Jazz Pharmaceuticals PLC (JAZZ) 2016 Q2 法說會逐字稿

Welcome to the Jazz Pharmaceuticals second-quarter 2016 earnings conference call. Following an introduction from the Company, we will open the call to questions. I'll now turn the call over to Kathee Littrell, Head of Investor Relations at Jazz Pharmaceuticals.

Thank you, Vince, and thank you for joining our investor call. Today reported our second-quarter 2016 financial results, and updated financial guidance in a press release. The release and slide presentation accompanying this call are all available on the investors section of our website.

With me for today's call are Bruce Cozadd, Chairman and CEO; Matt Young, our Chief Financial Officer; Russ Cox, our Chief Operating Officer; Mike Miller, our Head of US Commercial; and Karen Smith, our Global Head of R&D and our Chief Medical Officer. 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 future performance, rather than historical facts, and are forward-looking statements. Examples of forward-looking statements include statements related to our 2016 financial guidance and goals, our corporate development efforts, future product sales and volumes, future litigation and intellectual property-related events, our manufacturing plans, future share repurchases, ongoing and future clinical trials, and other product development activities, including regulatory events in the timing of such events and activities.

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, under Risk Factors in our Form 10-Q for the quarter ended March 31, and our Form 10-Q for the quarter ended June 30, which we will file shortly. We undertake no duty or obligation to update any forward-looking statements we make today.

On this call, we will discuss several non-GAAP financial measures, including historical and expected 2016 adjusted net income and their related per share measures. Historical and expected 2016 adjusted SG&A and R&D expenses, and adjusted income tax provisions, and expected 2016 net adjusted income expense. 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 in this call are included in today's press release, and the slide presentation accompanying this call.

Both are posted in the investors section of our website. I'll now turn the call over to Bruce.

Thanks, Kathee.

Good afternoon, everyone, and thank you for joining us. We had a strong 2016 thus far, as we continue to build the foundation for future growth by advancing and broadening our portfolio.

This has been a successful year on the corporate development front. Last month, we acquired Celator, which brings a near-to-market product candidate, Vyxeos, to our portfolio, as well as Celator's proprietary nanoscale combination drug delivery technology platform, CombiPlex.

We completed additional transactions with a license and option agreement with Pfenex, and an investment with Arrivo Bioventures that provide us with opportunities to access attractive product candidates on a worldwide basis to further expand our R&D portfolio. These transactions complement our R&D and commercial expertise in our key therapeutic areas, and have the potential to bring innovative products to patients with unmet medical needs.

We are also successfully executing on the early stages of the Defitelio US launch, with product orders from accounts representing over half of the bone marrow transplantation volume in the US. We continue to drive toward the accomplishment of our 2016 corporate goals of delivering strong top and bottom line growth, expanding and advancing our development pipeline, and identifying further innovative assets through corporate development efforts. We remain well positioned to accomplish these goals, which are focused on generating increased shareholder value, while executing on our mission of improving patient's lives.

I'll now update you on key commercial, legal, regulatory, and clinical development activities, highlighting some upcoming key events, and then turn the call over to Matt to review our financial results for the quarter, and provide updated financial guidance.

I'll start my comments with our sleep therapeutic area, and our lead product, Xyrem. During the second quarter, we delivered strong Xyrem sales growth. The average number of active Xyrem patients grew to approximately 12,850 in 2Q 2016 from 12,475 in Q2 2015. Xyrem bottle volume growth was 4% versus the same quarter in 2015.

We believe Xyrem has further growth potential, and note that both bottle volume and patient growth for Xyrem can vary from quarter to quarter. That said, we have observed some recent slowing of narcolepsy diagnosis growth in insurance claims databases.

We also see managed-care trends that apply increasingly stringent requirements for prior authorizations, and reauthorization for treatment. As we've mentioned, this trend is prevalent in the specialty pharmaceutical or orphan space, and has necessitated increased physician office workload to obtain approval for patients to receive their prescriptions. We believe that our marketing plans, such as the unbranded web-based disease awareness programs, utilization of the Swiss narcolepsy scale, and our overall focus on health care provider education remain effective tools to foster expansion of narcolepsy diagnosis, and we will be further increasing these efforts.

Also this quarter, we've implemented a new Xyrem field reimbursement support team, that will offer expertise to physician practices in navigating the prior authorization and reauthorization payer processes, for both the diagnosis and treatment of narcolepsy. We believe this dedicated field support team, along with our clinically-focused sales force, physician targeting program, branded advertising, and our satellite symposia are the most effective approaches to driving Xyrem growth for the remainder of the year.

Turning to a brief legal and intellectual property update on Xyrem. Patent litigation continues in the District Court in New Jersey. Recently, the District Court determined that it would try all the patents at issue in the first and second Roxane Laboratories cases together, including patents that were previously bifurcated in state, and set trial in this consolidated case for the second quarter of 2017. A separate consolidated case that includes the remaining ANDA litigants is also proceeding. No trial date has been set in that case.

With respect to challenges to our patents through the US Patent and Trademark Office Patent Trial and Appeal Board, or PTAB, we were disappointed that PTAB decided last month that all the claims contained in six patents directed to the Xyrem restricted distribution system were considered unpatentable. We are reviewing the decisions to determine whether a request for rehearing by PTAB is warranted, and we expect to appeal these decisions to United States Court of Appeals for the Federal Circuit. The appellate process typically takes 12 to 18 months.

Recall that earlier this year, an IPR petition on the seventh Orange Book-listed patent directed to the restricted distribution system for Xyrem, the 963 patent, was submitted to PTAB, and PTAB instituted review on only 3 of its 28 claims. As a result, the remaining 25 claims of the 963 patent continue to be enforced. I'd like to remind you that the 963 patent is not yet at issue in litigation with Roxane.

And finally last month, we received a decision from PTAB to deny institution of an IPR on our 306 patent, covering a method to avoid drug-to-drug interaction between Xyrem and valproate, removing the only remaining pending IPR challenge to the DDI family of patents. We are pleased with this outcome, and remain confident in the strength of our Xyrem patent estate.

Now turning to our development program for JZP-110. We have observed an increase in the enrollment rate in our Phase 3 OSA studies, following the protocol amendments that we implemented earlier this year. We are now expecting preliminary data from the two Phase 3 OSA studies in first quarter 2017.

The enrollment rate in the Phase 3 narcolepsy study is improving, but progressing slower than our earlier projections. We now anticipate preliminary data in this trial mid-year 2017. Subject to the results of these Phase 3 trials, we anticipate an NDA submission for narcolepsy and OSA in late 2017.

Now on to the hematology-oncology franchise: Erwinaze. Although the demand for Erwinaze remains strong, I'll remind you that because of constrained manufacturing capacity, we have not been able to build sufficient inventory levels to absorb potential supply disruptions.

During the second quarter, we continued to experience supply challenges, although we were able to meet patient demand. We expect that we will continue to experience inventory and supply challenges, which may result in temporary disruptions in our ability to supply certain markets, including the US, from time to time.

Now, I'll turn to Defitelio. Our sales force was well prepared for the US launch, and stocking and initial demand in the second quarter was strong. We received positive responses from healthcare providers, payors and institutions, following the launch, as they recognize the value that Defitelio brings to patients diagnosed with veno-occlusive disease or VOD, with multi-organ dysfunction, or MOD.

We had 83 accounts order product. These accounts represent approximately 55% of the total transplant volume in the US. 75% of these accounts reordered in the second quarter, an indication of patient on drug versus initial stocking. While we don't have patient-level data, based on institutions ordering, we believe that the majority of patients receiving Defitelio are pediatric, as expected. While nearly 80% of the accounts were part of the treatment IND study, it is a positive sign to see early adoption in multiple sites, that did not have previous experience in the TIND.

This quarter, US sales initiatives were focused on educating healthcare providers on the recognition of the signs and symptoms of VOD, diagnosis and treatment of VOD with MOD, and the clinical benefits of Defitelio. Our market access group also focused on educating payors and institutional stakeholders on the health economics and value of Defitelio. Last week, the US centers for Medicare and Medicaid Services approved a new technology add-on payment, or NTAP for Defitelio, after determining that the product met the NTAP criteria for newness, substantial clinical improvement relative to existing therapies, and specific cost thresholds.

Beginning October 1, NTAP will provide incremental reimbursement to the standard diagnosis-related group-based reimbursement, which should support Medicare beneficiaries' access to Defitelio. We believe that the NTAP approval reinforces the benefit of Defitelio across the payer landscape.

Our efforts in the EU remain focused on providing medical education, on early identification of the warning signs of VOD, VOD pathophysiology, appropriate diagnosis, and the importance of prompt treatment of severe VOD with Defitelio. We observed strong EU rest of world growth in the second quarter, and increased use of Defitelio, in line with the labeled indication for the treatment of severe VOD. We observed strong growth in EU rest of world sales for first-half 2016, versus first-half 2015.

In May, the European Society for Blood and Marrow Transplantation released revised diagnostic and severity guidelines for VOD. We believe these guidelines will be helpful to healthcare providers in the EU, as they define one standard diagnostic set of criteria for adult patients, and importantly, provide physicians with objective criteria for defining the severity of VOD. Finally, we are in the process of start-up activities for the global Defitelio study in prevention of VOD in high risk patients following HSCT, and we anticipate that the first patient will be enrolled into the study in the fourth quarter.

Now some comments on Vyxeos: we welcomed over 20 new employees from Celator to Jazz. At this point, our primary goal as a combined company is to remain focused on bringing Vyxeos to patients as quickly as possible. Therefore, we are working together towards the completion of a high-quality NDA submission packet for Vyxeos for the treatment of AML. We are planning to initiate a rolling NDA submission later this quarter, and anticipate completing the submission in late 2016 or early 2017.

Vyxeos has fast-track designation in the US, and we plan to request priority review. I'll remind you that Vyxeos was granted breakthrough therapy designation by the FDA for the treatment of adults with therapy-related AML or AML with mild dysplasia related to changes. We are currently evaluating the timing for our European submission, and will provide an update on expected timing later this year.

Additionally, we will be conducting a full assessment of the multiple development opportunities in our integrated development portfolio, to make thoughtful decisions on future development of the Celator product candidates, and the use of the CombiPlex technology platform. We will provide updates after we work through this process.

Now, a brief manufacturing update. In June, we received FDA approval for our manufacturing facility in Athlone, Ireland, where we plan to manufacture Xyrem and materials for development activities. This facility provides a secondary source for Xyrem manufacturing, and we expect that shipments of Xyrem from this facility to the US will begin this quarter.

We look forward to the rest of 2016, as we continue to execute on key financial, commercial, and R&D goals that have the potential to create significant value. We continue to invest in our key products, Xyrem, Erwinaze, Defitelio and Prialt, our product candidates JZP-110 and Vyxeos, and other focused development programs that have the potential to generate important new therapeutic options to patients.

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

Thanks, Bruce, and good afternoon, everyone.

We are pleased with our financial performance in the second quarter of 2016, as total revenues increased 14%, driven primarily by higher sales of Xyrem, Erwinaze, and Defitelio, compared to the second quarter in 2015. We expect strong top line growth for 2016, and are updating our total revenue guidance in the range of $1.485 billion to $1.53 billion, compared to previous guidance of $1.49 billion to $1.55 billion.

Net sales of Xyrem for the first quarter were $281 million, up 13% from $248 million in the second quarter of last year. We are maintaining our guidance for Xyrem net product sales in the range of $1.095 billion to $1.13 billion, and now expect mid to high single-digit volume growth during 2016.

Turning to Erwinaze, second-quarter worldwide net sales were $50 million, up 8% compared to net sales of $46 million in the second quarter of 2015. As Bruce noted, while we successfully managed patient supply during the second quarter, we anticipate that we will continue to experience supply constraints for the remainder of 2016. As a result, we are lowering our guidance for Erwinaze net sales to a range of $190 million to $215 million, compared to previous guidance of $200 million to $225 million for 2016.

Worldwide Defitelio net sales were $33 million in the second quarter, an increase of $18 million compared to $15 million in the second quarter of 2015. Sales were driven by strong Europe and rest of the world volume growth, and a $9.5 million contribution from the initial launch of Defitelio in the US. We are updating our guidance for Defitelio defribotide net sales for 2016 to a range of $105 million to $125 million, compared to previous guidance of $100 million to $125 million, with approximately $80 million to $90 million in Europe rest of world sales, and $25 million to $35 million in US sales.

As a reminder, Defitelio treats patients with an ultra-rare disease, and dosing is weight-based, which can increase intra quarter variability, just as we have seen with Erwinaze. Prialt net sales for the second quarter of 2016 increased to $8 million, compared to $7 million in the same period of 2015.

Turning to operating expenses, adjusted SG&A expenses for the second quarter of 2016 were $99 million or 26% of revenue, compared to $88 million, or 27% of revenue in the same period of 2015. The increase in adjusted SG&A was primarily due to higher headcount, and an increase in other expenses, resulting from expansion of our business, including Defitelio launch expenses.

Adjusted R&D expenses for the second quarter of 2016 were $36 million, or 9% of revenues, compared to $24 million or 7% of revenues for 2015. The increase in R&D expenses was due primarily to higher cost of clinical studies and outside services, for the development of our product candidate JZP-110, and line extensions for our existing products.

As a result of the Celator acquisition, we anticipate increasing operating expenses as we prepare for US and European regulatory submissions, and start preparations for the potential 2017 launch of Vyxeos in the US. Therefore, we are increasing our 2016 guidance for adjusted SG&A expenses to a range of $400 million to $415 million from a previous range of $390 million to $410 million, and are also increasing 2016 guidance for adjusted R&D expenses to a range of $135 million to $145 million, from a previous range of $115 million to $130 million.

In the second quarter we spent $29 million to repurchase shares at an average cost of $142.65 per ordinary share, leaving us with approximately $97 million under our $300 million share repurchase program. We temporarily suspended share repurchases when we announced the Celator transaction. The timing and amount of any future share repurchases will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, and market conditions.

As of June 30, the outstanding principal balance of our long-term debt was $1.3 billion, cash, cash equivalents, and investments were $916 million. On July 12, we completed the Celator pharmaceuticals acquisition for approximately $1.5 billion. We also amended our existing credit achievement in conjunction with the closing, increasing the borrowings available under our revolving credit facility from $750 million to $1.25 billion, and extending the maturity date of both the term out and revolving credit facilities to July 2021.

We used borrowings of $1 billion under the revolving credit facility and cash on hand to fund the acquisition of Celator. As a result, the outstanding principal balance of our long-term debt increased to $2.3 billion, and we had approximately $700 million in total cash investments and undrawn revolver available following the financing. With the $1 billion increase in our debt outstanding following the Celator acquisition and reduced cash balance, we expect our net adjusted interest expense for 2016 to be approximately $40 million.

Turning to adjusted net income and EPS, we have modified the calculation of our non-GAAP income tax provision in connection with the SEC's May 2016 guidance regarding non-GAAP financial measures. We've updated our 2015 and 2016 non-GAAP interim period results and full-year 2016 financial guidance to reflect this modification. The modified calculation no longer includes the cash tax benefits we realized during the year from net operating losses and credits and deductible share-based compensation, and now includes other deferred taxes and changes in unrecognized tax benefits.

This modification does not change the amount of cash taxes that we expect to pay in 2015, or in the future, or impact our future expected cash flows. Using this modified calculation, adjusted net income was $163 million or $2.63 per diluted share for the second quarter of 2016. Adjusted net income using our prior method for calculating the non-GAAP income tax provision would have been $174 million, or $2.82 per diluted share, a difference of $11 million, or $0.19 per diluted share.

Adjusted net income for the second quarter of 2015 was $144 million, or $2.28 per diluted share. Under our prior method for this calculation, adjusted net income for the second quarter of 2015 was reported as $152 million, or $2.41 per diluted share. We are updating our guidance for adjusted EPS to range of $9.90 to $10.30 per diluted share, compared to prior guidance of $11.10 to $11.50.

This reflects a reduction in 2016 adjusted EPS guidance of $1.20, due to increased expenses following this Celator acquisition, including the increase in SG&A and R&D expenses, as well as increase in net interest expense totaling approximately $0.55 per diluted share. The modification of the reported non-GAAP income tax provision which reduced our estimated EPS by a further approximately $0.55 per diluted share and the impact of global supply constraints for Erwinaze, and slightly higher R&D expenses associated with JZP-110, and line extension programs.

In closing, we are pleased with our progress year to date. We remain focused on opportunities to provide organic growth of our key products, and advance our current product pipeline. We continue to evaluate opportunities to diversify our portfolio. We are excited to work with our new colleagues from Celator to maximize the value of Vyxeos in the CombiPlex platform.

The Celator acquisition brings another source of diversification and growth, consistent with our strategy, and we believe that this is yet another step to further our mission of providing meaningful products to patients while delivering long-term growth and returns to our shareholders.

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

Thanks, Matt.

(Caller Instructions)

With that said, I'll turn the call back to the operator to open the line for your questions.

(Operator Instructions)

Our first question is from Louise Chen of Guggenheim. Your line is open.

So, I'm just curious more color, on the Xyrem volume growth this quarter, and some of the comments you made regarding that. So how should we think about narcolepsy diagnosis and prior auths for the remainder of the year, and how it reconciles with your Xyrem volume growth objective of mid to high single-digit? Thanks.

Yes, so Louise, this is Bruce. The guidance we are giving of mid to high single digits reflects all the information we have right now. At 4% volume growth for the first half of the year, we are now heading for a back half of the year we have a little bit easier comparison to last year. If you remember, the implementation of our REMS that started in late August of 2015. So I think that gets us to the growth rate that we are projecting.

But we are having to work harder for the growth of Xyrem. We don't see the tailwind of a rapid increase in diagnosis in narcolepsy, which honestly is what we have seen over some of the recent years. Perhaps, I would say in part due to our focused investments in that area.

And then, we noted the continuing trend we see in increased scrutiny, I think across the board for specialty pharmaceuticals, not specific to Xyrem. So we are growing. We expect to continue to grow, but we just did want to note some of those additional pressures.

Thank you.

Thank you our next question is from David Buck of Northland Capital Markets. Your line is open.

If I could just maybe sneak in two quick ones. First on Erwinaze supply, can you talk a little bit about what the impact there was on sales in the quarter, and what's the ability to think about a backup supply for that, looking out the next 12 months? And from that, just a quick question on the change in tax rate. What's the implication for actual cash flow from operations you expect from that going forward?

Okay, so David let me take the first part on Erwinaze supply, in terms of what impact that has on our sales. At this point I think supply limits the growth we can expect in sales. Any vial we can produce, we can sell. So our real job is to make sure we do satisfy product demand.

I think we were able to do that in the second quarter. That doesn't allow us to build up as much inventory at quarter end as we would like to have on hand, to make it easy for people to order. And our ability to do that at the end of each of the next couple quarters, I think, will be similarly constrained. It's very dependent on ongoing production.

In terms of your question about a backup supply, and how we handle this over the next 12 months, we and our partner on the supply side are working very hard to make improvements in production processes, better utilize available capacity, bring all resources to bear, to make sure we do our primary job, which is helping patients with acute lymphoblastic leukemia, who are allergic to Oncaspar, and therefore require treatment with Erwinaze.

Sourcing Erwinaze from a separate manufacturing facility is not something that will be possible in any short period of time, that would be a very much longer-term effort. So all of our efforts for near-term supply really revolve around a cooperative effort with our existing supplier. And Matt, let me hand the question about cash impact of the tax accounting change over to you.

Yes David, there is no impact in the cash tax we expect to pay, nor impact on cash flow. So it's merely again complying with the SEC's guidance as it relates to an accounting convention here, which will lead to some increased volatility in our adjusted cash tax rate, as it will more closely track GAAP as a result, which means you will have one-time events and discrete items that may influence quarter-over-quarter reporting, but in general the relative difference between the previously reported tax cash number and this new number will be fairly consistent over a longer period of time, meaning 4% to 5% differential, though again the actual cash taxes we will pay are completely unaffected.

And just to recap I guess, so the tax cash rate you expect to pay for 2016 is what, versus the new non-GAAP tax rate?

So roughly a 5 percentage point difference. It would of been in the 19.5% range for this quarter versus again 24.9%, and again for the year, the difference is fairly similar. But we would have been in the 19% to 20% range for the year, and will still be, from a cash tax perspective, but the number for the year on the new basis will be in the low 20%s.

Okay. Thank you.

Thank you our next question is from Gregg Gilbert from Deutsche Bank. Your line is open.

A couple on Vyxeos. Can you help us with any context around pricing for a product like this, and the number of cycles you'd expect? How soon could you be ready to ship the product if it's approved ahead of schedule, and what are your thoughts for now on combination therapy trials to consider for the future? Thanks.

So a couple parts to your question there, Gregg. On the first one, pricing, just too early for us to comment on pricing at this point. As you saw with the US launch of Defitelio, that's probably information we will provide at the time of launch, and I suspect not before then.

On being ready to ship, our goal as I said is to get product to patients as soon as we can, and I'm confident the combined Celator Jazz team is doing everything they can in that regard. Part of that is putting together a high quality NDA submission, but as you point out, it's really getting ready for all of it, supplying product to patients among those things. I'm really proud of how we did that on Defitelio. We got approval of the product, and had it available for shipment just days later, so we'll try to do the same with this product.

Again, we think it's a product with an important survival benefit, and we're going to want to get that to patients as soon as we can. In terms of the potential for combination trials, probably too early to comment at this point, having just completed the acquisition last month, and with everyone very focused on moving quickly to that regulatory submission. I think we will take a little bit more time to think about that, and give a more thoughtful response on a future call.

Okay. Thanks.

Thank you. Our next question is from Jason Gerberry of Leerink Partners. Your line is open, sir.

Bruce, just curious, you -- think it was on the Q1 call, you mentioned that we might get an update on Xyrem life cycle programs by the end of the year. Just curious as you think about a settlement process that's unresolved, how you reconcile those two things, and if you're still planning on providing that update by end of the year. Thanks.

Yes Jason, good question. I think I've said a couple times this year that this might be a year where we get more color on some of our sodium oxybate related life cycle management programs, and that was really driven by two things, where we might be in the process of litigation on the ANDA side, or potential settlement of that litigation.

But it was also driven by the fact that enough progress on those programs might also prompt us to want to, or need to do more disclosure around that. So I would think that is still the case, as we head toward the latter half of 2016, that it is certainly a possibility that there would be more color about what we're doing on sodium oxybate beyond the existing product, as we move to the back half of the year.

Okay. Thanks.

Thank you. Our next question is from Marc Goodman of UBS. Your line is open.

This is Ami on behalf of Mark. Could you give us some more clarity around Defitelio, with respect to where you are seeing utilization of the drug, and what's the composition of the types of patients that are using the drug, and also from an insurance coverage perspective. And the NTAP additional support, how does that impact either utilization or the net price realization on the drug? Thank you.

Okay, Ami, let me hand that over to Mike, at least with respect to the US commercialization of Defitelio.

Thanks, Bruce. As we said, there are 83 unique accounts that initially ordered Defitelio in Q2, and about 75% of them reordered. Typically in these accounts, they don't -- they only reorder when there is a patient, so it's pretty indicative of drug in patient. We don't have the information yet down to a patient-level basis on adult versus ped. We believe that the majority is ped, and we do that by looking at the types of centers that are ordering or reordering.

On the formulary side, with regard to at the institution, the P&C committees have gone very well. We haven't had any pushback on that. I think our preparation in terms of having our health economic and our budget impact model ready at launch helped us a great deal in that regard. We have been successful so far.

And then last NTAP, NTAP, as Bruce touched on it, it is a supplemental payment to -- for about a period of two to three years, during the DRG catch-up period. It takes two years for the DRG to catch up on it. It accounts for about half the cost, so it's a supplemental payment for about half the cost. So an adult, it's about $75,000 for a 21 day treatment. That is not anything -- in other words, we realize the full top line effect of that use in the patient. The CMS supplements that payment to the institution.

So if I could just ask for clarification question, so the CMS supplements 50% and the other 50% is paid by?

The institution.

The institution. Okay.

Correct.

All right, thank you.

Yes, and Ami, just important to remember in that, that the institution is paid generally for these patients on a per-transplant basis. Of course not all transplant patients develop severe VOD, and require treatment with Defitelio. So in those patients where Defitelio treatment is required, this helps them cover some of that cost. Of course we think it also produces better outcomes for those patients, and for that transplant center. And that's an important source of, I think, business for those transplant centers, is to be able to show their payors what kind of outcomes they are getting altogether.

And that's right, Bruce. The other is that there are not that many Medicare age patients in that patient group. But I do think the spillover to private and commercial pay is important, and it's a real validation of the drug.

Thank you.

Thank you. Our next question is from Douglas Tsao of Barclays. Your line is open.

This is Morgan Williams on for Doug. I just wanted to ask a few questions. So number one, does the approval and subsequent launch of the Ireland manufacturing facility have any implications in terms of the tax impact? And then, number two, I know that, Bruce, it sounded like you are confident in the potential success of all the educational tools around Xyrem reimbursement, but has the slowing in the diagnosis of narcolepsy impacted your thinking around potential contracting for the product going forward? And then finally, if you could just offer some thoughts on the relative strength of the 963 patent, and whether that provides some comfort in the go-forward durability of Xyrem?

Okay. A couple parts of the question there. On tax impact of supply of Xyrem out of the Athlone, Ireland plant, this gives us an additional source of supply. It won't be our primary source of supply, and I wouldn't expect to see any meaningful change in our overall economics there.

On the Xyrem reimbursement-related efforts we've made, our goal here is to make sure that patients who are properly diagnosed with narcolepsy for whom Xyrem would be good treatment do have access to the drug. We want to make sure we do everything we can to enable physicians to provide the best therapy to their patients, and we think those tools matter. I don't think that specifically relates to anything we would consider in the form of contracting.

On the 963 patent, I certainly can't and don't want to comment on the strength of particular patents, while we're in the midst of litigation with multiple parties. It is helpful to us to have many patents, patents in multiple families, patents that have already survived PTAB challenge, either not been picked up or only picked up in part and we think all of that contributes to our confidence that we have a durable asset in Xyrem.

Okay. Thanks, Bruce.

Thank you. Our next question is from Gary Nachman of BMO Capital Markets. Your line is open.

Bruce, Defitelio ex-US had a really nice uptick. Could you give a little more color on where you're getting the most traction there, and how sustainable you think that is going forward, understanding there are some fluctuations quarter to quarter? And any new countries you plan to enter sometime soon. Thanks.

Yes, Gary, thanks for the question. I'm really proud of our ex-US team in their efforts around Defitelio. It's nice to be able to talk about our early success with the US launch. Of course, our European team has been at this for a couple of years, and I think all of their efforts are really paying off. Maybe I can have Russ comment a little bit on what we're seeing over there, that is contributing to the strength, and what we might expect going forward.

Yes, Gary, one area in particular that's doing quite well this year is that we saw a lot of movement from prophylaxis last year in the UK, and the UK is actually now focused on what they can do for treatment, and we're seeing that pick up in a pretty dramatic way. I think the team has done a really nice job of identifying how to do that, and something that they've built that's sustainable going forward for the UK. So that's where a lot of improvement is going on, and I'd also say there's a number of other countries that had been waxing and waning that are picking up nicely as well. So very nice effort.

And any new countries that you plan on entering sometime soon, or do you think you have maxed out in Europe?

Nothing substantial that we will be announcing some.

And just remember, Gary, part of this process was really converting patients over to commercial over time, with full pricing and reimbursement approvals, country by country. It wasn't necessarily thinking about it as off to on, country by country.

Okay. Got it. Thanks.

Thanks. Your next question is from David Amsellem of Piper Jaffray. Your line is open.

Thanks, so question on 110. So you decided the pace of enrollment and the new timeline. Just wondering if you're contemplating any changes to the patient inclusion criteria for any of the studies, and also, if you're contemplating adding new sites. Thanks.

So maybe I'll have Karen answer that question on JZP-110.

Sure. So the studies are obviously blinded, randomized, they're both control studies and obviously in narcolepsy patients. And narcolepsy in particular, it's a rare disease, so they're difficult to recruit studies. So originally, I think when we designed the studies, they had very strict enrollment criteria, and this led to screen study rates that we immediately identified and addressed.

So we put in place a number of modifications that did include such things as increasing the number of sites, and it also included such things as broadening the inclusion and exclusion criteria. And what we have seen is an increase in the OSA study enrollment rate, and while we did also see an increase in the narcolepsy enrollment rate, this was slower than our earlier projections, and is not where we would like it to be at this point in time. So we have made the modifications that we believe are appropriate to continue to recruit at a good pace, and hit our timelines for the study and our filing.

Can you maybe elaborate on what the issues were on the narcolepsy studies, and what you think is the single biggest thing you have done to get enrollment back on track?

For the narcolepsy studies in particular, were things like BMI that we increased to enable patients to enroll, that may have otherwise been excluded. There are also cardiovascular parameters that we broadened, to enable those patients to be enrolled. One of the mitigation strategies we deployed was to go back and look at the patients who had previously been excluded, and then invite them then to reenter the trial, assuming that they met the other criteria, and a number of those patients did actually do that, and we did also additional sites.

Yes and just as a reminder, it's helpful David, to think about this, particularly in the OSA side. When we give you timelines to get the top line data, of course you got to back up from that data analysis. You got to back up from that, the treatment period, which for a number of these trials is 12 weeks, so we're actually pretty close to finishing the input side of the equation, at least on the OSA side. So we've got pretty good confidence around that, as Karen said. Narcolepsy, a little bit behind that.

It's also very difficult for narcolepsy patients who might be stable on a given treatment and the potential to go into a placebo arm could be concerning to some patients, and could be a deterrent. For example, to entering into a clinical trial, so I think in particular for narcolepsy patients, once they're stable, it's often taken a while to actually get past their reticence to potentially take themselves off the treatment.

Thank you. Our next question is from Stephan Stewart of Goldman Sachs. Your line is open.

Just wanted to follow-up on the Defitelio US launch, and any early feedback you might have around physician medication. I know infection was one area needed that some work. Just wondering how that's been going.

So maybe I'll let Mike address that.

Yes, thanks Bruce. We had a very nicely attended symposia, satellite symposia, that right after we saw a nice uptake with some centers. So we do believe that our educational objectives are on target. That is now getting expanded quite a bit this quarter, with speaker programs, and other things, in terms of reach out to the community, reach out to patient advocacy groups, and transplant support, the staff support that really raised the awareness around the signs and symptoms of VOD, for early detection.

Oh great. Thanks.

Thank you. Our next question is from Annabel Samimy of Stifel. Your line is open.

I had a quick question on Vyxeos. I guess it originally had been targeted to elderly high risk patients coming out of ASCO, it looked like some physicians were talking about how it could have potentially much broader utility in this population, given the toxicity of current therapy, so I just wanted to get your sense on that. And if I can quickly ask on Defitelio in the US, what exactly is the reason behind more pediatric patients right now, and will the NTAP payment help with the adult population at all? Can you just give us a little bit of color when you might see the transition to the adult population, since this [weight based test] has an impact.

All right. On the first question, Annabel, on Vyxeos, on the right patient population for that, maybe I will have Karen comment on that.

Thanks, Bruce. So Vyxeos is a fixed dose lysosomal formulation. So it's a synergistic 5 to 1 molar ratio, of cytarabine and daunorubicin, two well-established chemotherapeutic agents. The study, a Phase 3 registrational study was conducted in older patients between the ages of 60 and 75 years, which is aligned to the actual disease of AML itself, where the average age is around 67 years.

So these are generally older patients, and remembering also that this study was in high risk or secondary AML patients. So I think that the overall results were extremely good. It was, certainly overall survival was primary the endpoint and there was statistical significance for Vyxeos compared to 7+3, which is the standardized free drug, if you like [all the] cytarabine and daunorubicin. So in terms of could you apply this in other patient groups or other patient populations, or other diseases, I think the actual Vyxeos itself is definitely something we would consider. Likewise for the platform, could utilize more broadly. Definitely something that we are currently looking at.

And Mike, maybe you can comment on the rationale for more early uptake in pediatric and the potential for the adult side, including any impact of NTAP.

Sure. So first, VOD actually happens at a higher rate in pediatric transplant patients, than it happens in adults. And so that is one factor. The other is that because of our success with Erwinaze, we have good relationships in the peds centers, and I think naturally those relationships are working to the extent that we can get in there and get face-to-face with our customers more efficiently.

The NTAP does not present a huge swath of new patients for us. I think it creates very nice access to those Medicare patients, but I think, as I said earlier, I think the spillover to private and commercial pay will be equally or more beneficial for the brand and our ability for more patients to access the drug.

Okay. Great. Thank you.

Thank you. Our next question is from Ken Cacciatore of Cowen and Company. Your line is open.

Bruce, just wondering with the recent PTAB decisions, what possibly is left for all parties to know about ahead of litigation? Is there, I know you have to, or there will be appeals to these PTAB decisions. I'm just trying to understand, you've gone now a few years, and clearly having these PTABs out there and discovery out there, I would imagine all parties didn't fully understand what they were dealing with. But can you give us a sense now that the PTAB decisions have been issued, really what is outstanding for all parties to know about this litigation, before you head to trial?

Yes, so I think we've talked about the importance of patents. We've talked about the importance of the IPR process, that PTAB is separate from having an impact on the litigation. We've also talked about on the regulatory side, the process for getting approval, the need to have a REMS, either a single shared system or array of REMS. I think all of those pieces go into the mix in thinking about the relative parties' positions as we go through this, and there are lots of moving pieces there.

I think the recent IPR decisions and the non-pickup of an IPR challenge on the DDI side are a couple more pieces of the puzzle coming together. There's a lot that goes on in litigation, motions different parties have, and we've got some new pieces of the puzzle moving forward in litigation that previously hadn't been a part of what we thought would be the first Roxane trial. It's been consolidated now, so there's some more work to do, which is one of the reasons the trial date is now pushed back to second quarter of next year.

Remember, we had previously been saying it could be as early as third quarter this year. Well, frankly, we started the year saying it could be much earlier than that. So there are still, Ken, a number of moving pieces here, that could have an impact on how the parties view this situation.

Got it. Thank you.

Thank you. Our next question is from David Maris of Wells Fargo. Your line is open.

This is Katie Brennan in for David. I don't mean to not give credit where it's due, but I will throw a corporate development question your way. Following the progress you made in the past few months, what are your thoughts on business development going forward? And if I could just ask for one clarification from Matt, I'm not sure if I missed it. But I did see that there is a $0.65 impact from the tax reporting change that is a difference between your previous guidance and your current guidance. How much of the rest of that $0.65 change in the midpoint is from Celator, and how much of that is from the other changes in the business that you mentioned?

Yes Katie, maybe I'll ask Matt to take that second one first. That's a pretty easy factual answer, and then we'll come back to BD, and no problem with your question. You don't just have to give us credit for past deals. As you know, our appetite remains strong to continue to invest our cash flow, use our balance sheet to bring additional assets into the Company and I think it's a great question. So Matt, do you want to hit the breakdown of the $0.65 first and take that?

Yes. So there's $1.20 adjustment to our prior guidance to our current guidance. Again, $0.55 was related to the change in the patent non-GAAP tax ETR. There was also $0.55 related to the Celator transaction, and then you'd have the remaining $0.10, related again to Erwinaze supply issues, which as you saw in our revenue guidance, we took down Erwinaze revenue guidance for the year. And some related, some slightly higher R&D expense related to JZP-110 and some other line extension programs would make up the remainder.

Matt, do you want to take the biz dev part of the question.

Sure, just as it relates to BD, again we're very excited to have completed a few acquisitions, licensing transactions and investments this year between both Celator being the largest and most notable of those, but also with the transactions with Pfenex, Arrivo, and otherwise. So we're deeply committed to continuing to bring new products to market, and are very active in evaluating new opportunities.

You may have also seen, we did increase our revolver by $500 million, so while we did you some of our cash and balance sheet capacity, we continue to believe we have the firepower to do some meaningful transactions, and also believe that it's a favorable business development environment. So we are certainly going to make sure we get the value out of the things we buy, and are excited to be working with the Celator team to move Vyxeos along toward patients as fast as we can, but we fully intend to continue to add growth and diversification drivers to the business.

Great. Thank you.

Thank you. Our next question is from John Boris of SunTrust. Your line is open.

Congrats on the results. On Vyxeos, there was some pretty good data that was presented in Europe at one of the conferences, on some subgroup analyses that were done on the product. Is there any plan to present additional data at ASH? And then, it seems like than the timeline Celator had with the filing in 3Q, I think you are filing before year-end. Any [read]-through on that?

And then just back to a question on the REMS patent for Xyrem. FDA obviously has an ability to potentially help the Company develop an alternative REMS, especially if the product could potentially be safer. Just your thoughts around that in linking it to your strategy to develop your line extensions on Xyrem, and how you're thinking about that going forward -- the competitive threat and your own strategy to develop your own assets going forward?

Yes, so maybe I'll take those in reverse order. On the REMS side, we have a REMS that we believe is very effective at doing what REMS are supposed to do, which is balancing the benefit of bringing an important treatment to patients who can benefit from that treatment, while also minimizing the risk. In this case, both the risk to potential patients of inappropriate use, or risk to others through misuse of this particular product.

So we've got a lot of experience with our REMS. We recently upgraded to the final REMS in the third quarter of last year. We continue to collect data on the performance of our REMS, both that we submit to FDA as part of our ongoing assessment, but also to make sure we're doing our job well, and we believe that REMS does that.

Are there alternative REMS that could also successfully balance a benefit and risk of Xyrem, Xyrem-like products? Conceivably. But I would say we have high confidence that our particular approach works very well.

On Vyxeos timing, it is true that Celator had been working toward a goal of a third-quarter submission. We've revised that timeline in consultation with Celator, to look to start a rolling submission in the third quarter, but get all of it in by the end of the year, or early next year. We think that's the best strategy to achieve our real objective, which is a product on market, as opposed to just getting the fastest submission in, and a lot of credit to the Celator team for the great work they did during the time that they were unblinding and analyzing data, going through and M&A process, integrating companies, and continuing to move this program forward. We think they've done a really nice job. But all I would say is together, we've determined that this is the best strategy to achieve the ultimate goal, which is product available to patients.

On Vyxeos and ASH, I would say you can count on us being at ASH on Vyxeos, on Erwinaze, and Defitelio. It's a really, really important meeting for us. I think in addition to having some good data across products, we will be featuring a team on the heme-onc side that we continue to strengthen over time, even just since last year's ASH. You know I think we've made a tremendous amount of progress on many fronts, and if any of you are at ASH I hope you get a chance to see that in person.

Thanks.

Thank you. Our next question is from Irina Koffler of Mizuho. Your line is open.

I was wondering if you could comment on the Xyrem pricing environment, as we head into next year. Do you feel it's a little bit more restrictive, or about the same? And then, with respect to the additional expense for Celator, as we ramp into the back half of the year, is it going to be mostly higher in the fourth quarter, lower in the third quarter, lumpy? How should we think about the build?

Yes, Irena thanks for the questions. On Xyrem I would say no particular change in our view of the pricing environment for that product. Mike, anything you want to add there?

No, I would say I think, as with all specialty and drugs in the orphan space there is increasingly stringent PAs and re-auths, but this is the space. What is good is that our approval rate is still very steady at 80%, so we are very pleased with that. And Bruce touched on the field reimbursement team that will be out this quarter. We're very excited about that, helping practices with the PAs and the re-auths. So for both diagnosis and treatment.

And then on your question on Celator-related expense, Irina, I would say the interest expense part of that is pretty straightforward to figure out. Us taking on additional expense associated with Celator, and now expanding some of our capabilities to finish off this program, and then prepare for a launch, some of that expense will ramp up as we get through the back end of the year, and certainly as we head into 2017, to be ready to do a high quality launch.

I can't say there won't be any lumpiness in there, but I think that's the best way to think about it is, calculate the financial impact of the increase in debt and the reduction in cash, and then factor in some level of ongoing expense. There is some expense that goes away, a little lack of duplicative expense across the two organizations. But I think in general, we'll be adding some expense as we push this to the market.

Okay. Thank you.

Operator, this will be our last question now. Thank you.

Thank you ma'am. Our last question is from Jessica Fye of JPMorgan. Your line is now open.

I had a couple. First, the comments you had about biz dev and still having a strong appetite, can you just remind us of what your highest net debt to EBITDA ratio you would go up to is? Second, both in heme-onc space, what's the ideal label you would like to see for Vyxeos? Might you try to get a broader label than what you studied, and is that even possible? Also, on Defitelio, just trying to reconcile the patient numbers when you say the majority of use is coming from peds, I see that they get VOD more often, but there are just so many fewer stem cell implants in peds. I'm just trying to reconcile that. Maybe I'll stop there. Thank you.

Yes, maybe I'll have Mike take that last one first, in terms of the comment on pediatric use of Defitelio.

Sure. So I said the incidence in peds is higher in VOD, but there are fewer patients, I would agree with that. And also, keep in mind that this is a weight-based drug, and so they are going to use less viles per patient in the peds space. In pediatric transplant, they are aggressive with their treatments, and that's what drives a lot of the VOD that you see in kids. And these kids are primarily ALL but some AML, and so it's certainly a beginning for us, that we are very proud of. I think going back again to our access and knowledge in the peds space, but more importantly, we are looking forward to driving that adoption in the adult space.

And I would say, Jess, on this, remember as we got ready to launch, we forecasted that we expected more uptake quickly in the pediatric side. And just a reminder that under the treatment IND, we also saw a little more weighting toward the pediatric side.

Okay.

On the question about potential label for Vyxeos, I think since were heading for an ongoing dialogue from FDA, probably won't comment publicly on that. Again, this is, we think, a pretty important clinical result that we saw in a disease where we haven't seen a lot of meaningful improvements, and objective data, in this case, survival. So we'll certainly be focused on appropriate label for the product, but again, the goal is get it to patients as soon as we can. And maybe I'll have Matt address your comment on capacity for additional business development activity.

Yes, as it relates to that, Jessica, we have mentioned before, and would still say we'd be comfortable pushing up our leverage to, as we have said as high as 5 or so times for the right transaction. I do think it's quite dependent on the type of acquisition we're doing, and the types of reliability and predictability of the cash flows of the acquisition, and what would the deleveraging profile look like. As we've said before, we reflect on what consideration to use based on the risk and size associated with any particular asset, but we're absolutely prepared to lever up in the right situation.

Got it. Thank you.

All right. Operator, thank you for joining us today for this call. We will be participating in the Morgan Stanley Healthcare Conference next month, and we hope to see many of you there. This now will end our call.