Good day, ladies and gentlemen. Welcome to the Jazz Pharmaceuticals Conference Call. Following some prepared remarks, we will open the call to questions. I will now turn the call over to Ami Knoefler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals. Please proceed.
Welcome to the Jazz Pharmaceuticals 1st quarter 2011 financial results and business update conference call. Our results for the quarter, an update on our commercial and development activities, and updated financial guidance for 2011 were reported in a press release issued earlier today. The release is available on our company website. With me from the company are Bruce Cozadd, Chairman and CEO, Kathryn Falberg, CFO, and Russell Cox, SVP of Sales and Marketing. Following some introductory 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 and guidance, and our products and product candidates.
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 detailed in our SEC filings, including under the heading Risk Factors. Our SEC filings and reports are available on our website. We plan to file our Form 10-Q for the quarter ended March 31st, 2011 with the SEC in the next week. Now, let me turn the call over to Bruce Cozadd, Chairman and CEO, for opening remarks.
Thank you, Ami. Good afternoon, everyone, and thanks for joining our call today. Our 1st quarter results reflect the tremendous energy and enthusiasm of our company around the potential of Xyrem and our renewed focus on driving growth of the product in narcolepsy. Combined net sales of both of our products grew 46% over the 1st quarter of 2010, and volume growth was strong for both products. I'm very pleased to report that Xyrem volumes were up 12% over the prior year period and were down only modestly from the 4th quarter of 2010 as annual reimbursement plan changes had a smaller impact than in prior years. During the quarter, we continued to execute on various initiatives aimed at improving the overall patient experience.
In particular, the central pharmacy is working to ensure that new patients receive calls from a registered nurse to answer questions about the therapy and to ensure that patients are aware of the various assistance programs available to them. We are working hard with physicians to improve expectation setting with patients in an effort to improve patient compliance and persistence with Xyrem. We are also pleased by the passion and commitment of our sales force in rolling out our new initiatives to improve physician communication with patients. We continue to be very encouraged by the Xyrem volume trends and look forward to reporting further progress in future quarters. Regarding sodium oxybate supply for Xyrem, we and Siegfried remain on track for FDA approval of the site later this year.
Siegfried has manufactured the registration batches of sodium oxybate, the required stability data have been collected and analyzed, and we are currently planning to file this quarter for regulatory approval of the site. As a reminder, we have sufficient inventory on hand for all of our projected needs for this year and into next year. Finally, in keeping with our commitment to helping patients with narcolepsy, I'm very pleased to report that beginning this quarter, we are contributing to a charitable organization, the Caring Voice Coalition, to help ensure access to medicines for patients with narcolepsy. Turning to the pipeline, we have some important updates about the JZP-6 and JZP-8 programs. Regarding JZP-6, we have been evaluating next steps for the program in light of the complete response letter we received from FDA last October and additional interactions with the agency.
We have now concluded that the additional clinical trials requested by FDA would take years to complete, would require a significant investment, and would not sufficiently reduce regulatory uncertainty. While we continue to believe that Xyrem could be an important treatment option for fibromyalgia patients and treating physicians, we do not, at this time, believe that funding this clinical work would be a good use of our resources. Therefore, unless there is a significant change in the requirements for pre-approval clinical trials and/or we are able to gain additional regulatory certainty, we do not intend to move forward with additional clinical work. I want to express our gratitude to all of the fibromyalgia patients and investigators who participated in our development program over the years and acknowledge the efforts of many employees in conducting the clinical program.
This is clearly a disappointing outcome given the unmet patient need in fibromyalgia and the results of our clinical trials. Separately, we continue to evaluate next steps for JZP-8, our product candidate for acute repetitive seizures in epilepsy patients. We've recently received new input from outside advisors that suggested significant enhancements to the development plan to improve the probability of regulatory success. We also have additional information about the competitive landscape. Given this input and the associated cost and timing, we are reevaluating whether and how to proceed with future development for the intranasal clonazepam program. These pipeline developments are unfortunate, as developing new products is an important part of our corporate strategy. Over time, we intend to reinvigorate our R&D efforts. In the meantime, we are pleased to be serving patients with OCD and patients with narcolepsy, a serious medical condition where we have a firm and growing corporate commitment.
Now let me turn the call over to Kate to discuss our 1st quarter financial results and updated 2011 guidance.
Thanks, Bruce. 2011 is off to a great start, as evidenced by our results for the quarter and increased guidance. Total Xyrem net sales for the quarter were $42.8 million, up 49% from the 1st quarter of 2010. Net sales were negatively affected by higher gross to nets compared to the year-ago 1st quarter, due primarily to higher government rebates and discounts and higher specialty pharmacy program costs. For the balance of the year, we expect gross to nets to be more in line with last year, due in part to more favorable terms under our new contract with SDS. Net sales of Luvox CR for the quarter were $7.1 million, up 29% from the 1st quarter of last year. This increase was driven primarily by increased prescription volumes.
Gross margin for the quarter was 94%, compared to about 92% in 2010, reflecting the impact of higher Xyrem sales as a percentage of total sales. SG&A expenses for the quarter were $19.9 million, compared to $16.8 million for the prior year period. This increase is primarily due to higher headcount-related expenses, including stock-based compensation. The quarter also included $1.1 million in expenses associated with the departure of our former president. The remainder of the increase was due to higher legal and IT expenses. First quarter R&D expenses were $3.7 million, compared to $6.2 million in 2010, primarily due to lower spending on pipeline programs. Combined SG&A and R&D was essentially flat versus the prior year 1st quarter at $23.6 million.
Adjusted net income in the quarter was $26.8 million, or $0.59 per diluted share, a significant increase from adjusted net income of $6.1 million, or $0.18 per diluted share in the 1st quarter of 2010. Please refer to our press release for GAAP results and reconciliation of GAAP and non-GAAP financial measures. Our balance sheet continues to grow stronger as we ended the quarter with $65 million in cash against $37 million of long-term debt. Now, turning to our financial guidance for the year. We're updating our guidance today to reflect the stronger Xyrem sales growth we saw in the 1st quarter and the price increase of last month. We now expect Xyrem net sales to be in the range of $205 million-$215 million, reflecting growth of 44%-51% over 2010.
Luvox CR sales guidance is unchanged, and it incorporates the price increase implemented yesterday. Total net sales are now expected to be $237 million-$250 million, representing growth of 39%-47% over 2010. We will be evaluating R&D spending in light of the recent pipeline decisions and are not ready today to update that guidance specifically. We now expect that combined operating expenses will be lower than our prior guidance. We are estimating that SG&A and R&D expenses combined for the year are likely to be in a range of $105 million-$110 million, which is lower than the prior combined guidance of $107 million-$117 million.
Based on higher expected sales and lower expected expenses, our bottom-line guidance has increased significantly, with adjusted net income now in the range of $136 million-$146 million and adjusted net income per diluted share of $2.95-$3.10, an increase of 90%-100% over 2010. This growth rate is more than double the expected sales growth rate as we continue to realize the benefit of significant operating leverage in our business model. Thanks again for joining our call today, and I'll now ask the operator to open up the call for your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your touchtone phone. If your question has been answered or you would like to withdraw your question, you may press star two. Please press star one to begin. Our 1st question comes from the line of Rich Silver with Barclays Capital. Go ahead.
Good afternoon. I'm wondering if you could update us on your thoughts around business development and whether there have been any changes in light of the pipeline decisions.
Hi, Rich. This is Kate. No change in the strategy here. You know, we're still looking for new products that we can efficiently commercialize to specialty audiences. We're, you know, continue to be committed to developing products as an important part of our corporate strategy. Over time, you know, we do intend to bring in new product candidates when we can find ones that fit with our strategy, commercially and where the clinical costs, timelines, and risks are things that we're comfortable with. You know, we've always said that we're not in the business of doing early stage discovery type work or very early stage R&D. We continue to look at things that are, you know, further along in development or already on the market.
Okay. A 2nd question on the Xyrem guidance, in light of the fact that guidance has increased to reflect the April price increase. What does that mean in terms of further price increases, in the guidance? Are they included or not included, further price increases this year?
Yeah, Rich, you know, the reason for the increased guidance is largely due to the fact that we had a good, strong 1st quarter. We continue to see solid volume growth of the products. You'll recall that our growth rate last year was, you know, varied over the four quarters between 5%-8%. You know, a little better than that in the 1st quarter. We're not sure that 12% is a good number to use for the full year because we think, you know, part of that growth was doing a better job on the 4th quarter, 1st quarter dip we had seen in prior years. So that piece of the improvement, we don't think recurs for the other three quarters. But nonetheless, we saw very solid volume growth, and that puts us on track to achieve higher net sales.
You know, specifically to your question about what does that assume about further price increases, as we did when we 1st gave guidance for 2011, we're trying to give you guidance that encompasses our views of total revenue, which is volume plus price. In general, we don't comment specifically on plans for future price increases.
Just one last one on the KKR lockup. I believe that expires in July. Is that correct? Is there any possibility that that's, I don't know, renewed or any chance that that could be extended? Just any kind of color around the lockup terms.
Well, Rich, the NOL lockup agreement, which was signed, in fact, by a number of our larger board represented investors almost two years ago, does expire in July. I wouldn't say that's specific to KKR. You know, I would not expect that we would need to or want to extend that agreement. Maybe I'll have Kate explain a little bit about why.
Yeah. To add a little background, we entered this year with $320 million of NOLs. As you can see from our guidance today, we're, you know, eating into those NOLs at a fairly rapid clip. We're at this point, you know, pretty confident that we'll be able to fully utilize those NOLs. The way the rules work, if there was a Section 382 ownership change based on where our market cap is in this range, we don't see that there would be any significant limitation on our ability to run those NOLs out.
Okay. Thank you.
Our next question comes from the line of Bill Tanner with Lazard Capital Markets. Go ahead.
Thanks for taking the question. Very nice quarter. Bruce, just on you sort of answered the question I was gonna ask in terms of the sequential year-over-year increase in volume growth. You mentioned that managing better the dip from the 4th quarter to the 1st quarter. Could you elaborate a little bit on that? I mean, what was actually done? 'Cause I know you guys have called out historically this is something that's been seen. Is it something that goes throughout or through most of the 1st quarter? Meaning, would you still have seen, Did you still see, you know, pretty strong growth maybe in the back half, back part of the 1st quarter where it really wouldn't have been so much attributable to just managing that dip? Just trying to understand a little bit better, I'm sure as you guys are, what's the real organic run rate?
Yeah. Bill, let me give the short answer, which is, I think the growth we've seen was very strong even without that.
Yes.
I don't mean to single that out as the only reason, but we've got Russell Cox, our SVP Sales and Marketing, with us here in the room. Let me have Russ take that question for you.
Yeah. Thanks, Bill. As you know, we historically have seen that 1st quarter drop from the 4th quarter. While I can say that we managed it better, it's not that we didn't see any dip at all. It just wasn't quite as dramatic as in previous years. Having said that, if you were to sort of back out what would be the expected dip from historical years, we're still looking at single digit, high single digit growth, so still pretty sustainable.
Okay. Maybe as it relates, maybe it's a question for Kate, just in terms of the OpEx. I mean, lumping them together, and I appreciate the fact that, you know, there's still some uncertain times about thinking about the R&D spend. But, you know, is it conceivable as we look at the sum total's been lowered a little bit, maybe moving a little bit of or increasing the spend on G&A and dialing down R&D or as we think about the original guidance, how does that relate to what's been, I guess, lumped together here?
Yeah, Bill. We're thinking about the investments that we're making to support the commercial business, and the investments we need to make to protect the business. We're weighing resource allocation kind of as we speak, and we're ready today to figure out exactly which line item on the P&L things are gonna fall on.
It's conceivable, maybe overly simplistic way to think about it, is taking a little bit from what you would have spent on R&D and plugging it into the G&A line.
Yeah, that's quite conceivable.
Then last question, just on the margins, I mean, obviously strong margins in the quarter. Kate called out that because of the mix, it's higher than 90%, is that just kinda the standard boilerplate, Jazz greater than 90% gross margin? Should we really be looking at something at least as good as what you saw in the 1st quarter for the balance of the year?
Yeah. We don't see anything that would significantly change the number from the trend that it's been on, Bill.
Yep.
Occasionally, we have some international sales that move the number around a little bit, which is why we don't really pin down the guidance too specifically.
Okay. Okay, thanks very much.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your touch tone phone. Our next question comes from the line of Corey Davis with Jefferies. Go ahead.
Thanks very much. I wanted to ask a little bit about business development and a little bit about R&D spend in the context of earnings, 'cause now that you guys for the past couple quarters have nicely raised guidance, beat and raised, it's becoming addictive, this earnings upside. Anything you do BD-wise that enhances the pipeline, which sounds like there's not much left there, is gonna be by definition dilutive. I guess how do you balance kinda the Street's insatiable desire for continued earnings upside with kind of the need to look out five, 10 years from now and building a real company by in-licensing things?
Well, Corey, I think you did.
By real, I didn't mean you're not real, no.
I thought you did a nice job of answering the question at the end with the need to balance long term with short term. You know, I think the best way to think about it is we have anticipated and continue to anticipate some level of R&D investment that we can afford that's consistent with you know, strong earnings growth at the bottom line, which we've been experiencing, that will contribute to a higher growth rate for the company over the long term. I think our job is to find the best places to invest those dollars. We take that very seriously. You know, I think the announcements we've made about our pipeline should show you that we're serious about that we aren't gonna spend money just to spend money.
We wanna spend money to bring products to market that will help patients, products that are consistent with our commercial focus and that we feel confident will make a difference to the company and its shareholders in the future. Today, unfortunately, we're in a position where we've probably got more dollars available to fund that than we have projects we're confident moving forward. That can change, and our job is to find those right opportunities or to rethink existing opportunities and make them fit. To say that anything would necessarily be dilutive to prior estimates, you know, we've given estimates that don't assume no spending on R&D. They do assume some spending on R&D. If we thought about doing a transaction later in the year, it might be that we do have money already in our guidance to fund some of that R&D. I'm not gonna accept as a given your supposition that it's necessarily gonna take our guidance down.
On the volume growth for Xyrem, do you have any sense for what mix that 12% might comprise new patients versus dose creep and/or improved compliance among existing patients?
Yeah. If you were to break down the growth, we're seeing a really nice improvement in patients coming back to therapy who had been on therapy before. We're also seeing a very nice improvement in what I would characterize as true compliance. As you know, we put a nursing program in place that was geared to be able to have more meaningful conversations with patients while they're starting therapy and setting expectations. We worked very hard with physicians to make sure that they also are having the right conversations with patients, and it appears to be paying off.
Great. That's all I have. Thank you.
Thanks, Corey.
Ladies and gentlemen, we have no further questions at this time. I'd like to turn the call back over to Ms. Knoefler for any closing remarks. Please proceed.
Thanks again for joining our conference call today. We look forward to seeing you all at upcoming conferences and meetings. As a reminder, we're scheduled to present at the Bank of America Merrill Lynch Health Care Conference on May 10th and at the Jefferies 2011 Global Healthcare Conference in June. Thanks, and have a great afternoon.
Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.