Matthew Fust - CFO
Dr. Sam Saks - CEO
Bob Meyers - President
Rich Silver - Lehman Brothers
Marc Goodman - Credit Suisse
Oren Livnat - Natixis Bleichroeder
Phillip Perram - Bridge Partners
Jazz Pharmaceuticals Inc. (JAZZ) Q2 2008 Earnings Call Transcript August 7, 2008 5:00 PM ET
Good day, ladies and gentlemen and welcome to the second quarter 2008 Jazz Pharmaceuticals, Inc. earnings conference call. My name is Amanda and I will be your coordinator for today. At this time, all participants are in listen-only mode and we will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's call, Mr. Matthew Fust, Chief Financial Officer. Please proceed, sir.
Thanks and welcome to our second quarter financial results conference call. With me here today are Dr. Sam Saks, our CEO, and Bob Meyers, our President. Following some prepared remarks, we will open the call up to Q&A.
Our second quarter financial results press release was issued earlier this afternoon and is also available at our website. And I'll remind you that remarks we may make on this call about future expectations, plans or the prospects for Jazz Pharmaceuticals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and our actual results may differ.
I'll ask Bob to begin today's call with an update on our commercial activities.
Good afternoon, everyone, and thank you for joining us today. The first half of this year has been transforming for our Company. We've successfully launched Luvox CR. At the same time, we are continuing the strong growth trajectory for Xyrem.
I'll begin today with update on our progress for the launch of Luvox CR. Our sales representatives and our marketing activities are focused on highlighting the key features of Luvox CR. Most importantly, its proven efficacy in treating both obsessive compulsive disorder, or OCD, and social anxiety disorder, or SAD, two chronic and debilitating anxiety disorders, as well as Luvox CR's once daily dosing and its favorable tolerability profile, the weight neutral profile and a low incidence of sexual adverse events in our clinical trials.
Luvox CR'S tolerability profile is particularly important in light of recently published updates to the practice guidelines for OCD, which recommend increasing doses to levels that might not be tolerated with other therapies.
As we review IMS prescription data, it is important to remember that it's still early in the Luvox CR launch. Overall, looking at the [dilutive] quantity of weekly IMS prescription data currently available, we're currently tracking somewhat lower than our expectations.
According to NPA weekly data from IMS, from the time that our sales force started promotion in mid April through the week ended July 25th, which is the most recent weekly data that is available, approximately 8,600 prescriptions have been written for Luvox CR.
In July, the number of Luvox CR prescriptions reported by IMS grew significantly by approximately 50% compared to June. Not surprisingly, the majority of these prescriptions are new prescriptions for Luvox CR. In recent weeks, we're starting to see an increasing level of refill prescriptions.
As we evaluate the success factors of the launch of Luvox CR, we're looking at both quantitative and qualitative data. I'll take a few minutes now to review some of that information. First and foremost, we have a very experienced and motivated sales team. Our specialty sales representatives have an average of more than nine years sales experience with a focus on selling experience to specialty physicians.
Since our launch, our sales team has completed more than 64,000 sales calls on more than 24,000 physicians, focusing on targeted high value physicians in each of the 175 sales territories. Through the end of July, the top 25 target physicians in each sales representative's territory have received an average of four sales calls.
In the second quarter, we initiated our physician speaker program for Luvox CR. These programs involve trained clinicians or moderators who speak about SAD or OCD and, as appropriate, their own clinical experience with Luvox CR.
During the second quarter, we conducted approximately 200 of these physician speaker programs and we are continuing these important programs with more than 300 programs planned for the second half of this year. We expect that the impact of these programs will be seen in increasing Luvox Cr prescriptions in the fourth quarter of 2008 and beyond.
A key component of our overall launch strategy has been making Luvox CR samples available to physicians and patients. Our sample program is intended to encourage physicians to initiate Luvox CR therapy as well as to support the titration of Luvox CR to the appropriate maintenance dose for each patient.
Since the launch commenced in mid April, our sales team has distributed more than 225,000 one-week sample packs, or roughly the equivalent of 55,000 months of Luvox CR samples. While this heavy sampling does have a negative impact on the IMS prescription data, we are hearing encouraging qualitative feedback from our sales team regarding the positive flow of samples in the offices of physicians and that trial of Luvox CR is leading to successful Luvox CR treatment and is translating into increasing commercial prescriptions.
On the managed care front, we are pleased that we are exactly where we expected to be in ensuring access and reimbursement for Luvox CR. As expected, most managed care plans have placed Luvox CR on Tier III formulary status and this status puts Luvox CR on a similar level with other branded products in this therapeutic category.
Ensuring that patients have access to Luvox CR is a priority for our successful launch. And one program that we put in place is our point of sale discount program. This program consists of discount cards distributed by physicians to their patients. These discount cards reduce a patient's co-payments by up to $25 per prescription and each card can be used for up to three Luvox CR prescriptions.
This discount, which is given while the patient is at the pharmacy, brings a patient's co-pay to a level that is consistent with formulary Tier I or Tier II status. To date, we have distributed approximately 150,000 of these cards and the reception to the program has been extremely positive.
These discount cards have been used for approximately 15% of the prescriptions filled from launch through July 25th and we've seen increasing numbers of second and third time redemptions of our discount cards, which indicates that patients who start therapy with Luvox CR are benefiting from therapy and continuing on Luvox CR beyond their first prescriptions.
Of course, the most important dimension of the product launch experience is the success of Luvox CR therapy for patients and physicians. This is the area which we are most encouraged, as we're hearing increasing numbers of success stories, both from patients that were either refractory to other treatments and are now responding to Luvox CR, and from new patients receiving Luvox CR as their first treatment for OCD or SAD.
This feedback from our sales representatives indicates that Luvox CR is truly addressing an important need in the marketplace, offering SAD and OCD patients a new therapeutic option that provides efficacy they need to treat their symptoms and the tolerability profile they desire to stay on a long term therapy.
Turning to Xyrem, in the second quarter, the Xyrem marketing team launched a number of new initiatives, including a new Xyrem website and a new series of promotional programs and teleconferences.
The objective of these programs is to communicate the clinical data supporting the safe and effective use of Xyrem and to highlight Xyrem as a standard of care for the treatment of excessive daytime sleepiness and cataplexy in patients suffering from narcolepsy.
In June, the Associated Professional Sleep Studies or APSS meeting was held in Baltimore. At this important sleep meeting, there is very strong enthusiasm and interest from physicians in Xyrem. More patients with EDS and cataplexy associated with narcolepsy are seeking treatment options and more physicians are recognizing, diagnosing and understanding this disorder.
While launching Luvox CR, our sales team generated record sales of Xyrem in the second quarter of 2008. Xyrem net sales in the second quarter were $12.4 million, an increase of 29% compared to the second quarter of 2007.
For the first six months of 2008, Xyrem net sales were $23.8 million, an increase of more than 30% over the first half of 2007. Clearly, our marketing programs and our expanded sales force are having a considerable impact on increasing the number of narcolepsy patients receiving appropriate Xyrem therapy.
Before I wrap up, let me briefly mention our recent divestiture of Antizol and Antizol-Vet. Because Antizol is primarily used in hospital emergency departments and poison control centers, it was a non-strategic asset for us and was not in the line for focus in the neurology and psychiatry audiences.
We are pleased that Paladin Labs, our distribution partner for Antizol in Canada, has acquired the rights to Antizol from us and the product will remain available for patients. Under our agreement with Paladin Labs, we received a $5.5 million cash payment earlier this month and we are entitled to receive annual royalty payments based on Antizol net sales in excess of certain levels over the next three years.
I'll now turn the call over to Sam to provide you with updates on progress in our development portfolio. Thank you.
Dr. Sam Saks
Thanks, Bob. I'll begin the development updates today with an update on our JZP-6 clinical development program for fibromyalgia. As you'll recall, we are running two pivotal Phase III clinical programs together with an open label safety and efficacy continuation study for those patients who have completed one of the Phase III trials.
On June 2nd, we announced the completion of enrollment for the first Phase III trial with a total of 550 patients in 65 clinical sites in the U.S. We expect the last patient to complete the end-of-life portion of the trial in September and we will then move as quickly as possible to complete and lock the study database and begin analyses of the results. We anticipate providing top line results from this second Phase III trial during the fourth quarter of 2008.
Our second JZP-6 Phase III trial, which is being conducted at clinical sites in the U.S. and Europe, is more than 50% enrolled and we're on track to submit an NDA by the end of 2009 subject to the positive results from both of these studies.
The primary endpoint for both of these studies is the change from baseline and pain based on the Pain Visual Analog Scale, which the FDA and the European Medicines Agency have indicated is the appropriate primary endpoint in this disorder and which was an endpoint in our Phase II trial.
In our Phase II trial, the reduction in pain was statistically significant when compared to placebo. Presentation and publication of data regarding the use of sodium oxybate for the treatment of fibromyalgia are continuing as we move through the year.
In June, two abstracts were presented at EULAR, which is the European League Against Rheumatism, meeting in Paris. One abstract focused on disordered sleep and described the abnormal sleep patterns of 304 fibromyalgia patients screened for the Phase II fibromyalgia study I mentioned earlier.
A second abstract presented at this meeting described the effect of sodium oxybate on objective sleep measures, in particular increased slow wave sleep at the 6 gram per night sodium oxybate dose.
We were also anticipating publication of the data from our Phase II trial of sodium oxybate in the treatment of fibromyalgia syndrome in a peer reviewed journal in early 2009.
We have been very pleased to see the increased interest in diagnosing and treating fibromyalgia during the past year with Cymbalta receiving approval in June and with both Lily and Pfizer supporting major disease awareness and direct to consumer programs.
As you know, fibromyalgia is a complex of symptoms and we believe that treatment of fibromyalgia will continue to rely on a combination of therapies. The current commercial and third party efforts to grow awareness and trial during the next couple of years until JZP-6 could be approved will work to our benefit.
Turning to our other clinical programs, patient enrollment continues in our Phase II clinical program for JZP-8, our intranasal formulation of clonazepam for the treatment of recurrent acute repetitive seizures in patients with epilepsy. This is an open label study to evaluate the safety, efficacy and pharmacokinetics of JZP-8.
As we announced in June, we have slowed the development timelines for our two other clinical stage programs, JZP-7 and JZP-4. In a recent meeting with FDA regarding JZP-7, our novel gel formulation of ropinirole to treat restless leg syndrome, we obtained confirmation that a single positive Phase III study may be sufficient for approval of this product.
In response to guidance obtained at that meeting, we are now conducting additional pre-clinical studies. We expect to initiate a Phase III trial of JZP-7 in 2009 subject to obtaining financing from a development partner for this program.
We are conducting formulation development work on JZP-4, our product candidate for the treatment of epilepsy and bipolar disorder. Recall that JZP-4 is a controlled release formulation of an anticonvulsant that has a chemical structure similar to lamotrigine, which is the drug substance in Lamictal, which has been marketed by GlaxoSmithKline. We expect to initiate the Phase II trial of JZP-4 in 2009, again subject to obtaining financing from a development partner for this program.
Wrapping up our development updates, we're in active discussions with potential development partners for our JZP-8, 7 and JZP-4 programs and we have a corporate objective to complete at least one development partnership by the end of 2008. We look forward to updating you about our partnering progress in the coming months.
And now, I'll turn the call over to Matt for a financial review of the quarter.
All right. Thank you, Sam. So, we're pleased to report another quarter of strong sales growth. Our total revenues for the quarter ended June 30th, 2008 were $15.5 million, led by growth in Xyrem sales to $12.4 million for the quarter. Because this is the first quarter in which we are recognizing sales revenue from Luvox CR, I'll remind you that we're currently applying a sell-through revenue recognition method for Luvox CR, which means that we recognize sales revenue based upon prescription data.
Our GAAP net sales during the second quarter, measured using this sell-through approach, were approximately $0.7 million. During the second quarter, we shipped approximately $0.2 million of Luvox CR to wholesalers, which brought our total wholesaler shipments for the first half of 2008 to approximately $3.2 million.
For the second quarter of 2008, our reported gross margin on net sales was approximately 81%. Excluding Luvox CR, gross margin on net sales of Xyrem and Antizol would have been approximately 88% for the second quarter.
Cost of product sales in the second quarter includes approximately $0.1 million which relates to the net sales of Luvox CR, which we recognized during the quarter, along with approximately $1 million in manufacturing period costs, also related to Luvox CR, for which there is no corresponding net sales revenue. And that results in a lower reported gross margin.
Research and development expenses for the second quarter of 2008 were $21.9 million compared to $17.4 million for the second quarter of last year. The higher research and development expenses during the second quarter of 2008 primarily reflect the expanded Phase III clinical activities for JZP-6.
As we mentioned during our investor day presentation in March, we intend to limit our net R&D expenses during 2008 to the range of $60 million to $70 million. We expect that our reported R&D expenses for the full year under GAAP are likely to be in the range of $70 million to $80 million, offset by the $10 million payment we received from UCB in July and potentially also offset by cash we receive in connection with any new partnering arrangements we're successful in completing by the end of the year.
Selling, general and administrative expenses for the second quarter of 2008 were $34.1 million compared to $18.2 million for the second quarter of 2007. Higher SG&A expenses in 2008 resulted primarily from spending in connection with the Luvox CR launch, from expenses to support our larger sales force and from increased headcount compared with the 2007 period.
In June, we announced delays in the timelines for our JZP-4 and JZP-7 development programs and a reduction in our early stage research and development activities in order to reduce our R&D expense. In connection with this tightened strategic focus, we implemented a workforce reduction of 33 employees, primarily in the R&D and administrative areas. Expenses totaling approximately $0.5 million related to the workforce reduction are included in R&D expense and SG&A expense for the second quarter of 2008.
Let me note a few key items on cash consumption and cash resources. We ended the second quarter with approximately $54.7 million of cash, cash equivalents and marketable securities. Our operating cash consumption during the second quarter was $44.6 million and we also made a second milestone payment of $10 million to Solvay in connection with the approval and launch of Luvox CR.
As a reminder, our remaining milestone payments to Solvay, each $10.5 million, will be paid at the end of the third and fourth quarters of 2008. This amount appears as a $21 million purchase product rights liability on our June 30th balance sheet.
Subsequent to the end of the second quarter, we've completed three transactions which generated approximately $40 million in cash for the Company. In July, we completed the sale of units consisting of 3.8 million shares of common stock and 1.7 million warrants, which generated net proceeds of approximately $24.5 million.
Also in July, we completed an amendment to our license and distribution agreement with UCB in connection with the JZP-6 development program for fibromyalgia, under which UCB paid us $10 million. This payment, which we received in July, replaces a $7.5 million milestone payment which would have been due in 2009 upon the completion of the second JZP-6 Phase III clinical trial.
And third, as Bob mentioned, earlier this month, we completed an agreement to sell to Paladin Labs the Antizol and Antizol-Vet products together with our commercial inventory for those products for a cash payment of $5.5 million plus the sale of Antizol commercial inventory and potential future payments based upon product sales.
Finally, I'll wrap up with a few comments on financial guidance for 2008. At our Investor Day in March, we announced Xyrem net sales guidance of $45 million to $55 million for 2008. Based on Xyrem's performance during the first seven months of this year, we are able to narrow our guidance to a range of $50 million to $55 million in Xyrem net sales expected in 2008.
Because we're still early in the launch of Luvox CR, we will not be confirming or updating Luvox CR ex-factory sales guidance on today's call. We do expect to provide an update to Luvox CR guidance as we obtain more data on progress of the launch.
Turning to expenses, we're now forecasting that selling, general and administrative expense for 2008 will be in the range of $125 million to $135 million, which is lower than the expense guidance that we had previously provided.
We expect that our operating cash consumption in the second half of 2008 will be lower than in the first half of the year as a result of higher product sales, lower R&D expenditures and lower SG&A expenses. As you can see from our financial guidance as well as from the R&D program changes we announced in June, we're seeking to move the Company as quickly as possible to cash breakeven, which we expect could occur as early as 2009.
That concludes our management team update for the quarter. Thanks for your attention. And I'll now turn the call back to the operator to begin the question-and-answer portion of the call.
(Operator Instructions) Your first question comes from the line of Rich Silver with Lehman Brothers. Please proceed, sir.
Rich Silver - Lehman Brothers
Good afternoon. At what point will you provide updated guidance on Luvox CR? I mean, I think obviously, we know it's early. We appreciate all the detail that you provided in terms of the managed care receptivity, the physician receptivity. But again, just trying to get a sense of when you might be in a position to provide that kind of revised guidance.
Hi, Rich. It's Matt. Thanks for the question. We're not able today to provide you with a specific date or timeline for that guidance. On our end, we're obviously watching the weekly prescription trends along with the other data of the sort that Bob outlined for you. But our sense is that we had expected that we would see an inflection point, kind of growth in sales in prescriptions, and we want to monitor sales progress over the course of the next several weeks at minimum before we're in a position to provide more detail or specificity on guidance for the full year.
Rich Silver - Lehman Brothers
I mean, everything on the anecdotal front makes it sound like you're pleased with the launch, yet by sort of hesitating with this issue of the inflection point, that's where it sounds like its more cautionary. I mean, seriously, why don't you just, I mean, do we need to actually wait for another conference call?
We believe that we just don't have enough data in hand today to predict with confidence the sales that we'll see for the full year. We would not necessarily wait all the way until our next quarterly earnings call. In fact, at the point where we reach the conclusion either that we can confirm the guidance that was previously provided or that we need to change that guidance, we would expect to be back to you.
Rich Silver - Lehman Brothers
Your next question comes from the line of Marc Goodman with Credit Suisse. Please proceed.
Marc Goodman - Credit Suisse
Yes, what is the cost per script that I should be using for my script model for Luvox CR?
Were you asking about cost of goods, Marc? This is Bob Meyers.
Marc Goodman - Credit Suisse
No, no. The price per prescription, the average selling price, because you have these coupons and things going on, so I'm just wondering, like, how it all nets out. I mean, obviously the WAC is, like, 97 and change I think it was.
Yes. The important thing to remember there is that for patients who are taking -- the starting dose for Luvox CR is obviously 100 mg and patients can titrate in 50 mg increments. And what we're seeing is that patients are titrating above 150 mg into the higher doses, which means that they are taking multiple pills once per day. So, the value or price of a prescription is not 30 times $3.25 but actually 60 times $3.25 once you get to 200 mg or higher. So, that's the first point is consider that when you think about your model.
As I mentioned in my comments, we are handing out these discount cards that are only being used on a very small percentage of the prescriptions, which we had expected. So, that discount is a pretty small fraction once you realize the percent of prescriptions that are used net and the amount of the dollar discount.
Dr. Sam Saks
One thing we can say from our clinical trials, Marc, is that, to back up Bob's point about the blended rate between one and two pills a day, is that the average dose that patients wound up on in our randomized, controlled clinical trials was north of 200 mg, which would necessitate two pills a day. Obviously early in launch, everybody starts with one since that's the initial titration dose. But we would expect as the market matures that you're going to get a blended rate of between one and two pills per day.
(Operator Instructions) Your next question comes from the line of Corey Davis with Natixis. Please proceed.
Oren Livnat – Natixis
Hi. This is actually Oren for Corey. I have a couple of questions. First, just following on that last one, your overall gross margin I think is closer to 81% but you stated excluding Luvox CR it's about 88%. Can you just remind us what impact the coupon is having, if any, on the Luvox CR gross margin or what we should use for the sort of long term gross margin assumptions for that product?
Hi, Oren. This is Matt. The discounts that result from the prescription discount card will actually be reflected in the gross sales to net sales adjustment. So, in some ways, they're a little invisible to you in terms of our external reporting since we will report net sales of the product. We continue to believe, although it's still early in the manufacturing process as well as in the launch that the gross margin for Luvox CR will be approximately 80% on net sales, which is after taking impact of those prescription discounts into effect.
Oren Livnat – Natixis
Okay, thank you. Another question unrelated is to JZP-6 Phase III. There's been a lot of talk and we've probably been trumpeting it as much as anybody, but FDA's changing landscape in terms of statistical analyses, particularly with chronic pain studies, and an issue that's gotten a lot of attention is the imputation of missing data. I'm curious if you can speak at all to what methodology you did or maybe if you can't, what you didn't do or aren't doing in the JZP-6 space there?
Dr. Sam Saks
Well, I would say that we are very fortunate here because we've had two very recent approvals, one in the middle of '07 and one within months. So, there's a very recent FDA view, so we're not having to figure out based on what happened five or 10 years ago. We're looking at what happened in the last 12 months. So, there's that aspect of it. So, in terms of how those companies treated the endpoints and particularly missing data and other statistical issues, we're very well informed about that.
And then secondarily, we've had our own direct interactions with the FDA as well as the European authorities on these issues and we believe that we have a statistical analysis plan that has a high probability of being successful given that others have gone down the path very recently and we've had our own detailed discussions.
Oren Livnat – Natixis
Thank you so much.
Your next question comes from the line of [Phillip Perram] with Bridge Partners. Please proceed.
Phillip Perram - Bridge Partners
Yes, hi. This is Phillip Perram and I'm just curious how you guys feel about the participation with KKR, their participation here two or three weeks ago, and do you see other participation on that level coming down the pike at all?
Hi, Phillip. It's Matt Fust. We were obviously very pleased to have support both from KKR as well as a number of our other participants in our pre-IPO financing of our series A and B rounds, take part in the registered direct offering that we completed in July. So, that has continued to be a very productive relationship for us. Obviously, without having more visibility in terms of the Company's financing needs going forward, I can't speculate about future participation from KKR or other investors.
Phillip Perram - Bridge Partners
Okay, thank you very much.
Ladies and gentlemen, this concludes the question-and-answer session for today's conference. I'll now turn it back to Mr. Fust for closing remarks. Please proceed.
Great. Thank you and thanks for your participation in today's call. We look forward to keeping you updated on our development and commercial progress.
This fall, we'll be making Company presentations at the UBS Global Life Sciences Conference, which is being held in New York, September 22nd to 25th, at the Natixis Bleichroeder Hidden Gems Conference in New York on October 13th, and at the Credit Suisse Healthcare Conference being held in Phoenix on November 12th to 14th. We look forward to seeing you there and I hope you have a great afternoon.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.
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