Jazz Pharmaceuticals plc (JAZZ) Earnings Call Transcript & Summary

Hey. Good afternoon, everyone. My name is Jess Fye. I'm one of the Senior Biotech Analyst at JPMorgan, and we're continuing the 40th Annual Healthcare Conference today with Jazz Pharmaceuticals. I'm joined by the company's Chairman and CEO, Bruce Cozadd, who is going to give a presentation followed by a Q&A session. If you want to ask a question during the Q&A, use the blue ask question button on your screen, that will send it to me through the portal and I can ask management after the presentation. So with that out of the way, let me turn it over to Bruce.

All right. Thanks, Jess, and thanks, everyone, for joining us. I hope you're all well. I'm excited to be at my 31st consecutive JPMorgan Healthcare Conference, where today I have the privilege of sharing an update on the significant accomplishments and my excitement about the future of Jazz Pharmaceuticals. In 2021, thanks to the passion, innovation, integrity, collaboration and pursuit of excellence demonstrated by our 3,100 dedicated and talented employees around the world, we helped more patients achieve record product revenues, advanced our pipeline and position the company for success. My comments today will include forward-looking statements. These are based on current estimates and assumptions and are subject to risks and uncertainties outlined on Slide 2 that could cause our results to differ materially from current expectations. Please review the notice regarding forward-looking statements contained in the press release published today as well as our most recent SEC filings. I'll also refer to non-GAAP financial measures today. For a full reconciliation to GAAP, please see Slide 3 on our slide deck appendix. Turning to Slide 4. Jazz is committed to innovating to transform the lives of patients and their families. Within neuroscience and oncology, we focus on disease areas where we believe we can deliver a truly life changing medicine for patients with few to no options. By following the science, we bring these patients important new treatment options. Casey and Leighton pictured here participated in clinical trials in neuroscience and oncology. Casey has continued to use Xywav to treat her idiopathic hypersomnia, while Leighton was treated with Rylaze and is in remission and doing well. Their success and the success of others who benefit from our medicines is what drives and motivates our team. Moving to Slide 5. Our core strengths enable us to deliver life changing therapies to patients and value to shareholders. We have successfully grown our company by remaining laser focused on executing our strategy across commercial, R&D and corporate development. We are well positioned to deliver sustainable growth and enhanced value as we continue to build our high value portfolio of commercial and clinical stage therapies. We are a leader in sleep medicine and rare epilepsies. Our Oxybate franchise has redefined narcolepsy treatment and the indication expansion in idiopathic hypersomnia offers an important growth opportunity. Our acquisition of GW added Epidiolex to our commercial portfolio, an important therapy for treatment of refractory childhood onset epilepsies, and oncology is an area with significant growth potential. GW also expanded our R&D capabilities and expertise, complementing the investments we were already making to build out our R&D organization. The GW Cannabinoid platform has delivered the only cannabinoid-based therapy approved by FDA. We fuel our R&D engine through a combination of internally developed programs and strategic corporate development. In addition to the transformative GW acquisition last year, we have a proven track record of strategic capital allocation to expand our commercial portfolio and R&D pipeline, with 6 revenue diversifying transactions in the past decade and 22 molecules or programs acquired since 2019. We have a solid track record of delivering on corporate goals, several of which are highlighted on Slide 6. We met our goal of launching 5 products across 2020 and 2021. This includes our launch of Xywav in narcolepsy, which has been a significant success. These launches have contributed to diversifying our revenue base with over 50% of our revenues in our most recent quarter coming from products launched or acquired since 2019. Our investment in R&D has led to increased productivity exemplified by recent approvals and launches for Xywav and Rylaze, both of which we took from concept to approval, and a combination of productive M&A, in-licensing and partnerships has expanded our commercial portfolio and pipeline, with the addition of Epidiolex and Zepzelca being great examples. As noted on the bottom of the slide, our strategic capital allocation is driving commercial growth, R&D productivity, corporate development and deleveraging, and we're in a strong financial position to grow our business and deliver shareholder value. Turning to Slide 7. I'm pleased to report today that we expect to meet our previously announced 2021 revenue guidance range of $3.02 billion to $3.1 billion, as well as our net product sales guidance for both oncology and neuroscience. This strong performance reflects our commercial expertise, which has contributed to 16 consecutive years of total revenue growth and a 16% compound annual growth rate over the past 5 years. Moving to Slide 8. It's this history of execution that gives us confidence in our ability to deliver on future performance. Today, I'm excited to announce our Vision 2025. Moving to Slide 9. Our Vision 2025 aims to deliver sustainable growth and enhanced value, driving our continued transformation to an innovative, high-growth global biopharmaceutical leader as we bring new and innovative therapies to patients in critical need. There are 3 core components to our vision: commercial, pipeline and operational excellence. Commercial: after achieving over $3 billion in revenue in 2021 we're positioned to grow revenue to $5 billion in 2025. This includes current products as well as contributions from pipeline products that we advance the market and products that we acquired through strategic corporate development transactions. Pipeline: we believe our pipeline is positioned to deliver at least 5 novel product approvals in areas of critical unmet need and significant market opportunity by the end of the decade. In addition to what's currently in our pipeline, we're excited about assets emerging from the GW Cannabinoid platform, and we are continuing to evaluate and pursue novel neuroscience and oncology programs through corporate development. Operational excellence: over this period, we plan to improve our adjusted operating margin by 5 percentage points, delivering more of our top line through to the bottom line. Because this vision will frame our business for the next several years, I'll discuss each of these components in more depth. Beginning with the commercial component of our vision on Slide 10, the key takeaway is that we expect significant revenue growth and $5 billion in revenue in 2025. We will continue to put our commercial expertise to work across a variety of opportunities, including indication expansion, geographic expansion and bringing new products to market in areas of critical unmet patient need and significant market opportunity. To highlight the key growth drivers that contribute to our $5 billion revenue target in 2025, we expect our oxybate franchise to generate approximately $2 billion in 2025, which includes Xywav revenue from narcolepsy and idiopathic hypersomnia as well as sales of branded Xyrem and royalties from Xyrem authorized generics. This speaks to our confidence in this franchise as a sustainable and durable driver of value. In addition to oxybate, we believe our Epidiolex and oncology franchises combined will be generating approximately $2.5 billion in 2025. We've previously stated that we view Epidiolex as having blockbuster potential, and we're excited about the opportunity to grow that brand to reach more than $1 billion in annual net sales by 2025. We've also stated that we believe the oncology franchise will generate more than $1 billion annually, driven by growth opportunities for Zepzelca and Rylaze. We also anticipate $0.5 billion in revenue from other products in our existing portfolio as well as contributions from products emerging from our pipeline and future potential corporate development. Turning to Slide 11. Jazz is an established leader in sleep medicine with more than 15 years of experience and relationships. With the introduction of Xywav in narcolepsy in 2020, we have advanced patient care with a lower sodium oxybate product and are very pleased with its market-leading adoption in narcolepsy. Xywav is a long-lived product with IP into 2033 as well as orphan drug exclusivity in narcolepsy that extends into 2027. We continue to expect that a majority of all oxybate patients across approved indications will benefit from Xywav in 2023, which accounts for branded and AG competition. We believe oxybate is a durable revenue stream. We are very pleased with the adoption of Xywav, which is rapidly becoming the treatment of choice for narcolepsy patients who are either new to therapy or in many cases, had previously been using our older oxybate product, Xyrem. And moving to Slide 12, I'll highlight our opportunity to grow the oxybate franchise with our expansion into a new indication with the recent launch of Xywav in idiopathic hypersomnia. Xywav is the first and only FDA-approved therapy for IH. Other oxybate products, including future generic versions of Xyrem, do not have data in this new indication. There is a significant unmet need among these patients, and we're excited to bring Xywav to the IH community. We recently received orphan drug exclusivity from FDA for Xywav and IH, which goes to mid-2028. We also have IP into 2033. We launched Xywav in IH in November, leveraging existing Xywav commercial infrastructure and are pleased with initial reception from prescribers and IH patients. The approval of the IH indication was supported by robust data with key findings highlighted on Slide 13. We believe these findings are quite dramatic, and half the trial participants were taking wake-promoting agents when they entered the study, which indicates that current therapies being used to address symptoms of IH are not meeting the needs of patients. Remember, we received a broad indication for the treatment of idiopathic hypersomnia in adults, based on trial results that included numerous endpoints. Turning to another growth driver on Slide 14. We've established Zepzelca as the treatment of choice in second-line small cell lung cancer with opportunity to continue to expand in that setting. In addition, in collaboration with Roche, we are supporting a trial in first-line small cell lung cancer, which represents a significant opportunity to help a larger patient group. In the U.S., approximately 30,000 patients are diagnosed with small cell lung cancer each year with approximately 27,000 receiving first-line treatment. Moving to Slide 15. Our confidence in Epidiolex is blockbuster potential and its importance as a component of our commercial portfolio has only increased since we acquired it as part of the GW transaction in May. We see growth opportunities within Epidiolex's 3 existing indications through label expansion and use in other refractory epilepsies and international expansion. While COVID headwinds have impacted uptake of new therapies in this space generally, we are confident in Epidiolex' long-term opportunity. Our third quarter results showed more than 20% growth over the prior year period. Slide 16 provides more granular details on the global opportunity for Epidiolex. And I'll point specifically to very strong reimbursement and pricing in Europe. We're still early in the launch of most markets and expect to see significant growth as launches mature. As we've highlighted on Slide 17, we are rapidly transforming and diversifying our revenue base through both external corporate development and successfully advancing pipeline programs into approved products. As a result, we are on-track to deliver at least 65% of sales this year from products launched or acquired since 2019. On Slide 18, I'll move to the second component of our Vision 2025, our pipeline. We've invested in expanding our R&D capabilities, which gives us confidence in our ability to bring at least 5 more new products to market this decade. We have a robust pipeline and demonstrated success in efficiently advancing drug candidates through clinical trials and approval. In addition to the multiple mid- and late-stage programs in our pipeline, our GW Cannabinoid platform has the potential to generate multiple neuroscience drug candidates in the coming years. As you see on Slide 19, our pipeline provides significant opportunities to deliver important new therapies to large markets and areas of high unmet need. And turning to Slide 20. Our concerted efforts to build out our R&D capabilities is bearing fruit. The acquisition of GW, which added the cannabinoid platform and GW talent to our expanding R&D capabilities and expertise was an important step in adding new research programs and just as important, enabling us to merge to experienced R&D organizations into a singular team. This acquisition, along with other recent corporate development activity noted on this slide illustrates our experience, completing a range of deal structures and sizes. This experience will benefit us as we continue to be aggressive in looking at transactions that can contribute to growing our business. Diving further into our R&D capabilities on Slide 21, the recent approvals of Xywav and Rylaze demonstrate our ability to bring promising molecules from concept to approval. We have opportunities across a range of neuroscience and oncology targets and are investing to rapidly advance our most promising therapies. One area of research we're particularly excited about is movement disorders where there is significant unmet need and potential to deliver new therapies. Our nabiximols program is focused on multiple sclerosis spasticity with our first Phase III clinical data reading out in the first half of this year, which could potentially support a new drug application submission later this year. And we're advancing JZP385, now known as suvecaltamide, an essential tremor, where there has not been a significant therapeutic advance in over 5 decades. Turning to Slide 22. Rylaze highlights our ability to efficiently and effectively develop therapies. Rylaze moved from Phase I trial initiation to approval in just 2.5 years. We have an upcoming supplemental BLA submission to update our U.S. label to a Monday, Wednesday, Friday schedule and expect to submit in Europe midyear. As Slide 23 shows, we have a number of near-term data readouts that we believe will contribute to our vision of delivering at least 5 more new products before the end of the decade. And now on Slide 24, I'll discuss the third component of our Vision 2025, operational excellence. We have a history of generating strong cash flows and deploying that cash into revenue-generating assets. This strategic capital allocation is key to driving growth and diversification of our business. We expect our operational excellence to drive a 5-percentage point improvement in adjusted operating margin from 2021 to 2025. So as we grow our business, we can deliver stronger profitability. Let me explain what I mean by operating margin. This would be looking at our operating income, defined as revenue less adjusted cost of goods shipped, adjusted R&D and adjusted SG&A all as a percentage of revenue. Moving to Slide 25. Over time, we've demonstrated the discipline to lever up and allocate capital accordingly. At present, we are rapidly deleveraging and have flexibility to continue to identify and complete corporate development transactions. We're on track to hit our target of less than 3.5x net leverage by the end of this year. Moving to Slide 26. We have significant cash flow, and we're disciplined in how we put that capital to work with strategic investment in commercial growth, expanding our pipeline expertise, opportunistic corporate development and meeting our deleveraging targets. That strategic capital allocation will both grow and diversify our business. Our financial foundation remains solid, and our disciplined capital allocation is aligned with our key strategic priorities. Moving now to Slide 27. Our confidence in achieving our vision is based on delivering strong results over the course of our history. We've achieved double-digit revenue growth. We've expanded our pipeline and expertise, and we've executed transformative transactions to grow our business and capabilities. Let me conclude on Slide 28. Our Vision 2025 includes a clear perspective on what we can deliver, starting with $5 billion in revenue, driven by significant top line growth. We expect our expanded pipeline and development expertise to drive at least 5 more product approvals by the end of the decade and our strategic capital allocation will allow us to grow our business while achieving a 5-percentage point increase in our adjusted operating margin. We're very excited about our future and what we can deliver to patients and shareholders. We have a strong history of execution. We're focused on delivering across the business, and I look forward to updating you on our progress as we advance our Vision 2025. Before we begin Q&A, I'd like to express our gratitude to the patients we're privileged to serve. They provide inspiration and a deep sense of meaning to our work. I also want to thank all of our employees for their extraordinary efforts during 2021 to ensure we were able to meet our commitments to patients and take care of each other despite the challenges we faced. We're a stronger company for it and ready to deliver again in 2022. Thanks for your time and attention. Jess, over to you.

Great. Thanks, Bruce, for the presentation. And just as a reminder to folks, if you want to ask a question, click the blue button to send a question to me. I think first question that I have is on the long-term guidance, why now for that guidance?

Because you asked us to might be too short an answer, Jess. But let me just say that our experience has been that there's been a lot of investor focus on very short-term performance, exactly how we do in a particular quarter, exactly what to expect in the next quarter or 2. And in that focus, we feel like people have been missing the things that are really driving value, the durability and growth potential in the oxybate franchise. The fact that we are not going to turn off R&D at this point, right? We're going to continue to innovate and bring new products to market, and we've got interesting things in our pipeline. People have been asking us about our margins. We do see that our margins are going to expand in upcoming years, both because we move out of a launch period where we're now generating more revenues against what we're spending on these new products, but also as we transform the business across a larger scale enterprise. And on top of all that, we'll keep doing corporate development. So as you think about the future of Jazz from a shareholder's perspective, I think you need to think about oxybate, Epidiolex and oncology together and where they can go. You need to think about our pipeline, you need to think about margin expansion, and you need to think about the fact that we'll continue to strategically deploy capital to bring new opportunities into our commercial and R&D portfolios.

Okay. Got it. Looking at our model, the $2 billion kind of total oxybate guidance comes in higher than we were. And I suspect higher than where a lot of people were. I'm curious where the disconnect is that you see between that number and where the Street is, whether it's Xywav in IH or AG revenues? When you look at where expectations were -- like where were they wrong?

Yes. Well, different people's models, I'm sure, have different assumptions. But if you think about the pieces of that oxybate revenue stream, start with the most important, which is Xywav. Xywav is doing really well in narcolepsy. And we're not done right, both in terms of Xyrem patients moving over to a healthier alternative in Xywav, a product that's been found to be superior by the FDA in terms of being a safer product with lower cardiovascular comorbidity for a significant portion of patients. Add to that, the growth opportunity in IH, a market that we know could be of the size of narcolepsy over time. So let's start with we think Xywav is doing really well. But then remember, for whatever fraction of that business remains on the older, higher sodium product will still benefit from revenues of branded Xyrem sales and significant economics in the authorized generics. So when you put that all together, we see a really durable franchise.

Got a bunch of questions coming in on the portal. So thank you, everyone, for asking questions. This one here is on the 500 basis points of operating margin expansion. Can you provide some more color around the leverage and/or cost reductions, if there are any, and I guess bridge us from where we are to where we're going?

Yes. Renee, why don't I ask you to take that one?

Yes, I'd be happy to. So when we think about our vision, Jess, of course, there's a $5 billion revenue target. So embedded in this vision is growth on the top line. And as Bruce had mentioned, as we look at growing and scaling our commercial products, we'll continue to invest behind those products. But as they become more mature, we would expect those margins to expand. We'll also continue to invest in the pipeline in R&D as we have. And as you saw in the fourth quarter, we had additional advancements into the clinic and then also in the corporate development space. Bruce had mentioned this will be -- continue to be an important part of our strategy. And as part of our leveraging target, our deleveraging target of getting below 3.5x by the end of this year, we've given ourselves the flexibility to continue to do smaller scale corporate development, and we'll look at larger scale corporate development as we get past that deleveraging. So we're looking at growing the top line as we scale as a company, as a larger company, we'll continue to look at how we become more and more efficient. If you recall, and earlier in our presentation, Bruce discussed how our top line revenue has essentially transformed. And as our company transforms with that, we'll continue to look at ensuring our operations are fit for purpose and that as we grow and scale globally, we're focused not just on the growth, but also how we become as efficient as we possibly can through that.

So another one here is, the guidance mentions $500 million from the pipeline or business development. Can you walk through which pipeline products will likely be on the market to contribute to that 2025 guidance?

Yes. Just to be clear, that $500 million bucket does include some other existing products as well. That, plus anything that does emerge from our pipeline during this time frame plus anything we bring in from corporate development that would contribute revenue in that period is all assumed in that last $500 million bucket.

So which pipeline assets might be kind of commercial by '25?

Dan, do you want to take that?

Sure. I mean, indication expansion, of course, with our existing therapies and continued growth there. But really, nabiximolsis is probably the nearest term commercial opportunity. So we have a number of clinical studies for spasticity and MS. Any one of which those studies could bridge to an approval, and we're prepared to launch and think there's a significant opportunity for spasticity with those patients. Beyond that would be into spinal cord, but that could get beyond 2025.

Okay.

And just on the corp dev piece of that, remember, deals like Zepzelca, where we signed that deal, and it was generating revenues very quickly. So there is the opportunity that we could have some component of that come from new opportunities.

So if I put this improved margin on the $5 billion revenue target, it looks like you could be doubling the cash flow looking out several years. So how do you think about deploying that cash that you're going to be generating?

Happily is how we think about it. Renee, do you want to give a more quantitative answer?

Sure. Absolutely. So as we think about the future and that continued strong cash flow, investing behind our commercial launches will continue to be important. As I've mentioned, ensuring that from a pipeline perspective, we have a robust and growing pipeline to support durable, long-term sustainable growth. And part of that will be inherent in the corporate development that we undertake. As I had mentioned, we're on track to get below 3.5x by the end of this year. And getting on the other side of that really opens up additional flexibility and optionality with that strong cash flow to entertain larger transactions. We were comfortable scaling up and leveraging up for the GW transaction because we had a high level of confidence in the cash flows and the ability to then quickly de-lever. And with the additional expertise we've gained in being able to execute a large transaction of the scale, we're excited to put that back to work potentially in the future. And then in the near term, we'll also be looking at ways to continue to augment the pipeline from early stage to mid-stage all the way to late. And so, you should look to continue to see transactions of that nature, largely in the neuroscience and oncology space and also looking at ways that we can continue to build on the commercial presence that we have that's growing both in the U.S. and globally and augmenting that structure where we can commercialize assets effectively and efficiently.

And Jess, while your question right now has been focused on that 2025 revenue target, in that second piece of Vision 2025 where we talk about pipeline productivity, I just want to remind people, we've been really active lately, particularly in the fourth quarter of 2021 and kicking off a number of key clinical studies across JZP150, JZP385, Zepzelca in first line. We're getting ready to do a new trial with Epidiolex and EMAS. So as we look to the longer term, not just 2025, there's a lot of activity that we think is aimed in the right direction.

Okay. Take another question from the investors here. On Epidiolex, can you provide some color on near-term and medium-term drivers, given we saw some slowdown in growth sequentially in 2021? How should we think about Epidiolex performance in the U.S. in 2022?

Kim, do you want to weigh in on that?

Sure. So we remain very excited about this opportunity more so since we brought the product in-house. And when we look at the business today, we just see tremendous opportunity for growth really across all 3 indications, but particularly in LGS and TSC, which we just launched last year in the midst of COVID. So overall, seeing very strong potential there, very positive feedback from customers that I think when you talked about after 3Q that they are starting to get more experience with it and start to utilize it earlier in their treatment regimen. So very positive signals for penetration for the future. And that's just the U.S. right there. I'll turn it over to Dan to talk a bit about outside the U.S., the opportunity for growth.

Yes. As Bruce referenced in his presentation, we're relatively early in the product launches in Europe. While we got approval, we've only just recently gotten full reimbursement in several of the major market countries. So we're in launching in the fall in Italy and Spain, and that's in addition to the U.K. and Germany, which is sustaining growth. We've got 12 launches overall, both in Europe and outside Europe, the 35 approvals. So there's still plenty of room to penetrate and to move into major countries such as France this year and over time into Asia Pacific, including Japan.

Yes. And remember, we're very excited about how pricing and reimbursement has been going ex U.S. So as we think about the opportunity ex U.S. relative to the size of the U.S. market, it's very significant.

You alluded to the launch of Zepzelca and Rylaze is contributing to one of the elements of your long-term guidance. Now that we're a little further into the Rylaze launch, is there any updated color you can provide on how that's been going?

Kim?

Sure. So while customers were already at the beginning of the launch, excited to have a reliable, high-quality recombinant erwinia asparaginase available, the fact that it has now become the only FDA-approved erwinia asparaginase product in the market is really giving our customers the opportunity to operationalize it within their institutions and to see for themselves firsthand pretty rapidly, how it's working. And so we're getting very, very positive feedback from customers in terms of certainly the ease of ordering versus what they've been used to in the past, the ease of dose preparation compared to what they're used to and all of the Jazz care support services that we've wrapped around that. We are messaging very strongly around what we believe is a very clinically meaningful difference for this product in terms of having the product, maintaining a clinically significant meaningful level of asparaginase activity throughout the entire duration of treatment, and that is really resonating in addition to coming in the ready-to-use bile and not having to filtrate or reconstitute it. So very positive, and we look forward to not only educating customers about Rylaze but really starting to grow that market and expand it to its full potential, but we recognize that will take a little bit of time to undo some of the habits that we learned, that our customers had to undertake in a supply-constrained environment, but we're already hearing positive signals from them about potentially starting to roll back some of those short-term fixes they have in place.

And Rob, you might just want to jump in on where we're going from a development perspective.

Yes. So we have an ongoing supplemental BLA under review with the FDA in something called real-time oncology review, which is meant to expedite that. And this is for the Monday, an optimized Monday, Wednesday, Friday dosing regimen intramuscularly where we're giving and evaluating and giving twice the dose on a Friday to get pure coverage than what would be expected with other short-acting asparaginase's covering that Friday to Monday window.

Is there any more Erwinaze like at any institutions that they like still have in their pharmacy? Or has it all gone now?

Kim?

Well, I don't have the latest coming into the new year here, but I'd say at year-end, we still knew there were some institutions that still had some supply to deplete. I think many of them are utilizing for the patients that had already initiated on Erwinaze. I can't say that it's 0, but it's certainly doing the run every day to, I think, probably not meaningful level.

Got it. And then maybe the last one on Zepzelca. What's the next opportunity investors should be focused on for that product? Is it the confirmatory trial? Or is it the combination with Tecentriq for the opportunity in the front line setting?

Rob?

The frontline setting is a real opportunity to reach more patients, Jess, and to give them a longer duration of therapy by preemptively treating before their active disease progresses. So I think that's a real opportunity. There's a strong scientific rationale to use it there, and it's add-on therapy. So the comparator is essentially nothing. We think that has a high probability of succeeding and helping to bring this therapy earlier to patients to allow them to drive the greatest benefit.

Great. Well, with that, I think we're just about out of time. So we'll stop there. Thank you, guys, very much for the presentation, and thanks, everyone, for listening in.

Yes. Thanks, Jess, for the good questions.