Jazz Pharmaceuticals plc (JAZZ) Earnings Call Transcript & Summary

We'll start a little early if we can. Is that okay? All right. Well, good morning, everyone. My name is Akash Tewari. I'm one of the therapeutics analyst here at Jefferies. It's a pleasure seeing you all. It's great to see this conference back to kind of full strength. I have the pleasure today of hosting Jazz Pharmaceuticals. Joining us today will be Renee Gala, CFO; Dan Swisher, President; Kelvin Tan, Chief Medical Officer; and then Samantha Pearce, Senior Vice President of Europe and International. So we'll have some good European Epidiolex questions. So this is obviously -- next year is going to be a really big transition year for Jazz. We're going to start seeing generic entry, but at the same time, we're going to see growth on idiopathic hypersomnia for Xywav. We're going to see how Epidiolex really starts to play out. And I think it definitely looks like a -- what we would call a [ garpy ] name that has EPS and revenue expansion over the next few years. And I think if you can really grow, hit your Vision 2025, then I think a lot of people are going to look at your company very differently soon. I will start it off by handing it off to Renee to give some introductory remarks, and we'll take it from there.

Great. Well, thank you for having us. We're thrilled to be here. Just as a reminder, we'll be making forward-looking statements today. Please see our SEC filings and website for more information about our business. Should we refer to non-GAAP measures, we have full reconciliations to GAAP on our website as well. And then finally, should we refer to guidance today, we're not updating or reiterating our guidance. This is as of last week at our earnings call. So I don't know if I'm too close to this mic.

No, you're good, you're good. Yes.

Okay. Just stepping back then and looking at the business. So last week, we reported 3Q earnings. We had strong financial performance across our business, which enabled significant year-over-year top and bottom line growth. And so if I put that in the context of Vision 2025, as you'd mentioned, just starting off on the commercial front, we raised the midpoint of our top line revenue guidance and the midpoints of our neuroscience and oncology net sales guidance metrics. That was driven by strong continued underlying growth and adoption of Xywav and idiopathic hypersomnia as well as narcolepsy as well as strong underlying growth for Epidiolex, 22% year-over-year driven by underlying demand. On the oncology front, we've been really pleased with the continued success of Rylaze as well as Zepzelca established as the therapy of choice in second-line small cell lung cancer. So on the commercial front, the business is performing really well. Moving to the R&D pillar, the second pillar of Vision 2025, we have multiple compounds moving forward, multiple value inflection points across '23 and '24 and then, of course, recently announced the transaction with Zymeworks for Zanidatamab and expect data there before the end of the year. And then finally, with respect to our operational excellence pillar, we announced that the midpoint of our guidance ranges essentially lead to a 49% net operating margin. And what that means for us from a relevance standpoint is last year was 43%. We have laid out an objective of having 48% in 2025. So we're achieving 49% in 2022 with the midpoint of our guidance, which means it gives us a lot of headway and room to be able to invest in our business continually invest in corporate development, and that's important for our continued sustained growth and long-term value generation. Also on the operational and financial front, we generated $930 million in the first 9 months in operating cash flow. So significant cash flow underpinning our business ended the quarter with around $900 million of cash on our balance sheet. And importantly, also a 2.9x net leverage ratio. And that's important because it's essentially 2 full turns of leverage since closing the GW transaction just 1.5 year ago. Again, important for our continued growth to be able to have the bandwidth and capacity to invest in corporate development, but also invest in the underlying business. So strong performance in 2022, considerable momentum going into 2023, and we think we're really well positioned to deliver on Vision 2025. So with that, maybe we'll open it up for questions.

Yes, absolutely. Thanks so much, Renee. So I wanted to start off with maybe idiopathic hypersomnia. And it's funny, I always talk to investors. I feel like people say Jazz works because of earnings, but I think it really works if you have high quality top line growth, right? That's what I think people want. Earnings is always that [ exposed factors ], we say we're buying or selling the stock. And I think to that point, going into this year, you were saying IH is going to launch like an orphan drug with limited competition. I mean that's a very provocative statement to kind of make. You obviously had very nice new patient starts in the first half of the year. Still a good patient add number in Q3, but we did see a bit of a slowdown. If we kind of look at our math, consensus is talking about $270 million in IH sales in 2023. And you usually take about a 9% -- a price increase, you realize, let's say, 4% to 5% of that. That kind of implies in terms of net patient adds per quarter into next year. You're going to need to average about 350 to 400 somewhere in that range to kind of hit where consensus. Obviously, you're not putting out your numbers. But I guess, let's put this into a 2-part question. One, as we think about the optical small slowdown that we saw in Q3. What really drove that? Was there anything that we can read into? What's been kind of the demand with your prescribing base? And then number two, as we go into next year and kind of just that general math we laid out, let's say, a patient add rate of around 350 to 400 going into next year. Is that a comfortable assumption that The Street should have on idiopathic hypersomnia growth?

So maybe I'll just frame it up a bit and then ask Dan to comment more on how the launch is going and what we're expecting long term. Just stepping back, we're not going to provide product to product guidance or patient guidance in terms of the numbers that we expect. But as we look at narcolepsy and then look at idiopathic hypersomnia, obviously, there are very different launches for us. And idiopathic hypersomnia is a rare disease launch where we're educating patients and we're educating physicians. As you've said, this is the only drug that's approved for idiopathic hypersomnia. And what we're hearing from HCPs, from patients is that they're having a really good experience to be able to finally have a drug approved for that disease. But Dan, do you want to comment further?

Sure. Yes. And just on the big picture side, with Xywav, which is the one and only low sodium oxybate, so 92% less sodium than Xyrem, which translates at clinical doses to 1.5 grams in general, which is very clinically meaningful, has led to orphan drug exclusivity from the FDA in both narcolepsy and idiopathic hypersomnia. And so 2 years on the market now with -- in narcolepsy. And we are, as of October, the oxybate treatment of choice. So we have more patients on the Xywav and Xyrem for narcolepsy. So that's gone very nicely, the continued conversion of that market. In addition to new patients coming on or coming disproportionately over to Xywav, which really speaks to how we've shifted the beliefs of the physicians on the importance of treating the underlying comorbidities and the overall health of the patient, idiopathic hypersomnia, which we launched in November of last year, has gone very well. We've got 1,450 patients at the end of the third quarter. We see that as continued opportunity for growth. We're balancing, of course, our efforts with both continuing the work in narcolepsy as well as IH. But we see there's 37,000 diagnosed patients seeking treatment for IH. So plenty of room for continued growth. It's a new market, though, and that's why we say kind of quarter-to-quarter, there can be some variability. What we're really focused on is helping physicians identify the patients who could benefit from therapy and really educating them about the nighttime benefit of oxybate and particularly Xywav to treat the daytime symptoms.

So maybe, Dan, on that point, you mentioned continued growth. So Renee was talking about, you have a lot of operating leverage. You're going to hit your 2025 operating margin, probably no problem, right? So you have room to spend. It wouldn't be crazy, year-over-year, we see an increase in SG&A for idiopathic hypersomnia. Should we, therefore, expect some type of increase in new patient adds next year if you're going to be spending on what's a very commercially important launch for you? Is that a dynamic that could actually play out? Is this a promotion-sensitive type of market? Or is this really going to be more of this kind of continued study? That trajectory that you have, it's not going to accelerate, it's going to continue at its current rate.

So we think we're really well positioned for our operating margin, absolutely. And when you think about the opportunity that we have to invest in R&D, we've said we expect to continue to increase those investments. We expect to do that. We also expect to get greater leverage out of that SG&A line. And as part of our longer-term objectives, we've said we expect $2 billion of the $5 billion in 2025 to come from oxybate, and that includes Xywav and idiopathic hypersomnia, Xywav and narcolepsy, branded Xyrem and then, of course, royalties on authorized generics. So as we look longer term at idiopathic hypersomnia, definitely a growth driver for Xywav. As we get into 2023 as we typically would, when we report our year-end earnings early 2023, that's when we'll provide more context around the guidance that you should expect for 2023. But absolutely, we see idiopathic hypersomnia as an important growth driver for the brand. As Dan had mentioned, we have a meaningful patient population that's already actively seeking treatment. And if you step back and think about the fact that this indication has never had an approved medicine before, we think the underlying population could be as big as the narcoleptic population. So that provides greater growth as well.

And I would just add that we're well situated with our field force. So our field force is really the same physicians are prescribing and diagnosing idiopathic hypersomnia as narcolepsy. And we know that 37,000, 90% of those diagnoses -- or sorry, 65% of those diagnoses are in 1,300 physicians. So a pretty targeted group that we can really get to, and 90% of them were already had been calling on with narcolepsy. So there's a lot of leverage in our multiyear. We've been in the sleep disorder market for more than 15 years. We've now got good market access that's on parity with narcolepsy and idiopathic hypersomnia. So we do think it's promotionally sensitive. We do think there's an opportunity to continue to build on that. Medical education and other factors have to come into a new market. Obviously, we've built narcolepsy up over multiple years. We think we can accelerate that growth from -- in terms of how long it takes to sort of build that market, but there's going to be plenty of room for growth over the coming years.

Understood. So it's always a little tricky to model your company, especially with these, when does Hikma enter with their authorized generic and how the margins kind of play out. I guess one question I often get from investors. And I'm going to assume that once that switch goes to 50%, Hikma can enter. I know you're not going to say, but I'm going to make that assumption. But one thing that has been noticeable though, has -- the switch has started to flatten out, right? It's not -- it's approach -- you've been in kind of the 40s for a couple of quarters now, it's not necessarily starting to grow. . A question that we often think about is once you do have generics, let's -- until we get into the back half of next year, you're going to have several potential generics on the market. What is the new patient add market going to be for Xyrem versus Xywav? And one of the things you guys have said, which kind of stands out, as you feel pretty strongly that Xywav is going to be the preferred treatment for physicians, right? And then I think a lot of investors are like, look, 20% of these patients are high-risk ASCVD, but not everyone. Payers are going to step at it and make sure patients are going to be starting on Xyrem first. And if they can't handle it, it's only that subpopulation that's going to be the opportunity for Xywav in narcolepsy. How do you think about that, right? Like once you do have generics on the market, what are you kind of assuming the new patient add market for Xywav will be? Will it simply be just that 20% high-risk ASCVD market? Or do you feel like you have enough recognition with payers right now that you are still going to get the majority of new patient starts there?

Yes, maybe I'll start and then Dan, you want to comment. So just stepping back, based on what we've seen with Xywav, based on our ODE designation with superiority, based on greater safety, this is not just about lower sodium being better for just patients that have high cardiovascular risk, which, by the way, is a large percentage of narcolepsy patients. This -- it is simply healthier for any patient that is a patient that can be on oxybate therapy to be on Xywav versus Xyrem. We're talking about a massive sodium load each and every day for a chronic disease. We sometimes talk about this as 11 bags of potato chips at night before you go to bed. You might be able to do that once. You probably don't want to do that every single night for a chronic treatment. It's just not healthy with respect to the sodium aspects. So that's one piece of I think the appreciation that we've seen with HCPs is understanding this is not just for patients at high cardiovascular risk. It is a healthier option for any patient that is eligible for oxybate therapy. Dan?

Yes. Not much to add other than we really do think it's the better product for patients, and we've shown clinical studies that Kelvin could speak to and maybe that's a good sort of segue to talk about patients who've come over from Xyrem.

Yes. I think Renee touched on it already. Our data indicates that as much as 70% of patients with narcolepsy type 1 and type 2 will have cardiovascular risk and comorbidities. So we do believe there's a significant number of patients who will be continuing to need to transition over to that low sodium Xywav. Our data indicates that when patients do transition over, by far, it's a gram-for-gram transition from Xyrem to Xywav, that the patients are very happy. They prefer their treatment, that their main reason that the physician has switched them is because of the cardiovascular risk and the long-term health benefits that they can gain. So we do think there's going to be continued and we think it's important there's continued transition from Xyrem to Xywav. And there are not many of us that can have the FDA endorsements of that clinical superiority for Xywav as well given its low sodium benefits.

And I would say the conversion as well as the significant new patient adds to Xywav has all been done really on the clinical profile and the clinical benefit to the patients. We went out at launch with parity price. We've looked for parity access. We're not trying to play an economic card to move people over to Xywav. And so it really is the clinical benefit. We expect likely that it's going to continue to be parity access, and then physicians and patients can really choose the best therapy in the coming years.

Okay. So two questions on that. Let's just simplify that question. As we get into back half of '23, do you feel like the majority of new patient adds for narcolepsy will continue to be for Xywav or let's say, Xyrem second half '23, 2024? And then Dan, you had a -- I think another point you're touching on is the question of how does Xywav price and discounting change into next year as generics start to enter. Is it fair to say that there won't be meaningful discounting on Xywav as you start to see generic penetration on Xyrem next year?

Yes. We're not going to get into that level of sort of tactics. And of course, it's a dynamic market, and we don't know exactly what Hikma and the authorized generics are going to do. But we know we've established a clinical profile and benefit. We've got the orphan drug exclusivity. We've got great market access right now. And we can continue to build on that momentum, both in narcolepsy, and then, of course, the one and only approved therapy in idiopathic hypersomnia. So we feel really good about where we are positioned for 2023.

Understood. Now -- we can't talk about guidance. But I think just directionally, it does -- so the first thing you say is we're already almost at our 2025 margin. You have a lot of operating leverage. Is it fair to say, given the moving parts, that we shouldn't think of '23 as a net increase in operating -- you're, A, going to be spending more on R&D.; B, you're going to be spending on your IH launch, you're going to be spending on your Epidiolex launch. We shouldn't, as a base case, generally think of this as a margin expansion story in 2023. Is that a fair statement to make?

Well, as I said, we'll provide guidance for 2023, early 2023. I'd say 2022 is a margin expansion story in addition to top level growth. So we launched Vision 2025 earlier this year to provide more of that long-term picture of where the business is going given significant revenue diversification, given, of course, the eventual entry of AGs within the oxybate space and then also to provide that margin expansion story given that we've been busy investing in product launches, right? Recall, we had 5 significant launches between 2020 and 2021, and that's fueling some of the growth that we're seeing right now. But as you look at that journey between 2021 and 2025 in that overall operating margin expansion, what we've said is it may not be linear. We'll be looking to invest in R&D. And as you think about clinical trials, that comes up and down depending on what it is that you're investing in. But importantly, we plan to continue to invest behind the launches of the brands as well as the pipeline, but you should expect continued corporate development and business development as well. And that's what we're looking to leverage as we're building a more sustainable long-term business that can be fueled by both corporate development and internal pipeline.

Understood. So I think I'm the only analyst who covers both Zyme and Jazz, which is interesting. But here's -- you've talked about kind of a 500 -- you have $500 million in BD baked in for Vision 2025. Like refractory BTC is not a big indication, right? Maybe it's $100 million -- $50 million to $100 million. You're not going to convince people. It's going to be much bigger than that otherwise. There's a question on whether you get accelerated approval on GEA. So net-net, you're not -- I can't say you're going to -- your $500 million in GAAP that you've talked about for Vision 2025, ZW25 is filling a huge hole there, right? And you're hinting, you also still have great -- you're deleveraging, you still have potential to do BD. Is it fair to say like that you will still be pursuing deals somewhere in that size, $300 million to $500 million annually in order to kind of hit that gap. And is it fair to say ZW25 is not a material contributor to that kind of $500 million number that you guided for Vision 2025.

Yes. So what we've said about the transaction -- and I'd love to have Kelvin also comment in a minute about why we're excited about that particular molecule. But what we've said is we think it can contribute to the R&D objective of 5 novel approvals before the end of the decade as well as to the revenue objective that you mentioned, the $500 million. And the strategy is really to be able to get on the market as quickly as possible with the second-line BTC indication, be able to have physicians get experience with the drug in that indication, get on treatment guidelines so that when you're generating GEA data and also pursuing other tumor types, it's a more rapid adoption when you have physicians having had experience with it. I do also think, though, when you look at where our balance sheet is, our leverage at 2.9, we were able to get there, those 2 full turns through both paying down debt but also increasing the underlying adjusted EBITDA. And that's important because it creates greater capacity at the same leverage levels for future transactions. So I would expect to see us continue to be active in deals like this one, but also early pipeline deals and potentially on the M&A front. But Kelvin, do you want to comment further on Zani?

Yes. We're really excited about adding Zanidatamab to our pipeline. I think in a number of ways, I think about it in terms of a late-stage asset. So that helps us to balance late stage and early stage in our pipeline overall. BTC, as we've heard, will be coming first, and we expect data on that towards the end of this year. And then gastroesophageal, a bigger opportunity, but again, looking out a bit further into 2024. I think broadly from an R&D perspective, our excitement around Zani as a molecule that really stems from data that shows activity in monotherapy as well as in combination and also for patients who have been previously treated with HER2-targeted therapies. So I think broadly, it's a combination of adding it to the pipeline as well as it being a very interesting molecule that makes us think this has the potential to even transform how patients with multiple HER2 type tumors can be treated. It could really change that standard of care. So that's why we're so excited about having added it to our pipeline.

Understood. So here's a question I've gotten a lot is, why do the $325 million option, right? BTC, I feel like you have a pretty good idea of what that data set is going to see. I think the response rates decrease over time, but it's -- you have a general sense on where it's going to end up. And I was thinking maybe it's because you want to have your expense going into next year, but you're going to record the $325 million option by year-end. So there's no like accounting benefit for doing that either. So why do that $325 million? And like -- it's a very -- I love the simpler answer on this question. In terms of the BTC data that is going to come out later this year, what is going to be compelling enough? Let's just say that they show data that is consistent with what they've had previously, right? Is that -- is it fair to say that will be compelling enough for you to exercise that full option?

Yes. So we thought it was a terrific transaction to balance financial outlays and value inflection points. right? We get to see the data and make the decision of whether or not we'll continue in the transaction. Importantly, we can make that decision for any reason. We don't have prespecified clinical markers that are baked into the transaction. But to be clear, we're really excited about this transaction. We have high expectations of continuing. The back-end milestones are also based on regulatory and commercial success. So we think this was a smart deal for Jazz shareholders, and we think it's going to be an incredible deal for patients ultimately to get the compound to the market. In terms of any other comments on the commercial front...

I mean, I would say we're -- we did find the prior data very compelling. And if there's replication of that data, that's going to go very much with our thesis. So we're excited to see where the data takes us. And more broadly than just BTC as we mentioned, GEA, but also the other tumor types that are ongoing.

Got it. So I'm going to try 2 more R&D questions. I'm excited to have Kelvin here. One, I always have trouble modeling lurbinectedin post 2024, 2025 because Daiichi with the B7-H3 data, it looks really interesting in small cell. You have the DLL3 bispecific for Amgen. I mean you have some paradigm-changing drugs that are coming in development, both on the bispecific and ADC side on small cell. And you also kind of asked -- another question that I always had for lurb is you kind of implies some consistent growth on lurbinectedin even to hit your Vision 2025. You're kind of already at like 40% to 50% second-line penetration. So 2 parts. A, where do you think lurbinectedin kind of fits into the standard of care beyond 2025? How do we model that given we have some really, really compelling new medications that are in development. And two, as we think about its penetration in second line and third line, what makes you feel confident that you're going to be able to continue to grow here? And -- because you've taken a low-hanging fruit of topotecan. Where else can lurbinectedin kind of penetrate in small cell that has to start continuing to grow over the next 3 years?

Dan, you want to comment on commercial and then maybe Kelvin on data?

So lurbinectedin, we launched 6, 7 months after we licensed it. It was our first foray into solid tumor commercialization. It was, I think, June of 2020, so right in the midst of COVID. And it was a very successful launch, and it's been a very successful brand, really speaks to the underlying unmet need in that patient population that's seen very little in second line or later. It also speaks to the profile. It's very efficacious as a monotherapy with good safety and predictability, very easy dosing to administer. So also appeals beyond the KOLs into the community centers where a lot of these small cell lung cancer patients are treated. So we're excited for other therapies to come through. I think there's plenty of room for future combinations and new therapy. At the same time, it's a high bar that lurbinectedin has put out in the second line of both the safety, efficacy and administration. We're also committed to continuing to invest in additional patient populations and lines of therapy and even real-world evidence around platinum-sensitive patients, where I think there's plenty of room for growth in second line. But Kelvin, maybe the clinical program?

Yes. I mean, just before I do, I think it's really important to reiterate how quickly lurbinectedin established itself as second-line treatment of choice for patients with small cell lung cancer. That's after a short space of time with the data out there. That's what the clinical community and the guidelines have already endorsed it. And so to get to that position very quickly is important. But you're right, we are continuously thinking about where next for lurbinectedin. We do have an ongoing collaboration with Roche, looking at a combination of lurbinectedin and Tecentriq in first-line maintenance therapy for small cell lung cancer. As Dan was saying, we also got -- just initiated a basket trial looking at opportunities for lurbinectedin across a range of different solid tumors. And also our partners, PharmaMar, are conducting the pivotal trial looking at lurbinectedin, either as monotherapy or combination versus investigator choice. But we believe that also will help to move us from the accelerated to a confirmatory approval for lurbinectedin and, again, reaffirm its place in terms of treating with patients with metastatic lung disease. So again, a very broad approach to how we're looking at the development for lurbi, which we think is going to be really meaningful.

Okay. I'm going to sneak in one more question. I got 1 minute. All right. The orexin, so we're -- like I am personally very fascinated with that program. I think it's a big deal. It makes sense why you had to divest. I'm guessing you divested Sunosi because of that. That's my guess. The question we kind of have is that Sumito program, I mean, there's obviously a lot of secrecy in this space. No one really wants to disclose the structure or the amount of healthy volunteer data that you kind of had from Sumito. But the question of Takeda is liver tox, it's obviously a big debate in the space. Is it -- okay, so 2 parts. Is it fair to say you guys have a novel scaffold versus what Takeda showed with 994 and 861. That's question one. Question number two is, given that Takeda's didn't pick up the liver toxicity with the healthy volunteer studies before, and Alkermes is also hinting we might run longer healthy volunteer studies to kind of feel more comfortable about liver tox before we move into symptomatic patients. What -- like how should we think about the length and the duration of healthy volunteer studies for the program you in-licensed? And has some of that derisking already occurred in the hands of Sumito that we may not be privy to?

So maybe I'll start and then have Kelvin jump in. So in terms of Sunosi, that was part of our general prioritization of our business. That was not something that was forced due to the orexin. But I would say, keep in mind, we launched Sunosi before we had launched Xywav or Rylaze or purchased GW or Zepzelca, I think, as well. So we essentially transformed our commercial portfolio, and that was just the right thing for our business. We're super excited about the orexin and certainly licensed that with the assumption that it was quite different from the Takeda asset. Kelvin?

Yes. And I would just quickly add, I would remind everyone, we've got 2 decades almost of experience in the sleep medicine field. So we are very confident about our ability to develop, launch and bring these new medicines to the market. We do work very closely with Sumitomo, as you would expect. They're sharing with us blinded data on a regular basis. That data is informing our development programs, which we're not ready yet to share. But again, that's going to move very fast. We expect that to go very fast.

Potential for data in narcoleptic patients by next year.

Stay tuned. Stay tuned. We expect -- I mean, there are different ways that we can look at POC in terms of the...

Three to 5 healthy volunteers perhaps?

There are multiple ways we can look at it. So stay tuned.

Great. Hey, thank you so much. I really appreciate it. Thanks, everyone, for joining us.

Thank you.

Thank you.