Jazz Pharmaceuticals PLC (JAZZ) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jazz Pharmaceuticals fourth quarter and year end 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 Ms. Katherine Littrell, head of investor relations at Jazz Pharmaceuticals. Ma'am, you may proceed.

Thank you so much. Thank you for joining the Jazz Pharmaceuticals investor conference call. Today we reported our fourth quarter and year end 2014 financial results and provided 2015 financial guidance in a press release.

The release and the slide presentation accompanying this call are available in the news and events section of the Company's website. With me for today's call are Bruce Cozadd, Chairman and CEO; Matt Young, CFO; Russ Cox, Chief Operating officer; Jeff Tobias, head of R&D and Chief Medical Officer; and Mike Miller our head of US commercial. Following some introductory remarks, we will open the call for your questions.

Before we begin, 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, instead of historical facts and are forward-looking statements. These statements include future financial commercial development and regulatory plans, expectations and projections, such as our 2015 financial guidance, anticipated growth prospects for our products, planned commercial activities, expected submissions and interactions with regulatory agencies, anticipated litigation and patent related events, expected future events related to the planned and ongoing clinical trials, and our expectations regarding corporate development initiatives and the planned sale of our general medicines business.

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 our form 10-Q for the quarter ended September 30, 2014 and our form 10-K for the year ended December 31, 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 in some cases expected adjusted net income, adjusted net income per share, adjusted SG&A and R&D expenses, adjusted interest expense, and adjusted effective tax rate. 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 and accompanying this call those are posted in the news and events section of our website.

I'll now turn the call over to Bruce.

Thank you, Kathy. Good afternoon everyone and thank you for joining us. We do have a lot to cover today, so are remarks maybe a little longer than our usual call. 2014 was another outstanding year for Jazz.

During 2014, we executed on our growth strategy delivered strong sales growth for our key products, further diversified our commercial and R&D portfolio, and made significant progress on our operational capabilities through creation of the scalable infrastructure that is enhanced our readiness to support future growth.

I'm pleased with our accomplishments and 2014, which included, delivering significant top line growth a to exceed $1 billion in net revenues for the first time in our history, completing three acquisitions, expanding our R&D efforts, through beginning the rolling NDA submission for defibrotide in the US, receiving sBLA approval for intravenous administration of Erwinase, initiating multiple clinical trials and initiating start up activities for the phase 3 program for JZP-110, expanding the depth and breadth of our global organization, focusing our investments in the key growth areas of the franchises and enhancing our financial readiness through debt financing including the issuance of exchangeable senior notes in August, all while we continued to generate significant operating cash flow.

Now I'll update you on key products in our commercial and development portfolios starting with our sleep therapeutic area. Matt will then review our results for fourth quarter and full year 2014 and provide 2015 financial guidance. Our sleep therapeutic area consists of our lead product Xyrem which is indicated for the treatment of patients with excessive daytime sleepiness and cataplexy and narcolepsy and the product candidates JZP-110 and JZP- 386.

Xyrem remains a key driver of our growth. During 2014, we achieved a 10% volume growth rate of 2013. During the fourth quarter of 2014, volume growth was 14%, over the same period of 2013 benefiting from a change allowing patients to acquire a couple of extra days of Xyrem in order to give them more flexibility when they were traveling or had other issues that could affect the arrival timing of their Xyrem refill. Normalized fourth quarter volume growth would've been about 11%. And we do not expect the one-time event in the fourth quarter to impact model volume in 2015. The average number of active Xyrem patients grew to approximately 12,250 during the quarter compared to 11,250 in the same period of 2013.

In 2015, we will continue to make targeted investments to grow Xyrem. Our major focus areas for 2015 are one, continuing our sales efforts on further driving increased penetration in the low to mid decile physicians; two, educating physicians and healthcare providers on the symptoms and diagnosis of narcolepsy; and three, enhancing the patient and physician experience with the Xyrem success program by continuing to work with our central pharmacy on ensuring timely refills, and reimbursement decisions in an increasingly complex reimbursement environment.

Our decision to expand the Xyrem sales force last year to 100 representatives has contributed to our sustained volume growth through 2014 enabling us to expand our physician prescriber base though our focus on educating healthcare providers and increasing the use of Xyrem in the low to mid decile physicians while maintaining our strong core business in the top decile physician prescribers. In 2014, there were more than 650 new Xyrem prescribers.

We believe that these sales efforts will continue to position us well to deliver strong growth of Xyrem in 2015. We believe our efforts over the past three years to educate physicians and healthcare providers to increase awareness of narcolepsy have been successful as we have observed an increasing number of narcolepsy patients diagnosed across the US year-over-year.

We've recently reviewed insurance claims database trends on narcolepsy diagnosis to understand the effectiveness of the targeted disease awareness television campaigns we conducted in 2013 and 2014. Thus far, while the rate of diagnosis has increased across the US, as well as in the markets where we conducted television campaigns, we have not yet observed a significantly higher increase in the TV test markets compared to matched controls.

However, we are pleased with the overall growth of diagnosis and that our disease awareness TV campaign in certain markets did increase web traffic to the morethantired.com website and utilization of the Epworth sleepiness scale and the physician finder tools. At this time, we are not planning to conduct additional TV campaigns on disease awareness during 2015.

We will continue to evaluate the insurance claims databases and modify our print and web-based disease awareness efforts as we learn more. During the first few weeks of 2015, we observed a level of payer churn that is common throughout the industry at the beginning of each year as insurance plans change and re-authorizations occur. During 2014, we invested in our central pharmacy, and believe that SDS is well-prepared for this churn with a strong management team in place, additional headcount to handle volume during the first quarter, and process improvements implemented over 2014.

We are closely monitoring key leading indicators to confirm that patients are able to receive their new or refill prescriptions in a timely manner. While we have observed further increases in prior authorizations, and re-authorizations, as expected in the current managed care environment, our high reimbursement approval rates for patients remain steady.

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 first filer, Roxane, could occur as early as the third quarter of 2015.

We recently filed a new case against Roxane based on three recently issued Xyrem patents, including the patent expiring in 2033, related to methods of code administering Xyrem with valproate. Last summer, several of the ANDA applicants submitted covered business method or CBM petitions asking the Patent Trial and Appeal Board or PTAB, of the United States patent office to review and cancel certain patents covering our restricted distribution system for Xyrem. In early 2015 the PTAB issue their decisions denying institution of CBM review for all six patents subject to the CBM petitions. However, in January 2015 two of the ANDA applicants filed petitions with the PTAB for inter partes review or IPR of the same six patents.

We expect to file a preliminary response to these IPR petitions in the second quarter. We would expect the PTAB to make a decision on whether or not to institute review of the patents in the third quarter. If one or more of the IPR petitions is instituted, then the PTAB decision on whether the patents are valid would be expected approximately a year later in the third quarter of 2016.

Turning to a brief regulatory update on the Xyrem REMS. As discussed in prior calls, we initiated dispute resolution with FDA early in 2014 related to the Xyrem REMS. We met with FDA during the third quarter regarding our most recent request for supervisory review and subsequently provided additional information per FDA's requests. We expect a decision in the first quarter from the supervisory level of FDA.

Now I'll spend a few moments talking about two of our R&D programs in the sleep therapeutic area. Regarding JCP-110, we plan to evaluate this compound for the treatment of excessive daytime sleepiness in patients with narcolepsy, and in patients with obstructive sleep apnea. We are on track to initiate our three phase 3 studies evaluating safety and efficacy of JZP-110 in the second quarter and anticipate enrolling approximately 900 patients over the duration of the trial.

The co-primary endpoint measurements for the studies are the maintenance of wakefulness test and the Epworth sleepiness scale. We anticipate these trials will enroll during 2015 and 2016, and assuming that the trial results are favorable, we expect to submit the NDA in 2017. Regarding JZP-386, our deuterium modified sodium oxybate licensed from Concert, we began dosing in the second phase 1 study in normal volunteers this quarter and anticipate receiving data next quarter.

We expect to provide an update after we and Concert have evaluated the data and determined next steps. Now I'll provide an update on our hematology oncology portfolio that consists of Erwinaze, defibrotide and JZP-416. Erwinaze continues to perform well. We remain focused on our efforts to educate healthcare providers on the importance of one, identifying hypersensitivity reactions to E. coli derived a spirited and acute leukemia or ALL, in both pediatric and adult oncology centers using asparaginase therapy in their a chemotherapy regimens, two, maintaining appropriate asparaginase levels as well as three, switching or replacing an ineffective dose of E. coli-derived asparaginase when and as appropriate.

On another note, we received regulatory approval in France, the first country approval through our ongoing mutual recognition procedure and will seek additional approvals in other EU countries. In the US, FDA approved the IV administration of Erwinaze at the end of 2014. Our sales force was well-prepared and immediately began educational outreach efforts to healthcare providers following the approval of this alternate route of administration for Erwinaze.

We are encouraged by the emerging data on use asparaginases in the adolescent and young adult population. A presentation at ASH by Dr Wendy Stock highlighted the potential opportunity to improve patient care by treating adolescents and young adults with an intensive pediatric regimen. We also continue our efforts as a Company to learn more about Erwinaze in the young adult population initiating our study in 2014.

As expected, given the infrequent occurrence of hypersensitivity reactions to E. coli asparaginase in this small population, the limited use of asparaginase in adult oncology centers in the US and the relatively small number of sites that have initiated thus far, enrollment will be slow, and we have yet to enroll our first patient.

This year, our efforts will be focused on initiating more sites internationally which we believe will increase the potential for patient enrollment. JZP- 416 is the PEGylated recombinant Erwinia chrysanthemi L-esparaginase that we've been developing for the treatment of patients with ALL who are hypersensitive to PEGylated E. coli derived asparaginase. The pivotal phase 2 clinical trial began in the fourth quarter of 2014 and was designed as a dose confirmation and PK study of JZP- 416 administered in children and young adults with ALL following hypersensitivity to pegaspargase, or Oncaspar.

We recently voluntarily suspended patient enrollment in this trial based on the occurrence of hypersensitivity-like reactions following the administration of JZP- 416 in some treated patients. We are in the process of collecting and evaluating the available data and plan to conduct additional research and analysis prior to determining whether to resume the study and determining the next steps regarding the development of JZP- 416. We anticipate that we would be able to determine next steps later this year or in early 2016.

The Defitelio launch in the European Union continues to progress well, and our international Defitelio Erwinaze joint sales force is fully staffed. Our focus in Europe remains on establishing solid pricing and reimbursement in order to maximize access for patients in need, and we will continue to engage in pricing and reimbursement submissions and discussions throughout the EU this year. We will also continue our efforts to provide disease awareness education on VOD for healthcare providers.

We held a well attended continuing medical education event at the blood and marrow transplantation tandem meeting. We also plan to host two symposia and other educational events at the EBMT meeting in Istanbul in March, and we anticipate that a number of abstracts will be presented during the meeting.

Now a brief US regulatory update on defibrotide. We initiated the rolling NDA submission in December. Our priority is to complete a high quality package for the defibrotide NDA submission by mid-2015. We are pleased with the progress that we've made in collecting and remediating existing defibrotide clinical data. Defibrotide has fast track designation in the US, and we plan to work with FDA to seek regulatory approvals for defibrotide for the treatment of severe VOD as quickly as possible.

Our defibrotide development team is working closely with FDA on design and endpoints for other VOD trials where there has been little previous research or precedent for regulatory endpoints. Our team is assessing potential clinical strategies to evaluate defibrotide in the treatment of earlier VOD, which is VOD before it is progress to multi-organ failure and in prevention of VOD in high risk patients.

We expect to provide an update on our development program for defibrotide later this year. Finally we recently launched a comprehensive website, www.progressiveVOD.com along with other educational resources designed to educate healthcare professionals on the unpredictability, signs of progression, and potentially life-threatening consequences of VOD and the need for timely diagnosis.

Now, a few other business updates. During 2014, we scaled back our resources that supported the psychiatric and pain areas, while we continue to focus our investments in the key therapeutic areas of sleep and hematology oncology. Following the 2014 Gentium acquisition, we reorganized our operations in Europe to focus on the Company's hematology oncology business, and during the fourth quarter, we signed a definitive agreement to sell certain products and the related business known to us as the general medicines business acquired as part of the acquisition of EUSA Pharma.

The definitive agreement includes the transfer to the purchaser of designated staff supporting the general medicines business. We expect to close this transaction in the first half of 2015 subject to the satisfaction of closing conditions and completion of pre-closing activities. 2015 will be another exciting year for Jazz as we continue to focus on growth opportunities for our key products. Additionally we have a strong balance sheet with increasing cash on hand and financial readiness to implement our growth strategy and focus on delivering shareholder value. Matt, let me turn the call over to you.

Thanks, Bruce, and good afternoon, everyone. We are pleased with our strong performance in 2014 as we saw total revenues increase by 34%, adjusted net income attributable to Jazz increase by 36%, and adjusted EPS attributable to Jazz increase by 34% compared to 2013.

We see 2015 as a year of continued investment in our business as we focus on growing our core franchises including the continued launch of defitelio in the EU, preparing for the potential launch of defibrotide in the US, developing our product candidates and investing in lifecycle management for key products.

Total net revenues of $1.17 billion for 2014 exceeded our expectations as our key products continue to deliver strong growth. Adjusted EPS for 2014 was $8.43 per share, exceeding our most recent 2014 guidance primarily due to slightly higher product sales and lower adjusted expenses.

Looking ahead, we expect strong top and bottom line growth this year driven by revenue from a Xyrem, Erwinaze and defitelio. We expect total revenues for 2015 to be in the range of $1.31 billion to $1.37 billion up 12% to 17% on a reported basis from 2014. Net sales of Xyrem for 2014 were $779 million up 37% from $569 million in 2013. Net sales of Xyrem for the fourth quarter of 2014 were $223 million up 36% from $164 million in the same period of 2013.

Our Xyrem net sales guidance for 2015 is in a range of $950 million to $970 million, representing expected growth of 22% to 25%, reflecting a price increase of 9% taken earlier this month and our expectation of high single digit volume growth this year. I'll also remind you of the typical fourth quarter to first quarter pattern that we see in Xyrem volume related payer churn and gross to net adjustments.

Turning to Erwinaze world-wide net sales for 2014 were $200 million op 15% compared to net sales of $174 million in 2013. Net sales of Erwinaze for the fourth quarter of 2014 were $53 million up 21% from $43 million in the same period of 2013. Today we are providing 2015 guidance for worldwide Erwinaze net sales in the range of $200 million to $215 million representing expected growth of up to 8%.

The guidance for Erwinaze takes into account the anticipated commercial impact from our clinical trial for Erwinaze in young adult patients and expected unfavorable foreign exchange impact in the EU partially offset by a 3% price increase taken in the US on January 7, 2015. Defitelio pro forma net sales for 2014 were $73 million of 65% compared to pro forma net sales of $45 million in 2013.

Net sales of defitelio for the fourth quarter of 2014 were $19 million, up 51% from pro forma net sales of $13 million in the same period of 2013. Today we are providing 2015 guidance for defitelio net sales in the range of $73 million to $83 million. Our guidance reflects the impact of unfavorable exchange rates in Europe and the near-term impact of our continued strategy that Bruce mentioned earlier to maximize patient access and strong reimbursement across the EU over the long term.

We are pleased with our strong underlying growth we are realizing in the countries where we have received final pricing and reimbursement decisions. However, we don't have final reimbursement approval in all major markets in Europe which in some cases is dampening our near-term growth. Turning to operating expenses, adjusted SG&A expenses for 2014 were $316 million or 27% of revenue compared to $244 million or 28% of revenue in 2013.

Adjusted SG&A expenses for the fourth quarter of 2014 were $82 million or 25% of revenue compared to $64 million or 27% of revenue in the same period in 2013. The increase in adjusted SG&A expenses in 2014 was primarily due to higher headcount and expenses resulting from the expansion of our business. For 2015, our adjusted SG&A expenses are expected to be within a range of $355 million to $365 million or 26% to 28% of 2015 revenue guidance.

SG&A expenses are expected to increase primarily due to continued investments in -- related to Xyrem, planning for potential defibrotide launch in the US and continued defitelio launch expenses in the EU as well as expected increases in litigation related expenses as Xyrem and the litigation activities advance including a potential trial with our first ANDA filer for Xyrem as early as the third quarter of 2015. Also I'll remind you that when we look at fourth quarter to first quarter adjusted SG&A trends, our adjusted SG&A expenses have historically increased due to our typical pattern of quarterly spending.

Adjusted R&D expenses for 2014 were $71 million or 6% of revenue compared to $34 million or 4% of revenue for 2013. The increase was primarily related to increased costs associated with the advancement of our sleep and hematology oncology product candidates and lifecycle management activities for our existing products. For 2015 our adjusted R&D expected expenses are expected to be in the range of $95 million to $105 million or 7% to 8% of 2015 revenue guidance.

R&D expenses are expected to increase primarily due to anticipated investments in clinical development of JZP-110, Xyrem in pediatric narcolepsy JZP-386, Erwinase in young adults as well as estimated costs related to the US regulatory submission of the NDA for defibrotide. Adjusted interest expense for 2014 was $39 million including our senior notes issued in August 2014. For 2015, adjusted interest expense is expected to be approximately $40 million.

Our adjusted non-GAAP effective tax rate is expected to remain in the high teens in 2015, similar to 2014. Foreign currency gain in 2014 was $8.7 million or $0.13 per diluted share after-tax primarily due to the strengthening of the US dollar against the euro. For 2015, we expect an unfavorable foreign currency exchange impact.

The top line revenue impact across defitelio and Erwinaze is expected to be approximately $10 million to $20 million arising from ex-US sales primarily in Europe. We expect a lesser bottom-line impact as we incur European expenses and have otherwise largely reduced our net exposure. We have assumed a bottom-line impact in the range of $0.01 to $0.03 per diluted share. Our 2015 guidance includes two important factors that will affect comparable growth relative to 2014.

First, our treatment of depreciation expense for purposes of calculating our non-GAAP adjusted financial measures going forward, and second, the planned sale of our general medicines business. Our 2015 non-GAAP adjusted financial guidance measures do not include adjustments for depreciation expense.

Starting with our first quarter earnings release we will also reflect this change for comparative historical periods. For context, depreciation expense for 2015 is estimated to be approximately $0.16 per diluted share while depreciation expense for 2014 was approximately $0.11 per diluted share. Our adjusted EPS guidance for 2015 also assumes the planned sale of the general medicines business.

During 2014, the general medicines business had total net product sales of approximately $27 million, and we anticipate that 2015 sales could grow modestly. We have assumed the negative impact of the sale on our 2015 EPS to be approximately $0.10 per diluted share. The amount depends on the timing of the closing which we currently expect in the first half of the year.

We anticipate our 2015 non-GAAP adjusted EPS to be in the range of $9.45 to $9.75 per share which represents growth of 14% to 70% compared to 2014 assuming no adjustment for depreciation expense. In 2014 the Company spent $42 million under our share repurchase program at an average cost of $138.64 per ordinary share, leaving us with $21 million remaining under previously announced $200 million share repurchase program.

As of December 31, 2014, the principal balance of the Company's total debt was $1.5 billion. As of December 31, 2014, cash and cash equivalents were $684 million. Our cash and cash equivalents together with the undrawn capacity under our revolving credit facility total over $1.1 billion.

We continue to believe that we have the financial capacity to pursue additional corporate development initiatives and regularly evaluate a broad group of assets with the potential for a strong strategic. We remain open to new therapeutic areas when as asset meets our criteria, and we continue to approach corporate development in a disciplined manner with patience to find the right assets and further diversify our portfolio to deliver long-term growth and returns to our shareholders.

In closing, we are very pleased with the strong results in 2014, and we expect continued positive momentum in 2015 with top and bottom line growth driven by Xyrem, Erwinaze and defitelio. Thank you for joining us on the call today, and I'll now turn the call back over to Bruce.

Thanks, Matt. Separately we announced today that Jeff Tobias, Executive Vice President of R&D and CMO, will retire in September after four years at jazz and more than 35 years in medicine in the biopharmaceuticals industry. In the interim, Jeff will transition to a new role EVP of R&D strategy and CMO beginning in April.

In this role, Jeff will focus on overseeing the key 2015 R&D value drivers such as completion of the defibrotide rolling NDA solution and other strategic initiatives. We are very grateful to Jeff for his significant contributions and key role in the Company over the past four years. We will miss Jeff's leadership, keen intellect, and passion for patients and wish him the best as he retires from Jazz. Jeff, why don't I turn it over to you before we begin our Q&A.

Thanks, Bruce. The decision to retire this year was a difficult one. Last few years have been extremely rewarding being part of the rapid growth and success of Jazz as we expanded internationally and importantly as we brought meaningful medicines to patients in need.

It has been a great pleasure to work with the strong management team at Jazz, to be part of an R&D organization of people who are passionate about our mission, improving patients' lives, and I am confident that the experienced R&D leadership team is prepared to step forward and help make this a smooth transition. I'll now turn the call over to Kathy.

Thanks, Jeff. In order today to allow everyone to ask questions, I know we normally limit to two questions, but I'd really like to ask you today to try to limit to one and then jump back in the queue, but we're trying to give everyone the opportunity, since we know the script ran a little long today. With that said, I'll turn the line back over to the operator to open the line for your questions.

( Operator Instructions )

Marc Goodman, UBS.

Hi. So can you talk about Defitelio a little bit? Obviously the FX hit. I'm not exactly sure how much it was up about $20 million and maybe you can help us with that. But it just seems like the guidance is a little bit lower than what we would have thought. And I think you called out reimbursements so maybe you can remind us of the areas that haven't gotten reimbursement yet that you would have thought that you would've already gotten it. And what's going on? Are you just fighting for price, and that's what's taking longer, or just give us a sense of what's going on there. Thanks.

Yes, Marc. This is Bruce. Let me hand that off to Russ, but obviously our goal with Defitelio is to maximize the return on the product to us over time as opposed to in the short term, and I think as Russ talks you through what we're doing, that'll make sense.

Yes. So Marc, you mentioned the FX headwinds that we are experiencing, so that's in the tune of about $10 million. We also are thinking about this very much as Bruce mentioned from a long-term strategy, and some of that requires taking a few short-term hits along the way. We are seeing double digit growth on a constant currency basis, and remember we're less than a year into the growth right now, and we expect that growth to continue.

And the issue that we are experiencing is that we're seeing some change in use in France so there moving more to prophylaxis -- from prophylaxis to severe VOC treatment which is consistent with our label. We also would look at that and say, while that's a short-term hit, do think that the long-term prospects for Defitelio are great.

We're excited about growth coming from the VOD education initiatives to improve diagnosis and awareness of VOD, and we're also planning to evaluate defibrotide in earlier use. So when I think about that, yes, there's certainly a number of countries that have come on, and we're really thrilled with what we've seen from a reimbursement perspective. There's a few of them that we're going a little bit slower to make sure that we maximize the long-term.

Can you just reminded us which ones they are?

So there's a number of those that we are excited about that just hit, so the UK is one in particular that we are very excited about that has come online, Ireland as well. We're waiting on places like Belgium, France, and others to come on line. But again, I think when we think about those other countries, we sit there and go what's the best long-term strategy to maximize long-term opportunity?

David Amsellem, Piper Jaffray.

I just wanted to drill down on the R&D spend. Can you just talk about how much of that increase in the spend this year is coming from the pivotal studies for 110 and just give us -- remind us what the all in costs of the phase 3 program for 110 is including any long-term safety studies or other clinical work beyond the pivotals that you need to do before you file. Thanks.

Sure, it's Matt. With respect to JZP-110 in particular what we've articulated is that we expect the phase 3 clinical program which does include the supporting study to be in the range of $100 million, and we've said the bulk of that spending would be in 2015 and 2016. So with that study starting up this year, that is a substantial expenses as it relates to the increase in our R&D this year.

Recall we do also have several other initiatives ongoing including pediatric narcolepsy, JZP-306, regulatory spending around the potential defibrotide submission in the US and our Erwinase young adult study ongoing. So we had several other initiatives as well that are in fact impacting that program spend which is really where the vast majority of the spending increase comes from this year in R&D.

Annabel Samimy, Stifel.

Hi. Thanks for taking my question. I just wanted to circle back on defibrotide again. You mentioned that you are taking some short-term hits, and it was primarily prophylaxis. As you're getting reimbursements approvals through Europe are you taking any pricing hits, or is the pricing remain consistent and then in the US, what other rate limiting steps for the rolling NDA and completing that? What is it that you're still trying to get together in terms of filing that?

Anabel, let me have Russ address the first piece of that, and Jeff can talk about the submission.

Thank you.

Yes. So when I think about it in terms of where we are taking reimbursement, and if I use the word hits, I wouldn't characterize it as that. I would characterize it as we are seeing excellent reimbursement and consistent reimbursement,and we're making sure that that's exactly the way that it plays out over all the key countries that we're focused on, so we have not seen any changes in overall reimbursement. We have seen some changes in terms of the type of use.

Okay. But not in terms of the pricing?

Yes.

Okay.

And regarding the NDA submission, we've substantially completed the data collection and remediation that we feel is required to meet the FDA's standards and in our discussions with FDA. We think we're on track with that. Currently, where we are targeting is to complete the CMC module which is going to be going in next and then subsequently the clinical modules which will be the final stage of the submission. And just -- we're working toward getting that is quality as we can.

I think we're still on track with our initial projections, but obviously, quality is going to be something we're going to be looking at all along the way from this point forward.

Thank you.

Michael Faerm, Wells Fargo.

Hi. Thanks for taking the question. Now, my question's on the Xyrem guidance and specifically about the assumption for a single price increase next year. That's a departure from what we've seen in the past several years, and I'm wondering, does that reflect changing dynamics you're seeing whether it's in terms of reimbursement push back, or maybe detecting changes in the relationship between volumes and prices increases? Or is it you being conservative? Or is it some combination? Thank you.

Yes, Mike, this is Bruce. I think we have been pretty consistent over a number of years at not commenting specifically on forward pricing strategy, whether that's magnitude of or frequency of price increases. So I wouldn't read anything more into what we are saying now than our current guidance for the year based on what we've already done. And in terms of, are we seeing any changes in payer dynamics, maybe I'll have Mike comment on that a little bit.

Sure, Bruce. Yes, in terms of the increasing reimbursement environment and how it's playing out, keep in mind that it's -- this is really a specialty pharma phenomenon, not just a Xyrem phenomena. And despite that, we have had maintained very good coverage rates. And we're very pleased through Q1 2015 with the manner in which SDS has handled the PA volume and the processing so we are pleased.

Thanks.

Gary Nachman, Goldman Sachs.

Hi. Good afternoon. Bruce, on the DTC for Xyrem has there been enough time to see if the TV ads really had an impact? It sounded pretty definitive that you didn't see a result so far, but I'm just curious why you didn't -- why you think it didn't have the impact you expected and why you think it's not worth it to continue with these programs going forward? Thanks.

Yes. Let me start and then maybe I'll have Mike add-on. Our campaign, which just technically I'll say is not a DTC campaign, because it's not branded. Were doing a disease awareness campaign. We recognize that there's some timed diagnosis with narcolepsy.

One of the reasons we're attacking this problem in the first place is we're aware that patients can often go many years, sometimes 5 to 10 years or more from emergence of initial symptoms to ultimate correct diagnosis of narcolepsy, and we're seeing if we can impact that. So we certainly understand there could be some lag between the start of that process, which might be getting in to see a sleep specialist, and the conclusion of that process, and I'll let Mike comment a little bit on that. But I would say our specific decision right now an investment is do we see that the investments we been making have had a measurable impact on actual diagnosis?

And if they were having a great impact, we'd re-up on that investment, but until we see that, we're not convinced that's the best place to put our dollars in really improving results for narcolepsy patients. Mike?

Yes. I think one thing to point out as Bruce said earlier, this is really a test between test and control areas. And in fact, what happened was at both groups went up. The diagnosis year-over-year was about 9% gain in the diagnosis of narcolepsy which we are very pleased with. And to Bruce's point, I think it does take time to see that diagnosis. We will continue to monitor those insurance claims to see if that difference did occur.

We know that we did see a difference between test and control on website traffic, the Epworth sleepiness scale, test taking, physician finder, and we are very pleased with that. And so we will continue our print and web-based disease awareness efforts, but we have temporarily suspended is the TV until we monitor that situation further.

Okay. Thanks.

Irina Koffler, Cantor Fitzgerald.

Thanks very much. I don't think I heard you provide tax guidance. If I missed it, and then the other thing is on Xyrem DTC, it seems like we're going back to the old play book of what you were doing before. So, do you think you can still get another 1000 patients in the coming year like you've been typically growing the business? Thanks.

Yes. Just quickly, Irina, and tax guidance, we said we expect our adjusted tax or effective tax rate to be in the high teens as it has been.

Yes. And then on new patient growth, is it back to the same play book? I would say we're always updating our play book. We're always trying the things we think will make the biggest impact. We've been tremendously pleased over the past few years that we've been continuing to see significant volume growth for Xyrem, which is certainly driven in part by maintaining existing patients on drug but is absolutely fueled by bringing new patients on therapy, new patients through new doctors and new patients through existing doctors, too.

So no, it is not just at the same thing we've been doing for years, but I will say we're pleased that the things we have been doing historically have worked out well. I don't think we plan to go into detail on today's call so don't ask a follow-up question and try to get me to do it, but I think we did mention we're going to make some new investments behind Xyrem this year. And I think we will have more to say in the quarters to come about exactly what's entailed in that, and those are the investments we believe have the greatest potential to fuel continued volume growth near-term and long-term for Xyrem.

Thank you.

[Jessica Frye], JPMorgan.

Thanks. I guess I wanted to ask a question just as the increased focus on these IPR challenges, across the industry right now. I think we understand the timelines here, and I realized this is only on certain patents for you guys, but is there any additional sort of framework you can provide us with as we try to handicap the risk associated with this process if it does move forward in the summer? Thanks.

Yes. Jessica, I am happy to make a couple comments, but I don't want to claim that we are the experts on IPR, and I encourage all of you to continue getting smart on this area, because like it or not, it appears to be an area we are going to see more of in our industry going forward.

In broad terms, I'd say it's a way of going after patents not infringement of patents but validity of patents in certain ways with respect to prior art, not in other ways, such as obviousness. There's a slightly different standard applied, to overturn a patent from something that's clear and convincing -- I'm not getting my legal terms right -- to something that's more like preponderance of evidence, so it's a slightly different and I would say lower standard.

What does all that mean specifically with respect to our patents? We'll have to wait and see first as to whether PTAB even decides to get that far. Right? Are they even going to review the patents and make a determination by the third quarter of 2016 as to how they feel about it?

I will say we feel a little different about this process versus CBM, and we've been on record on that for quite some time that with respect to CBMs, we thought the right thing was for PTAB not to pick up our patents for review, because they didn't look to us like they fall -- fell under that particular piece of the review process.

But I think we were also clear of saying that if they did get picked up by that particular -- under the CBM process, we knew that the track record of invalidating patents was very high. I wouldn't say we necessarily feel the same way about IPR, although I will also say there's not as much precedent as all of us would like to feel super confident about where that ends up. So I hope that's helpful generally as context for IPR.

Yes. Thanks.

Ken Cacciatore, Cowen and Company.

Hey, guys. Question, Bruce, on the comment you made about initiating litigation on the Xyrem 2033 expiring patent, the valproate combination Xyrem patent. Did Roxane certify paragraph 4 to that patent, or are you proactively suing them?

Good catch, Ken. Yes. They paragraph 4 certified.

Okay. Thank you very much.

Louise Chen, Guggenheim.

Hi. Thank you for the question. So quick question, what gives you confidence that your patents will be upheld in the IPR review? Can you provide us any color on what they are arguing regarding your patents and which patents they are targeting, and also what happens if the IPR process goes against you?

Yes. I can't provide too much play-by-play on exactly what we think will happen. I will remind you that ultimately, our belief is if litigation continued moving forward, we'd be arguing about these same issues if not a broader set of issues in litigation. So this is a slightly different way of getting there on a slightly different timetable with slightly different characteristics.

But I would say in general, and the filers want to claim both that they don't infringe your patents, and that if they did, it doesn't matter because your patents aren't invalid, and they can do that in many ways, historically through litigation, and they are now going a different route through IPR. But much like we haven't done a blow-by-blow in what our arguments in litigation will be, I'm not sure we're going to do a blow-by-blow as to what our arguments in IPR would be other than let's first wait and see a couple quarters from now as to whether PTAB is even going to pick them up and review them, because we don't know that yet.

Douglas Tsao, Barclays.

Bruce, just in terms of Xyrem and the DTC campaign, obviously you alluded that you're going to be sort of investing into new marketing initiatives. Just curious, are those going to be targeted on the undiagnosed narcolepsy population? Or will that sort of be focused much more on really just ramping up your penetration into the diagnosis population, just simply because they're just much more readily available?

Yes. So again, we're -- we have a couple different types of efforts we invest behind. Part of it is very specific to our brand on label for treatment of narcolepsy patients with EDS and cataplexy. And then we're doing this in general disease awareness effort which obviously is targeted at undiagnosed patients. So maybe I'll have Mike comment on what that makes is and how we think about that.

Sure. So, with regard to the disease awareness, as I said earlier, we're going to continue the print and web-based efforts. We will not do it in a targeted approach. We'll do it in a broader approach, which we know have resulted in very good traffic to the websites, to the Doc Finder and so on, so we're very pleased with that.

We will continue those efforts. As Bruce said, and you also have the existing patient and current prescriber service area that this is a key area for us to continue to invest in. And so we are excited about some of the initiatives that we are kicking off in 2015 with regard to those.

Okay. Great. Thank you.

[David Mares].

Hi. This is [Katie Brendan] in for David Mares. Thanks for taking my question. As far as defibrotide in other indications, have you guys made any further progress in kind of specifying where the potential lies? What are your conversations with the FDA looking like on that front, and can you just give us a little more color as to how that will look in the coming year?

Yes. Katie, this is Bruce. We don't want to make a lot of specific comments. We've sort of said will get back to later in the year on that, but maybe I will have Jeff give you a general sense of how we are thinking about the opportunities set for defibrotide.

So, as Bruce mentioned previously, some of the areas that we are looking at are the earlier intervention into VOD before patients get so severely ill that they have multi-organ failure and an 80% mortality rate so that's an area that we've been exploring. In addition we will be looking at the prophylaxis in a high risk populations sort of defining what that might look like but in specifically, we are in conversations with FDA regarding some of these paths, because these are new areas that really haven't had a good regulatory pathway established previously. So things about end points and design we are in conversations with FDA now and will continue to be in those conversations going forward.

Thank you.

John Newman, Canaccord.

Hey, guys. Thanks for taking the question. Bruce, I just had a question on Erwinase. I just wonder, given what you've seen with JZP-416, has the manufacturing situation with Erwinase changed at all -- has improved a bit? I'm just curious as to how you guys stand at this point with regard to keeping up with current demand and also just maintaining sort of batch success that you've seen in the past. Thanks.

Yes, John, thanks for that question and, this is -- it is important I give you both sides of this answer so everyone hears it clearly. We have been working closely with our contract manufacturer, and I think we are making strides to improve what we can expect out of the manufacturing of Erwinaze in terms of quantities, quality, consistency, reliability, absolutely.

And to that extent, my positive comment would be we think we do have enough supply to keep up with both current demand and projected growth in demand. That said, I also want to be clear as we are in a risk factors that we can't build enough safety stock of this drug that we could necessarily get through a complete loss of a batch without short supplying the market.

And as we've told you, the overall production cycle for this product is many, many months and so while we're getting better, and while we've got more inventory on hand and are better prepared to meet demand increases, we aren't yet in a position where we can say, don't worry about it if something goes wrong. We've got enough sitting on the shelf that we'll make more before you ever notice there was an issue. So I hope that's fair and balanced in how I laid out.

Were absolutely making progress. We are not saying that we can grow the product based on our single supply source, but we got to be fair with you and warn you, we just don't have the kind of protection you'd like to have for a key products like this when you can build up safety stock.

Great. Thank you.

Gregg Gilbert, Deutsche Bank.

Hello. For Bruce and Matt, just wanted to ask you to expand a bit on business development and how would you characterize the opportunities that are currently in front of you from a size range standpoint maybe a ripeness of standpoint if you are in the mood to talk about that. Thanks, guys.

Yes. I'll make the general comment and I'll put Matt on the hot seat to give you more specifics, but in general, I think we've characterize to all of you that our readiness for additional corporate development transactions is based on a number of things. Our financial readiness, and I think we've talked about the strength of our balance sheet, the financing we've done to enhance our flexibility, our good cash flow. Matt gave you I think in his commentary $1.1 billion in cash and equivalents and undrawn revolver we have available to us. Of course that doesn't count the fact that we are confident we can finance beyond that based on our own cash flow and even more than that, if we were acquiring an asset that brought with it incremental cash flow so financial readiness is one aspect.

Operational readiness is another aspect. Are we ready to take on a new challenge? And my confidence is much higher today than it was a year ago that our organization is ready for that. We've assembled and are up to speed on our launch strategy in Europe for defibrotide, our Erwinaze defibrotide sales force is completely staffed. And as you heard today, I think for the first time, we are proceeding with a potential divestiture of our other less core European business.

We're getting ready to do more in Europe. Same thing in the US, we've got a great team now focused on sleep and hematology oncology. We've scaled back our support on psych. We're really focused on areas where we can grow. We've got a great defibrotide launch team coming together to get us ready for that during 2015.

But that puts us in a strong position I think to take on an additional commercial asset in the US. And similarly, our R&D team has just done a really nice job advancing our programs and getting the key programs, particularly the defibrotide rolling submission and the JZP-110 Phase 3 program to a point where those are in execution mode, and we can take on another R&D program as well if it fits our strategy.

So I think our financial readiness has improved. I think our operational readiness has improved. I think we've got the right management team to take it on. And now I'll turn it over to Matt for the easy part which is -- which opportunities when. Matt, take it away.

Thanks, Bruce. Thanks for leaving me all the easy stuff. So, Gregg, the main thing I'd want to convey is really we haven't changed our approach. We continue to evaluate a pretty wide range of transactions, and I feel good about and Bruce talked about both financial and operational capacity.

Our capacity to evaluate transactions is also higher than it's ever been, so I think we are ready on all fronts and are very active, looking at and assessing numerous opportunities, but again, they do range across the same span we've talked about before, at or near market assets as well as development assets in our therapeutic areas again with respect to at or near market assets looking outside of our current therapeutic areas as well.

As long as we see asset to that can generate attractive returns for our shareholders and have good longevity and will help us meaningfully diversify our business over time. So from a size and breadth perspective, it's still a large list of things to evaluate. We're going to continue with the same focus and discipline though that we've always had, and as a result, I think it remains difficult to predict for you the exact timing of when we will actually get a transaction done. But we like what we see, and we like our position and ability to act.

Thanks, guys.

John Boris, SunTrust.

Thanks, Bruce. So just on the DTC, not to beat a dead horse to death year but can you just quantify how much you spent in DTC in 2014 and then just on Defitelio, can you maybe just cite what the upper and lower limit is of the price band that you might have in place just to gauge what pricing has been so far for the asset? Thanks.

Yes. So on the spend on our disease awareness campaign, in 2014, Matt, have we given that never before?

We have.

So I think it's about $5 million. I think that's pretty darn close to what we spent in 2014. And then, on Defitelio, I think you're talking about European pricing.

Correct.

On the Defitelio maybe I'll let Kathy or Russ take that one.

So the price per vial is EUR426, that's the price we were staying at a very, very narrow window around that EUR426. And that translates into dollars for an adult of about 75 kilos about $93,000, $94,000 a year and for a child of about 25 kilos it's about $34,000 a year, take a haircut, that's kind of like a list price.

Thank you.

Jason Gerberry, Leerink Partners.

Hi. Thanks for taking the questions. Just on Defitelio, you mentioned that France that the switch from prophylactic to more on label use, is France an outlier in terms of using Defitelio prophylactically, or are there other markets where we could potentially see a switch away from prophylactic use to more of the on label use? And then as a relates to reimbursement, in those markets where you are holding tight, are patients still getting product on a compassionate use basis, or are they not getting access to Defitelio in those markets? Thanks.

Yes. So let me give you an answer to the first part which is France is an outlier. France has lots of experience with defibrotide. They have tremendous scale experience, and so it was a larger country just in terms of the breadth and depth experience they had and comfort with the product. And so they had evolved more to early use and prophylaxis in general, and so that's where we've seen some changes that's more consistent with the label. I would say they are an outlier.

You can see that in other countries to the extent that you've seen it in France, and I would say pretty much in general, the other countries are fairly consistent in terms of what we've seen from usage. And then as it relates to think about the change here, remember it is available on a compassionate use basis, and so you're then going on to reimburse basis on a number of countries.

Some countries that exists, some countries that doesn't exist I don't think of this as a launch from nothing. Typically if the transition from name patient basis and we will continue to see that happen over the course of 2015. So like I said, if I just step back and I say what do I see in terms of growth with Defitelio in the countries where we are watching, not only reimbursement but future growth, we're actually pretty happy with what we're seeing in terms of double-digit growth.

Okay. Thank you.

Last question?

That was the last question, ma'am. I would now like to turn the call back over to Kathy for any closing remarks.

Well, thank you very much for joining us today. I wanted mention that we are planning to attend the upcoming Cowen conference in Boston and also the Barclays healthcare conference in Miami, and we look forward to seeing many of you at those conferences. Thank you very much and have a good afternoon.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect.