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Jazz Pharmaceuticals, Inc. (JAZZ)

March 12, 2013 9:00 am ET

Executives

Bruce C. Cozadd - Co-Founder, Executive Chairman and Chief Executive Officer

Analysts

Douglas D. Tsao - Barclays Capital, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

[Audio Gap]

started. My name is Doug Tsao with Barclays. I cover U.S. tech pharma. Up next, I am pleased to have Bruce Cozadd with Jazz Pharmaceuticals, who -- I think Jazz continues to be sort of one of the most interesting and exciting companies in the sort of tech pharma universe. And I'm going to sort of ask you a starting question, but as a -- sort of it's amazing -- as an observation, I'll start with just, how much of a change from when I first met you, I think we talked about this a little last night, this was probably about 18 to 20 months ago, the first time I met you, how our conversation was focused solely on Xyrem and how different the story is today. So with that, maybe, Bruce, you can sort of provide an update on where the company is, what -- how you see things, the progress you've made and sort of how you're looking forward.

Bruce C. Cozadd

Great. So thanks, Doug, for having us, and I'll keep my opening remarks short because I know Doug has good questions. He tried out a couple of them on me last night.

So Jazz Pharmaceuticals has really been transformed in the past 12 to 18 months, if you've been following the story. From a company that certainly had shown it could take a highly specialized product in Xyrem, get it out in an orphan population and really make some progress, to a company with 3 growth drivers in Xyrem, Erwinaze and Prialt, as well as a very active business development effort. If you look at the 3 core franchises, they all have some similar characteristics, products that are highly differentiated, a target of very at-need patient population, have great exclusivity and all have current growth and, we believe, substantial future growth in front of them. We are trying to optimize the value of each of those franchises and then take the cash flow from those franchises, and we've estimated adjusted net income, which is a relatively good proxy for cash flow, at north of $350 million this year, that's on top of almost $400 million in cash coming into the year, to redeploy that both into growing our existing franchises; business development deals, whether that's for on-market products or late stage products in development; and then selective R&D investments to continue to grow our franchises.

So we think we're well-positioned, Doug, not only in terms of our 2013 guidance we just gave, but really as a platform to continue to grow the company over the medium and the long-term.

Question-and-Answer Session

Douglas D. Tsao - Barclays Capital, Research Division

Just perhaps to start with Xyrem, perhaps provide an update on what's going on with the ongoing IP litigation, as well as I think this -- early this year, the end of last year, you had a second ANDA filer and if, in your perspective, that necessarily changes anything.

Bruce C. Cozadd

Yes, so Xyrem, we're fortunate to have very strong IP protection around Xyrem. We have 11 issued patents covering the product. Those patents include formulation patents, method of use patents and patents around our restricted distribution system, as Xyrem is a controlled substance with very, very tightly controlled distribution. So we do have 2 ANDA filers, as Doug points out. We're in litigation with both -- that litigation, though, the first -- in the first case has been ongoing for several years, is still in a fairly early stage. No trial date has been set. We still haven't had expert discovery. And right now, activities in that case are stayed while we wait for the judge to decide whether to consolidate 2 recently issued patents into the rest of the litigation. Although this product has been on the market for more than 10 years now, we continue to pursue aggressive intellectual property, both development of new intellectual property, as well as protection of the intellectual property we already have. So we had new patents issue in September and December last year. Some people know we have additional patents winding their way through the system, including at least 1 that's now been allowed. So the litigation remains complex.

Douglas D. Tsao - Barclays Capital, Research Division

And then, with the 4Q report, you did announce the partnership with Concert Pharmaceuticals, perhaps talk about how -- what advantage -- what you see from this Deuterium platform in terms of life cycle management, as well as opportunities to improve the existing formulation, of Xyrem.

Bruce C. Cozadd

Yes, so Xyrem, which treats narcolepsy, is an exceptionally effective product. It really works for these patients given at night to improve their sleep, and therefore, reduce the 2 primary symptoms of narcolepsy, which are excessive daytime sleepiness and cataplexy, but it's not a perfect product. And one of the ways it's not a perfect product is that it's dosed as a liquid with a very short half-life, half-life of 0.5 hour to 1 hour, and what that means in practice is that patients need to take 1 dose before bedtime and another dose 2.5 to 4 hours later. Taking patients with an underlying sleep disorder and asking them to get up in the middle of the night to take a second dose of medicine is not ideal. I will point out that narcolepsy patients without medication are often up 8 to 10 times a night, so I don't want to overdramatize the problem. But we clearly think there could be a better formulation of sodium oxidate in the future. And one possible route to that is our partnership with Concert around C-10323, which is a pre-clinical compound we plan to file an IND on this year. Because it's deuterated, it has different pharmacokinetics, we believe a longer half-life and thus offer at least the possibility that there are some things we could do to make this an even better product for patients.

Douglas D. Tsao - Barclays Capital, Research Division

And then just turning to the existing formulation. One of the things that you spoke about with 4Q results was the fact that you're seeing now new patients coming in, which I think has been overlooked by many and surprised many since as you referenced earlier, the product has been on the market for a decade, which you typically don't see at this point. How has that changed your perspective on growing the franchise further over the next handful of years?

Bruce C. Cozadd

Yes, so we've experienced good volume growth with Xyrem for each of the past 2 or 3 years, high single-digit, low double-digit volume growth rates, with 11% growth in 2012. And one of the questions in our mind and I know your mind has been how sustainable is that growth. Two years ago and at the early part of last year, we were seeing a lot of the growth in volume come from improvements in persistency and compliance. In other words, once we had a patient, how likely was that patient to stay on medication and how reliably were they taking their medication twice a night, 365 days a year. And we saw significant improvements in persistence and compliance, which led to solid volume growth. But I think everyone realizes you can only go so far with that kind of growth. You can't get compliance greater than 100%. And once patients are already staying on therapy, you can't continue to improve that. And while I'll say we have some room for growth remaining there, what's been particularly encouraging to us, particularly as we hit the second half of 2012, as we saw a pretty significant increase in new patients coming into the top of the funnel. We're seeing new physicians prescribing Xyrem. We're seeing some of our mid-decile docs prescribing at a greater rate. And we -- and so that new patient growth offers us the potential for a much longer continuation of our strong volume growth. We also announced some new initiatives coming into this year that we think will help us both capture a greater fraction of the 50,000 or so estimated, diagnosed and treated narcolepsy patients, but importantly, also start to make some progress in reaching the more than half of narcolepsy patients in the U.S. who are, as yet, undiagnosed. This is a difficult to diagnose condition. Often, patients go 7 to 10 years before they get the diagnosis. So if we can make some real progress in disease education and helping physicians understand how to recognize and diagnose narcolepsy better, we think that substantially expands the relevant market population for us.

Douglas D. Tsao - Barclays Capital, Research Division

And when you think about the improvement you're seeing in terms of prescription rates from the mid-decile physician base or sort of group of physicians, what do you think is causing them to now more readily write a script for Xyrem for their narcolepsy patients?

Bruce C. Cozadd

So one of the interesting things that's been going on over the last few years is physicians are starting to develop a new appreciation for narcolepsy as a disease. What does it mean for the patients living with narcolepsy? We've seen tremendous data now on co-morbidities associated with narcolepsy and the true burden of disease. We see in these patients high rates of cardiovascular problems, G.I. problems, psychiatric illness, depression, high suicide rate. And so, if you think about narcolepsy as a disease with a disability burden greater than that of MS, for example, and how you best ought to treat that disease, I think it suggests a potential paradigm shift from past practice. Past practice with narcolepsy was often to treat the excessive daytime sleepiness component of the disease just with a stimulant, Provigil, Nuvigil, other stimulants you may be familiar with, perking patients up during the day to help combat that excessive daytime sleepiness. But if you think of this as a pervasive sleep disorder with serious chronic consequences to patients, the idea that you're just stimulating someone during the day to keep them awake doesn't seem as sensible as treating the underlying sleep disorder, giving a medication that, in fact, helps patients get consolidated sleep with stage 3, stage 4 restorative sleep and help reduce these daytime symptoms while sort of addressing the underlying problem. So as the sense for the disease has changed, I think we're seeing some changes in how physicians choose to treat the disease.

Douglas D. Tsao - Barclays Capital, Research Division

Do you think Provigil going generic in its way has potentially helped you because I know there was some concern at the beginning of last year that Provigil going generic would be a hindrance because there'd be cheap stimulants available, so do you think the sort of disappearance of that share voice showing up in a food specialist's office promoting and reminding that message has given your reps greater sort of mind share with the docs right now?

Bruce C. Cozadd

Yes, it's a great question, Doug, and it's something we spend a lot of time trying to figure out how that change would play out. In fact, I think it's had very little impact. As you know, about 80% to 90% of Xyrem patients are on stimulant therapy as well. The 2 agents are used together. That's also true in our clinical trials and in the label for the product. So with concomitant use already and given the fact that 4 of the stimulants, the narcolepsy segment of their market was very small. But true narcolepsy patients are getting stimulants, but if you were in charge of the Provigil or Nuvigil brand, the percentage of your business coming from narcolepsy was vanishingly small. So we never really saw attention from a detailing perspective to that market anyway, so I would say essentially no change.

Douglas D. Tsao - Barclays Capital, Research Division

And then, how has been the impact to the switch to your specialized Xyrem -- sort of dedicated sales force for Xyrem overall worked in terms of your overall sort of rep productivity and how you're thinking about the world?

Bruce C. Cozadd

So Doug's referring to a change we made effective March 1 of last year, so we're just 1 year into this, where a post-demerger with Azur which closed last January, we took a sales force that had been detailing both Xyrem, to sleep specialists, as well as LUVOX CR to psychiatrists, and we broke that sales force apart and created a dedicated 100% Xyrem sales force with 77 reps. And what we've seen is we are getting additional business now because we've taken reps who used to spend 30% to 40% of their time out talking to psychiatrists and freed them up to take the rest of the time and prospects in new board certified sleep specialists and spend some more time with some of those mid-decile physicians, giving them more comfort both in diagnosing and treating narcolepsy. And we've seen a really nice payoff with that.

Douglas D. Tsao - Barclays Capital, Research Division

And then you -- with the conversion to a sort of single product sales force, does that change how you think about business development opportunities?

Bruce C. Cozadd

Yes, good insightful question. As we've looked at new opportunities for the company, while we, like all companies, are always interested in finding new opportunities that play to existing franchise strengths that could leverage existing resources, including a sales force, we've also found opportunities that are so specialized in terms of the selling resources required that it's been fairly easy for us to go into a new therapeutic category, and the best example of that of late was our deal to buy EUSA in June of last year, where we added a very specialized pediatric oncology product that treats children with acute lymphoblastic leukemia and requires a sales force of just over 20 people. So for a product like that, a highly focused physician target group, you really need a very small commitment on the commercial side, and that plays right to our strengths.

Douglas D. Tsao - Barclays Capital, Research Division

And so given what we've now seen in terms of the change in sort of model for promoting Xyrem, as well as the ads that are sort of focused with the specialty sales force for Prialt, as well as now specialty sales force for Erwinaze. Is that -- so that clearly sort of changes -- you don't need to limit yourself in terms of therapeutic areas and you're not looking for typical synergies as you will. And so, when you look at business development, you are now strong across all of sort of what you would consider orphan conditions largely.

Bruce C. Cozadd

Yes, I think the commonality in the things we're looking at is that targeted physician group. And I distinguish that a little bit from saying we're only after orphan drugs because I'm not really presupposing how many patients are on the other side of that narrow physician funnel. It could be a group of patients that's larger than the cutoff for what's considered an orphan disease. But it's really that tightly focused physician group we're looking for.

Douglas D. Tsao - Barclays Capital, Research Division

And so, when you look at those kinds of opportunities, do you find that the bidding is a little less intense from other companies looking to acquire product right now?

Bruce C. Cozadd

Yes, I'm not sure I'd say that. There has been competition for each of the assets we've successfully brought into the company over -- well, since the company was founded. There's always been at least somebody else at the table. In each case, it's been a particularly good fit for us. We've found ways to structure deals that I think are creative. We've built good relationships with management teams and shareholders, in some cases, of the other companies that have enabled us to land these deals. But it's not that we're not running into competition. But we have a really good sense for opportunities that make sense for us. And I think we're not scared off by complexity. The products we sell now have very complex distribution requirements, reimbursement landscapes, and we've found a way to make that work, working very closely with physicians, but also patient groups, foundations and others to really ensure that this specialized patient population and physician population are getting what they need to deliver effective therapy.

Douglas D. Tsao - Barclays Capital, Research Division

And then perhaps provide some perspectives on where you are with the Erwinaze franchise given you've sort of started to see a little improvement in results in the fourth quarter. There's been some lumpiness in the past, and I think we talked about -- you don't -- how do you distinguish when lumpiness is negative versus positive, you don't want to -- you sort of have to take it on both sides. How are you now looking at 2013, as well as the impact of the availability of the AI assets?

Bruce C. Cozadd

Yes, so Erwinaze, our product for acute lymphoblastic leukemia, did $132 million in full-year sales for 2012. Jazz Pharmaceuticals didn't record all of that because we bought the asset halfway through the year. But full-year sales were $132 million, and we've guided to $155 million to $165 million for 2013, so we're seeing nice growth. But Doug's referring to the fact that predicting quarterly volumes and revenues for Erwinaze is a little challenging, just given we're treating a very small number of ALL patients. Total ALL incidents in the U.S. is about 6,000 a year, of which about 3,600 is pediatrics, and of those pediatric patients being treated for ALL, almost all of them will receive asparaginase as part of their therapy, but only the fraction of those patients who develop a hypersensitivity to E. coli asparaginase will then go on to our product, which is an Erwinia-derived asparaginase. So we're now down to fewer than 20% of those 3,600 patients. So it's a very small number of patients. So some variation quarter-to-quarter in how many people are diagnosed, where they are in their treatment, when they develop hypersensitivity in their existing treatment regimens with the E. coli asparaginase, how big they are since the product is dosed by body surface area, all play into our immediate volume. But the growth trend, we think, is a very good one. We're seeing improved recognition of hypersensitivity to E. coli asparaginase, in other words, how the nurses and doctors grade the hypersensitivity reaction and decide whether Erwinaze therapy is warranted. We're seeing some recognition that there's subclinical hypersensitivity, in other words, no outward manifestation of this allergic reaction, and yet, we know the patients are producing antibodies against the E. coli asparaginase, which may be neutralizing that agent. So even if you're not seeing the adverse events side of the equation, you're losing the efficacy side of the therapy that's so critical for these kids. So we're seeing improvements there. We're also seeing increased recognition of the potential of the use of asparaginases, not just in the pediatric population, but in the adolescent and young adult population, where outcome studies are showing that the AYA patients who get an asparaginase-containing regimen have very significantly better survival outcomes than those who aren't getting that, so we're seeing an increased use of asparaginase in that population. So lots of growth drivers we think for that franchise.

Douglas D. Tsao - Barclays Capital, Research Division

And then in terms of the AYA population, how significant can it be relative to the current base of existing patients, and do you think this outcomes data is sufficient or will there be a necessity for you to develop a more complete data packet before you can really make a full-on assault of that particular segment?

Bruce C. Cozadd

So if you remember the numbers I just gave, 6,000 patients, of which 3,600 are pediatric, the remainder are adolescent, young adult or adult patients, some of whom might be potential candidates for Erwinaze therapy in the future. So it's a smaller number of patients, but body surface area is larger, and so they actually consume, on average, more drug per patient. In terms of the requirement for additional clinical data, we are, in fact, collecting additional data. We're launching a trial this year to gain more experience in the AYA population. But the ALL treatment community is very well-organized, both in Europe and in the United States. And we think the thought leaders in that field, who developed the protocols that everyone uses, are well aware of the potential for the use in the AYA population.

Douglas D. Tsao - Barclays Capital, Research Division

And beyond the AYA population, as you think about the core initial indication, what do you see as the primary goals for this year in terms of positioning the product?

Bruce C. Cozadd

Yes, so the primary goal this year is just to make sure that every center in the United States that does treat ALL is aware that they should be using Erwinaze when they see hypersensitivity reaction in their patients receiving E. coli asparaginase to make sure they're grading that hypersensitivity consistently. There are published guidelines for how to do that, but as we've surveyed hemog nurses and docs, we've found quite a bit of variability in how that's being graded in practice. So we want to see more consistency there. And we also want to make sure people understand how to use the product. And there's a fair amount of variation again, once you do recognize a hypersensitivity reaction, when do you initiate Erwinaze therapy? And even a difference as small as, do I wait until I would have given my next Oncaspar dose, which will be several weeks hence, or do I bring the patient right back in 2 days from now and start them on Erwinaze, even that difference can make, we believe, a significant difference in our business, but potentially also a significant difference to the patients who are being treated.

Douglas D. Tsao - Barclays Capital, Research Division

And then I think we have just a few seconds left, in terms of your thoughts, you're coming off of last year, the closing of the Azur deal that was announced in 2011, as well as the EUSA transaction, what is your perspective on the likelihood and timing of a potential deal in 2013?

Bruce C. Cozadd

Yes, so we've been careful not to promise a deal for a couple of reasons, and we don't want to back ourselves into a corner where we feel we've got to do a deal, whether it's smart or not, I'd rather not do a deal than do a dumb deal. But also because, as you can see from our 2013 guidance, we're in the fortunate position of having really good top line growth, as well as very good bottom line growth, and so we certainly don't need to do a transaction. That said, all the caveats out of the way, we did 2 transactions last year, there are lots of transactions we're looking at, including a number we're very interested in. So I would be disappointed -- I know the rest of the management team would be disappointed if we didn't, in fact, bring an additional marketed product or more into the company this year.

Douglas D. Tsao - Barclays Capital, Research Division

Okay, with that, Bruce, thank you. And we will take it to the breakout session, which will be in the New Yorker Sands Room [ph] .

Bruce C. Cozadd

Terrific. Thank you, all.

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