Jazz Pharmaceuticals plc (JAZZ) Earnings Call Transcript & Summary

Well, good afternoon, everyone. I apologize, I was about to say good morning because I took a red eye from New York. I have the pleasure of hosting Jazz Pharmaceuticals. For those who don't know me, my name is Akash Tewari. I am a senior biotech analyst at Jefferies. Joining us today from the Jazz team is Renee Gala, CFO; Dan Swisher, President; and then Samantha Pearce, who is Senior Vice President and Head of Europe and the international business for Jazz. I guess maybe before I get started with my own questions. maybe, Renee, if you want to take a few moments to introduce where Jazz is kind of as a company, and we'll take it from there. Go ahead.

Sure. Great. I'd love to. Well, and also thank you for inviting us. We're thrilled to be here. Before we get started, though, I will remind you, we'll be making forward-looking statements today, so I would point you to our SEC filings on our website for more information on the risks related to our business. So Akash, this is a very exciting time for Jazz. Last year, we established an aggressive target of completing 5 commercial launches across 2020 and 2021. With the launch of Xywav and IH earlier this month, we have now completed this goal, which plays a significant role in the overall transformation of our business. We remain on track for substantial revenue growth this year. And for the first time, we expect to exceed $3 billion in annual revenue. We've demonstrated strong performance throughout the first 3 quarters of the year, and this is underpinned by commercial execution, financial discipline and strategic allocation of capital as well as prioritization of commercial and R&D opportunities that we believe will have the most impact on our future growth. So launching multiple products, also coupled with our acquisition of GW Pharmaceuticals earlier this year has enabled us also to advance our objective of diversifying revenue. 52% of our net product sales in the third quarter were generated from products which we have launched or acquired since 2019. And given our expectations of the durability and growth potential of these products, we remain confident in our goal of at least 65% of net product sales coming from these newer products in 2022. Now this represents a major shift in our product portfolio, which just a year ago generated only 8% of net sales from newer products. Also with the GW acquisition, we were able to add an important commercial product in Epidiolex, which, of course, is for pediatric onset treatment-refractory seizures. We also bolstered our clinical pipeline with nabiximols program and Phase III development in the U.S. as well as the GW cannabinoid platform. And as part of the transaction, you recall, we issued over $5 billion of new debt, and we were pleased to share last week that we have already achieved a 4.4x net leverage ratio at the end of the third quarter, which, of course, represents a half turn decrease in net leverage in just 5 months. Importantly, we continue to expect the GW transaction to be accretive beginning in 2022, and we're on track to achieve our stated net leverage target of being below 3.5x by the end of 2022. In addition to reducing debt, we are also investing in our business. We're investing to drive future growth and durability. And this, of course, includes focused investments in the ongoing commercial launches of Xywav, Zepzelca and Rylaze realizing the blockbuster potential of Epidiolex and then advancing our R&D pipeline and the GW cannabinoid platform. So in summary, it's a very exciting and productive time to be at Jazz. And with that, I'll turn it back to you for Q&A.

Thanks so much. And yes, definitely it's an exciting time to cover your company. I think we'll talk about Epidiolex in a bit, but let's just start off with the sodium oxybate franchise and kind of holistically how you think about it, on a kind of 5- to 10-year horizon? And I say that because I think back in 2019 or even from 2015 to 2019, most people thought your sodium oxybate franchise is something that's going to peak kind of in 2023 and then start to decline after that. And at that point, most of us were really just considering the narcolepsy opportunity and maybe not giving that much credit to Xywav. I think you were a great stock for investors back in 2020 when you gave guidance and you talked about the switch rate, you talked about the Xywav opportunity. And I think the Street started to contemplate this idea that sodium oxybate isn't a declining asset, but something that maybe could either flatten out as we go into -- through the mid-2020s. And then even there's [indiscernible] who think that it could grow through your genericization of Xyrem. And also maybe there could be stable, if not growing operating margins. I think when you look at those 3 options now and you've seen the run rate of the business, where do you kind of holistically think about the sodium oxybate franchise on a 5-year window? Is this still going to be a growth franchise for Jazz internally or at least something that will be stable?

So Akash, I'll start, and Renee can contribute too. But first of all, we don't think of it as our sodium oxybate franchise. We think of it as our oxybate franchise. And obviously, a key part, of course, is Xywav, which is our low-sodium option. And we're really pleased to date with the sort of market-leading adoption that we've seen in approximately a year since November when we launched it in narcolepsy. And I think it's a real realization we had that sodium for these patients that were at cardiovascular complications, lifelong therapy, there is significant clinical benefit from oxybate, but definitely that sodium burden was too much for those patients. So we showed that at the end of third quarter, we had -- sorry, at the end of second -- third quarter, yes, we had 6,000 patients of 16,000 that were already on Xywav in just a year. And then, of course, we've got the new launch coming as of November 1 with IH, which is -- there's no FDA-approved therapy. We saw with Xywav, the low-sodium version that we had significant benefit across endpoints. So we do remain very encouraged that there is long-term both growth and durability in the franchise. And maybe I'll leave it at that and let Renee comment further, if you want to add something?

Yes, I think you've hit all of the key points, Dan. At the end of the day, Akash, our business really is transforming here. You can see it's transforming in terms of diversification of revenue. And a big part of that is a shift to a healthier, lower sodium option with Xywav. In addition when you look at IH and the opportunity to go into a population that has a significant need and has not had the availability of any approved therapies, we also see that as an important overall growth driver.

Understood. And I think, Renee, you made a really interesting comment on the Q3 call when you kind of honed in on operating margin for -- and this is more for Jazz broadly, but can you talk about the operating margin and how it's going to evolve for the sodium oxybate business through this kind of genericization? And how it's going to evolve for the sodium oxybate business through this kind of genericization? And then maybe stepping back and think about as you overlay GW and then your hem/onc franchise, where do you see kind of the operating margin for Jazz evolving over the next 3 to 5 years?

Well, I'd say with respect to specific guidance for 2022 or beyond that, you can expect us in the beginning of next year to provide guidance on a top line basis and then what we're expecting with respect to bottom line. But the holistic message here is that as our business is transforming, as we have integrated GW Pharmaceuticals, we have also taken the opportunity to look at this transformation of our business to say how is it that we want to operate going forward based on where we're headed, based on double-digit expected top line growth? What does our operating structure need to be to support this growth over time to support growth in Europe, which is going to be an important area for Epidiolex in addition to the U.S.? And we also want to ensure that we're investing in our R&D pipeline. So we've taken the time over the course of this integration to prioritize what we think will be the most important investments, both on the commercial and in the R&D pipeline, not only to sustain the growth in the near term, but also thinking about that longer-term growth. Sustainability and durability coming from our pipeline, having multiple new programs enter the clinic in Q4 that will then turn to value drivers going forward. And then how do we, in turn, ensure that the baseline infrastructure of our business is built to scale effectively and efficiently. So we did come out with 2021 guidance that showed a pretty significant improvement with respect to our 2021 ANI and EPS. And as we go forward, we'll be focused on both investing in the business to ensure that durability and growth also investing and ensuring that we deleverage and hit our target of getting below 3.5x by the end of next year. But then importantly, also continued business development. We've built in flexibility in our 2022 net leverage target to continue smaller-scale business development. And when you look at where business will be at the other side of deleveraging will have an incredible amount of flexibility with our underpinning of cash flow to be able to then also contemplate larger scale corporate development.

Okay. Interesting. Yes, I'll tell you, I think us internally, I think a lot of buy-side investors, when you put out that 3.5x by 2023, we were getting to close to 3 in terms of getting to your leverage target, we thought, it looked at least optically kind of conservative. You're mentioning that, that may bake in some business development is that $500 million, billion type of deal? Could it be another larger transaction? How -- what is the kind of extent of business development that you have baked in to that 3.5x leverage target that you put out for 2023?

Well, without getting into the specifics of that because as you know, business development is incredibly difficult to predict until you're getting to the final stages. But I would say what we guided to was getting below 3.5x by the end of 2022. I would think of transactions that we would contemplate during that time ranging from something along the lines of -- on the smaller side of a Redx deal or a SpringWorks transaction to even going slightly larger than that and contemplating something like what we executed for Zepzelca, transitioning our cash into an important revenue-driving asset.

Okay. Well, all right. That's really interesting. Now in Q4, I didn't see the cost cut coming. I don't think anyone did. And that I think part of that is also I noticed the way that you described the GW deal. Everyone thought there was going to be synergies. You very explicitly at the time of the deal didn't bake that into people's base case, and I think that's partially because you wanted to invest into the growth of that franchise and that totally makes sense. The question that I get the most from the buy side right now is, look, Akash, they cut like, I think, $120 million in OpEx for 2021. And you talked about 3 different buckets that contributed to that. Is this a reset of expectations for OpEx going into next year, right? Is this a wholesale kind of change in the spending profile of the company? Or is this more of a onetime thing where you got -- you looked at the business that you bought, you weren't able to kind of adequately assess the cost cuts you could do and you had kind of a onetime effect? How would you describe the OpEx cuts in Q3 and how it relates to the business going forward?

Well, I think it's important to start with. I wouldn't characterize that as OpEx cuts as much as I would a prioritization and increased understanding of what our prioritized investments should be moving forward to optimize the outcome. So we gave guidance in June, early in our integration and reiterated that guidance in August and course of this integration, we have been focused on ensuring that as we look at our entire expanded portfolio now on the R&D side, and also contemplating that COVID has lasted longer in terms of the impacts to the business, in-person interactions and other elements that I think any of us expected. So we certainly don't want to invest in in-person commercialization activities that may not translate into productive outcomes. So we took a very close look at our entire investment portfolio and decided to reduce the OpEx guidance to reflect that more thoughtful and better understanding of the full portfolio and where we needed to invest. I would also say that as you think about the fourth quarter, and what it means for the go-forward, I wouldn't necessarily draw a correlation to the spend in 3Q or the spend in 4Q to a direct correlation to 2022. And I say that because you'll see, of course, there's an increase in spend in Q4 that is related to our launch of Xywav and IH and 3 important clinical trial initiations with JZP-385, JZP-150 as well as Zepzelca. And then as we go forward and think about what is going to be the investment profile that's going to enable us to appropriately invest in all of our commercial launches as well as our prioritized R&D pipeline, including clinical development and that new for Jazz GW cannabinoid platform we're going to provide that more specific guidance as we come into 2022 and report our year-end earnings.

Okay. All right. And maybe if you could -- because you talked about 3 buckets that contributed to the cost reduction. Is there any general guidance you can give us on how much of that spend that you were planning to do in 2021 is now probably pushed to 2022? Like is there any ballpark number or -- I'm not going to say guidance, but any directional, it would be very helpful for us.

Yes, I'm not sure how valuable it would be because if you think about it, commercialization activities that you plan as part of your ongoing support of a product, it doesn't necessarily double if you push some of it out. Some of it will coincide and ramp along with the COVID conditions becoming more conducive to that in-person interaction. Some of the spending decisions that we made on the OpEx side were related to prioritization of programs within our portfolio where we were pursuing the same indication with 2 different compounds, and we made decisions on staging and sequencing as a result of that great problem to have, which is multiple compounds to invest in. So I'm not sure it would be that valuable to try to parse it out. It's a great question, though, Akash.

Okay. Fair enough. Now on GW itself, I think optically, you look at -- you're going to do a little over $500 million this year. Consensus next year is $850 million, right? And that -- if you're talking a long only investors that scares people a little that seems like a lot of sequential growth. And you've talked about you kind of being in a COVID effect environment. At the same time, Q1, Q2 were kind of mulligans. I think if you look at the implied back half performance for Epidiolex and you annualize that, you kind of only need about 15% year-over-year growth to get to that $850 million consensus number for Epidiolex next year. When you think about the performance you've seen in 2021, maybe if you could give us some guidance, how much of that has been affected by COVID, right? If you were to be able to quantify the COVID impact on Epidiolex in 2021, is there a ballpark number that you would assign to it?

Well, first, I think it's important to remember that we have not provided Epidiolex guidance for 2022 yet. So rather than get into the deltas between various consensus or analyst models, I would really focus more of the energy on how we're addressing Epidiolex potential growth, expansion into Europe and the progress we've made there. So Dan, would you like to comment further?

Yes. As Renee is commenting, I mean, we definitely see Epidiolex as with growth potential opportunity to become cornerstone of therapy for these treatment-resistant refractory epilepsies and continue to expect growth across our labeled indications. We've seen even in the headwinds of COVID increasing prescriber base, very high persistency for those patients who started. So we know that the clinical benefit is really there, and it's translating into real-world experience. Definitely, the COVID impact has been stronger on Epidiolex than some of our other products. And you think about it both from the patient perspective where a lot of the patient starts are pediatric patients, many of them did not have access to vaccines or only just now getting access to vaccines. And so they have fragile health. They are at risk of increased epilepsy with viral infection. And so the parents are very reluctant to bring them into the institution and risk the exposure or change their medication, which can also trigger breakthrough seizures. At the same time, Epidiolex is a relatively new product in the market, and we're still trying to grow that prescriber base. TSC was the most recent indication. And so not having those face-to-face interactions. And we referenced the first 3 quarters of this year relative to 2019 pre-COVID were down overall 70% in terms of face-to-face or 40% overall. We definitely see those conditions improving going into 2022 as both kids are now getting access to approved vaccines and also the face-to-face interactions, I'm hearing anecdotally are definitely picking up. So given that the drug is proven, proven broad spectrum activity is combinable, has very favorable payer coverage. We definitely see growth going forward. And importantly, not just in the U.S. market but outside the U.S. as well. And Sam, who is our General Manager for the international business can speak to that.

Thanks, Dan. Yes. I mean we're very excited about the opportunity to drive the growth of Epidiolex across the European and international region. Since the launches last year, first of all, in Germany and U.K., we've added in Q3, reimbursed launches across Italy, Spain and Switzerland. So we're now fully reimbursed and launched in 4 of the 5 largest European markets, and we're looking forward to launching in France next year as well. And I think what's really encouraging about the potential of Epidiolex in the region is the pricing that we've achieved which is -- exceeds 70% of the pricing that we have in the U.S. And I think that's just really indicative given the very robust and rigorous value assessments that occur in Europe. It's really such a great indicator of the clinical value that Epidiolex is bringing to patients. And of course, we have the TSC indication to come in addition as well. So we're currently registered in 34 countries and launched and launched in 11 countries across the region with growth -- with terrific growth opportunities ahead of us.

That's really helpful. And I guess if we were to look at Epidiolex in 2026 or as this product becomes more mature, what do you -- what would you guess would be kind of the scope of the European opportunity relative to the U.S. one? Because I do notice that you guys seem to be more excited about the European launch than maybe I had picked up in the past. Is this something that could be as big as the U.S. market, 75% of the U.S. market? Or do you think it will be more of a sub-50% whatever the U.S. market would be in terms of a sales opportunity?

We haven't provided a specific split of that, Akash. But we do think it's a meaningful opportunity. And when you think about what Sam just provided in terms of the number of countries and also the progress that we've made in pricing at over 70% of U.S. pricing, it's meaningful. And quite frankly, Epidiolex is a drug that in the U.S., we've mentioned the high persistence patients that go on the drug tend to stay on the drug. It has a well-characterized safety profile. And we do want to focus right now our efforts on ensuring that we realize that blockbuster potential and then maximize the opportunity globally.

And I would just add that we're also investing in data generation and new clinical trials. As we referenced in the first half of next year, we're expecting a registration trial to be initiated for EMAS, which is a seizure type. We don't have -- we haven't shown efficacy in yet, which is myoclonic atonic. But given sort of the broad spectrum of activities we've had across other seizure types that will be a very important puzzle piece to fill in and increasingly with experience in that evidence epileptologists, what they do is they treat the underlying seizure type, many of which have disorders that have no proven FDA-approved therapy. So the more they gain the experience, the more the evidence is out there for all the factors we mentioned in terms of novel mechanism combinable broad spectrum of activity, we do see this as a major growth driver and a cornerstone of therapy where there's still a lot of room ahead from where we are today.

Okay. Now I'm not going to ask you the penetration rates for all of the markets because I know you're [indiscernible] to give it. But I mean, if we're going to try to back it out, right, like the last GW disclosure Dravet was kind of at a 40% penetration. Fintepla has launched and the company is giving disclosures, they're about 20% penetrated in Dravet. To me, it doesn't seem like there's a ton of room for upside in that indication. I think most investors kind of understand that. The thing that I'm trying to figure out, I suspect a lot of your investors are too is LGS obviously a very, very important indication for Epidiolex growth not only into next year, but kind of long term. And Fintepla is going to be launching in that indication relatively soon. How do you think about the growth in LGS? And can you kind of compare -- what would a physician think when they're deciding to give their patients either Epidiolex or Fintepla? And do you see any short-term impact in demand for Epidiolex as that product gets on to the market going into next year?

Yes. So Akash, I mean, one thing to remember across all these indications and just broadly across treatment-resistant epilepsy is these patients are often on multiple different antiepilepsy or antiseizure drugs often 2 to 5. So we actually haven't seen an impact to the Dravet business because of Fintepla, and we don't expect it in the other indications either. There's sort of a novel -- the novel mechanism of Epidiolex, the price point we have, the favorable risk/benefit, it all puts it in a very favorable light. And obviously, now a growing prescriber base and experience in the market all puts it in a very favorable light to become a cornerstone. And we do hear anecdotally actually of combinations being used, including with Fintepla. So that doesn't concern us. I mean, there's already 30 generic drugs out there that we've worked through as well. And so there's a lot of medications. And -- but I think that's where importantly, getting that increasing prescriber base, getting that face-to-face interaction where physicians who have little or no experience that often helps that in-office support for them to try it with a few patients, get the positive experience, hear from their peers how things are going, overcome any perceived barriers, which is really more of a perception than reality of payer coverage, et cetera. And so we do think there's room for a polypharmacy and definitely room for a very novel medication like Epidiolex.

Okay. Understood. That's helpful. Maybe lastly, just on -- you mentioned there's a ton of generic options in the epilepsy space. And if you look at some of the most successful commercial launches, all of them had a substantial amount of patients that were off-label, right? So it's probably going to be the same, to some extent, for Epidiolex. It historically absolutely has been the case in epilepsy as a whole. We've attempted to back out how many patients right now are kind of off-label. We're getting to high single digits, not double digits in terms of patient volumes for Epidiolex. I guess would you comment on what percent or what's the group of patients that are kind of off-label use right now and other refractory epilepsies for Epidiolex right now. And then when you think about the growth profile of that, it's been so important for some of the historical launches. How important is the off-label use going to be to kind of drive growth over the next 3 to 5 years?

Yes. Akash, I'll say, I mean, one way to think about it is that the pool of patients, which are treatment-resistant outside of the labeled indications is quite large. And many of them are in these disorders where there's no proven FDA therapy. And the disorders are so small, you can't really run studies and all those different seizure -- in all those different disorders. What you do have is physicians experiencing what medicines do they go to for different seizure types, which crosses that broad spectrum we mentioned, both with the current labeled indications, but also with the EMAS trial coming. So the 160,000 epilepsy patients that are treatment-resistant pediatric a million. In the U.S., I mean, even if you went the other way and said our business already had 10%, 20%, 30% sort of off label. That's a very small number of that relatively large patient pool to be addressed. And we have physicians and then payer coverage to support sort of that broader use where appropriate, where other treatments are not working and the kids continue or the patients continue to have breakthrough seizures. So there's definitely room for opportunity in epilepsy as that goes through. I mean what we're trying to lean into is continued data generation as well as sharing the experiences that physicians are having both in the U.S. and outside the U.S.

Okay. Understood. I think we will jump back to your oxybate franchise, not just sodium oxybate. And I think Hikma has always been this kind of wildcard going into next year. And part of that is I don't know when the product is entering. I don't know what royalty they're paying back to Jazz. I also don't know are they going to launch their own generic? Are they going to just continue with their authorized generic? That's a lot of moving pieces for kind of settled generic entry. So I guess what can you -- like for an investor who's confused about how to model the impact of Hikma. Is your base case that, a, they haven't authorized generic, they don't launch their own generic; b, that they come at kind of a reasonable discount, 15% to 20%, not something that's more aggressive; and c, do you expect Hikma and then the 2 volume gated generics to kind of be your only competitors, at least in the generic side going out to 2025, 2026? Or are there other variables we should be paying attention to here?

Yes. So I'll take that, Akash. And of course, we can't predict exactly what Hikma may or may not do. I would just frame it first as we've stated the first authorized generic can enter the market at the beginning of 2023 or earlier, if triggered by a significant decline in Xyrem revenue. And we've also said that given the substantial uptake and adoption of Xywav, which is the biggest driver to Xyrem declines, that could very well happen prior to the beginning of 2023. With respect to full generics, if Hikma were to choose to launch a full generic, this would accelerate other generics to the market. Hikma would have to construct their own REMS and then give other generics access to it. So again, we can't predict this. But we -- what we're looking at with Hikma is if when they come into the market with an AG, then they would come in with an authorized generic of Xyrem that they would be purchasing from Jazz, that they would be distributing through the Jazz REMs and Jazz would be receiving meaningful economics on that product. Because they are volume unlimited, we don't expect there to be a substantial decrease in price although, again, we can't predict what they may do. And then, of course, the next 3 generics authorized generics, excuse me, have the right to come in 6 months later. And they have, as you stated, volume limitations, single-digit volume percentage volume limitations. So again, declining price dramatically is not necessarily going to make a big impact because they are volume limited. Importantly, Jazz is entitled to meaningful royalties over the entire AG term. And after that this royalty will increase substantially should the AG term extend beyond 1 year. So we view the overall oxybate business for us, including potential AGs as being one that is a meaningful contributor to our business now and into 2025 and well beyond even once full generics can come on to the market at the beginning of 2026.

That was really helpful. So thank you so much for that. I believe we're out of time. I see the timer, okay, we are out of time. Thank you so much for virtually attending. I hope next year, we can all see each other in person, but this has been a blast, and I really appreciate all of your comments, and have a good one, guys.

Thanks, Akash.

Thank you for having us.

Thank you.