Welcome to the Jazz Pharmaceuticals third quarter financial results conference call. Following an introduction from the company, we'll open the call to questions. I'd now like to turn the call over to Amy Knoepfler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals.
Good afternoon, and welcome to our third quarter 2011 financial results and business update conference call. Our results for the third quarter, including updated financial guidance for 2011, were reported in a press release issued earlier today and available on our company website. Among other things, the press release includes a reconciliation of GAAP net income to adjusted net income, along with the related per share amounts. With me for today's call are Bruce Cozadd, Chairman and CEO, Kathryn Falberg, CFO, and Russell Cox, Senior Vice President of Sales and Marketing. Following some prepared comments, we'll open the call for your questions.
Remarks we make on this call about future expectations, plans, and prospects for Jazz Pharmaceuticals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to our financial performance and position, growth potential, tax position, guidance, and the anticipated confirmation of our proposed transaction with Azur Pharma and the potential benefits and timing of that transaction.
These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to differ significantly from those projected, including, without limitation, risks and uncertainties associated with the timing and completion of the proposed transaction with Azur Pharma, opportunities and plans for the combined company, including uncertainty of the expected financial performance and growth potential, as well as risks related to Jazz Pharmaceuticals business detailed in our SEC filings, including under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended June 30, 2011, and the risks relating to the Azur Pharma transaction disclosed under the heading Risk
Factors and elsewhere in our preliminary proxy statement relating to the Azur Pharma transaction filed with the SEC on October 26, 2011. Our SEC filings and reports are available through the Investor Relations section on our website.
We plan to file our Form 10-Q for the quarter ended September 30, 2011 with the SEC soon. Please also note that we have filed a preliminary proxy statement, and we'll be filing a definitive proxy statement, and Azur Pharma has filed a registration statement with the SEC. We encourage you to read these and the other relevant materials filed by us and Azur Pharma with the SEC because these documents have important information about the proposed transaction.
Now let's turn the call over to Bruce Cozadd, Chairman and CEO, for some opening remarks.
Good afternoon, everyone, and thank you for joining our conference call. I'm pleased to report our strong quarterly financial results today, which continue to reflect the successful implementation of our plans to grow Xyrem sales. The past several months have been a busy time at Jazz Pharmaceuticals as we made significant progress across all three of the core elements of our corporate strategy. Continuing to grow Xyrem, expanding our product portfolio and establishing a platform for future growth through the Azur Pharma transaction, and most recently, hiring a new head of R&D and Chief Medical Officer to lead the development team to build and deliver a pipeline for sustainable growth. Our financial results reflect our continued focus on Xyrem growth. Total revenues for the quarter were $73 million, an increase of 64% over the third quarter of 2010.
Adjusted net income of $44 million was up 157%, demonstrating the company's continued operating leverage. As Kate will detail, we are pleased to be updating our full year guidance to reflect higher expected sales and earnings for the year. Let me discuss our progress in more detail, starting with the outstanding performance of Xyrem, which continues to exceed the expectations we had coming into this year. We are extremely happy to see sustained double-digit volume growth this quarter, up 11% over the third quarter of 2010. As you know, this builds on several consecutive quarters of strong year-over-year volume growth. Xyrem volume growth continues to be driven by an increased number of patients on active therapy, now reaching over 9,000.
The growth in bottle volume and patients on therapy reflects our ongoing commercial focus and targeted investments to increase the number of patients with key symptoms of narcolepsy who benefit from Xyrem therapy and our continued efforts to improve their overall experience with the product. We are seeing additional improvements in compliance and persistence rates, again reinforcing the importance of our work with physicians and patients to set appropriate expectations about their treatment and provide continued support through our central pharmacy. We believe a number of initiatives are fueling this volume growth, including the renewed focus of our sales force on Xyrem and continued enhancements to the services we offer through the central pharmacy. One specific program is the addition of new physician prospect calls, which began earlier this year.
As you may recall, through triangulation of new data, we identified several hundred physicians who were treating narcolepsy with stimulants but were not in our call audience. Outreach to these new potential prescribers began in the first half of the year. Some of those physicians have become familiar with Xyrem and are now prescribing it. Another effort that is showing early results is a change in the interaction with patients as they are initially prescribed therapy. During the quarter, we launched through the central pharmacy a nurse welcome call for new patients. Patients have the option to speak with a nurse who will answer questions and address any concerns they may have about their Xyrem prescription before their first shipment.
The initial reaction to this effort suggests it may help to increase the likelihood that patients who have received a Xyrem prescription will fill that prescription.
The welcome call enhances our overall patient offering, reflects our commitment to improve a patient's treatment experience and interaction with the Xyrem Success Program. Another key area of focus for our company continues to be working diligently to ensure that we are in compliance across all of our activities. As you know, last month, we received a warning letter from FDA relating to matters covered by the Form 483 we received in May. I want to assure all of you that we take our responsibility to ensure accurate and timely adverse event reporting very seriously. We have responded to the FDA detailing the many concrete steps we've taken over the past 6 months to address their comments. Since we first learned of the unreported AEs in April, we have been intently focused on making improvements in our systems.
We've worked closely with SDS to revise and implement new procedures at both companies, revised our SOPs and reporting systems, enhanced training of personnel, improved our auditing programs, and made personnel changes in order to prevent any similar situations in the future. We are confident these improvements address the items outlined in the warning letter and ensure that our systems are effective and compliant.
Another significant development for our company during the past few months was the signing of our agreement to combine with Azur Pharma to create Jazz Pharmaceuticals plc. As a reminder, the combined company will have a strong balance sheet as well as a portfolio of 12 products in the US. We estimate it will generate $475 million in revenues and be highly profitable with net cash from operations of at least $200 million, both in its first 12 months.
As we plan for the long-term growth of our company, this transaction represents a significant step forward. Not only will it diversify our revenue stream and increase cash flows, but importantly, it creates an efficient structure and platform to leverage our existing business and acquire new products. The past few months have been an exciting time for both of our organizations as we work toward our anticipated closing of the transaction in the first quarter of 2012. Just last week, a joint S-4 registration statement and preliminary proxy statement were filed, and we are on track at both companies with pre-close activities. We believe this transaction will add significant value to our company, and we encourage all of our investors to carefully review the available information describing it when the proxy statement and prospectus are mailed.
Finally, I wanna publicly welcome Jeff Tobias as our new SVP, Research and Development, and Chief Medical Officer. Jeff joined the company just a few weeks ago to take the reins in R&D as we increase our medical and scientific support for Xyrem and refine our longer-term strategy to develop new products. With over 20 years of experience in the biopharmaceutical industry across a range of therapeutic areas and treatment modalities, Jeff brings new scientific and medical expertise as well as proven leadership to our organization. He has shown he can work effectively in a dynamic company environment, has been involved in business development, and has a passion for the commercial side of the business with our mission of helping patients in mind. Now let me turn the call over to Kate.
Thanks, Bruce, and good afternoon, everyone. I'll briefly summarize the third quarter numbers, review our updated guidance, and comment on the impact of the proposed combination with Azur Pharma. Sales in the third quarter increased to a new record of $72 million from $44 million in the prior year's third quarter. Bruce commented on Xyrem revenue growth, which reflects the impact of pricing and double-digit volume growth. I also wanna comment briefly on Luvox CR, which achieved sales of $9.7 million in the quarter, up significantly from the prior year and from the second quarter of this year. We estimate that approximately $700,000 of the increase was due to wholesaler inventory restocking and that inventories were at normal levels at quarter end.
We were pleased to see maintenance of prescription volumes for this product despite the change in allocation of our sales force's time towards Xyrem, which occurred in July. Last quarter, I mentioned that we expected Luvox CR to come in at the lower end of our guidance range, and today we are confirming that expectation by lowering our guidance slightly. Combined SG&A and R&D expenses for the quarter were $33.8 million. This includes approximately $6 million in costs associated with the Azur Pharma transaction, primarily legal and professional fees. You'll note that our updated full-year expense guidance includes total anticipated transaction-related costs of approximately $10 million-$11 million. Our guidance for non-transaction related expenses is actually reduced somewhat, reflecting continued expense discipline.
Aside from the transaction-related expenses, the $2.5 million sequential increase in SG&A spending reflects higher incentive compensation related to our strong performance, higher sales and marketing expenses aimed at driving sales growth, and increased expenses in our drug safety group. Turning to the balance sheet, I'll remind you that we paid in full our outstanding debt of $33 million in July. As mentioned last quarter, we recorded a loss on extinguishment of that debt of $1.1 million, which included approximately $800,000 of non-cash write-off of unamortized debt issuance costs. We ended the third quarter with $113 million in cash and investments and no debt. Now for our updated guidance for 2011. Xyrem sales guidance has increased to $230 million-$235 million. Guidance on Luvox CR is updated to $31 million-$33 million.
This reflects our continued focus on Xyrem and alignment of sales force priorities with that top corporate goal. Total net sales are now expected to be in the range of $261 million-$268 million. Our combined SG&A and R&D expense guidance for the year is updated to a range of $114 million-$118 million, including approximately $10 million-$11 million in costs associated with the Azur Pharma transaction. Note that approximately $6 million of this was reported in the third quarter. Finally, we are updating our guidance for adjusted net income to be in the range of $160 million-$163 million and adjusted net income per share to be in the range of $3.45-$3.50, a significant increase from last quarter's guidance.
I'd also like to make some comments related to the Azur Pharma transaction, as I know many investors are creating their models for 2012 and beyond. We expect to end this year with approximately 170-175 million of NOLs available to offset future pre-tax income. As a result, we expect to begin paying some cash taxes in 2012. Our book tax rate in 2012 will depend on several factors, the largest of which is the accounting treatment of our NOLs, which remain fully reserved on our balance sheet. Without the merger, we would have expected our book tax rate to be approximately 40%-41%. With the merger, we expect our tax rate to be lower.
For modeling purposes, we've suggested that investors assume a book tax rate in the low- to mid-30s% for 2012 and in the mid-20s% for 2013 and beyond. These numbers exclude the impact of deal-related amortization. We expect to provide updated guidance on the 2012 tax rate on our fourth quarter earnings call in late February, when we will have more clarity around the accounting treatment of the NOLs. The important tax-related points to note are that subject to its closing, the merger is expected to result in a very significant reduction in taxes applicable to the existing combined businesses and therefore significantly greater cash flows.
Future products acquired and developed may receive a greater benefit due to Ireland's 12.5% tax rate, and we expect that cash generated in the future will be freely available for use in the U.S. Establishing an efficient corporate structure and platform for growth is an important step in our strategy to continue to deliver compelling top and bottom line growth and build shareholder value. Thanks again for joining our call today, and I'll now ask the operator to open up the call for your questions.
All right. Ladies and gentlemen, if you'd like to ask a question, simply press star one on your phone's keypad. If you wish to withdraw, you can press star two. Please press star one now to begin. Your first question is from the line of Corey Davis with Jefferies. Please proceed.
Great. Thank you. Kate, while you're on the subject of tax, I'm not sure I caught all of the nuances there. To be clear, you, one, will be able to use all of your NOLs. Is that correct?
Corey, we do expect that we will likely be able to use all the NOLs and the merger did not disturb the NOLs.
Okay. As you're reporting each quarter of 2012, there'll be a departure between a cash tax rate and what I think you call the book tax rate. Is that correct? If so, can you explain that a little bit more?
Yeah, I think that's an important point that you make, Corey. It's quite possible that in 2012, we'll report on our financial statements a higher tax rate than we actually pay, and that difference would be due to usage of the NOLs, which as I mentioned, we expect to end this year with $170 million-$175 million of NOLs.
As you calculate your adjusted EPS, is that tax differential going to show up in the adjusted EPS figure?
We do not expect to be adjusting the cash taxes when we report adjusted EPS. I think that adjusted EPS will likely reflect the book tax rate. We will make comments to the extent that we can about our use of the NOLs as we go through 2012.
Okay. Last question, on the volume growth that you saw in this quarter, another one in the double digits. Any reason not to suspect that this is now a sustainable rate of volume growth in the double-digit range? Sorry.
Corey, this is Bruce. Let me start off the answer, then I'm gonna hand it over to Russell Cox to continue. You know, I'll say, as you think about a long-term product life cycle, if you plot out the effect of a continued strong double-digit growth rate, you get an acceleration of volume, right? You're sort of compounding that effect over time. I don't think we wanna say we know that we'll enjoy this kind of volume growth forever. That's a tough thing to do nine years after a product launch. That's the long-term answer, but let me hand over to Russ to talk about what we're seeing now.
Yeah, Corey, most of the growth that we described for the third quarter is coming from areas like improvements in compliance, improvements in persistency or duration of therapy. We're also seeing some of the programs that we are putting in place, like the Success program, starting to actually pay dividends. While those programs are still very early in terms of their implementation, it's hard to say whether compliance persistency can continue to generate that kind of growth. However, the new Success programs and other focus on Xyrem, we believe will be things that, you know, over the long term, will continue to pay off. That is the plan, and we're gonna continue to work against that.
Great. Thanks. That's all I had.
Next question is from the line of David Amsellem with Piper Jaffray. Please proceed.
Hey, thanks. Just a couple. I wanted to drill down on the initiatives to drive volume growth from doctors new to Xyrem. I guess the question here is, why weren't they prescribing it in the past? Was it lack of awareness or skittishness about the product, or maybe a combination of both? Can you talk more specifically about what you've done to get these doctors to start prescribing the product? Thanks.
Yeah. Thanks, David. To be clear, the physicians that we're speaking about as new prospects are in fact physicians we were not calling on at all. We actually went out and purchased the data on patients who were actually treated by physicians who were treating narcolepsy and treating stimulants, triangulated that data against our current call pattern, and then built out an additional call pattern to make sure that we were targeting those physicians. They're new. Having said that, it takes about, you know, 4-6 months to really get a physician comfortable typically with Xyrem. You're seeing, now we're at that timeframe where we're starting to see the benefits of that. It's our same story. It's consistent with what we've done historically with other physicians, but it's a new set of physicians that we're calling on.
I guess the question here is, what's getting them over the hump? I mean, they're treating narcoleptics already, so they must know about the drug, I would imagine. I guess the question is, what is getting these doctors into the fold, if you will?
Yeah. I would venture to say that a large percentage of them really knew very little about Xyrem to begin with. Some of it is really getting them comfortable with what is the titration schedule, how do you set expectations, how do you work through the central pharmacy to become a prescriber? There is really a learning curve. It's not anything new that we're doing with them, it's just that we're spending time with a new group of physicians, and they're on the regular curve that we've seen historically with other physicians.
Okay. That's helpful. Question on pricing. I mean, any color on how payers have responded to the most recent pricing action, and what does that tell you about your ability to continue to take price aggressively?
Yeah. Based on the current price increase that we implemented, we've not seen any change in payer behavior. We continue to monitor volume, and we continue to monitor the payer environment.
Okay. All right. That's all I have. Thanks.
Your next question's from the line of Gene Mack with Mizuho. Please proceed.
Thanks for taking the questions. First, a couple on the FDA warning letter. Just get that out of the way. Can you talk just a little bit about what the next steps are and how you've responded to FDA? Do they have a certain amount of time to respond back to you of whether or not things were satisfactory? Where you know, what's the scenario tree there in terms of whether they're satisfied or dissatisfied?
Yeah. Gene, good question. There's no defined timeline for FDA to respond to us. You know, as I mentioned, we have sent in our response, and we will be following up with our local district to see if there's any other information we can provide to be helpful. You know, it's important for everyone to realize that, you know, while there's now an exchange of information, the changes we've made, of course, are in effect, right? We're not waiting for a green light to make changes. We've already made many changes. That in our view enhance our compliance and the certainty of accurate and timely AE reporting. That's the most important thing to us.
We now also need to make sure FDA is comfortable with how we've set that up, understands what we're doing and why we're doing it, and understands how we're measuring the effectiveness of the measures we've taken to ensure everything's working as we have designed it to. You know, how long could this take to completely resolve in terms of getting a formal sign-off? It's a little bit hard to predict. Of course, we're putting in place a program that's designed to run effectively over years. It includes, you know, checks we're gonna do on ourselves and other parties we work with over time.
Whether FDA wants to allow time to go by to see that plan is executed well, and what the results of that are, we don't know, and that would be a reasonable thing for them to do. If they were to do that could push off, you know, formal resolution of this for quite some time. In the meantime, we would continue operating the system we've put in place.
You said that you made some personnel changes, which sounds pretty, you know, a little bit like some heads roll. Can you just talk a little bit about, you know, what level those personnel changes were made and how widespread?
Yeah, I certainly didn't use the terminology you did. You know, our job is to make sure we've got all the right resources in place to ensure the effectiveness of our system, including the appropriate level of expertise, the appropriate staffing, the appropriate leadership. As you know, we have a new Chief Medical Officer. That's something we've been talking about for some time that we have launched a search for a head of R&D. We also have a new VP of Drug Safety and Pharmacovigilance. We've put other very talented folks, many of whom were already part of our organization, in positions to ensure that we responded aggressively and effectively and successfully to this problem as soon as we learned about it in April.
Okay. All right. For Kate, the tax rate, the book tax rate that you've provided for guidance purposes, I'm still a little bit confused there. Will that overstate or understate the actual cash tax paid? That might be an easier way for at least me to understand.
Yeah. I would expect that, to the extent that there's a difference between the two, the book tax rate would be higher than the cash tax rate.
Okay.
Overstate taxes.
Okay. Can you talk a little bit also about what if there was any change in the gross-to-net spread during the quarter on Xyrem?
No, no big change. It was consistent.
Okay. Just finally, Bruce, maybe you can talk a little bit about how are you gonna prioritize R&D at this point? You know, what sorts of initiatives might we start to look at near term? How do we think about how you're gonna go about this now?
Yeah, good question, Gene. You know, the way we're looking at R&D is that we would like to invest in programs that we believe could result in near-term marketed products, where those marketed products would be a good fit with our focus, which is in places where we can call on a specialist group of physicians and efficiently commercialize a product that we believe will make a big difference to patients. You know, exactly how and when this will roll out will take some time to determine. You know, we've laid out a long-term strategy that includes beginning to make investments in R&D programs, but I don't think you'll see that overnight.
Okay, great. Thanks. That's it for me.
As a reminder, ladies and gentlemen, if anyone has a question, please press star one on your phone to queue up. Your next question is from the line of Daifei Yang with Aequitas USA. Please proceed.
Hello, and thanks for taking my question. First question is really just related to the housekeeping of Xyrem. What's the current price of Xyrem?
The current price, the bottle price is $2,100-$4,100 per month based on the dose. If you were to assume that patients were compliant and they were taking, you know, 100%, you know, you would be in that average of about $41,000 for somebody who's taking 7.5 grams, which is our average dose. As you know, not everybody is 100% compliant.
Yeah. Okay. Thank you. The second question is, with regards to this mortality rate. We know that because of the underreported adverse event, so you have revised the mortality rate from a lower number, I wanted to say maybe 0.2%, upwards to a number that's slightly over 0.6%. Do you have conversation with FDA, or do you expect to have conversation with FDA with regards to potential labeling change, or you think that's pretty much the end of the discussion on that line?
Well, that's a complex question. There are a lot in there. Let me remind you that the previously unreported all-cause mortality cases were reported to the FDA immediately upon us becoming aware of those. So that happened in the second quarter. In terms of a change in rate, I'll also remind you that virtually all of those cases were in the period 2003 to 2007, with a handful of cases in each of 2008, 2009, and 2010. So the biggest change in the all-cause mortality rate was really in the older years, and in fact gave us a pattern of consistent rate, not increasing rate, over the period from the time of the product launch through the current period.
That information has also been made publicly available. We put that in a peer review journal article that was published in August. Yes, we have continued to make FDA aware of all of our findings as we continue investigating not only why these AEs were not reported on a timely basis, but also what they mean, if anything, from a safety perspective. We certainly gave our top-line conclusions as soon as we had reached them, that we didn't see a new safety signal in the all-cause mortality rate.
Thank you. That's very helpful.
There are no other questions at this time. One more quick reminder, if anyone has a question, please press star one now. All right. Looks like no other questions today. I'd like to turn the call back over to management for closing remarks.
Thank you all again for joining our conference call today. I'd like to remind you that we'll be presenting at two upcoming conferences later this month, the Lazard Capital Markets eighth Annual Healthcare Conference and the Piper Jaffray Healthcare Conference, both in New York. We look forward to seeing those of you who may attend. Thanks, and have a great evening.
Okay, ladies and gentlemen, that concludes today's conference. Thank you for joining us.