Welcome to the Jazz Pharmaceuticals second quarter 2016 earnings conference call. Following an introduction from the company, we will open the call to questions. I will now turn the call over to Kathy Luttrell, Head of Investor Relations at Jazz Pharmaceuticals.
Thank you, Vince, and thank you for joining our investor call. Today, we reported our second quarter 2016 financial results and updated financial guidance in a press release. The release and the slide presentation accompanying this call are available in the Investor section of our website. With me for today's call are Bruce Cozadd, Chairman and CEO, Matt Young, our Chief Financial Officer, Russell Cox, our Chief Operating Officer, Michael Miller, our Head of U.S. Commercial, and Karen Smith, our Global Head of R&D and our Chief Medical Officer. Following some remarks, we'll open the call for your questions. I'd like to remind you that some of the statements we will make on this call relate to future events and future performance rather than historical facts and are forward-looking statements.
Examples of forward-looking statements include statements related to our 2016 financial guidance and goals, our corporate development efforts, future product sales and volume, future litigation and intellectual property-related events, our manufacturing plans, future share repurchases, ongoing and future clinical trials, and other product development activities, including regulatory events and the timing of such events and activities. These forward-looking statements involve numerous risks and uncertainties that could cause actual events, performance, and results to differ materially. These risks and uncertainties are identified and described in today's press release, the slide presentation accompanying this call, under Risk Factors in our Form 10-Q for the quarter ended March 31, and our Form 10-Q for the quarter ended June 30, which we will file shortly. We undertake no duty or obligation to update any forward-looking statements we make today.
On this call, we will discuss several Non-GAAP financial measures, including historical and expected 2016 adjusted net income and the related per share measures, historical and expected 2016 Adjusted SG&A and R&D expenses, and adjusted income tax provision, and expected 2016 net adjusted interest expense. We believe that these Non-GAAP financial measures are helpful in understanding our past financial performance and potential future results. They are not meant to be considered in isolation or as a substitute for comparable reported GAAP measures. Reconciliations of GAAP to Non-GAAP financial measures discussed on this call are included in today's press release and the slide presentation accompanying this call. Both are posted in the Investor section of our website. I'll now turn the call over to Bruce.
Thanks, Kathy. Good afternoon, everyone, and thank you for joining us. We've had a strong 2016 thus far as we continue to build the foundation for future growth by advancing and broadening our portfolio. This has been a successful year on the corporate development front. Last month, we acquired Celator, which brings a near-to-market product candidate, Vyxeos, to our portfolio, as well as Celator's proprietary nanoscale combination drug delivery technology platform, CombiPlex. We completed additional transactions with a license and option agreement, rEVO Biologics, that provide us with opportunities to access attractive product candidates on a worldwide basis to further expand our R&D portfolio. These transactions complement our R&D and commercial expertise in our key therapeutic areas and have the potential to bring innovative products to patients with unmet medical needs.
We are also successfully executing on the early stages of the Defitelio U.S. launch, with product orders from accounts representing over half of the bone marrow transplantation volume in the U.S. We continue to drive toward the accomplishment of our 2016 corporate goals of delivering strong top and bottom-line growth, expanding and advancing our development pipeline, and identifying further innovative assets through corporate development efforts. We remain well positioned to accomplish these goals, which are focused on generating increased shareholder value while executing on our mission of improving patients' lives. I'll now update you on key commercial, legal, regulatory, and clinical development activities, highlighting some upcoming key events, and then turn the call over to Matt to review our financial results for the quarter and provide updated financial guidance. I'll start my comments with our sleep therapeutic area and our lead product, Xyrem.
During the second quarter, we delivered strong Xyrem sales growth. The average number of active Xyrem patients grew to approximately 12,850 in 2Q16 from 12,475 in 2Q15. Xyrem bottle volume growth was 4% versus the same quarter in 2015. We believe Xyrem has further growth potential and note that both bottle volume and patient growth for Xyrem can vary from quarter to quarter. That said, we have observed some recent slowing of narcolepsy diagnosis growth in insurance claims databases. We also see managed care trends that apply increasingly stringent requirements for prior authorizations and reauthorizations for treatment. As we've mentioned, this trend is prevalent in the specialty pharmaceutical or orphan space and has necessitated increased physician office workload to obtain approval for patients to receive their prescriptions.
We believe that our marketing plans, such as the unbranded web-based disease awareness programs, utilization of the Swiss Narcolepsy Scale, and our overall focus on healthcare provider education remain effective tools to foster expansion of narcolepsy diagnosis, and we will be further increasing these efforts. Also, this quarter, we've implemented a new Xyrem field reimbursement support team that will offer expertise to physician practices in navigating the prior authorization and reauthorization payer processes for both the diagnosis and treatment of narcolepsy. We believe this dedicated field support team, along with our clinically focused sales force, physician targeting program, branded advertising, and our satellite symposia, are the most effective approaches to driving Xyrem growth for the remainder of the year. Turning to a brief legal and intellectual property update on Xyrem. Patent litigation continues in the district court in New Jersey.
Recently, the district court determined that it would try all of the patents at issue in the first and second Roxane Laboratories cases together, including patents that were previously bifurcated and stayed, and set trial in this consolidated case for the second quarter of 2017. A separate consolidated case that includes the remaining ANDAs and the litigants is also proceeding. No trial date has been set in that case. With respect to challenges to our patents through the U.S. Patent and Trademark Office Patent Trial and Appeal Board, or PTAB, we were disappointed that PTAB decided last month that all the claims contained in six patents directed to the Xyrem restricted distribution system were considered unpatentable. We are reviewing the decisions to determine whether a request for rehearing by PTAB is warranted, and we expect to appeal these decisions to the United States Court of Appeals for the Federal Circuit.
The appellate process typically takes 12-18 months. Recall that earlier this year, an IPR petition on the seventh Orange Book-listed patent directed to the restricted distribution system for Xyrem, the 963 patent, was submitted to PTAB, and PTAB instituted review on only three of its 28 claims. As a result, the remaining 25 claims of the nine-six-three patent continue to be in force. I'd like to remind you that the nine-six-three patent is not yet at issue in litigation with Roxane. Finally, last month, we received a decision from PTAB to deny institution of an IPR on our 306 patent, covering a method to avoid drug-to-drug interaction between Xyrem and valproate, removing the only remaining pending IPR challenge to the DDI family of patents. We are pleased with this outcome and remain confident in the strength of our Xyrem patent estate.
Now turning to our development program for JZP-110. We have observed an increase in the enrollment rate in our phase lll OSA studies following the protocol amendments that we implemented earlier this year. We are now expecting preliminary data from the two phase lll OSA studies in first quarter 2017. The enrollment rate in the phase lll narcolepsy study is improving but progressing slower than our earlier projections. We now anticipate preliminary data in this trial mid-year 2017. Subject to the results of these phase lll trials, we anticipate an NDA submission for narcolepsy and OSA in late 2017. Now on to the Hematology Oncology franchise. Erwinaze. Although the demand for Erwinaze remains strong, I'll remind you that because of constrained manufacturing capacity, we have not been able to build sufficient inventory levels to absorb potential supply disruptions.
During the second quarter, we continued to experience supply challenges, although we were able to meet patient demand. We expect that we will continue to experience inventory and supply challenges, which may result in temporary disruptions in our ability to supply certain markets, including the U.S., from time to time. Now I'll turn to Defitelio. Our sales force was well prepared for the U.S. launch, and stocking and initial demand in the second quarter was strong. We received positive responses from healthcare providers, payers, and institutions following the launch, as they recognized the value that Defitelio brings to patients diagnosed with veno-occlusive disease, or VOD, with multi-organ dysfunction, or MOD. We had 83 accounts order product. These accounts represent approximately 55% of the total transplant volume in the U.S. 75% of these accounts reordered in the second quarter, an indication of patient on drug versus initial stocking.
While we don't have patient-level data, based on the institutions ordering, we believe that the majority of patients receiving Defitelio are pediatric, as expected. While nearly 80% of the accounts were part of the treatment IND study, it is a positive sign to see early adoption in multiple sites that did not have previous experience in the IND. This quarter, U.S. sales initiatives were focused on educating healthcare providers on the recognition of the signs and symptoms of VOD, diagnosis and treatment of VOD with MOD, and the clinical benefits of Defitelio. Our market access group also focused on educating payers and institutional stakeholders on the health economics and value of Defitelio.
Last week, the U.S. Centers for Medicare & Medicaid Services approved a new technology add-on payment, or NTAP, for Defitelio after determining that the product met the NTAP criteria for newness, substantial clinical improvement relative to existing therapies, and specific cost thresholds. Beginning October first, NTAP will provide incremental reimbursement to the standard diagnosis-related group-based reimbursement, which is, should support Medicare beneficiaries' access to Defitelio. We believe that the NTAP approval reinforces the benefit of Defitelio across the payer landscape. Our efforts in the EU remain focused on providing medical education on early identification of the warning signs of VOD pathophysiology, appropriate diagnosis, and the importance of prompt treatment of severe VOD with Defitelio. We observed strong EU rest of world growth in the second quarter and increased use of Defitelio in line with the labeled indication for the treatment of severe VOD.
We observed strong growth in EU rest of world sales for first half 2016 versus first half 2015. In May, the European Society for Blood and Marrow Transplantation released revised diagnostic and severity guidelines for VOD. We believe these guidelines will be helpful to healthcare providers in the EU as they define one standard diagnostic set of criteria for adult patients, and importantly, provide physicians with objective criteria for defining the severity of VOD. We are in the process of startup activities for the global Defitelio study and prevention of VOD in high-risk patients following HSCT, and we anticipate that the first patient will be enrolled into the study in the fourth quarter. Now some comments on Vyxeos. We've welcomed over 20 new employees from Celator to Jazz.
At this point, our primary goal as a combined company is to remain focused on bringing Vyxeos to patients as quickly as possible. Therefore, we are working together towards the completion of a high-quality NDA submission package for Vyxeos for the treatment of AML. We are planning to initiate a rolling NDA submission later this quarter and anticipate completing the submission in late 2016 or early 2017. Vyxeos has Fast Track designation in the U.S., and we plan to request priority review. I'll remind you that Vyxeos was granted breakthrough therapy designation by the FDA for the treatment of adults with therapy-related AML or AML with myelodysplasia-related changes. We are currently evaluating the timing for our European submission and will provide an update on expected timing later this year.
Additionally, we will be conducting a full assessment of the multiple development opportunities in our integrated development portfolio to make thoughtful decisions on future development of the Celator product candidates and the use of the CombiPlex technology platform. We'll provide updates after we work through this process. Now a brief manufacturing update. In June, we received FDA approval for our manufacturing facility in Athlone, Ireland, where we plan to manufacture Xyrem and materials for development activities. This facility provides a secondary source for Xyrem manufacturing, and we expect that shipments of Xyrem from this facility to the U.S. will begin this quarter. We look forward to the rest of 2016 as we continue to execute on key financial, commercial, and R&D goals that have the potential to create significant value.
We continue to invest in our key products, Xyrem, Erwinaze, Defitelio and Prialt, our product candidates JZP-110 and Vyxeos, and other focused development programs that have the potential to generate important new therapeutic options for patients. Matt, let me now turn the call over to you.
Thanks, Bruce, and good afternoon, everyone. We are pleased with our financial performance in the second quarter of 2016 as total revenues increased 14%, driven primarily by higher sales of Xyrem, Erwinaze and Defitelio compared to the second quarter of 2015. We expect strong top-line growth for 2016 and are updating our total revenue guidance in the range of $1.485 billion-$1.53 billion, compared to previous guidance of $1.49 billion-$1.55 billion. Net sales of Xyrem for the first quarter were $281 million, up 13% from $248 million in the second quarter of last year.
We are maintaining our guidance for Xyrem net product sales in the range of $1.095 billion-$1.13 billion and now expect mid- to high single-digit volume growth during 2016. Turning to Erwinaze, second quarter worldwide net sales were $50 million, up 8% compared to net sales of $46 million in the second quarter of 2015. As Bruce noted, while we successfully managed patient supply during the second quarter, we anticipate that we will continue to experience supply constraints for the remainder of 2016. As a result, we are lowering our guidance for Erwinaze net sales to a range of $190 million-$215 million compared to previous guidance of $200 million-$225 million for 2016.
Worldwide Defitelio net sales were $33 million in the second quarter, an increase of $18 million compared to $15 million in the second quarter of 2015. Sales were driven by strong Europe and rest of world volume growth and a $9.5 million contribution from the initial launch of Defitelio in the U.S. We are updating our guidance for Defitelio defibrotide net sales for 2016 to a range of $105 million-$125 million compared to previous guidance of $100 million-$125 million, with approximately $80 million-$90 million in Europe, rest of world sales and $25 million-$35 million in U.S. sales. As a reminder, Defitelio treats patients with an ultra-rare disease and dosing is weight-based, which can increase intra-quarter variability, just as we have seen with Erwinaze.
Prialt net sales for the second quarter of 2016 increased to $8 million compared to $7 million in the same period of 2015. Turning to operating expenses, Adjusted SG&A expenses for the second quarter of 2016 were $99 million or 26% of revenue, compared to $88 million or 27% of revenue in the same period of 2015. The increase in Adjusted SG&A was primarily due to higher headcount and an increase in other expenses resulting from expansion of our business, including Defitelio launch expenses. Adjusted R&D expenses for the second quarter of 2016 were $36 million or 9% of revenues, compared to $24 million or 7% of revenues for 2015. The increase in R&D expenses was due primarily to higher costs of clinical studies and outside services for the development of our product candidate, JZP-110, and line extensions for our existing products.
As a result of the Celator acquisition, we anticipate increasing operating expenses as we prepare for U.S. and European regulatory submissions and start preparations for the potential 2017 launch of Vyxeos in the U.S.
Therefore, we are increasing our 2016 guidance for Adjusted SG&A expenses to a range of $400 million-$415 million from a previous range of $390 million-$410 million, and are also increasing 2016 guidance for adjusted R&D expenses to a range of $135 million-$145 million from a previous range of $115 million-$130 million. In the second quarter, we spent $29 million to repurchase shares at an average cost of $142.65 per ordinary share, leaving us with approximately $97 million under our $300 million share repurchase program. We temporarily suspended share repurchases when we announced the Celator transaction.
The timing and amount of any future share repurchases will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, and market conditions. As of June 30, the outstanding principal balance of our long-term debt was $1.3 billion. Cash, cash equivalents, and investments were $916 million. On July 12, we completed the Celator Pharmaceuticals acquisition for approximately $1.5 billion. We also amended our existing credit agreement in conjunction with the closing, increasing the borrowings available under a revolving credit facility from $750 million to $1.25 billion and extending the maturity date of both the term loan and revolving credit facilities to July 2021. We used borrowings of $1 billion under the revolving credit facility and cash on hand to fund the acquisition of Celator.
As a result, the outstanding principal balance of our long-term debt increased to $2.3 billion, and we had approximately $700 million in total cash investments and undrawn revolver available following the financing. With the $1 billion increase in our debt outstanding following the Celator acquisition and reduced cash balance, we expect our net adjusted interest expense for 2016 to be approximately $40 million. Turning to adjusted net income and EPS, we have modified the calculation of our Non-GAAP income tax provision in connection with the SEC's May 2016 guidance regarding Non-GAAP financial measures. We've updated our 2015 and 2016 Non-GAAP interim period results and full year 2016 financial guidance to reflect this modification.
The modified calculation no longer includes the cash tax benefits we realized during the year from net operating losses and credits and deductible share-based compensation, and now includes other deferred taxes and changes in unrecognized tax benefits. This modification does not change the amount of cash taxes that we expect to pay in 2016 or in the future or impact our future expected cash flows. Using this modified calculation, adjusted net income was $163 million or $2.63 per diluted share for the second quarter of 2016. Adjusted net income using our prior method for calculating the Non-GAAP income tax provision would have been $174 million or $2.82 per diluted share, a difference of $11 million or $0.19 per diluted share.
Adjusted net income for the second quarter of 2015 was $144 million or $2.28 per diluted share. Under our prior method for this calculation, adjusted net income for the second quarter of 2015 was reported as $152 million or $2.41 per diluted share. We are updating our guidance for Adjusted EPS to a range of $9.90-$10.30 per diluted share compared to prior guidance of $11.10-$11.50.
This reflects a reduction in 2016 Adjusted EPS guidance of $1.20 due to increased expenses following the Celator acquisition, including an increase in SG&A and R&D expenses, as well as increase in net interest expense totaling approximately $0.55 per diluted share, the modification of the non-reported Non-GAAP income tax provision, which reduced our estimated EPS by a further approximately $0.55 per diluted share, and the impact of global supply constraints for Erwinaze and slightly higher R&D expenses associated with JZP-110 and line extension programs. In closing, we are pleased with our progress year to date. We remain focused on opportunities to provide organic growth of our key products and advance our current product pipeline. We continue to evaluate opportunities to diversify our portfolio.
We're excited to work with our new colleagues from Celator to maximize the value of Vyxeos and the CombiPlex platform. The Celator acquisition brings another source of diversification and growth consistent with our strategy, and we believe that this is yet another step to further our mission of providing meaningful products to patients while delivering long-term growth and returns to our shareholders. Thank you for joining us on the call today, and I'll now ask Kathy to make a brief comment about our Q&A session.
Thanks, Matt. We request that you limit your questions to one at a time and then feel free to reenter the queue if you have further questions. With that said, I'll turn the call back to the Operator to open the line for your questioning.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press the star, then the one key on your touchtone phone. If your question has been answered or you wish to remove yourself from queue, you can do so by pressing the pound key. If you have a question, please press star and then one. Our first question is from Louise Chen of Guggenheim. Your line is open.
Hi, thanks for taking my question. I'm just curious, more color on the Xyrem volume growth this quarter and some of the comments that you made regarding that. How should we think about narcolepsy diagnosis and prior auths for the remainder of the year and how that reconciles with your Xyrem volume growth objective of mid- to high-single-digit? Thanks.
Yeah. Louise, this is Bruce. You know, the guidance we're giving of mid- to high-single digits reflects all the information we have right now. You know, at 4% volume growth through the first half of the year, we're now heading for a back half of the year where we have a little bit easier comparison to last year, if you remember the implementation of our REMS that started in late August of 2015. I think that gets us to the growth rate that we're projecting. We are having to work harder for the growth of Xyrem.
We don't see the tailwind of a rapid increase in diagnosis in narcolepsy, which honestly is what we had seen over some of the recent years. You know, perhaps I would say in part due to our focused investments in that area. We noted the continuing trend we see in increased scrutiny, I think across the board for specialty pharmaceuticals, not specific to Xyrem. We are growing. We expect to continue to grow, but we just did wanna note some of those additional pressures.
Thank you.
Thank you. Our next question is from David Buck of Northland Capital Markets. Your line is open.
Yes, thanks for taking the question. If I could just maybe sneak in two quick ones. First on Erwinaze supply. Can you talk a little bit about what the impact there was on sales in the quarter? And, you know, what's the ability to think about a backup supply for that looking out the next 12 months? And for Matt, just a quick question on the change in tax rate. What's the implication for actual cash flow from operations that you expect from that going forward?
Okay. David, let me take the first part on Erwinaze supply in terms of what impact that has on our sales. You know, at this point, I think, you know, supply sort of limits the growth we can expect in sales. Any vial we can produce, we can sell. Our real job is to make sure we do satisfy product demand. I think we were able to do that in the second quarter. That doesn't allow us to build up as much inventory at quarter end as we would like to have on hand to make it easy for people to order. Our ability to do that at the end of each of the next couple quarters, I think, will be similarly constrained. It's very dependent on ongoing production.
In terms of your question about a backup supply, and how we handle this over the next 12 months, we and our partner, on the supply side are working very hard, to make improvements in, production processes, better utilize available capacity, bring all resources to bear to make sure, we do our primary job, which is, helping patients, with, acute lymphoblastic leukemia who are allergic to Oncaspar and therefore require treatment, with Erwinaze. You know, sourcing Erwinaze from a separate, manufacturing facility is not something that would be possible in any short period of time. That would be very much a longer-term effort. All of our efforts, for near-term, supply really revolve around, cooperative efforts with our existing supplier.
Matt, let me hand the question about cash impact of the tax accounting change over to you.
Yeah, David, there is no impact in the cash tax we expect to pay, nor impact on cash flow. It's merely, again, complying with the SEC's guidance as it relates to an accounting convention here, which will lead to some increased volatility in our adjusted cash tax or adjusted tax rate as it will more closely track GAAP as a result, which means you'll have, you know, one-time events and discrete items that may influence quarter-over-quarter reporting. In general, the relative difference between the previously reported cash tax number and this new number will be fairly consistent over a longer period of time, meaning 4%-5% differential, though again, the actual cash taxes we will pay are completely unaffected.
Just to recap, I guess, Matt, what, so the cash tax rate you expect to pay for 2016 is what versus the new Non-GAAP tax rate?
Roughly, a five percentage point difference. It would have been in, you know, the 19.5% range for this quarter versus, again, 24.9%. Again, for the year, you know, the difference is fairly similar. But we would have been in the 19%-20% range for the year and will still be from a cash tax perspective. The number for the year, on the new basis, will be in the, you know, low 20s%.
Okay. Thank you.
Thank you. Our next question is from Gregg Gilbert of Deutsche Bank. Your line is open.
Thanks. A couple on Vyxeos. Can you help us with any context around pricing for a product like this and the number of cycles you'd expect? How soon could you be ready to ship the product if it's approved ahead of schedule? What are your thoughts for now on combination therapy trials to consider for the future? Thanks.
Couple parts to your question there, Gregg. On the first one, pricing, just too early for us to comment on pricing at this point. As you saw, with the U.S. launch of Defitelio, that's probably information we'll provide at the time of launch, and I suspect not before then. On being ready to ship, you know, our goal, as I said, is to get product to patients as soon as we can, and I'm confident the combined Celator Jazz team is doing everything it can in that regard. Part of that is putting together a high-quality NDA submission. But as you point out, it's really getting ready for all of it, supplying product to patients, among those things. You know, I'm really proud of how we did that on Defitelio.
You know, we got approval of the product and had it available for shipment just days later.
We'll try to do the same with this product. Again, we think it's a product with an important survival benefit, and we're gonna wanna get that to patients as soon as we can. In terms of the potential for combination trials, probably too early to comment at this point, having just completed the acquisition last month and with everyone very focused on moving quickly to that regulatory submission. You know, I think we'll take a little more time to think about that and give a more thoughtful response on a future call.
Okay, thanks.
Thank you. Our next question is from Jason Gerberry of Leerink Partners. Your line is open, sir.
Hey, good evening. Thanks for taking my question. Bruce, just curious, you think it was on the 1Q call mentioned that we might get an update on Xyrem lifecycle programs by the end of the year. Just kinda curious, as you think about a settlement process that's unresolved, how you reconcile those two things, and if you're still planning on providing that update by end of year. Thanks.
Yeah, Jason, good question. I think I've said a couple times this year that this might be a year where we get more color on some of our sodium oxybate-related lifecycle management programs. That was really driven by two things, where we might be in the process of litigation on the ANDAs side or potential settlement of that litigation. It was also driven by the fact that enough progress on those programs might also prompt us to want to or need to do more disclosure around that.
I would say that's still the case, as we head toward the latter half of 2016 that it is certainly a possibility that there'd be more color about what we're doing on sodium oxybate beyond the existing product, as we move to the back half of the year.
Okay, thanks.
Thank you. Our next question is from Marc Goodman of UBS. Your line is open.
Hi, this is Ami on behalf of Marc. Could you give us some more clarity around Defitelio with respect to where you're seeing utilization of the drug and what's sort of the composition of the types of patients that are using the drug and also from an insurance coverage perspective? The NTAP additional support, how does that impact either utilization or the net price realization on the drug? Thank you.
Okay, Ami, let me hand that over to Mike at least with respect to the U.S. commercialization of Defitelio.
Thanks, Bruce. As we said, there are 83 unique accounts that initially ordered Defitelio in Q2, and about 75% of them reordered. Typically in these accounts, they only reorder when there is a patient, so it's pretty indicative of drug inpatients. We don't have the information yet down to a patient-level basis on adult versus ped. We believe that the majority is ped, and we do that by looking at the type of centers that are ordering or reordering. On the formulary side, with regard to the institution, the P&T committees have gone very well. We haven't had any pushback on that.
I think our preparation in terms of having our health economic and our budget impact model ready at launch helped us a great deal in that regard. We have been successful so far. Then last on NTAP. NTAP, as Bruce touched on it's a supplemental payment for about a period of 2-3 years during the DRG catch-up period. It takes 2 years for the DRG to catch up on it. It counts for about half the cost. This is a supplemental payment for about half the cost. So an adult, that's about $75,000 for a 21-day treatment. That is not a anything we. In other words, we realize the full top-line effect of that use in the patient.
The CMS supplements that payment to the institution.
If I could just ask a clarification question. The CMS supplements 50% and the other 50% is paid by?
The institution.
The institution.
Correct.
Okay. All right. Thank you.
Yeah. Ami, just important to remember in that, you know, the institution is paid generally for these patients on a, you know, per transplant basis. Of course, not all of the transplant patients develop severe VOD and require treatment with Defitelio. So in those patients where Defitelio treatment is required, you know, this helps them cover some of that cost. Of course, we think it also produces better outcomes for those patients and for that transplant center. That's an important source of, I think, business for those transplant centers is to be able to show their payers what kind of outcomes they're getting altogether.
That's right, Bruce. The other is that there are not that many Medicare-aged patients.
In that patient group. I do think the spillover to private and commercial pay is important, and it's a real validation of the drug.
Thank you.
Thank you. Our next question is from Douglas Tsao of Barclays. Your line is open.
Hi, this is Morgan Williams on for Doug. I just wanted to ask a few questions. Number one, does the approval and subsequent, I guess, launch of the Ireland manufacturing facility have any implications in terms of the tax impact? Number two, I know that, Bruce, it sounded like you were confident in the potential success of all the educational tools around Xyrem reimbursement. Has the kind of slowing in the diagnosis of narcolepsy impacted your thinking around potential contracting for the product going forward? Finally, if you could just offer some thoughts on the relative strength of the 963 patent and whether that provides some sort of comfort in the go-forward durability of Xyrem.
Okay. Couple parts to the question there. On tax impact of supply of Xyrem out of the Athlone, Ireland plant, you know, this gives us an additional source of supply. It won't be our primary source of supply, and I wouldn't expect to see any meaningful change in our overall economics there. On the Xyrem reimbursement related efforts we've made, you know, our goal here is to make sure that patients who are properly diagnosed with narcolepsy for whom Xyrem would be good treatment do have access to the drug. We wanna make sure we do everything we can to enable physicians to provide the best therapy to their patients. You know, we think those tools matter.
I don't think that specifically relates to anything we would consider in the form of contracting. On the 963 patent, I certainly can't and don't want to comment on the strength of particular patents while we're in the midst of litigation with multiple parties. You know, it is helpful to us to have many patents in multiple families, patents that have already survived a PTAB challenge, either not been picked up or only picked up in part. We think all of that contributes to our confidence that we have a durable asset in Xyrem.
Okay. Thanks, Bruce.
Thank you. Our next question is from Gary Nachman of BMO Capital Markets. Your line is open.
Hi, good afternoon. Bruce, Defitelio ex U.S. Had a really nice uptick. Could you give a little more color on where you're getting the most traction there and how sustainable you think that is going forward, understanding there are some fluctuations quarter to quarter, and any new countries you plan to enter sometime soon? Thanks.
Yeah, Gary, thanks. Thanks for the question. I'm really proud of our ex-U.S. team and their efforts around Defitelio. You know, it's nice to be able to talk about our early success with the U.S. launch. Of course, our European team's been at this for a couple of years, and I think all of their efforts are really paying off. Maybe I can have Russ comment a little bit on what we're seeing over there that's contributing to the strength and what we might expect going forward.
Yeah, Gary. One area in particular that's doing quite well this year is that we saw a lot of movement from prophylaxis last year in the U.K., and the U.K. Is actually now focused on what they can do for treatment, and we're seeing that pick up in a pretty dramatic way. I think the team's done a really nice job of identifying how to do that and something that they've built that's sustainable going forward for the U.K.. That's where a lot of improvement is going on. I'll also say there's a number of other countries that had sort of been waxing and waning that are picking up nicely as well. Very nice effort.
Okay. Any new countries that you plan on entering sometime soon, or do you think you've sort of maxed out in Europe?
Nothing substantial that we'll be announcing soon.
Just remember, Gary, part of this process was really converting patients over to commercial over time, you know, with full pricing and reimbursement approvals country by country. It wasn't necessarily thinking about it as off to on, country by country.
Okay. Got it. Thanks.
Thanks. Our next question is from David Amsellem of Piper Jaffray. Your line is open.
Thanks. Question on 110. You cited the pace of enrollment and the new timelines. Just wondering if you're contemplating any changes to the patient inclusion criteria for any of the studies and also if you're contemplating adding new sites. Thanks.
Maybe I'll have Karen answer that question on JZP-110.
Sure. The studies are obviously blinded, randomized, placebo-controlled studies, and they're, as I say, narcolepsy patients. Narcolepsy in particular is a rare disease, so they're difficult to recruit studies. Originally, I think when we designed the studies, they had very strict enrollment criteria, and this led to screen failure rates that we immediately identified and addressed. We put in place a number of modifications that did include such things as increasing the number of sites, and it also included such things as broadening the inclusion and exclusion criteria. What we have seen is an increase in the OSA study enrollment rate. While we did also see an increase in the narcolepsy enrollment rate, this was slower than our earlier projections, and is not where we would like it to be at this point in time.
We have made the modifications that we believe are appropriate to continue to recruit with pace and hit our timelines for the studies and our filing.
Okay. Can you maybe elaborate on just what the issues were in the narcolepsy studies, and what do you think's been the single biggest thing you've done to get enrollment back on track?
For the narcolepsy studies in particular, were things like a BMI that we increased to enable patients to enroll that may have otherwise been excluded. There were also cardiovascular parameters that we broadened to enable those patients to be enrolled. One of the mitigation strategies we deployed was to go back and look at the patients who had previously been excluded and invite them to reenter the trial, assuming that they met the other criteria, and a number of those patients did actually do that. We did also open additional sites.
Thank you.
Yeah, just as a reminder, if it's helpful, David, to think about this, particularly on the OSA side, you know, when we give you timelines to get to top-line data, of course you gotta back up from that data analysis. You gotta back up from that, the treatment period, which for a number of these trials is 12 weeks. We're actually pretty close to finishing the input side of the equation, at least on the OSA side. We've got pretty good confidence around that. As Karen said, narcolepsy a little bit behind that.
It's also very difficult for narcolepsy patients who might be stable on a given treatment, and the potential to go into a placebo arm could be concerning for some patients and could be a deterrent, for example, to entering into a clinical trial. I think in particular for narcolepsy patients, once they're stable, it's often taken a while to actually get there, and they are reticent to potentially take themselves off treatment.
Thank you. Our next question is from Stephen Willey of Goldman Sachs. Your line is open.
Thanks, and good afternoon, guys. Just wanted to follow up on Defitelio U.S. launch and any early feedback you might have around physician education. I know VOD detection was one area that maybe needed some work. Just wondering how that's been going.
Maybe I'll let Mike address that.
Yeah. Thanks, Bruce. We had a very nicely attended satellite symposia that right after we saw a nice uptake with some centers. We do believe that our educational objectives are on target. That is now getting expanded quite a bit this quarter with speaker programs and other things in terms of reach out to the community, reach out to patient advocacy groups and transplant support, the staff support that really, I think, raised the awareness around the signs and symptoms of VOD for early detection.
Great. Thanks.
Thank you. Our next question is from Annabel Samimy of Stifel. Your line is open.
Hi. Thanks for taking my question. I had a quick question on Vyxeos. I guess originally it's been sort of targeted to elderly high-risk patients. Coming out of ASCO, it looked like some physicians were talking about how it could have potentially much broader utility in this population given the toxicity of current therapy. I just wanted to get your sense on that. If I can quickly ask on Defitelio in the U.S., you know, what exactly is the reason behind more pediatric patients right now? Will the NTAP payment help with the adult population at all? Can you just give us a little bit of color when we might see the transition to the adult population since it's weight-based dosing and has an impact?
All right. On the first question, Annabel, on Vyxeos and the right patient population for that, maybe I'll have Karen comment on that.
Thanks, Bruce. Vyxeos is a fixed-dose, liposomal formulation. It's a synergistic 5-to-1 molar ratio of cytarabine and daunorubicin, two well-established chemotherapeutic agents. The studies of the phase III registrational study was conducted in older patients, so between the ages of 60 and 75 years, which is aligned to the actual disease of AML itself, where the average age is around 67 years. These are generally older patients, and, remembering also that this study was in high risk or secondary AML patients. I think that, the overall results were extremely good. There was, certainly overall survival was the primary endpoint, and there was, statistical significance achieved for Vyxeos, compared to 7+3, which is the standardized free drug, if you like, of, cytarabine and daunorubicin.
In terms of could you apply this in other patient groups or other patient populations or other diseases, I think the actual Vyxeos itself is definitely something we would consider. Likewise for the platform could be utilized more broadly, definitely something that we are currently looking at.
Mike, maybe you could comment on the rationale for more early uptake in pediatric and the potential for the adult side, including any impact of NTAP.
Sure. First, VOD actually happens at a higher rate in pediatric transplant patients than it happens in adults.
That is one factor. The other is that, because of our success with Erwinaze, we have good relationships in the ped centers. I think naturally, those relationships are working to the extent that we can get in there and get face-to-face with our customers more efficiently. The NTAP does not present a huge swath of new patients for us. I think it did create some very nice access for those Medicare patients. I think that as I said earlier, I think the spillover to private and commercial pay will be equally or more beneficial for the brand and our ability for more patients to access the drug.
Okay, great. Thank you.
Thank you. Our next question is from Ken Cacciatore of Cowen & Company. Your line is open.
Thanks. Bruce, just wondering with the recent PTAB decisions, what possibly is left for all parties to know about ahead of litigation? Is there. I know you have to or there will be appeals to these PTAB decisions, but just trying to understand, we've gone now a few years, and clearly having these PTABs out there and discovery out there, I would imagine all parties didn't fully understand what they were dealing with. Can you give us a sense now that the PTAB decisions have been issued, really, what is outstanding for all parties to know about this litigation before you head to trial?
Yeah. I think, you know, we've talked about the importance of patents. We've talked about the importance of the IPR process at PTAB as separate from, but having an impact on the litigation. We've also talked about on the regulatory side, the process for getting approval, the need to have a REMS, either a single shared system or a way of REMS. I think all of those pieces go into the mix in thinking about, you know, the relative parties' positions as we go through this. You know, there are lots of moving pieces there. I think the recent IPR decisions and the non-pickup of an IPR challenge on the DDI side are a couple more pieces of the puzzle coming together.
There's a lot that goes on in litigation, motions different parties have, and, you know, we've got some new pieces of the puzzle moving forward in litigation that previously hadn't been a part of what we thought would be the first Roxane trial. It's sort of been consolidated now. There's some more work to do, which is one of the reasons the trial date is now pushed back to second quarter of next year. Remember, we had previously been saying it could be as early as third quarter this year. Well, frankly, we started the year saying it could be much earlier than that. There are still, Ken, a number of moving pieces here that could have an impact on how the parties view the situation.
Got it. Thank you.
Thank you. Our next question is from David Maris of Wells Fargo. Your line is open, sir.
Hi, this is Katey Brennan in for David. Thank you for taking the question. I don't mean to not give credit where it's due, but I will throw a corporate development question your way. Following the progress you guys made in the past few months, you know, what are your thoughts on business development going forward? If I can ask just for one clarification from Matt, I'm not sure if I missed it. But I did see that there's a $0.55 impact from the tax reporting change that is a difference between your previous guidance and your current guidance. How much of the rest of that $0.65 change in the midpoint is from Celator, and how much is from the other changes in the business that you mentioned?
Yeah, Katey Brennan, maybe I'll ask Matt Young to just take that second one first. That's a pretty easy factual answer. Then we'll come back to BD. No problem with your question. You don't just have to give us credit for past deals. As you know, our appetite remains strong to continue to invest our cash flow, use our balance sheet to bring additional assets into the company, and I think it's a great question. Matt, you wanna hit the breakdown of the $0.65 first and then take that?
Yeah. There's a $1.20 adjustment to our, you know, prior guidance to our current guidance. Again, $0.55 was related to the change in the tax Non-GAAP ETR. There was also $0.55 related to the Celator transaction, and then you'd have the remaining $0.10 related again to Erwinaze supply issues, which as you saw in our revenue guidance, we took down Erwinaze revenue guidance for the year and some related some slightly higher R&D expense related to JZP-110 and some other line extension programs would make up the remainder.
Matt, you wanna take the biz dev, part of the question?
Sure. Just as it relates to BD, again, we're very excited to have completed a few acquisitions, licensing transactions and investments this year between both Celator being the largest or most notable of those, but also with the other transactions with PharmaEssentia or rEVO and otherwise. We're deeply committed to continuing to bring new products to market and are very active in evaluating new opportunities. You may have also seen we did
Increase our revolver by $500 million. While we did use some of our cash and balance sheet capacity, we continue to believe we have the firepower to do some meaningful transactions and also believe it's a favorable business development environment. We are certainly gonna make sure we get the value out of the things we buy and are excited to be working with the Celator team to move Vyxeos along toward patients as fast as we can. We fully intend to continue to add growth and diversification drivers to the business.
Great. Thank you.
Thank you. Our next question is from John Boris of SunTrust. Your line is open.
Thanks. Thanks for taking the questions and congrats on the results. On Vyxeos, there was some pretty good data that was presented in Europe at one of the conferences on some subgroup analyses that were done on the product. Is there any plan to present additional data at ASH? Seems like the timeline that Celator had was to file in 3Q. I think you're filing before year-end. Just any read-through on that. Just back to a question on the REMS patents on Xyrem. FDA obviously has an ability to potentially help a company develop an alternative REMS, especially if a product could potentially be safer.
Just your thoughts around that and linking it to your strategy to develop your line extension on Xyrem and how you're thinking about that going forward, the competitive threat and, you know, kind of your own strategy to develop your own asset going forward.
Yeah. Maybe I'll take those in reverse order. You know, on the REMS side, we have a REMS that we believe is very effective at doing what REMS are supposed to do, which is, you know, balancing the benefit of bringing an important treatment to patients who can benefit from that treatment while also minimizing the risk. In this case, both the risk to potential patients of inappropriate use or risk to others through, you know, misuse of this particular product. You know, we've got a lot of experience with our REMS. We recently upgraded to the final REMS in the third quarter of last year.
You know, we continue to collect data on the performance of our REMS, both that we submit to FDA as part of our ongoing assessment, but also to make sure we're doing our job well. We believe that REMS does that. You know, are there alternative REMS that could also successfully balance benefit and risk of Xyrem-like products? You know, conceivably, but I would say we have high confidence that our particular approach works very well. On Vyxeos timing, it is true that Celator had been working toward a goal of a third quarter submission. We've revised that timeline in consultation with Celator to look to start a rolling submission in the third quarter, but get all of it in by end of year or early next year.
We think that's the best strategy to achieve our real objective, which is a product on market as opposed to just getting the fastest submission in. A lot of credit to the Celator team for the great work they did during the time that they were unblinding, analyzing data, going through an M&A process, integrating companies, and continuing to move this program forward. We think they've done a really nice job. All I would say is together, we've determined that this is the best strategy to achieve the ultimate goal, which is product available to patients. On Vyxeos and ASH, I would say you can count on us being at ASH on Vyxeos, on Erwinaze, and Defitelio. It's a really important meeting for us.
I think in addition to having some good data across products, we'll be featuring a team on the hem-on side that we've continued to strengthen over time. Even just since last year's ASH, you know, I think we've made a tremendous amount of progress on many fronts. If any of you are at ASH, I hope you'll get a chance to see that in person.
Thanks.
Thank you. Our next question is from Irina Koffler of Mizuho. Your line is open.
Hi. Thanks for taking the questions. I was wondering if you could comment on the, Xyrem pricing environment as we head into next year. Do you feel it's a little bit more restrictive or about the same? Then with respect to the additional expense, for Celator, as we ramp into the back half of the year, is it gonna be kind of, mostly, you know, higher in the fourth quarter, lower in the third quarter, lumpy? How should we think about the build?
Yeah. Irina, thanks for the questions. On Xyrem, I would say no particular change in our view of the pricing environment for that product. Mike, anything you wanna add there?
No, I'd say that, you know, I think, as with all specialty and drugs in the orphan space, there's increasingly stringent PAs and reauths. The, you know, this is the space. What is good is that our approval rate is still very steady at 80%, so we're very pleased with that. Bruce touched on the field reimbursement team that'll be out this quarter. We're very excited about that, helping practices with the PAs and the reauths, so for both diagnosis and treatment.
On your question on Celator related expense, Irina, I would say, you know, the interest expense part of that is pretty straightforward to figure out, us taking on additional expense associated with Celator and now expanding some of our capabilities to finish off this program and then prepare for a launch. You know, some of that expense will ramp up as we get through the back end of the year, and certainly as we head into 2017 to be ready to do a high quality launch.
You know, I can't say there won't be any lumpiness in there, but I think that's the best way to think about it, is you know calculate the financial impact of the increase in debt and the reduction in cash, and then factor in some level of ongoing expense. You know, there is some expense that goes away, you know, a little lack of duplicative expense across the two organizations. I think in general, you know, we'll be adding some expense as we push this to the market.
Okay, thank you.
Operator, this will be our last question now. Thank you.
Thank you, ma'am. Our last question is from Jessica Fye of JP Morgan. Your line is open.
Hey, guys. Thanks for taking my question. I had a couple. First, you know, based on the comments you had about biz dev and still having a strong appetite, can you just remind us what your highest kind of net debt to EBITDA ratio you would go up to is? Second, both in the heme/onc space, what's the ideal label you would like to see for Vyxeos? Might you try to get a broader label than what you studied, and is that even possible? Also on Defitelio, just trying to reconcile the patient numbers when you say the majority of use is coming from peds. I see that they get VOD more often, but there are just so many fewer stem cell transplants in peds. I'm just trying to kind of reconcile that. Maybe I'll stop there. Thank you.
Yeah. Maybe I'll have Mike take that last one first, in terms of the comment on pediatric use of Defitelio.
Sure. Yeah, as I said, the incidence in peds is higher in VOD, but there are fewer patients. I would agree with that. Also keep in mind that this is a weight-based drug, and so you're gonna use less vials per patient in the ped space. In pediatric transplant, they are aggressive with their treatment. That's what drives a lot of the VOD that you see in kids. These kids are primarily ALL, but some AML. It is certainly a beginning for us that we're very proud of. I think going back again to our access and knowledge in the ped space, but you know, more importantly, we're looking forward to driving that adoption in the adult space.
I would say, Jess, on this, remember that as we got ready to launch, we sort of forecast that we expected more uptake quickly in the pediatric side. Just a reminder that under the treatment IND, we also saw a little more weighting toward the pediatric side.
Okay.
On the question about potential label for Vyxeos, I think since we're headed for an ongoing dialogue from FDA, probably won't comment publicly on that. You know, again, this is we think a pretty important clinical result that we saw in a disease where we haven't seen a lot of you know, meaningful improvements in objective data, in this case, survival. So you know, we'll certainly be focused on appropriate label for the product, but again, the goal is get it to patients as soon as we can. Maybe I'll have Matt address your comment on capacity for additional business development activity.
Yeah. As it relates to that, Jessica, we have mentioned before and would still say we'd be comfortable pushing up our leverage to, as we've said, as high as, you know, five or so times for the right transaction. I do think it's quite dependent on the type of acquisition we're doing and the types of, you know, reliability and predictability of the cash flows of that acquisition and sort of what would the de-leveraging profile look like. As we've said before, we, you know, reflect on what consideration to use based on sort of the risk and size associated with any particular asset, but we're absolutely prepared to lever up in the right situation.
Got it. Thank you.
All right. Operator, thank you for joining us today for this call. We will be participating in the Morgan Stanley healthcare conference next month, and we hope to see many of you there. This now will end our call.