Jazz Pharmaceuticals Plc (JAZZ) Bruce C. Cozadd on Q4 2015 Results - Earnings Call Transcript

| About: Jazz Pharmaceuticals, (JAZZ)

Jazz Pharmaceuticals Plc (NASDAQ:JAZZ)

Q4 2015 Earnings Call

February 23, 2016 4:30 pm ET

Executives

Katherine A. Littrell - Vice President-Investor Relations

Bruce C. Cozadd - Chairman & Chief Executive Officer

Matthew P. Young - Chief Financial Officer & Senior Vice President

Michael Patrick Miller - Senior Vice President, U.S. Commercial

Russell J. Cox - Chief Operating Officer & Executive VP

Analysts

David A. Amsellem - Piper Jaffray & Co (Broker)

Jessica M. Fye - JPMorgan Securities LLC

David G. Buck - Northland Securities, Inc.

Ken Cacciatore - Cowen & Co. LLC

Louise Chen - Guggenheim Securities LLC

Jason M. Gerberry - Leerink Partners LLC

Douglas Tsao - Barclays Capital, Inc.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Ami Fadia - UBS Securities LLC

Gregory D. Fraser - Deutsche Bank Securities, Inc.

Irina R. Koffler - Mizuho Securities USA, Inc.

David William Maris - Wells Fargo Securities

Liav Abraham - Citigroup Global Markets, Inc. (Broker)

John T. Boris - SunTrust Robinson Humphrey, Inc.

Operator

Good day and welcome to the Jazz Pharmaceuticals Plc full-year and fourth quarter 2015 earnings conference call. Following an introduction from the company, we will open the call to questions. As a reminder, this call is being recorded.

I will now turn the call over to Kathee Littrell, Head of Investor Relations at Jazz Pharmaceuticals.

Katherine A. Littrell - Vice President-Investor Relations

Thank you, Kat, and thank you for joining our investor call. Today, we reported our fourth quarter and full-year financial results and 2016 financial guidance in a press release. The release and the slide presentation accompanying this call are available in the Investors section of our website.

With me for today's call are: Bruce Cozadd, Chairman of the Board and CEO; Matt Young, our Chief Financial Officer; Russ Cox, our Chief Operating Officer; Mike Miller, our Head of U.S. Commercial; and Karen Smith, Global Head of R&D and Chief Medical Officer. Following some remarks, we'll 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; future product sales and volume; future regulatory, litigation, and intellectual property-related events; clinical trials and other product development activates; our commercial goals and initiatives, including the potential approval of our NDA for defibrotide and commercial launch of defibrotide in the U.S.; our corporate development efforts and 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, and under Risk Factors in our Form 10-Q for the quarter ended September 30, 2015 and our Form 10-K for the year ended December 31, 2015 that we expect to file shortly. We undertake no duty or obligation to update any forward-looking statements we make today.

On this call, we will discuss several non-GAAP financial measures, including historical and expected 2016 adjusted net income attributable to Jazz Pharmaceuticals and the related per share measures and historical and expected 2016 adjusted SG&A and R&D expenses. We believe that these non-GAAP financial measures are helpful in understanding our past financial performance and potential future results. They are not meant to be considered in isolation or as a substitute for comparable reported GAAP measures. Reconciliations of GAAP to non-GAAP financial measures discussed on this call are included in today's press release and the slide presentation accompanying this call. Both are posted in the Investors section of our website.

I'll now turn the call over to Bruce.

Bruce C. Cozadd - Chairman & Chief Executive Officer

Good afternoon, everyone, and thank you for joining us.

Our solid progress as a company in 2015 has positioned us well for 2016 and beyond. In 2015, we grew both our top and bottom line consistent with guidance and also made important progress on a number of fronts. We've implemented our approved REMS [Risk Evaluation and Mitigation Strategy] for Xyrem, realigned our European team to focus exclusively in hematology and oncology, launched our Phase 3 program for JZP-110, and completed our NDA submission for defibrotide.

With our guidance today, you can see that we plan to grow our top and bottom line nicely again in 2016 while advancing our development pipeline in meaningful ways. Our PDUFA date on our defibrotide NDA is next month. And this year, we plan to start a clinical trial of defibrotide in prevention of VOD in high-risk patients, complete enrollment in our study of Xyrem in pediatric patients, and complete enrollment in and see top line data from our JZP-110 program.

And we are well positioned to broaden our business through corporate development, with a strong balance sheet, significant cash, and overall market valuations that are more conducive to transactions as we generate strong returns.

Current market conditions are also allowing us to repurchase stock under our existing $300 million stock repurchase program at extremely attractive prices. In short, we're well positioned to deliver results in 2016 that we believe will generate increased shareholder value.

I'll now update you on key commercial, legal, regulatory, and clinical development activities during the fourth quarter, highlight some key events that we expect in 2016, and then turn the call over to Matt to review our financial results for the quarter and full year and provide 2016 financial guidance.

Let me start my comments with our sleep therapeutic area and our lead product, Xyrem. In 2015 we continued to see strong underlying organic demand for Xyrem. In the fourth quarter, the average number of active Xyrem patients grew to a record 12,550.

During the fourth quarter of 2015, Xyrem bottle growth was negatively impacted by the operational disruptions at the central pharmacy, resulting in approximately 1% growth compared to the strong fourth quarter of 2014. Volume growth during the first half of 2015 prior to the REMS implementation in late August was approximately 10% compared to the same period of 2014, while our full-year 2015 volume growth was 6%. By the end of 2015, our operational metrics at the central pharmacy had returned to normal, and we expect high single-digit volume growth this year.

As expected, in the increasingly complex managed care environment for the specialty pharmaceuticals category, we observed further increases in the rate of Xyrem prior authorizations and reauthorizations during 2015 and are seeing further increases in reauthorizations in early 2016. These prior auths and reauths lead to an increased workload for physician offices and the central pharmacy. However, we are pleased that higher reimbursement approval rates for patients remain steady. We believe that the central pharmacy is prepared to handle the increased prior authorizations and reauthorizations, including typical first quarter payer churn, as a result of significant improvements in central pharmacy processes and increased staffing put in place during the second half of 2015.

Turning now to key Xyrem growth opportunities, we believe that we have an opportunity to further penetrate our physician base by: targeting healthcare providers with high narcolepsy diagnoses and low utilization of Xyrem; educate healthcare providers on the early recognition, diagnosis, and treatment of narcolepsy, including use of tools like the Swiss Narcolepsy Scale to help diagnose narcolepsy with cataplexy; enhance patient and healthcare provider office services in this increasingly complex reimbursement environment; and continue to provide unbranded web-based disease awareness to increase the diagnosis of narcolepsy in the U.S.

Turning to a brief legal and intellectual property update on Xyrem, patent litigation continues in the District Court in New Jersey. No trial dates have been set in any of the cases. We anticipate the trial of a portion of the case against the first filer, Roxane Laboratories, would not occur any earlier than the second quarter of 2016.

Activity on challenges to our patents with the U.S. Patent and Trademark Office Patent, Trial and Appeal Board, or PTAB, is continuing. In July 2015, PTAB instituted proceedings for inter-partes review, or IPR, on six of our distribution patents listed in the Orange Book for Xyrem, and we expect a decision from PTAB on those petitions in mid-July 2016. Additional IPR petitions challenging certain of our distribution, method-of-use, and formulation patents covering Xyrem have also been filed, but PTAB has not yet ruled on institution of those proceedings. For further details, please see our 2015 Form 10-K, which we will file shortly.

Now turning to our development programs for JZP-110, we are enrolling patients in the Phase 3 safety and efficacy studies, and we expect that preliminary efficacy results from three of our Phase 3 studies in narcolepsy and in obstructive sleep apnea [OSA] will be available at the end of 2016. Subject to these results, we anticipate submitting an NDA next year.

We plan to enroll other studies to support the NDA during 2016, including a planned study of driving performance in narcolepsy and OSA that we expect to begin this quarter. Studying the effects of JZP-110 on driving performance will allow for assessment of potential impairments and improvement in patient populations where there are known increases in accident risk relative to people of the same age and gender who do not have a sleep disorder. We also expect to present our human abuse liability results midyear and will provide more detail once the relevant meetings are confirmed.

Now on to Erwinaze, we continue to believe that Erwinaze has the potential to help more patients in the adolescent and young adult population with acute lymphoblastic leukemia, as more adult oncology centers are using pediatric-inspired asparaginase protocols for the treatment of some of their ALL patients. We also saw additional adult accounts order Erwinaze for the first time in 2015.

In 2016, the sales force will focus on educating new physicians who are treating adolescents and young adult patients with ALL to reinforce the impact of asparaginase-based protocols on patient outcomes. We continued our support in medical education through CME symposia at the American Society of Hematology in December, where the session focused on adult ALL.

As part of our preparation for a potential defibrotide U.S launch, we completed hiring and training our hematology and oncology sales force, increasing from 25 to 35 representatives, and adding to the depth of our experience in the transplant setting. The 10 new sales representatives entered their Erwinaze territories as of January 1. The hematology/oncology sales force is prepared to sell both Erwinaze and defibrotide following FDA approval of defibrotide in the U.S.

We continue to observe strong Defitelio volume growth in the EU, and are pleased to see better than expected usage of Defitelio in countries such as France and Italy, where we do not currently have centralized reimbursement. Our efforts in the EU are focused on providing medical education on early identification of the warning of signs of Veno-Occlusive Disease, or VOD, VOD path of physiology, appropriate diagnosis, and the importance of prompt treatment with Defitelio.

Our PDUFA date is March 31, and we are well prepared for our planned launch of defibrotide in the U.S. after FDA approval of our NDA. Our initiatives are focused on increasing the timely recognition of VOD and educating healthcare providers on the importance of treatment with defibrotide. In preparation for our planned U.S. launch, we had a strong presence at the American Society of Hematology meeting in December with multiple abstract presentations, have medical science liaisons available to address defibrotide questions upon request, submitted the new technology add-on payment application for defibrotide to CMS, published pivotal data in Blood last month, provided training to our hematology and oncology sales representatives, and had a strong presence at the American Society of Bone Marrow Transplant meeting this past weekend.

Our reimbursement account managers will focus on ensuring that key hospital decision makers, such as P&T committees, have an understanding of defibrotide's clinical value and understand the importance of rapid formulary approval to ensure patients have access to defibrotide when needed. And importantly, they will also provide disease education to payers.

In summary, in 2016, we look forward to delivering on key financial, commercial, and R&D goals that have the potential to drive significant value creation moving forward. In 2016 and beyond, we will continue to invest in our key products, Xyrem, Erwinaze, and Defitelio and product candidate JZP-110, as we pursue lifecycle management and line extensions that have the potential to generate important new therapeutic options for patients and expand our business. And we remain enthusiastic about opportunities to further enhance and diversify our portfolio through corporate development activities.

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

Matthew P. Young - Chief Financial Officer & Senior Vice President

Thanks, Bruce, and good afternoon, everyone.

We are pleased with our continued growth and strong performance in 2015 compared to 2014, as total revenues increased by 13% and adjusted net income and EPS attributable to Jazz increased by 15%. The growth in 2015 was driven primarily by higher sales of Xyrem.

Total net revenues of $1.32 billion for the full year 2015 and adjusted EPS of $9.52 per share were consistent with expectations, while GAAP EPS of $5.23 per share was below the guidance we gave on November 9, 2015, primarily due to the increase in GAAP SG&A expenses related to a one-time charge for settlement of a contract claim originally asserted against Azur Pharma Public Limited Company prior to the 2012 merger between Azur and Jazz. For 2016, we expect strong top and bottom line growth, driven by revenue from Xyrem, Erwinaze, Defitelio in the EU, and the product launch of defibrotide in the U.S. We anticipate total revenues for 2016 to be in the range of $1.49 billion to $1.55 billion, up 12% to 17% from 2015.

Net sales of Xyrem for 2015 were $955 million, up 23% from $779 million in 2014. Net sales of Xyrem for the fourth quarter of 2015 were $252 million, up 13% from $223 million in the same period of 2014. Our Xyrem net sales guidance for 2016 is in the range of $1.095 billion to $1.13 billion, representing expected growth of 15% to 18%. This guidance reflects a recent price increase of approximately 9% and our expectation of high single-digit volume growth during 2016. As we look forward to 2016, I'll remind you that there is a fourth quarter to first quarter pattern that we see in Xyrem volumes related to payer churn in the industry and higher gross-to-net adjustments that typically occur in the first quarter.

Turning to Erwinaze, worldwide net sales for 2015 were $203 million, up 2% compared to net sales of $200 million in 2014. Net sales of Erwinaze for the fourth quarter of 2015 decreased by 4% to $50 million compared to $53 million in the same period of 2014. Foreign exchange rates negatively impacted Erwinaze net sales by approximately $1 million and $7 million for the fourth quarter and full year 2015 respectively.

During the fourth quarter, we experienced Erwinaze supply challenges that required us to work with our distributors to prioritize getting drug to patients who have been prescribed Erwinaze. In the U.S., fourth quarter volume increased approximately 7% compared to the prior year. In the fourth quarter of 2015, sales of Erwinaze were lower than the third quarter due to our supply challenges that led to depletion of inventory at McKesson compared to our anticipated fourth quarter increase in net inventory level. While we replenished inventory early in the first quarter of 2016, we expect that inventory may be depleted again from time to time this year and that inventory levels will continue to fluctuate. We will need to continue to proactively manage supply to meet product demand.

For 2016, we expect Erwinaze net sales in the range of $200 million to $225 million. Our 2016 guidance has taken into account our 3% price increase in late January in the U.S., our fluctuations in inventory from supply challenges, and our intent to resupply McKesson to a standard inventory level by the end of the year.

Defitelio net sales for 2015 were $71 million, down 4% from $73 million in 2014 on a pro forma basis. Net sales of Defitelio for the fourth quarter of 2015 were $18 million, a slight decrease from 2014. Foreign exchange rates negatively impacted Defitelio net sales by approximately $3 million and $14 million for the fourth quarter and full year 2015 respectively. However, product sales volume was strong and consistent with our guidance assumptions. For 2016, we expect Defitelio defibrotide net sales in the range of $100 million to $125 million. This guidance assumes the approval of Defitelio occurs in the U.S. on the FDA PDUFA date of March 31, 2016.

Turning to Prialt, net sales for 2015 and 2014 were $26 million. Net sales of Prialt for the fourth quarter of 2015 decreased to $6 million compared to $10 million in the same period of 2014, primarily due to the timing of shipments to Eisai Co., the European distributor of Prialt.

Turning to operating expenses, adjusted SG&A expenses for 2015 were $355 million or 27% of revenue compared to $321 million, also 27% of revenue, in 2014. Adjusted SG&A expenses for the fourth quarter of 2015 were $87 million or 26% of revenue compared to $83 million or 25% of revenue in the same period of 2014. The increase in adjusted SG&A in both periods was primarily due to the higher head count and other expenses resulting from the expansion of our business.

For 2016, our adjusted SG&A expenses are expected to be within the range of $390 million to $410 million, or 25% to 27% of 2016 revenue guidance. Adjusted SG&A expenses are expected to increase primarily due to investments in the planned launch of Defitelio in the U.S. and in Xyrem in our central pharmacy services, as well as expected increases in litigation and other business-related expenses. Also, I will remind you that when we look at fourth quarter to first quarter adjusted SG&A trends, our adjusted SG&A expenses have historically increased due to our typical pattern of spending during the first quarter, and in 2016 will also include the Defitelio launch expenses in the first quarter.

Adjusted R&D expenses for 2015 were $97 million or 7% of revenue compared to $72 million or 6% of revenue for 2014. Adjusted R&D expenses for the fourth quarter of 2015 were $26 million or 8% of total revenues compared to $21 million or 6% of revenues for 2014. The increase in R&D expenses was due primarily to higher cost of clinical studies and outside services for the development of new product candidates and line extensions for the company's existing products.

For 2016, our adjusted R&D expenses are expected to increase and be in the range of $115 million to $130 million, or approximately 7% to 9% of 2016 revenue guidance. R&D expenses are expected to increase primarily due to: continued investment into the late-stage clinical development program for JZP-110, including exploring additional new indications; the evaluation of Xyrem in pediatric narcolepsy; other activities related to the potential development of options for narcolepsy patients that would provide clinically meaningful improvements compared to Xyrem, including once-nightly dosing; development of defibrotide in the prevention of VOD and exploration of potential additional new indications; as well as our efforts in lifecycle management or line extensions for Erwinaze.

Our adjusted non-GAAP effective tax rate for 2016 is expected to be similar to our 2015 rate.

We anticipate our 2016 non-GAAP adjusted EPS to be in the range of $10.90 to $11.30 per share, which represents growth of 14% to 19% compared to 2015.

In 2015, the company spent $62 million repurchasing shares at an average cost of $150.24 per ordinary share, leaving us with approximately $260 million remaining under our current share repurchase program.

As of December 31, 2015, the outstanding principal balance of the company's long-term debt was $1.3 billion, and cash and cash equivalents were $989 million. Our main uses of cash during the fourth quarter included repayment of the revolving credit facility balance of $80 million in October and repurchase of $40 million of ordinary shares under the share repurchase program. Our cash and cash equivalents together with our undrawn capacity under the revolving credit facility total over $1.7 billion.

We're confident in our ability to pursue corporate development initiatives that fit with our strategic criteria in 2016. We are focused on opportunities that have the potential to deliver long-term growth and returns to our shareholders, all while we remained focused on our mission of delivering meaningful products to patients.

In closing, 2015 was a solid year for Jazz Pharmaceuticals, and we expect to continue our positive momentum into 2016 with our planned U.S. launch of Defitelio, growth from key products, investments in the continued advancement of our clinical development pipeline, and pursue strategic corporate development opportunities.

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.

Katherine A. Littrell - Vice President-Investor Relations

Thanks, Matt. We request that you continue to limit your questions to a maximum of one at a time and then feel free to just reenter the queue if you have further questions.

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

Question-and-Answer Session

Operator

Our first question comes from the line of David Amsellem with Piper Jaffray. Your line is open. Please go ahead.

David A. Amsellem - Piper Jaffray & Co (Broker)

So I had a question on defibrotide. I wanted to get your early thoughts on how you think the payer landscape in the U.S. will evolve regarding early intervention in VOD. And I guess the broader question is how should we think about the potential for a restrictive environment here versus what you had experienced early on in Europe? Thanks.

Bruce C. Cozadd - Chairman & Chief Executive Officer

Let me have Mike address that.

Michael Patrick Miller - Senior Vice President, U.S. Commercial

Sure, hi, this is Mike Miller. With regard to the payer landscape with defibrotide, the commercial payers themselves contract with the institutions to do the bone marrow transplant on a contract rate basis. So we do not anticipate step-ins by payers on the use of the drug. Where I do think we have to make our valid clinical arguments for the marrow end of the drug is in the institutions and in the clinical practice. And it has to be established that this is a condition with high mortality. This is a very expensive sequelae of bone marrow transplant that can run into hundreds of thousands of dollars to these patients that end up in ICU. So I think our health economic and outcome research data will help us a lot in that regard, and we feel very good going into that environment.

David A. Amsellem - Piper Jaffray & Co (Broker)

Thank you.

Operator

Thank you. Our next question comes from the line of Jessica Fye with JPMorgan. Your line is open. Please go ahead.

Jessica M. Fye - JPMorgan Securities LLC

Hey, guys. Thanks for taking my question. You referred to the stock buyback in your prepared remarks. I guess with the stock price down here, how do you weigh potentially aggressively buying in your own shares versus keeping some dry powder for future business development?

Bruce C. Cozadd - Chairman & Chief Executive Officer

Jessica, great question because they're both great opportunities for us. Buying back our stock at these levels is not an opportunity we necessarily would have thought we would have had going back a number of months and we believe is a pretty attractive thing for us to do for our shareholders. But we've been very clear that our priority is to diversify our current and long-term portfolio through activity on the corporate development front. And as attractive as it is to buy our stock at these levels, it's also true that other valuations have pulled back in the market, and that makes the returns we think we can earn on smart corporate development investments also very attractive to us.

So it's a balance. The $300 million stock repurchase program that we announced in November is something that we in general intended to spend over a couple of years. But I will say at these prices, we'll probably be a little more aggressive at taking advantage of that. But I think you heard in Matt's comments in terms of our balance sheet, our cash, our undrawn revolvers, and of course we believe we have capacity beyond that that we do feel we're also well positioned in terms of capacity on the corporate dev front.

Jessica M. Fye - JPMorgan Securities LLC

Got it, thank you.

Operator

Thank you. Our next question comes from the line of David Buck with Northland Capital Markets. Your line is open. Please go ahead.

David G. Buck - Northland Securities, Inc.

Yes, thanks for the taking the question. The first one is on revenue maybe before boost on defibrotide, can you talk a little bit about what type of access you'd be expecting from patients that you've identified already? How quick of a ramp would you expect for that line item? What type of volume growth are you embedding in Europe? And just a quick one, if I could sneak it in, any gross-to-net changes that you're assuming for 2016, and can you give maybe a quick update on the once-nightly potential for sodium oxybate?

Bruce C. Cozadd - Chairman & Chief Executive Officer

Thank you for that one question, David. So on defibrotide, let me split that question into two pieces, how we think about initial uptake in the U.S. given that we have had a treatment IND [TIND] open for some time. And then maybe I'll separate out and have Russ to talk about volume growth in Europe a little bit. Mike, do you want to take the first part?

Michael Patrick Miller - Senior Vice President, U.S. Commercial

Sure. So the first and most important strategic imperative we have for the launch is to educate around VOD. While the IND, the TIND study was useful in getting practice in some of these sites, VOD is under-diagnosed. And as a result, many people die of VOD that shouldn't. So we have I think a challenge in front of us in terms of education. We look forward to that. We've tested the messaging, and we think that the audience will be quite receptive.

Russell J. Cox - Chief Operating Officer & Executive VP

And as it relates to Europe, we've seen a number of countries that continue to grow well, and we've seen a fair amount of variability from the time that we launched from today. It started initially more in severe VOD, and you can see physicians now moving more towards early treatment. And so I think that the same will hold true in terms of the way that initially you'll see uptake in the U.S.

Bruce C. Cozadd - Chairman & Chief Executive Officer

So maybe I'll have Matt talk about gross-to-net.

Matthew P. Young - Chief Financial Officer & Senior Vice President

Hey, David. On the gross-to-net for U.S. sales principally, obviously we're talking about Xyrem. We're not seeing any meaningful changes this year. We did, as I will remind people, have some positive trending in gross-to-net over the last couple of years, but I'd expect that to be based generally on payer mix working very slightly against the neutral this year.

Erwinaze, I think we will continue to see some increased 340B utilization, and as a result some incremental increase in gross-to-net there, though much less severe than last year, where that was a much more meaningful move. And then we'll see a little bit of headwind there also pick up as it relates to Prialt, but relatively marginal.

Bruce C. Cozadd - Chairman & Chief Executive Officer

And then on once-nightly sodium oxybate, nothing in particular to disclose at this point. Just as a reminder, we've got several initiatives moving forward around potential better treatment options for patients with narcolepsy. And it is certainly possible we will have more to say later this year. Obviously, that depends on how things go, but nothing to say at this point.

Operator

Thank you. Our next question comes from the line of Ken Cacciatore with Cowen & Company. Your line is open. Please go ahead.

Ken Cacciatore - Cowen & Co. LLC

Thanks and good afternoon, just a question around your commentary surrounding the Xyrem litigation. I just want to clarify, Bruce. Did you say that we may get litigation in Q2? And then also just looking to hear you talk aloud about the confluence of if a trial was to start before you started getting a ruling from the PTAB, how all of that gets factored into trying to strike an agreement and if an agreement could be reached. Just the timing would seem odd and difficult, and maybe you could help square that away in our heads. Thank you.

Bruce C. Cozadd - Chairman & Chief Executive Officer

Yes, so I did say that the first piece of Xyrem litigation could go to trial essentially no earlier than the second quarter. It doesn't mean it will happen in the second quarter, but no earlier than the second quarter.

And in terms of the confluence of events, this is a complex situation, as we've been talking about for many years: a significant amount of IP with 20 patents covering Xyrem, three different patent families, multiple ANDA filers; litigation bifurcated into multiple cases and multiple pieces; IPR challenges, some of which have been picked up, some of which haven't; some regulatory complexity around whether there will be a single shared REMS or whether FDA will consider a waiver REMS and how that would be comparable and whether that might also fall within some of our IP. We also of course are working on multiple development programs to come up with a better product. So there are a lot of pieces here.

And I appreciate your question about how would that affect the potential for a business resolution or some sort of settlement agreement at any point. You were specifically asking as we approach a trial. I don't think that prevents us from going that route. That's one route we could go, not the only route we can go. I think historically, we've said settlement is something we'd consider. We thought that was in the best interest of our shareholders, and that in terms of timing of that in our industry generally, not that I can promise anything with this case, but in our industry generally, those settlements tend to occur as you get closer to or in fact into trial.

Ken Cacciatore - Cowen & Co. LLC

Thank you.

Operator

Thank you. Our next question comes from the line of Louise Chen with Guggenheim. Your line is open. Please go ahead.

Louise Chen - Guggenheim Securities LLC

Hi, thanks for taking my question. So I'm curious. What has held you back on deals? Is it valuation or lack of the right opportunity? And also, how do you think about M&A versus other capital allocation strategies now that the market doesn't necessarily reward companies for a large transformational deal? Thanks.

Matthew P. Young - Chief Financial Officer & Senior Vice President

Sure. I think, Louise, we think about it basically the same way we always have, which is we're looking for differentiated products that do a lot for patients. And with that, we expect to be able to grow those products over time, to invest in developing those products, hopefully for broader use as we're seeing with JZP-110 and defibrotide, and ultimately to build franchises around them that we believe can generate attractive margins and allow us to build a durable business.

So as far as what has held us back, obviously we've seen a relatively meaningful shift in valuations from last year, where we've said while there was some confounding of getting things done in that environment, we did see and pursue many opportunities during that period of time, whether it be valuations or in some cases waiting for an evolution in the dialogue in this recent event to move us in the right direction. We are often looking at situations for a long period of time before they come to fruition as we've some of the deals we have completed in the past.

So really for us not much has changed, and we continue to see a great dashboard of opportunities in front of us today that continue to range from smaller to larger. And as it relates to immediate stock price reactions, it was never really the driver for us anyway. I think we're focused on if they're very good deals for our shareholders, then ultimately we'll be able to build a good return around that.

Operator

Thank you. Our next question comes from the line of Jason Gerberry with Leerink. Your line is open. Please go ahead.

Jason M. Gerberry - Leerink Partners LLC

Hi, good evening. Thanks for taking my question. I just had a quick question regarding the operating margin profile of the business. I think you're creeping upwards to 60% on an EBIT margin profile, which is relatively higher relative to industry peers. Can you just walk us through how you think about the margin profile of this business in the next few years, just assuming no external transactions are done? And on the step up in R&D, is that mainly JZP-110, or is the Xyrem lifecycle management a big component the R&D cost step up? Thanks.

Bruce C. Cozadd - Chairman & Chief Executive Officer

So, Jason, let me make some general comments, and I'll hand your specific question about R&D over to Matt.

As I think about our operating margins going forward, we've seen gross margin generally drift upward a little bit. But I would also say cost of goods is not a big driver of our cost structure. And I think particularly as we look at challenges around Erwinaze supply, I'd probably trade a little margin for better continuity of products, just making sure we can do what's right by patients. So while in general I would say gross margins are probably trending in the right direction, I'm not sure that's a big strategic imperative for us.

On the SG&A and the R&D side, we're trying to make good investment decisions based on generating return for our shareholders, and the few places we've consciously increased expenses I think make sense for us. As we look at SG&A expenses going up a little bit as we prepare for a U.S. launch of what we think is an important new product, we're pretty excited about making that investment.

I will say we're a little less excited about the legal expenses that we're incurring, but we also think it's a very strategic investment for us. So some of the places we're driving increased investments we're confident are the right thing to do for our business, although as Matt ran you through the numbers, in general SG&A spending as a percentage of total revenues is actually maybe coming down a little bit.

R&D, we've been very clear I think with everybody that we expect R&D spend as a percent of top line to go up over time. Now that's going up to the extent we've got value-creating programs we're ready to invest in. Basically JZP-110 is obviously in that phase. We've already made a commitment to do the next defibrotide trial that we also think is really important. And honestly, I hope we're back to you with other programs or other indications for existing molecules that we feel really good about investing into. I don't think that increase as a percentage of top line is going to be sudden or dramatic, but the trend I think is we'd like to be in a position to have a more visible, valuable product pipeline that our investors can evaluate as part of our long-term growth potential.

So, Matt, maybe I can have you comment on specifically what's driving the increase in R&D in 2016.

Matthew P. Young - Chief Financial Officer & Senior Vice President

Sure. Jason, the largest part is increases around JZP-110. Recall we talked about that being a roughly $100 million program overall, mostly in 2015 and 2016, but it got started in terms of enrollment more like middle of 2015, and we talked about top line data quite late this year. So you'll see more spend in 2016 versus 2015 on that as well as related non-clinical studies and driving studies and other things that's spent in addition to the indication expansion, where we'll be doing some exploration there as well.

So beyond that, we also are looking to start the defibrotide prevention study in VOD this year as well. And we do have some other lifecycle management activities that do include investments around oxybate but also around asparaginase. So we have all of those embedded in the numbers we quoted.

Jason M. Gerberry - Leerink Partners LLC

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Douglas Tsao with Barclays. Your line is open. Please go ahead.

Douglas Tsao - Barclays Capital, Inc.

Hi, good afternoon. Thanks for taking my question. So just first maybe, Matt, if you could, provide a little more help with us in understanding the growth of Defitelio between U.S. and EU, and thinking ahead of that launch curve in the U.S.

And then just, Bruce, maybe you could provide a little bit more detail in terms of the supply disruptions we've seen in Erwinaze. I know we had a similar situation a couple years ago. And was it basically the same issues? And I promised Jason Gerberry I would not ask you about the Warriors tonight because I guess I learned you [like the Cavs]. I'm a Knicks fan, so I'm really not in any position to ask about that.

Bruce C. Cozadd - Chairman & Chief Executive Officer

Thanks, Doug, for holding off on that one. So let's talk a little bit about what if anything we can say, Matt, on distributor type breakdown of geographic revenues.

Matthew P. Young - Chief Financial Officer & Senior Vice President

Yes, so recall in 2016, what we've modeled and provided in the guidance is a March 31 launch date, so we'd be looking at roughly nine months of sales for a product with a small epidemiology in a market where, while it's existed under a treatment IND, we have less physician experience than we did in Europe. So we'll see that market build over time and probably also start with pediatric volumes in a greater degree than adults. So embedded in that is what we think is an achievable growth rate in those first nine months in terms of addressable patients.

Related to Europe, we're still continuing, as I think Russ alluded to earlier, to see good double-digit volume growth. We don't anticipate the same kinds of swings this year as we did see in FX last year, where again, we saw a $14 million headwind on the year overall. So we should expect to see more of that double-digit volume growth flow through as it relates to the European number.

Bruce C. Cozadd - Chairman & Chief Executive Officer

And then, Doug, on the supply disruption on the Erwinaze side, just to be clear, thus far we've largely been able to ensure that our constrained supply situation doesn't get in the way of treating these patients that really need the drug. So the disruption you've seen for the most part thus far has just been us having to more carefully manage a smaller inventory at our distributor, which does impact our reported revenues.

We've got to do a good job in 2016 at improving the supply situation for Erwinaze. We have to build through a variety of means additional capacity. That doesn't necessarily mean a new facility, but we need to get more capacity out of our supplier, working hand in hand with our supplier, and do a really good job again of managing the supply we do have to achieve our objective, which is to help patients. And I think we were just warning you that we're close to that capacity limit. We came real close to it towards the end of last year and early this year. That may happen again, and we need to manage it well. And I think in our commentary, we were trying to also tell you, depending on where we are at the end of any quarter with our inventory level at the distributor, you may see a little fluctuation quarter to quarter in what we report.

Douglas Tsao - Barclays Capital, Inc.

Could some of these supply constraints affect how clinicians use the product as they're trying to expand into adults and the adolescent population?

Bruce C. Cozadd - Chairman & Chief Executive Officer

Our objective would be no because we don't want people to have to make frequent decisions based on our supply situation. But to the extent that we have to tell accounts they can't stock as much as they'd like to at the facility level because we're carefully managing it, could that impact their confidence in using it more broadly? Conceivably it could. Again, our job is to be pretty transparent about what we're trying to do, which is make sure that the product we do have goes to treat active patients rather than sitting on the shelf somewhere when another patient is in need.

Douglas Tsao - Barclays Capital, Inc.

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Annabel Samimy with Stifel. Your line is open. Please go ahead.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Hi, thanks for taking my question. I wanted to ask you about the growth in Xyrem. I guess how confident are you that you can continue to penetrate the market? You've been talking for some time about initiatives to drive this growth, like awareness and diagnosis and tapping into physicians that have lower use. But it seems like patient growth has hovered around 12,000 and change for some time even I guess before the REMS issue. So I guess what is it that's going to be driving the volume growth? Is it going to be the new patients, or is it going to be different types of compliance issues. Or if you can, give us a little bit more color there around your confidence of breaking through that 12,000-patient range.

Bruce C. Cozadd - Chairman & Chief Executive Officer

So, Annabel, a couple comments. First of all, the data we give you, I would say our volume growth and our revenue number is the most important number to look at. That's actual number of bottles we ship. The active patients number is a much cruder figure. That's an average over time and can be bumpy quarter to quarter, probably more so than our true underlying business.

In terms of where is growth going to come from, we've continued to see really good growth of this product many, many years after its initial commercialization. The fact that we were growing 10% volume the first half of 2015 over 2014, I have to say we're really, really pleased with. And despite the operational difficulties we ran into starting in late August and really through the end of the third quarter and through most of the fourth quarter, to say that despite that we did 6% volume growth isn't too bad either. Now we think we could have done better than that without that disruption, and we're certainly hoping to see north of 6% this year, but we're actually pretty pleased – pretty pleased with our growth.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Okay, great. Thanks.

Operator

Thank you. Our next question comes from the line of Marc Goodman with UBS. Your line is open. Please go ahead.

Ami Fadia - UBS Securities LLC

Hi, this is Ami Fadia on behalf of Marc. I had a two-part question regarding your guidance for 2016. Firstly, on Xyrem, you mentioned that some of the issues with respect to the REMS program have been sorted out. So my question is, what type of volume growth are you seeing in the first quarter? Is it in the high single digits already, or should we think about it as an acceleration in the volume growth as the year progresses? And on the pricing side, the price increase, when should we start to see the effect? Would that be immediate, or is that going to be something that comes up over the course of the year?

And then secondly on Erwinaze, what was the inventory drawdown in the fourth quarter, and how much of an inventory impact have you taken to your 2016 guidance? Thanks.

Bruce C. Cozadd - Chairman & Chief Executive Officer

So, Ami, let me take the two Xyrem questions and maybe have Matt talk about Erwinaze inventory. On the volume growth, essentially as we said last month in our public disclosure, we do feel that the operating issues at the pharmacy are behind us, and so really we're right back to essentially volume growth all year as opposed to start slow and speed up. Now I say that in reality, as you know, historically sometimes we're comparing back to stronger quarters, sometimes we're comparing back to weaker quarters, so they can be little bumpy. But in general, we think we ought to be right back on track to the growth in volumes really reflecting the underlying organic demand for the product.

And on your question about the impact of price increase, that's immediate.

Ami Fadia - UBS Securities LLC

Thanks.

Bruce C. Cozadd - Chairman & Chief Executive Officer

So, Matt, any extra color we can provide on extent of impact on Erwinaze inventory drawdown?

Matthew P. Young - Chief Financial Officer & Senior Vice President

Yes, sure. So typical inventory levels typically are in that 20-day range. If you look at the end of third quarter, we were at about 16 days, at the end of the fourth quarter at about nine days, and then we have replenished supply. And we want to get close to the average, and so that's our guidance for what we'd love to be at in 2016. Again, it depends on our supply whether we can actually do that or not.

Bruce C. Cozadd - Chairman & Chief Executive Officer

And there may be some variance about exactly where we are on March 31 or June 30 or September 30.

Ami Fadia - UBS Securities LLC

All right, thank you.

Operator

Thank you. Our next question comes from the line of Greg Fraser with Deutsche Bank. Your line is open. Please go ahead.

Gregory D. Fraser - Deutsche Bank Securities, Inc.

Thank you, it's Greg Fraser on for Gregg Gilbert. On defibrotide, is it too early to talk about your pricing expectations for the U.S.? And if there's a very short answer to that, my secondary question is on Erwinaze. Can you just update us on your efforts to secure a backup supplier? Is that still something that you're working on?

Bruce C. Cozadd - Chairman & Chief Executive Officer

So the answer for the first one is short. We're not prepared to give additional information at this time.

And on the second one, whether there could be or should be a backup supplier is really a long-term strategic question for Erwinaze. It is not a question that will help us with any of our near-term issues. That is at minimum a multiyear effort. And so really our focus right now is much more on ensuring we get maximum production, reliable production out of the existing facility.

Operator

Thank you. Our next question comes from the line of Irina Koffler with Mizuho. Your line is open. Please go ahead.

Irina R. Koffler - Mizuho Securities USA, Inc.

Hi, thanks for taking my question. If your trial with Roxane should happen to slip further back into the year, later than the PTAB decision that you're expecting in July, is there any sense of urgency on your part to maybe have settlement discussions ahead of the PTAB decision, especially if they could potentially weaken your position? That's question one.

And then the second question is on the Defitelio guidance for $100 million to $125 million in 2016, if you were for some reason not to get approved, what would your range be then? I'm just trying to understand what the standalone would be like. Thanks.

Bruce C. Cozadd - Chairman & Chief Executive Officer

So maybe I'll have Matt take the second part of the question first, and then I'll come back on Xyrem.

Matthew P. Young - Chief Financial Officer & Senior Vice President

Hey, Irina. I would say if you think about again strong double-digit volume growth for Europe, again with no real change in price in Europe, that would give you a trend line for the European business over the roughly $70 million we recorded in 2015. As it relates to what we'll say about the U.S. and if we do or don't get approved or what that scenario would look like, I think if we have that or a different timeline or something else, we can talk about that specific scenario and adjust our guidance appropriately at that time.

Bruce C. Cozadd - Chairman & Chief Executive Officer

And on your first part of your question, I can't comment specifically on probability or timing of a settlement. But I will comment that you said, wouldn't a PTAB decision potentially weaken your position? Of course, a PTAB decision can go either way. You could argue it could strengthen our position, and I'll also remind you that a negative PTAB decision could be appealed into the court. So it's not quite the one moment in time determines everything scenario.

Irina R. Koffler - Mizuho Securities USA, Inc.

Okay, thank you.

Operator

Thank you. Our next question comes from the line of David Maris with Wells Fargo. Your line is open. Please go ahead.

David William Maris - Wells Fargo Securities

Hi, Bruce. You mentioned that you have been very active on the deal side of things despite not closing anything. So maybe you could talk a little bit about what's preventing that. I know most people would say it always comes down to price. But with the market down and there are still good assets, does it make sellers a little bit less likely to sell? Would they rather have stock at this point because they want to participate in the upside? And as the prices have come down for franchises, do you start to widen the scope of the things that you might think about therapeutically? Thank you.

Bruce C. Cozadd - Chairman & Chief Executive Officer

Yes, David. I think it doesn't necessarily cause us to widen our scope of the types of opportunities we'd look at. If their price is coming down, arguably we can afford something a little bit bigger, but I don't think it changes the types of opportunities we're looking at.

We have been active. I'm not sure it always comes down just to price. I think different deal structuring options definitely can help in different scenarios, and there may be companies out there with assets where they view the opportunity to participate in upside going forward as more attractive given their current price. I can't disagree with that. But I think we're well positioned. I think our balance sheet and liquidity put us in a good place, particularly on a relative basis. You can look at us in a vacuum or you can look at us relative to some other companies that I think levered up to do some deals in a higher-priced environment, and maybe that gives us a little better positioning in the current market.

But if you look at the three years before last year, we on average did a couple deals a year. We took last year off, not that that was our intent going into the year, but that's the way things worked out. And our hope is to get back to doing a series of transactions over time that our investors look at and say fit our strategy, will generate good returns, and broaden and diversify our business.

David William Maris - Wells Fargo Securities

All right, thank you.

Operator

Thank you. Our next question comes from the line of Liav Abraham with Citi. Your line is now open. Please go ahead.

Liav Abraham - Citigroup Global Markets, Inc. (Broker)

Good afternoon. I'm just wondering if you can provide an update on where you stand with potential Xyrem line extensions, just your once-daily formulation, and when it's possible to receive an update on that? And any change in your sense of urgency in bringing some new formulation to market? Thanks very much.

Bruce C. Cozadd - Chairman & Chief Executive Officer

So I would say no change in our sense of urgency. This is, has been, and will remain a very high priority for us. That's why we've got multiple efforts underway. Nothing particular to report right now, although as I did say a little bit earlier, I do think there's good potential that we will have more to say this year. That obviously depends on how things work out on a number of fronts. But I do think we're reaching a point where we may in fact have some things to say, not today but as we go through the year.

Operator

Thank you. Our next question comes from the line of John Boris with SunTrust. Your line is open. Please go ahead.

John T. Boris - SunTrust Robinson Humphrey, Inc.

Thanks for taking the question and congrats on the results. The question is related to Xyrem, and it just relates to your commentary on settlement and standard industry practice, quite frequently entering into settlements before litigating. Have you taken a look at the – obviously it's a completely different case, but a case that has distribution patents around it, the Celgene case and the uniqueness of that settlement? Just your thoughts around the construct of that in terms of allowing competition but in a controlled fashion with controlled market shares, so any thoughts around that.

Secondly, on Xyrem, in the back half there will be a competitor that's rolling out a clinical. Have you taken into account that a significant number of patients could be taken out of the market? I think they're enrolling about 300 patients in a competitive trial, with a substantial number of those coming out of the U.S. largely. Is that factored into your volume guidance? Thanks.

Bruce C. Cozadd - Chairman & Chief Executive Officer

John, we're certainly aware of the Celgene settlement but really can't comment on specifically how that might apply to our situation, but interesting view and you draw some parallels there that I think are relevant. Our Xyrem guidance does take into account what we think will happen to our business this year.

John T. Boris - SunTrust Robinson Humphrey, Inc.

Thanks.

Operator

Thank you. And our last question is from the line of David Buck with Northland Capital Markets. Your line is open. Please go ahead.

David G. Buck - Northland Securities, Inc.

Yes, thanks for taking the follow up. Maybe for Matt, can you talk a little bit about what the sales and earnings impact was from foreign exchange overall for 2015 and what the expectation embedded in the guidance is for the sales and EPS impact from foreign exchange? Thanks.

Matthew P. Young - Chief Financial Officer & Senior Vice President

Sure, David. The impact overall for 2015 of FX was $22 million. So roughly $7 million with respect to Erwinaze; roughly $14 million, rounded up to $22 million – about $14 million for Defitelio. And bottom line, as we've mentioned many times, was really relatively neutral. In fact, there was a slight gain, most of which occurred in the fourth quarter, but less than $2 million. And that relates to some balance sheet exposures we had in terms of how we held our cash and intercompany loans, but also related to having a significant number of our expenses denominated in euro, given both European operations and our substantial presence in Ireland.

Operator

Thank you. And that does conclude today's Q&A portion of the call. I'd like to turn the call back over to Kathee Littrell for any closing remarks.

Katherine A. Littrell - Vice President-Investor Relations

Thanks, Kat. Thank you again for joining us today. We will be participating in the Cowen Healthcare Conference and the Barclays Healthcare Conference this quarter, and we hope to see many of you there. This will now end our call.

Operator

Ladies and gentlemen, thank you for your participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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