Jazz Pharmaceuticals plc (JAZZ) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. David Amsellem from the Piper Sandler Specialty Pharma team. Welcome again to the 34th Annual Piper Sandler Healthcare Conference. We're delighted to have Jazz Pharmaceuticals join us. So we have senior management with us, Renee Gala, CEO -- sorry CFO; Robbie Iannone, Global Head of R&D; Abizer Gaslightwala from the Oncology business unit; P.J. Honerkamp from the Sleep Medicine business unit. Other than promoting you to CEO, I hope I didn't butcher the introductions. Well, anyway, thanks for joining us. I'll turn it over to you, Renee, for just some brief introductory remarks, and then we can go right into Q&A, if that's okay.

Yes. That sounds great. And thank you again for the promotion. That's wonderful. Just a few reminders. One, we'll be making forward-looking statements today. These are all subject to risk factors, and you can learn more about those in our SEC filings as well as our website. Also on our website, you'll find conversions from all of our non-GAAP to GAAP measures. And then finally, should we make reference to financial guidance, we're not updating today. All of our financial guidance is as of November 9, earlier this month at our 3Q earnings. So maybe just a few minutes on the business, and then we'll dive right in. So at that earnings call just a couple of weeks ago, we reported impressive top and bottom line growth versus the prior year. This is driven by continued execution in our commercial franchises, including Xywav adoption in both narcolepsy and IH and Epidiolex continued growth. Rylaze continues to have an excellent launch and Zepzelca also as the treatment of choice in second-line small cell lung cancer. So we're quite pleased with how the business is performing. That performance, of course, led us to increase the midpoint of our full year revenue guidance for 2022. We increased that to $3.65 billion for the year and also increased our adjusted net income guidance in spite of bringing in additional payments for business development transactions. Speaking of business development, we also recently brought in Zanidatamab asset from Zymeworks. We're excited to see that data next month, and we think that has the potential to be really game changing with respect to HER2 expressing cancers. Also, on the R&D front, we recently announced with Rylaze, we received approval for Monday, Wednesday, Friday IM dosing and that we enrolled our first participant in the JZP441 Phase I study in the U.S. That's, of course, the orexin agonist that we licensed in from Sumitomo. And throughout all of that activity, we've been busy deleveraging the business on the back of the GW transaction and closed the third quarter at 2.9x adjusted net leverage, which, of course, gives us greater flexibility for future corporate development and enables us to continue to invest in the business as we do so in a disciplined manner. So great momentum coming into 2023, strong financial position and a clear path forward with Vision 2025.

That's great. Great introduction, Renee. I wish we had more than 25 minutes. Lots to talk about. So I just want to dive right in with some questions about your 2025 goals. You've talked about margin expansion as a key part of your long-term goals or your targets for 2025. Can you remind us what your targets are here? And talk about how you get to that kind of margin improvement. Is it a function of both top line growth, say, Epidiolex and also expense control? Or is it more one versus the other?

I would say it's a little bit of both. So just stepping back in terms of looking at our operating margin objectives, we stated that with Vision 2025, we expected to have a 5 percentage point improvement between 2021, where we had 43% and 2025, where we expect to then have 48%. If you look at the midpoints of the guidance that we just provided earlier this month, that actually equates to a 49% operating margin for 2022. So what that allows us to do, as our top line grows, which we expect consistent with Vision 2025, it allows us to keep investing in the business. It allows us to invest more in 2023 and 2024. We have stated we don't necessarily expect that operating margin to be exactly linear. And as we look to greater opportunities on the business development front, continued investments in the pipeline and continued investments in the commercial business, we have that flexibility to invest, and we're well positioned to be able to accomplish that given where we are today.

I think you said in the past by 2025, the margin target is in the high 40s. You're already there. So, I guess the question is, does it continue to grow from there? I mean, it sounds like that is a conservative target is what I'm getting at.

I would say we'll be balancing our operating margin targets with wanting to invest further in our R&D business, wanting to ensure that we have the flexibility and capacity when we bring in new assets from the outside through corporate development to appropriately invest behind them. So 48% is the goal. We think it's very much achievable. And we think there are lots of opportunities for us to put our capital to work.

Okay. So let's switch gears and talk about sleep medicine and specifically Xywav, Xyrem. So you've said on your 3Q call that more than half of oxybate patients with narcolepsy are now on Xywav. So with that in mind, how do you think about your ability to continue to drive switches once we see that authorized generic ostensibly at the beginning of 2023?

Yes. Well, we're very pleased with what we've accomplished to date. But maybe P.J. would like to take that question?

Yes, sure. So we've been competing against high sodium oxybate for the past 2 years in the form of Xyrem. So the AG presents a similar opportunity moving forward. And we expect that we'll be able to continue to compete for patients going forward and that we'll be able to maintain access with payers during that period of time. So we believe that the success we've had through Q3 will continue going forward.

And in terms of the AG royalties, I mean, this is really a moving target and something that I think we and the analyst and also in the investment community are trying to figure out. So I know it's early to think about 2023 guidance, but I guess I'll ask the question this way, are AG royalties likely to be a major contributor to overall oxybate revenue in 2023 or put differently, where do the AG royalties fit in in terms of all the oxybate moving parts in '23?

Yes well, stepping back, we have laid out in 2025, we expect our revenues from the oxybate franchise to be $2 billion -- to make up $2 billion of that $5 billion broader revenue target. And those revenues to come from Xywav in IH and narcolepsy, branded Xyrem and then also in AG royalties. We haven't given 2023 guidance and would expect to do so near the beginning of 2023 when we are reporting our Q4 and full year 2022 results. But I would say the way to think about it is we've stated this is expected as we look forward to be a meaningful royalty to Jazz. We've also described the nature of the royalties. And of course, Hikma is the first AG on the market. They are volume unlimited. And the royalties to Jazz in the first 6 months are tiered and wide-ranging going from 10% all the way up to 90%. In the second 6 months of that AG period, Hikma, of course, remains volume unlimited. But at that point in time, the royalties increase such that both Jazz and Hikma are entitled to meaningful economics. And during that time, also, we expect 3 additional AGs to enter the market, all extremely volume limited with fixed meaningful royalties to Jazz. So we're not going to provide the specific 2023 guidance, but that gives you some context on how the royalties are structured.

Got it. Okay. That's helpful. And then just another question about Xywav in narcolepsy. Just looking at commercial dynamics, one thing you've talked about in the past is that you're getting a lot of oxybate-naive patients with narcolepsy on the Xywav as opposed to Xyrem. So does that change once you see AGs in the marketplace?

So we have seen the vast majority of patients that are new to oxybate going on Xywav for narcolepsy. And of course, Xywav is the only drug approved for IH. With respect to our overall expectations, we continue to expect that in 2023, Xywav will be the oxybate of choice. And that is when both AGs will be on the market and when we very likely will have a competitive oxybate on the market as well. So we are confident in continuing to see that as the case.

I mean, part of that, I would imagine, just a function of the fact that it's not a crowded generic market or really a traditional generic market as we think of one. If you have on AG and then others that are volume limited, that's not the same thing as garden-variety generic competition. Is that a fair way to think about it?

Well, very importantly, the authorized generics coming on to the market are authorized generics of Xyrem, they are high sodium oxybate, which is very different from Xywav. They're not AB rated relative to Xywav.

Okay. I wanted to switch gears and talk about idiopathic hypersomnia. You've had some early success there. Now, is there anything to read into the somewhat slower pace of adds in 3Q relative to 2Q and 1Q here success notwithstanding?

P.J., do you want to take that?

Sure. I think the short answer is no. I think we're really pleased that we ended Q3 with over about 1,450 patients on Xywav for idiopathic hypersomnia. And it reminds me of the early days of narcolepsy in terms of -- when oxybate first came on and physicians had really been focused on excessive daytime sleepiness and narcolepsy and understanding the innate value proposition that oxybate brought for narcolepsy, in particularly, around cataplexy and getting comfort and success there and then growing out from that. And I think what we're seeing in the idiopathic hypersomnia market is a prescribing community that's been predominantly focused on excessive daytime sleepiness because that's what they had available. And really understanding based on the clinical results that we got, the full value of Xywav in particular on all of the symptoms of idiopathic hypersomnia and the unique role that oxybate plays, so if you take, for example, sleep inertia, these are patients that could have 10 alarm clocks and they don't get up. Now what good is a wake-promoting agent if you can't get up to take it? And so having a nighttime agent such as Xywav, I think and then getting that confidence in that, I think we'll continue to see it grow. As today in narcolepsy, we're 20 years out almost, and we're continuing to grow that market.

Who are the patients that with IH that are getting Xywav? Are you getting newly diagnosed patients? Are you getting patients who have been on modafinil or armodafinil or stimulants? Or is it a mix? Can you talk about the patient mix?

Yes. I think we're getting a mix. I mean as in our clinical trial, over 57% of the patients were on wake-promoting agents, which is not uncommon as in our narcolepsy trials too. And so it's not really a choice between wake-promoting agents and oxybate. A lot of times, it's you're adding oxybate on. But you also have for patients that are presenting with some of these symptoms like sleep inertia, physicians going directly to oxybate.

Before we move to other parts of the business, I wanted to just pick your brain real quick on the Orexin program. So a broad question here. We have a few Orexin agonists that are in development. The compound that you in-license, how do you see that potentially being differentiated from other Orexin agonist? Takeda obviously has one, we're going to get [indiscernible] some down the next year. Alkermes has one. How do you think about yours and where it may fit?

So for starters, chemically distinct, we think, from the Takeda series, and that was intentional. We knew some of the liabilities around the prior compounds that were in the clinic. And so looking for something that was chemically distinct, had a very good safety profile in the IND-enabling preclinical studies, was potent and selective for Orexin-2 agonism. At the time that we signed the deal, there was a typical rising single-dose healthy volunteer first-in-human study that Sumitomo was conducting. So we had some early clinical data even at that time. That trial has progressed through dose escalation, and we continue to see data from that trial. That has been supportive in our planning. The next trial, which, as Renee mentioned, just initiated recently, and that's a trial of sleep-deprived healthy volunteers where we will do -- continue to do a dose escalation, leveraging the prior data we have. But in sleep deprived patients, in addition to having more safety and PK, we will have some way of measuring pharmacodynamic effects as well across a range of doses.

So to be clear, there haven't been any safety signals that you've observed that are troubling?

There have not been. We, of course, shared all the relevant data with the FDA, not just preclinical, but the current all available data from the ongoing Phase I in Japan, clear that IND recently, as we just mentioned.

Okay. Looking ahead, where do you see the orexin sitting into this narcolepsy and even potentially IH landscape where polypharmacy is very much the norm? Do you think it's ultimately an agent that is additive and is adjunct to what we see that's used or could it displace any of the available modalities inclusive of oxybate?

Yes. I think ultimately, the data will guide us there. We're very interested because it is essential to the pathology that exists at least in NT1, where there's loss of orexin neurons. And so the relevance of the biology to the target is critical. So I think we're very interested overall. The data will tell over time, certainly not every patient is a good candidate for an oxybate as effective as it is. And so certainly, there's an opportunity to capture additional patients. As P.J. described earlier, oxybate is effective as a nighttime agent because it improves nighttime sleep. And so we certainly are very interested in understanding even for those patients on Xyrem, where there an orexin agonist would be a more effective daytime agent compared to some of the wake-promoting agents that have really limited efficacy, whether that be in narcolepsy or IH. So potentially complementary, but we have quite a bit to learn around the mechanism.

Okay. I'd like to switch gears and spend a couple of minutes on Epidiolex. And I'll start with citing some comments you made over the last couple of quarters where you cited growth in new prescribers in the U.S. So just simply I'll ask, what has been driving that growth in new prescribers?

Yes. Well, we were really pleased with the growth that we were able to report in the third quarter. And what we are seeing, as we've said in the past, Epidiolex is a promotionally sensitive product. And with the changing dynamics of COVID and the ability to have an increase in our interactions, both virtual and in-person with health care providers, that's a lot of what is driving the increased activity and then the increased level of prescribers. We've also been highlighting the combination data with Epidiolex and clobazam and the impressive reduction in seizures there. So as we've said in the past, the promotionally sensitive aspect of this is now playing out as we've seen increases in our overall interactions. We've seen increases, therefore, in the activity on the back end. We've also seen more patients coming into the offices physically. And so physicians are at a point now where as they are exercising that polypharmacy that we also see in epilepsies, they're adding Epidiolex on to the mix. And with the ability to see their patients more frequently had greater comfort in making those changes.

So it sounds like there's a little bit of a post-pandemic bounce, if you will, or just more awareness as more patients are coming into the office, and there's more interaction between the commercial organization and physicians. Is that a fair way to put it?

I think it's a fair way to put it. Also now the physical presence at AES, getting back to conferences being able to share more data certainly helps.

Okay. And then there's Europe, which is a newer opportunity. I guess, a general question here is, do you think it could look like the United States in terms of patient adoption? That's not a sales question, that's more of just a penetration. What ultimately do you think will be the dynamics there in terms of adoption relative to the United States?

I think if you step back and look at the speed at which we are able to get pricing and reimbursement negotiated and then launch across multiple markets, I think that speaks to the level of interest. We've been able to accomplish around a 70% of U.S. WAC pricing, average price across Europe, which is, I would say, fairly impressive and also speaks to the value that's seen in the product. By the end of this year, we'll be fully launched in the 5 major markets. We're continuing to undertake new launches and new indication launches across various parts of Europe. So we do expect it to be a meaningful driver of the long-term value and growth. And importantly, we've also recently started our study in Japan, which maybe, Rob, you want to comment a bit on that.

Sure. So in Japan, we have an agreement with the PMDA around the trial that includes all 3 disease type syndromes. It's a single-arm trial for each, so they're noncomparative study. High level of interest there, and we think that's a very feasible study to complete in order to support approval there. And I would just add in terms of Europe and other parts of the world, you asked about comparison to U.S., very similar treatment landscape. In this disease context, you have patients with pretty refractory epilepsy who often typically require multiple agents and a growing experience with Epidiolex, where it is effective, well tolerated, easy to combine. And I think in part that's driving some of the growth as well.

So we have a few minutes left. I wanted to spend some time on the oncology business and with Zanidatamab, recent addition. Just wanted to get your general thoughts on the strategic rationale here. And also as a follow-up to that, the transaction structure, which is an interesting one in the sense that you have -- the upfront payment was not particularly large, and it sounds like there's more spend to the extent there's a derisking. Is that the kind of structure we should think about for future deals in oncology, or really any pipeline assets for that matter?

Well, maybe I'll start and then have Rob and Abizer comment further on Zani. But in terms of the deal structure, we really like the ability to get to a point where we were balancing the cash outlays with the value inflection points. And so to the extent that we can structure deals in that way to obviously manage our risk and manage milestone payments as in the Zani transaction being commercial and regulatory based. Those are transactions that we think are great for the company, great for shareholders and enable us, if we don't see success, to keep investing more in the business. But Rob, and maybe if Abizer both can comment.

So HER2 is a really critical oncogenic driver across many tumor types and certainly in certain tumor types established in other areas, still the opportunity to be first-in-class as an anti-HER2 agent. What's really important to understand about tumors that are driven by HER2 is that often there is escape around any particular therapy. And if you have a follow-on therapy that can address that escape, they're effective again. So HER2 continues to be the driver line over line. And you're seeing that even with the available agents that are out there. What's unique about Zani is it's a bispecific antibody that binds to 2 different epitopes on HER2, which is a unique mechanism of action and has its advantages when you look at the preclinical data showing really efficient internalization of the receptor, so shutting down that pathway, but also having the ability to induce sell debt through ADCC and complement dependent cellular cytotoxicity. Because of that, there's activity even when patients have been given other HER2 therapies. And so there's data showing after 1, 2, 3, even 4 different HER2 therapies, still seeing activity. It was a unique opportunity in that there's a near-term approval path with BTC. There's some potential differentiated first-line gastric opportunity. And there's clearly a lifecycle around other tumor types where HER2 therapies are established, but in later line is a rescue, like I mentioned, such as breast cancer, but also other tumors where HER2 has been expressed and therapies haven't been developed there.

That actually answered my other question is, could these patients respond if they've been exposed to prior HER2 therapies. So that's helpful. So you have the biliary tract cancer and also the gastroesophageal carcinoma program. I mean real quick because I know we're out of time, but looking at those 2, is there one that you're more excited about versus the other?

Well, they're different. I mean second-line biliary tract cancer, there's really no significantly effective therapy. So a low bar for approval gives you some near-term opportunity to be on the market, beginning to put that in the hands of prescribing physicians makes the path for the second indication shorter because it's a supplemental application. Of course, as soon as you have data, you go to NCCN. So together, it's a really smart initial strategy. And then as I said, opportunity behind that in different tumor types combinations.

Okay. Great. Well, we're out of time. Thanks so much for joining us today. Thanks to everyone in the audience for listening.