approval for defibrotide for the treatment of severe VOD as quickly as possible.

Our defibrotide development team is assessing potential clinical strategies to evaluate defibrotide in the treatment of earlier VOD. That is, VOD before it has progressed multi-organ failure and in prevention of VOD in high risk patients. We plan to provide an update on our development plans during the first half of 2015. Also, in light of previously published data, we continue to assess the best approach to understanding defibrotide's potential role in prevention of VOD and acute graph verses host disease.

Finally, for a more general regulatory update, as previously disclosed we received a Form 483 in April at the conclusion of pharmacovigilance inspection conducted by FDA and responded to FDA to address those observations. In August, FDA issued an establishment inspection report to us which indicates the inspection is now closed. 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 third quarter as we saw adjusted EPS attributable to Jazz increase by 31% year over year. We expect continued strong top line growth for 2014 driven by growth in sales of Xyrem, Erwinaze and Defitelio. We are increasing our total revenue guidance to range of $1.15 billion to $1.17 billion and increasing adjusted EPS guidance to a range from $8.20 to $8.35 per share. Net sales of Xyrem for the quarter were $204 million, up from $154 million in the third quarter last year. We are maintaining our guidance for Xyrem net product sales in a rage of $765 million to $780 million for 2014. We expect high-single to low-double-digit bottle volume growth in 2014.

Turning to Erwinaze, third-quarter worldwide net sales were $52 million, up 18% from the same period in 2013. We are increasing the lower end of our guidance for Erwinaze net product sales to a range of $190 million to $200 million for 2014. For Defitelio defibrotide, third-quarter worldwide net sales were $19 million compared to pro forma net sales of $13 million in the third quarter of 2013. We are increasing our previous defibrotide net sales guidance to range of $65 million to $70 million. In the third quarter, Prialt net sales were $6 million compared to $11 million for the same period in 2013. As a reminder, sales in the third quarter of 2013 including $5.7 million in sales to for distribution in Aseco for distribution in Europe. We anticipate sales to (inaudible) during the fourth quarter of 2014.

Turning to operating expenses, adjusted SG&A expenses for third quarter were $77 million, or 25% of total revenues, compared to $60 million, or 26% of total revenues, for the third quarter of 2013. The increase in adjusted SG&A expense was primarily due to higher head count and expenses resulting from the expansion of our business. Adjusted R&D expenses for third quarter were $18 million, or 6% of total revenues, compared to $10 million, or 4% of total revenues, for the third quarter of 2013. The increase was primarily related to increased costs associated with the advancement of our sleep and hematology/oncology product candidates as well as life cycle management activities for our existing products. We anticipate higher R&D expenses as we advance our clinical development programs and continue our regulatory efforts.

While the expenses in SG&A and R&D can vary quarter to quarter, we expect to be in our guidance range for the full year. We are maintaining 2014 guidance on adjusted SG&A in the range of $315 million to $325 million and maintaining our guidance on adjusted R&D in a range of $65 million to $75 million. As of September 30, 2014, cash and cash equivalents were $575 million and we have available capacity under our existing revolving credit facility of $425 million. During the third quarter, the main use of cash were repayment of $300 million under the revolving credit facility, the up front payment of $75 million to Sigma-Tau for the acquisition of rights to defibrotide in the Americas, tax payments, capital expenditures and repurchase of our ordinary shares.

During the third quarter we repurchased approximately 44,000 shares at average cost of $148.38 per share, leaving us with $33.6 million remaining in our previously announced $200 million share repurchase program. In August 2014, we completed the placement of $575 million principal amounts of 1.875% exchange able senior notes due 2021, resulting in net proceeds to us after that issuance cost of $559 million. As of September 30, 2014, the principal balance of the company's total debt was $1.5 billion. Foreign currency gain during third quarter of 2013 was $6.5 million, or $0.08 per diluted share, primarily due to strengthening of US dollar against the Euro.

In closing, we continue to pursue attractive opportunities to expand our business through our corporate development initiative. We are pleased with our progress year to date, including our completion of multiple transactions and execution on commercial, development and regulatory objectives, all of which we believe continues to support our focus on acquiring or developing important differentiated medicines for patients while generating value for our shareholders. Thank you for joining us on the call today and I will now ask Kathee to make a brief comment about our Q&A session.

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

(Operator Instructions)

Our first question will come from the line of Annabel Samimy from Stifel. Please proceed.

Hi. Thanks for taking my question. Good quarter. Had a few questions on volume verses pricing on Xyrem, specifically. It looks like you only added about 300 patients, which was slight slow down from the uptick that you saw last quarter, so I would have expected a little bit more support from the volume growth. Can you give us a little bit of characterization of what's going on there given that you had been targeting the lower-decile physicians and also increase the education efforts? And on defibrotide, can you help us understand whether there is any big volume orders to distributors over there or if that's pure demand? Thank you.

Okay. Let's start with your Xyrem question. Of course we typically provide our growth numbers year over prior year, and you saw we reported 9% volume growth. I think the number of patients, average patients, during the period grew approximately the same amount and I will also say we are maintaining our Xyrem guidance.

So I wouldn't say anything about the quarter surprised us from a volume perspective. We continue to see good growth from our low- to mid-decile prescribers and as we have said, the non-branded disease awareness program we just completed in August is really expected to have an impact over time, not so much in the current period. So I would say right on track with Xyrem. And with respect to defibrotide, maybe I will let Russ make a comment on that.

So we had commented in the second quarter we did see some stocking into different countries and we are not seeing same level stocking taking place in the third quarter.

So it's more demand rather than stocking?

That is correct.

Okay. Thank you.

Our next question will come from the line of Michael Faerm with Wells Fargo. Please proceed.

Hi. Good afternoon. Thanks for taking the question. My question is regarding M&A, if you could please give us kind of your latest thinking in terms of priorities, what types of size transactions you'd consider, what sort of timing we might expect with respect to future transactions? And with regard to size maybe, some color on how high you would be willing to push your leverage and whether you would use stock for the right transaction? Thank you.

Mike, let me ask Matt to take this one.

Sure. Hey, Mike, thanks for the question. As we said previously, we continue to be very focused on corporate development and our priority remains on near or close to market or on market opportunities while principally in our current franchises we would look beyond that. We also are looking at the development stage opportunities within those franchises.

So the priority really hasn't changed. All of that continues to be driven by a focus on medicines that do something substantial for patients that have the opportunity to generate strong margins to offer us long-term growth and good exclusive and again continue to be a focus with our business overall. We continue to see the breadth of those opportunities given our size and geographic footprint today as having increased, so the number of situations we are willing to look at and can look at has increased. And we continue to see an attractive set of opportunities out there.

As we have said before, it's difficult to comment specifically on timing because in any one transaction, they don't follow a perfectly linear path and as it relates to leverage and the currency we may use I think as we have said before, we would be willing to push our leverage higher up to levels that you see elsewhere across our industry in the five or north of five times leverage range if we believed we were buying an asset that changed the overall portfolio of our business in a way where we felt we would easily be able to reduce that leverage quickly over time and that our risk was diversified and we would be willing to consider large transactions that would contemplate that. We have also said that we would be willing to use our equity in the right situation where we feel the opportunity from a value and risk perspective was something that we believe would be attractive to our shareholders as we think about relative value of currencies and over an absolute value of what we are looking to accomplish.

Thank you.

Our next question will come from the line of Ken Cacciatore from Cowen & Company. Please proceed.

Hi. Thanks. I was just wondering in terms of defibrotide if you could give us initial indication in the US kind of patient size of those patients that traditionally progress to VOD with stem cell transplant verses if you were able to actually get it used in what you term prevention or earlier treatment? Can you give us the magnitude difference of both? Then also just wondering on your valproate coadministration patent, it appears that Amneal, Ranbaxy and Par have each certified Paragraph IV to that patent, but the lead litigant, Roxane, has not yet certified so I was wondering if there is anything we conclude from them not filing yet on that patent? Could you discuss that? Thank you.

The first part of your question, sort of defibrotide market size depending on indication, let me have Russ walk through some of those numbers.

I will just give you a flavor for differences between the EU and the US and then specifically in the US. In the EU we see in terms of number of Hematopoietic stem cells transplantations 35,200 in the EU and there is about 6,300 then in terms of patients that are high risk for VOD and then the report incidents of VOD is in the 3,600 range. That's sort of the high range of the numbers that we have seen in the EU. As it relates to the US, it's less but still substantial where you see about 19,500 HSCTs. You see about 3,000 patients at high risk for VOD and somewhere between 1,000 to 2,000 with reported incidents of VOD so those are your high end numbers. Our goal obviously was to look at a label that's consistent with what we have seen in Europe but clearly our goal would be to work towards early treatment where we think that we will see better outcomes over time.

Ken, on the second part of your question, I think I am going to disappoint you a little bit by declining to comment on what ANDA filers may be doing in terms of their strategy. I can tell you obviously we continue to feel we've got a robust intellectual property portfolio around Xyrem including, but not limited to, the specific patent you referenced that expires in 2033, but you know not going to get into ANDA filer by ANDA filer discussion of that.

Our next question will come from the line of David Amsellem from Piper Jaffray. Please proceed.

Thanks. So just on Xyrem, can you give us some more color on the reimbursement headwinds that you are seeing, I guess the extent to which you are seeing out right denials and to what extent are headwinds limiting volume growth? Then secondly on 386, if safety checks out fine and you potentially have a differentiated dated PK profile, would it be reasonable to conclude that you can move directly into Phase 3? Thanks.

So on the first one maybe I will let Mike Miller address the Xyrem reimbursement environment.

Thanks, Bruce. So the environment is becoming increasingly restrictive, and it really has been focused on speciality form in the orphan drug category or space. And the PAs increased environmentally, I would say that. And the purpose of those PAs is to really make sure that the drugs were used appropriately and diagnosis is well documented. But I will say that our coverage is quite good. Our approval rate is you know in the almost 80% range so our denial issue is not a large one. We continue to provide the services that we think enable timely refills and filling the first scripts at the pharmacy for both providers and patients. So we feel quite good about it.

Okay. Maybe I'll have Jeff talk about 386 and the potential with that.

Right, so in anticipating results from the study you can imagine there could be any number of different findings that come out of that trial. But assuming the scenario you set up that everything looked really interesting, there are still a number of questions I think that remain for any product as it's changing the delivery pattern of Xyrem to patients. And certainly it's not well established as to what that might do as regard to impact on efficacy and other perimeters. So there mainly needs to be a little bit of additional work before that and going right into pivotal trials, again, depending on the results you might want to think about other type of approaches but there is additional work that would need to be done.

Thank you.

Our next question will come from the line of Louise Chen from Guggenheim. Please proceed.

Hi. Thanks for taking my questions. So my first question is with respect to potential pool of patients for Xyrem. I know you've had initiatives to increase that from 50,000 to 55,000 to 75,000 to 100,000 over time. I am just curious how that initiative is playing out. Secondly with respect to OUS business, curious how large it is today and where you want to grow that to over the next several years? Thanks.

Yes, maybe I'll take the second half of your question first and then have Russ take the first part of your question. You know with regard to XUS I would say this is a partnered product for us outside the US with UCV and Valiant, our two partners so we don't really comment too much on exactly what's going on there. It's not a major driver of our revenue growth for the product. Russ, you want to take the first half of the question?

Yes, sure. So you heard us comment that we are looking at penetration levels of about 12,000 patients currently in the US. We have seen claims data that gets us anywhere from 50,000 to 65,000 in terms of current patients that are diagnosed in the US and there are databases that show you anywhere from 155,000 to 200,000 patients actually have narcolepsy. We have seen claims data to get us in the 175,000 patient range so there are a series of different numbers that we've seen but I think it's pretty clear that you've got over 50,000 patients that are in the US, are diagnosed today.

Thank you.

Our next question will come from the line of Bill Tanner from FBR Capital Markets. Please proceed.

Thanks for taking the questions. I had one follow up maybe, Jeff, for you just on 386. I know the trial was intended to measure PK profile and safety so I would say it's safe. Is there a bogey as it relates to the half life, I guess, that one would need to see to take it forward? Is there any analogue, any observation from Concert as it relates to other compounds, what they see with extended half life?

Then I guess the second question, Bruce, you mentioned something about on the Xyrem REMS dispute resolution that the FDA has requested additional information. I guess I hadn't heard that before and I am wondering is that a departure from what the process has been like in the past? And I guess I wouldn't ask you to handicap whether or not that's a good sign or not but just help us understand if this is a little bit different as you go higher within the agency.

So yes, the bogey for 86 any number of them are possible but the one that first comes to mind would be if indeed the half life is too long. So you end up with a product that has effect going into the morning and that could be problematic with the product.

(Multiple speakers.) Maybe there is kind of a window then, not so much a hurdle because it could be too short and too long so somewhere in the middle.

I think that's the right way to think about it and what the shape is in between and what that's doing to the patients. On your second question, Bill, you are right. This is you know new information since our last update a quarter ago. We had previously said we expected a response back in the third quarter. In fact, what happened is FDA did ask us for some supplemental information which they then will react to and we expect now that, that response, which we had targeted for the third quarter is of this quarter, meaning a fourth quarter event. What to read into that, I wouldn't read anything into that other than FDA is actively engaged in this process and we are working with them to make sure they have the information they want to have.

Without maybe, Bruce, naming names at the FDA, could you give us a sense as to what level you're at? Sea-suite level, the analogue of that?

Yes I think the way we have characterized this before is we are at the first supervisory review level, meaning this is the first time we have gone back to a group that's different from the group that originally made the decision. So our first appeal, if you will, was to ask the group that made the original decision did they want it make a different decision? We are now up a step on the ladder from that.

Got it. Okay. Thank you.

Our next question will come from the line of Jason Gerberry from Leerink Partners. Please proceed.

Hi. Thanks for taking the questions. Just two for me. First on Defitelio, based on your more recent meetings just kind of curious what the outlook is for the prevention indication? If there is anything encouraging where there might be potential path forward on the basis of the completed study or if your thought is still that, that would require another clinical trial? And then I guess as you launch Defitelio in more European markets just wondering if the pricing has been consistent with the early launch markets? Thanks.

Yes so, Jason, I will take the first part of the question. Just to be clear, the conversations we have been having with FDA relating to near term submission are for the treatment of severe VOD. We are not in any way suggesting existing clinical data would get us or them to prevention indication. We're exploring what additional clinical work we would like to do in that regard but that's really a separate discussion. I want to be very clear about that. On pricing, maybe I will have Russ address that.

Yes, Jason, we established EUR426 as pricing we had seen initially, and we are continuing to see good consistency there throughout different countries. So pretty much holding the course.

Great. Thanks.

Our next question will come from the line of Gregg Gilbert from Deutsche Bank. Please proceed.

Thank you. Going back to the dispute resolution, Bruce, the news you expect to hear by year end, can you bucket that for us in terms of then possible outcomes? Then on the CBM, process which I am not as experienced with, can you talk about how that might affect the legal process if at all, both the process and sort of the time line in the legal process as it relates to CBM process? Thanks.

Yes so the bracketing of different outcomes for the current phase of dispute resolution could be anything from they completely disagree with all the arguments we're making and they're not moving a bit from anything they have said historically to they completely agree with us or anything in between. I don't think we have a basis to know where we'll end up there.

In terms of the covered business method situation and how that dove tails in with litigation, that's a complex question. In the litigation we are undergoing right now, we are obviously arguing that ANDA filers, and you are probably referring to Roxane in this particular case, infringe patents we have. Those are presumed to be valid patents right now. ANDA filers would obviously argue in their defense that either they don't infringe or that the patents are not valid. If there is a decision, which I think I described in my early remarks as being as early as the first quarter of 2016, that they both decided to review, completed the review and found those patents to be invalid then obviously no longer be able to argue that particular case.

Is that part appealable?

Hang on one second. Let me just finish up. Remember that in the Roxane litigation we have previously disclosed that we bifurcated the case and the piece relating to the distribution system related patents is stayed as of now.

Okay. Thanks.

Our next question will come from the line of Jessica Fye from JPMorgan. Please proceed.

Hey there. Two for me as well. As we think about timing of those JZP-110 trials, I think you mentioned you have begun start-of activities here ahead of the planned Phase 3s and are producing trial material. I guess just given that we've had the Phase 2 data, my question is about timing. Have you finalized those Phase 3 trial designs at this point? If not, is there some special complexity we should think about?

Basically, are these trials likely to start early in 2015 as opposed later in the first half and also is that trial material a gating factor for shutting the Phase 3s or are you really all set there? Second one is just the low end of your Xyrem guidance at this point, would you characterize that as conservative? It looks like it would imply a deceleration in growth.

Jessica, thanks for the questions. On the JZP-110 trials, we did have an end-of-Phase 2 meeting with FDA over the summer. We did share our plans, got good feedback from FDA and feel we definitely understand what those trials look like. Is there any piece of that where we are still dotting Is and crossing Ts? Maybe. But I think substantially we know what those trials look like. In terms of timing early or late in the first half of next year, I will just say our guidance at this point is first half of next year. Don't want to be more specific than that.

Is clinical trial material gating? Yes, it is. We need materials to do the trials. I point that out just to make sure you know what we are currently working on. We don't foresee a problem with that, but yes, we need to complete that to get those trials going.

And on the Xyrem guidance, I wouldn't characterize our guidance any differently than I usually do, which is we give guidance that's intended to give you a sense for what we think the range is on average. I think we want to be right and we don't want to come in at the low end or below our guidance so if that means it's a little conservative, it's a little conservative. But we typically give bottom of the end of the range for a reason which is it is possible, not necessarily probable, but possible.

Thanks.

Our next question will come from the line of Irina Koffler from Cantor Fitzgerald. Please proceed.

Thanks for taking the questions. As we're heading into the new sign-up period for the healthcare exchanges, I know we had some issues last year, disruption in the first quarter on Xyrem. Do you anticipate that these issues have been ironed out at this point? That's question one. Then the second question is about Erwinaze. Do you foresee any potential competition to Erwinaze from the Erytech product being filed in Europe or T-cell immunotherapy approaches that are a little bit earlier in development? Thanks.

Let me have Mike Miller handle the first part of your question.

Sure. Thanks, Bruce. The Q1 payer activity that you see is driven a lot by the new enrollments, plan design, things of that nature that are not Xyrem specific. They are environmental, and they will occur again. With respect to SDS however, we have seen improvements in processes and operations. We have increased our staffing. We think that SDS will perform better in Q1 2015 and as I said earlier, our job is to make sure that we continue to get timely dispensing for both providers and patients and that's our goal.

On the second part of your question which is, I'll describe broadly as potential evolution in treatment options in ALL let me have Jeff talk about that a little bit.

So there is activity in this area and there are areas of still unmet need. Beginning with the first part of your question, the Erytech product, GRASPA, which is for those who may not be familiar with it, it's just asparaginase encapsulated within red blood cells which presumably reduces the immunogenicity and increases the half life. That's something that's been studied mostly in Europe, mostly in France, somewhat in Belgium. Their studies have been up against native E coli based asparaginase, which is rarely used if all here in the US. I don't think there is a product you can get now.

So it seems it's very difficult to kind of assess where it will fit into somebody's regimen as they move forward with that. The other the T-cell mediated approach, either the [Mituna Mab] or CAR T approaches are interesting. These are right now being focused mostly on the relapse refractory group and the older age group where using asparaginase is a little bit more difficult. Some of the results are pretty impressive, so this is something we'll watch over time. They each have their pluses and minuses but again, some of the results have been pretty nice.

Then just one last one. Would you be able to comment on what exactly the FDA asked for in terms of the shared REMS dispute? Thanks.

Yes, just one more comment on ALL before I move onto that. I would just say as a reminder to everyone that in the pediatric ALL treatment, right now the accepted protocols are very effective in terms of the efficacy of the regimens and so talking about significant advances in ALL therapy, you are generally not talking about that sort of starting regiment. You are talking about relapsed or refractory patients, older patients. I just want to make sure that we put Jeff's comments in context.

On the second -- on your follow up question, I won't ask exactly what data they asked for in their request for additional information other than to point out that, that was really part of our ongoing deem-REMS to REMS approval process. That's separate from the single shared system discussions that are ongoing that started, as most of you will recall, early in 2014 but this those are sort of two separate processes.

Our next question will come from the line of Gary Nachman from Goldman Sachs. Please proceed.

Hi, Bruce. Just a follow up on that last point on Xyrem with the shared REMS process. Just give us a little bit more in terms of how that has been progressing in terms of discussions with the generic companies. Is that even feasible at this point? Sounds like they have still been moving forward. And then from that, SG&A came down sequentially in 3Q. Why is that, with the DTC campaign that you had over the summer? Should it pick back up? What are some of the key drivers of SG&A we should think about moving forward over time?

Thanks, Gary. On the first one, I really can't provide more color other than to say that process for single shared system discussions, which include us and the ANDA filers is an ongoing discussion. I think I have said in the past these are complex discussions. I think I have pointed out that we have been involved in other single shared system discussions outside of sodium oxybate and those have proven to be complex and lengthy, so I wouldn't read anything in particular into the time.

Is it possible to get there? We'll see. It often has been in other situations. If not, there are you know procedures for what FDA can do in those instances but I think the preference is in general to start with an effort to identify whether there is a single shared system that in fact can work. On SG&A sequential, let me hand that over to Matt.

Hey Gary. Much of the discrepancy in the third quarter in terms of lower SG&A relates to timing related factors so we do expect, again, based on our overall guidance for the year a pick up in SG&A in the fourth quarter. Some of that is on you know various sales and marketing initiatives in the third quarter, though not related to general awareness. Much of it is also in a variety of G&A-related projects that really span across all of the G&A functions, legal, IT, corporate affairs, med affairs in a few cases. It's actually not any one thing to point to other than we had delayed spending in the quarter that again we anticipate picking back up here in the fourth quarter. We would reiterate that we would expect SG&A again for the year to be (technical difficulty) 2013 as we continue to invest and grow in our business this year as we stated earlier in the year.

Okay. And then I know you are obviously not giving guidance for 2015 but could you point to maybe some of the areas that you've earmarked that you might increase some of your spending in terms of sales and marking, some of the initiatives that you are thinking about? Thanks.

Okay, Gary, for the third of your two questions I will hand it over to Matt.

Thanks, Bruce. Thanks, Gary. So we probably won't get into a lot of specifics about what we are going to see in 2015 at this point in time. You know, is it possible as we continue to evaluate our general awareness campaign that we invest money there, yes but we are still in the middle of setting our numbers for 2015 and aren't really prepared to give really specific guidance at this time.

Okay. Bruce, it was more of a follow up, so thank you.

Fair enough Gary.

Our next question will come from the line of John Newman from Canaccord. Please proceed.

Hi guys. Thanks for taking the question. A question for Bruce. Bruce, the comments that you made earlier in the call regarding Erwinaze almost sounded like you're feeling more confident in terms of really fortifying the manufacturing process there as well as expanding the capacity. I just wondered if that's the case and also how the progress is going in terms of switching over to a new manufacturing process there in the future? Thanks.

Yes, thanks, John. You know on the Erwinaze supply situation, this is something we are very focused on. We are aware that this is a critical drug for the patients who need it, and we do not want to be in a situation where we're unable to supply. Our efforts working together with our supplier are to build up inventory levels over time, do things that make that manufacturing process more robust. At this point we are talking just about working with them. I am not intending to signal that we've got some separate supply coming online. This is working with our existing supplier in that regard.

Just to be perfectly clear with everyone, we have pointed out we are not running at a point where we have sufficient inventory levels to handle a big manufacturing problem. Were we to not be able to use one of the batches that's manufactured, that would be a serious problem. And that's why we are focused on doing everything we can to have a more robust, meaning certain, process that every batch we make is in fact a quality batch that can be used in the market place. But also ideally to put ourselves in a position where you've got inventory on hand to buffer against anything that can go wrong, which is of course what we do for other products and what I think is standardly done in our industry.

So we're focused on it. We are working on it. We have a lot of good people both at Jazz and our supplier working on it, but I didn't mean to suggest more confidence. I just mean to suggest we are focused on it. We are making progress, but we are not at a point and we won't be at a point in the near term where we have such an inventory level that we won't continue to be concerned and focused on this.

Great. Thank you.

Your next question will come from the line of Jonathan Eckard from Citi. Please proceed.

Thanks for taking the question. I will only ask one to bring down the average. So for JPZ-386 I think you guys have done quite a bit of work on different Xyrem formulations, or sodium oxybate formulations, in the past. Would it be safe to say that when we see the data, the PK will be fairly self explanatory of what it is? But does that always answer all the questions regarding appropriate PD? I am just trying to understand what we need to assess in the data for both yours JPZ-386 as well as competitive formulations when they start coming out?

John, I'll make a comment that I've made before, so I don't mean this to be new to anyone, but Xyrem has been studied as twice-nightly dosing in significant pivotal clinical trials. That's the basis for the approval we have and the treatment paradigm that exists. Changing that delivery profile and knowing exactly what that will do in terms of efficacy, in terms of safety is not something that's been studied in any significant way, certainly in any determinative way in the past.

So do we feel like we are as educated as anyone on the planet in terms of what we want to accomplish and what it might do in patients and benefits wanted risks and how to think through all that? Absolutely we do. Does that mean we have all the answers as if all the experiments have been done and all the clinical work had been done? No. We don't have those answers and no one has those answers. I hope that helps.

Okay. Yes, thank you very much.

Our next question will come from the line of Marc Goodman from UBS. Please proceed.

I was hoping we could talk about Defitelio a little more, just give us a flavor for as the countries came on was it geographical expansion that drove sales? Was it more penetration in the areas where you were? Give us the flavor for that. When you look at the sales, obviously, last quarter $20 million, this quarter $19 million, I am seeing your guidance which is basically not even $20 million in the fourth quarter. Can you give us a flavor of how you are thinking on had? Thanks.

Marc, I would just say it's a complex process to launch this product. I can't say it's just geographic expansion because remember, the product has been available and generating revenues on a inpatient basis in many of these markets historically so it's not your typical launch where each time you start selling in a new territory you are realizing revenues for the first time. There is an impact of what the price is in each market where we are selling. There is an impact of how the reimbursement system works. And there are also impacts as we transition or can be impacts as we transition from name patient basis over to an approved product with improved reimbursement that's being commercially promoted so there can be some disruption during that process.

So what we have tried to do, starting with our initial guidance for 2014 and in all of our commentary about this launch, is really focus people on the fact that we are taking our time to get this right over the balance of this year and into next year, honestly, to position this product for creating the value we think this franchise will be over time, starting within the EU. Obviously, separately we'll talk about the US. So this is a very deliberate effort. It will take some time but particularly given we are doing inpatient basis over to commercial transition, it's worth taking the time to get it right.

It's not as though that product is not available to the critical patients who need it in those markets before we do that transition. I want to make that clear. We are very focused on making sure patients get the benefit of the therapy, but that's why this is not your typical stair step, add a new market, get new sales, kind of launch. And in terms of the progression quarter to quarter, I think we are less concerned about exactly what that looks like than the overall trends. I would say we see that in our Erwinaze business a little bit where we'll see some bumpiness quarter to quarter that we don't think necessarily reflects any true underlying trend. It can be more related to ordering patterns or just how the disease presents and what is an orphaned indication, a very small number of patients.

Our next question will come from the line of Douglas Tsao from Barclays. Please proceed.

Hi. Good afternoon. Thanks for taking the questions. Just maybe, Bruce, you can provide a little color in terms of the 20% of patients who are actually getting denied reimbursement for Xyrem? Are those patients who are potentially being treated for an off-label use? Are they being sort of a step edit for them to go on stimulants first and do you see evidence that they make it back to Xyrem? Just given the fact that we know that stimulants don't have terribly good efficacy.

I guess as a quick follow up question, obviously it seems like by many of the metrics you track, are there a lot of really strong indicators in terms of DTC campaign in terms of disease awareness in those initial eight cities? At what point would you think about taking it more broadly? Or do you think were those markets sort of the ones that for whatever reason had the best characteristics and you will perhaps wait a little bit before going sort of national, if you will? Thank you.

Okay. I would just say on the first part of the question, I don't know the drug out there that's got 100% non-denial rate. I think you hit a couple things that probably do factor into that, including people for whom the drug may not be appropriate therapy in which case it's a good outcome, honestly, that it's not being paid for and not being dispensed. That's not a number we would ever expect to be 100%. I am not sure it would be a good thing if it were 100%.

Mike, if you want to add anything to that, feel free. Then I will let you comment on how we evaluate the disease awareness, which I will just point out for people is not really a direct-to-consumer campaign. We are not promoting our brand to consumers, but talk about how we'll evaluate that data and make a decision on potentially broadening the campaign.

The approval rate of the 80% has been actually pretty consistent throughout the year and we are pleased with that. Denials can range from a number of reasons that you mentioned as well as even pushing back on requirements for a sleep test and that they see the sleep specialist and there are some step therapy in some of the plans and so on. So there is a variety of reasons.

They can also be appealed. When you do get denied, there are appeal processes that are done. That includes a letter of medical necessity and so on and so on. So there is a range of reasons for denial. I think we focus on the positive side of the coin, which 80% getting approved is, I think, important for patients and providers. So we're quite good with that.

And so on the disease awareness, as Bruce said this is really the long range goal is to increase the diagnosis of narcolepsy. We are looking at the claims data that would reveal that. There is a lag to that data. We are pleased with the initial interest and based on the website and the ESS testing and so on, we are pleased with the outcomes that we have seen so far. Ultimately, we need to see the claims data. And I think that is what we hope to get here in the coming quarter and we'll see what it says.

Great. Thank you.

Our next question will come from the line of John Boris from SunTrust. Please proceed.

Thanks for taking the questions and congratulations on the results. First question on JZP-386, it certainly sounds like there could be some data read outs. Can you maybe possibly give us an idea of what we might see going forward here at (inaudible) European study that's ongoing and timing for that. And then, the technical hurdles, quite frequently some of the products that have been deuterated are in very low milligram potencies. In the case of Xyrem, we are dealing with anywhere between six to nine grams of drug. Does the agency have any concerns? I think you articulated, Bruce, that obviously there is a fine line again maximizing efficacy within that once-daily dose and obviously safety of the patients and ensuring they wake up within the prescribed period of time, that you are deuterating the compound. Does the agency have concern over the amount of deuteration that could be given to a given patient because of the gram quantities?

And then second question just has to do with Federal Trade Commission. Have you had any dialogue with the FTC? Have they requested any information on your distribution mechanism? Thanks.

On the first part of your question, I think you are asking would regulatory agencies have any particular concern about the absolute quantity of deuterium-modified compound and I would say no. That doesn't mean to say it's not something they would look at, but it's something you can imagine has been discussed in early conversations as part of us thinking about how to do clinical work. So I would take that off your list of things to have high on your priority list. On the FTC, not something we would really comment on. If we had something to say there, we would have said it, but no more comments there.

Next question will come from the line of David Morris from BMO Capital Markets. Please proceed.

Hi, Bruce. On JZP-110, how many patients do you think you will have to study as part of the Phase 3 program? And given that, you mentioned earlier that the trials will really be starting up later this year and early next year, should investors be thinking of a big step up in R&D spending or is this going to be managed as a gradual increase? How should we think about that? Thank you.

Yes, good question David. I will be taking the second half first and hand it back to Jeff for sizing of the trials. We have given some general commentary about the size of the Phase 3 program for JZP-110. We have estimated it's about $100 million investment over time, 2014, 2015, 2016 we said we want to submit in 2017. We think the bulk of that spending happens in 2015 and 2016, but we haven't you know obviously given specific R&D guidance for 2015 alone yet. Jeff you want to talk a little bit about size of the Phase 3 program?

Sure. We have some good Phase 2 data to work off of for planing the sample size for various studies, the types of effect sizes we would hope to get and so we're pretty clear on how do that. Narcolepsy studies tend to be smaller than OSA studies. What we also have to do is achieve the total number of exposures determined by ICH guidelines and that's going to be one of the factors that are going to play into the total number that we have. So it will be in excess of what goes into the Phase 3 pivotal trial. It will be a safety study which will be able to provide us with some additional exposure.

Great. Thank you very much.

Operator, this will be our last question.

Our next question will come from the line of Oren Livnat from JMP Securities. Please proceed.

Before the bell. Thanks. Just a couple. On JZT-110, how much of a potential game changer one way or the other is DEA scheduling for that product on the road? And at what point in the development timeline might you get some indication where that could shake out? And also, maybe this is a no comment I'm going to get on this, but on the shared REMS negotiations, can you at least characterize whether you are discussing with all filers potential shared REMS and when someone new like Watson files and certifies, do they get invited to the table? Or is this just currently a first-filer negotiation thing?

Yes, let me take the second question first. Yes, in general the discussions are between the brand company and any ANDA filers. I will point out that Watson Paragraph IV certification was very recent, so they do get added in over time. That would be our expectation. On the first question on scheduling of JZT-110, I do think that's important to products in this space. Typically, the assigning of a schedule happens at the very end of the process. That doesn't mean we don't have a look at relevant data that would inform that discussion earlier on development. But as a matter of fact, I think the actual final determination happens late in the process.

We've said, in the case of JZT-110 we really like the product's profile, both in terms of the efficacy we've seen in the two Phase 2 trials, the strong affect it has on excessive daytime sleepiness in these patients where that is a critically important thing to them, but I think we've also commented that we really like what we've seen from the tolerability side and I'll just say, safety broadly. Not based on Phase 2, not larger Phase 3 trials, but I'll remind you the product has been in development in other indications earlier in its history, so we do have a fair number of exposures to base our data thus far on. So part of the reason we are very excited JZT-110.

Thank you.

And I'd like to turn the call back over to Kathee for closing remarks.

Thank you, Crystal. Thank you again for joining us today. We are planning to attend the Credit Suisse, the Stifel, the Piper Jaffray and the NASDAQ conferences in the fourth quarter, and look forward to seeing many of you there. This will now end the call.

Ladies and gentlemen, that concludes today's conference. You may now disconnect. Have a great day.