Jazz Pharmaceuticals' CEO Presents at 25th Annual Piper Jaffray Healthcare Conference (Transcript)

Executives

Bruce Cozadd - Chairman and Chief Executive Officer

Katherine Littrell - Vice President, Investor Relations

Analysts

David Amsellem - Piper Jaffray

Jazz Pharmaceuticals, Inc. (JAZZ) 25th Annual Piper Jaffray Healthcare Conference December 3, 2013 8:30 AM ET

David Amsellem - Piper Jaffray

Good morning, everyone. Thanks for joining us at the Piper Jaffray Healthcare Conference. Our next company presentation is Jazz Pharmaceuticals. For those of you, who don't know me, my name is David Amsellem, and I cover specialty pharmaceuticals for Piper.

With us today from Jazz is Bruce Cozadd, CEO of the company. Bruce, thank you for joining us. What I'm going to do is turn it over to Bruce for some brief introductory remarks, and then we can get right down into Q&A. Go ahead Bruce.

Bruce Cozadd

Thanks, David, and good morning, everyone. I'm also joined today by Kathy Littrell, our Head of Investor Relations. I'm just going to make brief comment, so that we can spend most of our time on Q&A. I know David is all loaded up with some good questions here and take questions from you as well.

Before I give remarks, of course I will make forward-looking statements including referring to guidance. So please see risk factors in our SEC filings. And also I will mention some non-GAAP financial measures, we think some of these measures are very helpful in evaluating the performance of the company and give you a better sense for how we're doing on an ongoing basis, but we do provide GAAP to non-GAAP reconciliations in all of our press releases and presentations and you can find those on our website.

Now on to the more exciting stuff. A quick snapshot of the company, revenue run rate in the third quarter was approximately $930 million. And we're giving guidance for the year that would indicate revenues up about 50% over 2012.

If you go from the topline down to the bottomline our adjusted net income, so our after-tax income is estimated to be about 45% of our topline. And for investors the important piece of that is, obviously if we can continue to drive revenue growth, we're pulling a lot of that straight through to profitability of the company.

On an adjusted EPS basis, we're guiding to $6.30 to $6.40 a share for 2013. We're in the midst of a $200 million stock buyback, so that EPS is being helped a little bit by a reduction in shares outstanding.

On to the key products. Xyrem continues to perform very well. This is our treatment for excessive daytime sleepiness and cataplexy associated with narcolepsy and orphan disease. We've seen volume growth rates year-over-year of between 12% and 15% for each of the past four quarters and we see continued growth opportunities there.

We do have litigation ongoing, most notably with Roxane Labs. There are now three ANDA filers, so we have them notified of one additional ANDA filer since our third quarter report. We've also had a 14 patent issued to us and we received noticeable allowance for two additional patents beyond that.

Our existing patents have expiration dates between 2019 and 2024. We do have additional patents beyond anything I've just mentioned also working our way through the system, including some that could have expiration dates beyond 2024.

I'll quote from a recent proceeding in the court to let to you know that Roxane said, there are 78 claims at stake, if we don't win all 78, we lose. So we think the breadth of our IP protection for the product is very important.

Coming behind Xyrem, we do have an early development, JZP-386, which is a deuterated version of sodium oxybate the drug in Xyrem, and we're expecting to make a filing this month to start human clinical trials in 2014.

Erwinaze, our treatment for acute lymphoblastic leukemia continues to perform well. We've guided to revenues for this year of approximately $175 million. And we see continued growth opportunities for Erwinaze, as we educate on recognizing hypersensitivity in kids who have an allergic reaction to E. coli drug asparaginases, but we see also opportunities and other appropriate patient populations, including adolescent in young adults and silent hypersensitivity.

We do have an amendment on file to our BLA to allow for IV dosing in addition to intramuscular injection, which is the current route of administration in the U.S. And we also have trials moving forward on Asparec, which is our recombinantly produced PEGylated version of Erwinia asparaginase.

Beyond our current products, we continue to be very active on the corporate development side, looking for additions to our portfolio with a primary focus on commercial assets, things that are on market or near the market, that treat a serious condition, make a real difference to patients or highly differentiated with good exclusivity. But we are also looking to make selected R&D investments, our existing pipeline, but potential additions to that as well as we build a more sustainable growth model for the company.

I've said to people that the deal flow we are seeing right now is the best I can remember. I can't obviously promise exactly what deal we'll do when, but I'll tell you we're very happy with the opportunities we're looking at.

So a brief strategic recap and then I'll open up for questions. We're a company that's very focused on commercial opportunities, where a small, well-trained sales force can access the right physicians to drive growth in our product. So that's what we refer to as specialty pharmaceuticals, a specialist audience.

We apply the skills we have in that area to our existing portfolio, primarily Xyrem, Erwinaze and Prialt. And then we take the significant cash flow, which is approaching $400 million a year from those franchises and redeploy that cash flow.

In the other activities, we believe we'll continue to create value for shareholders, leveraging our efficient corporate structure, our Irish domicile to invest in R&D, to invest in corporate development opportunities to continue our growth. So that's a quick snapshot of the company. And David, I'll turn it over to you.

David Amsellem - Piper Jaffray

Great introduction, Bruce, thanks. So I'd like to expand upon your comments regarding strategic initiatives. And obviously, I'm not going to ask you what you're going to acquire. But I guess I'll ask the question this way, given the strength of the balance sheet and it's only getting stronger and given that you have a favorable tech structure, I guess the question is, how ambitious are you in terms of the scale of an acquisition in terms of being able to or being willing to do something that you would consider to be transformative?

Bruce Cozadd

Well, just as a reminder, the last significant deal we did on the buy side was the acquisition of EUSA, which we did in June of last year. That was about a $700 million transaction. Obviously, through the addition of that business, which includes Erwinaze and continued growth in our business, we're a company that could do a deal much larger than that today. Financing remains readily available. Our balance sheet is strong. So I think something that's a multiple of the size of EUSA is clearly doable.

Are we looking for a transformative deal? We're looking for a good deal. If it's large, I think our standards for how good it has to be to go up. We want to be really sure if we're doing a major transaction. It's one that's going to push the company in the right direction strategically and in terms of return. So we are looking at those transactions, but our standards are pretty high. But we're looking at a range of transactions below that.

David Amsellem - Piper Jaffray

What are your targets in terms of return on investment? When you're thinking about a transaction, obviously you have a business development team that is vetting these different assets. But how do you think about ROI, I know there is sort of metrics, when you're looking at a different asset. So help us understand that?

Bruce Cozadd

So we don't look at just one metric. ROI is clearly an important one, sort of a risk-adjusted ROI. We look at NPV, we look at accretion, but I won't say that's the most important piece of the equation. We look at valuation multiples on a different basis. Traditionally we try to do deals, where the return we can expect, given what we believe are conservative assumptions, would still be well north of our cost of capital. If there is significant risk on the deal, we're going to look for even higher returns.

And historically, if you look back at the Orphan Medical deal we did in 2005, if you look at the Azur transaction early 2012, if you look at EUSA transaction, we typically outperform those conservative assumptions and our returns have been terrific. And I think that's a good generalized approach, with conservative assumptions can we see a good return and then our job on the execution side is to beat those conservative expectations.

David Amsellem - Piper Jaffray

Let's switch gears to Xyrem, and there is obviously a lot that one can ask here. You had alluded to additional patents that are pending. I guess the question here is, to the extent you can talk about how they may be different or how different they are from the current group of patents you have issued? And then how should we think about expirees of those new patents, would they significant extend the patent life for the overall estate?

Bruce Cozadd

On differentiation, most of the recent patents that have been granted, let's say, over the last 18 months or two years have been related to earlier to patents. They are parts of the same family as they typically share an expiration date, but they are different, whether those differences turn out to be meaningful in terms of providing IP protection for the current products, we'll have to watch the litigation to find out.

But if you go back in time for example to the patents that were issued in September and December of 2012, you may remember that a lot of people that looked at those patents said they were meaningful relative to the prior patents we have. So even if the patent is related, it doesn't mean it's not potentially valuable.

On expiration dates, newer patents that aren't parts of the same families could conceivably have expiration dates going out closer to 20 years from today, rather than 20 years from when those patent families were originally submitted and prosecuted. So there is the potential for significantly longer-lived patents. None of those have issued yet, but that's the potential.

David Amsellem - Piper Jaffray

Now, as it relates to the pharmacovigilance of REMS for Xyrem, one thing you said on the most recent earnings call is that you eventually would be meeting with the FDA with the generic filers to potentially work through a shared REMS, and that's something that is top of line for a lot of people. So I guess the question here is, given that you have IP around your own REMS, there is probably not a better way of asking this, but do you believe that you even need to work with the generic filers through a single shared REMS, given that you actually have protection. How should we think about that?

Bruce Cozadd

It's a good and complex question, David. I think as part of the normal process FDA goes through, when they are reviewing and the filings for products that do have REMS, FDA is on record, and saying, they will in due course ask the brand company and the generic companies to get together to see if they can come up with a shared REMS, and FDA has said, that's their preference. It's not the only thing that can happen, but that's their preference.

And of course, FDA has asked us to sit down with the ANDA filers in the future and have that discussion. I think it's important, we do have that discussion. I don't think that means we can't protect our intellectual property, which is sort of a separate question, I know there are linked. But are there terms under which we and the generics could work together, while respecting our IP, whether that means not using it or paying an appropriate price for it or something else, remains to be seen. It's not certain that can be done, but I think it's a discussion worth having.

David Amsellem - Piper Jaffray

So one potential scenario is the FDA essentially carving out REMS for the generic filers, we've seen that with other products, and bearing in mind that the FDA's preference that there is a single shared REMS. So in the context of a product like Xyrem, with the kind of history that Xyrem has, sodium oxybate really. How should we think about the likelihood of something like that happening or how do you think about that?

Bruce Cozadd

Well, I mean we have a point of view, we're not FDA. This is a product, sodium oxybate, which is the sodium salt of the gamma hydroxybutyric, GHB, also known as the date rape drug. On the one hand is an important agent for helping these narcolepsy patients, and Congress and the FDA 11 years ago saw a benefit to bringing it to market, and yet there was great concern about what would happen by putting this abusable drug, making it more available. And so a REMS was designed or at that time called a RiskMAP that has proven over the last 11 years to do a really nice job of giving patients access to the drug, while minimizing safety risks for patients and the public.

The question is could multiple REMS serve the same risk mitigation goal. One of the key elements in our minds of the existing REMS is that we know that no patient can get more than one prescription for Xyrem. If they doctor shop, if they go see multiple physicians, our system is going to catch that and make sure they only get one prescription.

One of our concerns about the potential for a parallel REMS or separate REMS is that unless that knows who we're shipping drug to, you could start to get the potential that people are getting multiple prescriptions of the drug, which we think would defeat one of the risk mitigation goal. So we think that's a complex proposition.

Question-and-Answer Session

David Amsellem - Piper Jaffray

Anyone in the audience have any more questions about this complex subject, before I move on to other topics. Go ahead, please.

Unidentified Analyst

Yes, I just want to know what the FDA's response to that question that you just brought up about shopping, patients being able to shop around with generic prescriptions.

Bruce Cozadd

Somebody repeat the question, just because we're webcasting. So the question was what's FDA's response to that concern about patients potentially shopping? So I don't know because they haven't finalized their view. They haven't finalized our deemed REMS to look for over five years now, nor have they in fact approved a shared REMS or waiver separate REMS.

I do believe they are acutely aware of the concerns. We've heard that over the years in our discussions with FDA about the existing REMS. We heard that in August 2010 penal discussion about the potential to broaden the indication for Xyrem, but we won't know until they are done. But I do think they recognize the concerns about making sure that there is adequate control over the distribution of this product.

David Amsellem - Piper Jaffray

So I wanted to make sure we cover a few other topics in the six minutes or so that we have left. You alluded to JZP-386, or potential next-generation sodium oxybate. I was hoping you could walk us through the next steps here. And my follow-up to that is could we potentially see early pharmacokinetic data sometime next year? Is that something that's within the realm of possibility?

Bruce Cozadd

So our next steps for JZP-386, we are looking to do our first in-man trial next year. We do think we'll see our PK data next year, which will answer some of the important questions for us. We think Xyrem is a terrific drug, but it does have drawbacks. One of the drawbacks is that it's extremely short half-life, means that patients need to be dosed twice nightly. They take a liquid dose of Xyrem right before bedtime and then they wake up and take a second dose, two-and-a-half to four hours later.

We think it would be a benefit to patients, if we could get to once-nightly dosing, which is at least possible, depending on what we see in this trial. Will that data be publicly available next year, I can't promise that yet. But I think we'll have enough to go on to have some intelligent conversations with FDA about clinical regulatory strategy and for us to plot our next steps.

David Amsellem - Piper Jaffray

I guess the one follow-up to that is just a once a night dose sufficient to move forward or do you have to see something else? How do you think about the boxes you need to check in order to advance this into later stage studies?

Bruce Cozadd

I wouldn't say once-nightly dosing is the only thing we can look at, but I do think that if that were the only difference, that would be a significant difference. In terms of a benefit to patients, to not force some of them to set an alarm and wake up in the middle of the night to take a second dose and to eliminate potential risks to patients with middle-of-the-night dosing and to eliminate the risk of having a second dose of a controlled substance out on the nightstand, while the patient is deeply asleep. So I think that would represent a meaningful benefit in the overall risk benefit equation of sodium oxybate.

David Amsellem - Piper Jaffray

Walk us through the recent sales force expansion supporting Xyrem. And I guess help us think about or help us in terms of thinking about the impact of that greater sales force reach in terms of the number of additional doctors and the number of additional patients you think you can reach.

Bruce Cozadd

So we recently decided to expand our narcolepsy sales force from 80 territories to 100 territories. We did this after some initial efforts aimed at increasing our call universe by looking at data on prescribers of other drugs who we know do treat narcolepsy, but hadn't been Xyrem writers and hadn't been part of our call plan historically. We started rolling out waves of those physicians over the past 12 months to 18 months. And we were able to track some uptake in those lower-docile physicians that made us confident that this expansion would be a good thing.

What would that mean in terms of patients, we currently have approximately 11,000 patients on therapy, out of about 50,000 diagnosed and treated patients on what is estimated to be a closer to a 160,000 narcolepsy sufferers in the U.S. So we're looking to expand our impact on that population by reaching more physicians, by reaching more existing patients and potentially helping with the better diagnosis of this disease.

We just announced on the last call our initial efforts to test some disease awareness initiatives, including T.V. advertising in two markets that we're using as controls right now to see what responsible do we get. We have a T.V. ad that directs people to website. We can obviously track our website hits. We can then track what people do on that website.

Do they run through some of the self diagnostics? Do they print out those results? Do they use the physician finder feature to find a sleep specialist in their area? That much we can see really quickly and easily and directly. Over time we'll now track what happened in those markets with prescriptions and new patient starts by those physicians. And we'll be able to see whether we're having a true impact in patients recognizing symptom of narcolepsy, seeking diagnosis and treatment and whether that turns into more Xyrem usage. If it does, we will expand those efforts, if it doesn't we will shut them down.

David Amsellem - Piper Jaffray

Well, the clock is ticking down, so I want to thank everyone in the audience. And thank you, Bruce, for joining us today.

Bruce Cozadd

Thanks, Dave.

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