Jazz Pharmaceuticals plc Q3 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2021 Jazz Pharmaceuticals Earnings Conference Call. Operator instructions. I would now like to turn the conference over to your host, Ms. Andrea Flynn, Head of Investor Relations. Ma'am, please go ahead.

Thank you, and good afternoon, everyone. Today, Jazz Pharmaceuticals reported its third quarter 2021 financial results. The slide presentation accompanying this webcast is available on the Investors section of our website. Investors may also refer to the press release we issued earlier today, which is also posted to our website. On the call today are Bruce Cozadd, Chairman and Chief Executive Officer; Renee Gala, Executive Vice President and Chief Financial Officer; Dan Swisher, President; and Rob Iannone, Executive Vice President, R&D and Chief Medical Officer. Kim Sablich, Executive Vice President and General Manager of North America; and Phil Jochelson, Neuroscience Therapeutic Head, will join for Q&A. On Slide 2, I'd like to remind you that today's webcast includes forward-looking statements, such as those related to our future financial and operating results, growth potential and anticipated development and commercialization milestones and goals, which involve risks and uncertainties that could cause actual events, performance and results to differ materially from those contained in these forward-looking statements. We encourage you to review the statements contained in today's press release, in our slide deck and in our latest SEC disclosure documents, which identify certain factors that may cause the company's actual events, performance and results to differ materially from those contained in the forward-looking statements made on today's webcast. We undertake no duty or obligation to update our forward-looking statements. Turning to Slide 3. On this webcast, we'll discuss non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are included in today's press release and the slide deck available on the Investors section of our website. I'll now turn the call over to Bruce.

Thanks, Andrea. Good afternoon, everyone, and thank you for joining us today. I'll start on Slide 5. We remain laser-focused on executing our strategy across commercial, R&D and corporate development, positioning Jazz to deliver sustained growth as we continue to build our high-value portfolio of commercial and clinical stage therapies. In the third quarter, we continued to make progress in our transition to a diversified innovative biopharma company by focusing on our three primary pillars. First, growing sales of existing products in our commercial portfolio, including through indication and geographic expansion. The market-leading adoption of Xywav for narcolepsy and top-tier launch of Zepzelca in small cell lung cancer highlight our commercial execution across both our neuroscience and oncology therapeutic areas. The recent approval and launch of Xywav for idiopathic hypersomnia, or IH, showcases our ability to expand to new indications, in this case, where there are no other FDA-approved therapies. Further, our progress in securing access and reimbursement for Epidiolex across major European markets demonstrates our team's capabilities outside the U.S. Our acquisition of GW Pharmaceuticals epitomizes our second strategic pillar, acquiring differentiated commercial products and late-stage programs. This acquisition brought in a high-growth, durable commercial product in Epidiolex and expanded our R&D portfolio. Our third pillar is pursuing pipeline development of differentiated therapies. Excluding the acquisition of GW, since 2015, our team has increased our pipeline assets fourfold, resulting in 11 product approvals. Now with the addition of the GW pipeline and cannabinoid platform, we are excited about a more robust pipeline that will further enhance our R&D productivity. Turning to several key highlights this quarter. In 2020, we established an aggressive target of completing five commercial launches in 2020 and 2021. I'm pleased to announce that earlier this month, we launched Xywav for IH in adults, which completes that goal. This represents a major milestone for Jazz, underscoring our ability to advance therapies from concept to commercialization and successfully execute on launches of differentiated products that address critical patient needs. The launch of Xywav for IH provides a significant growth opportunity for our oxybate franchise, which we view as a durable core component of Jazz's long-term value that has multiple Orange Book-listed patents extending through 2033. We continue to expect that a majority of oxybate patients across all approved indications will benefit from Xywav in 2023, which accounts for branded and generic higher sodium oxybate therapies entering the market. With respect to the entry of authorized generic Xyrem, we plan to provide guidance for 2022, as usual, on our fourth quarter earnings call. At that time, we anticipate providing more information on the Xyrem authorized generic launch. The integration of GW continues to move ahead. As I noted in the past, there is a superb cultural fit between the Jazz and GW teams. The acquisition is proving to be highly complementary to our existing commercial portfolio and added the GW cannabinoid platform and science to our R&D pipeline. That said, we acknowledge there is work to be done. While we have continued to grow Epidiolex in the U.S., there have been challenges due to the COVID-19 pandemic. Dan will provide more detail about how our commercial team is addressing these challenges to support further Epidiolex growth in the U.S. We continue to strengthen the durability of Epidiolex and now have 20 Orange Book-listed patents with the majority extending through 2035. We are also generating additional IP, including a composition of matter-like patent that we expect will be issued later this year and listed in the Orange Book in the first quarter of 2022. This patent would expire in 2039. I want to be very clear: we remain excited by the potential long-term value creation that the GW acquisition can deliver. Our confidence in Epidiolex's blockbuster potential and its importance as a component of our commercial portfolio has only increased since we brought it in-house. Turning to oncology. Our Zepzelca team is executing a top-tier commercial launch. We are also advancing a robust clinical development plan and Rob will provide more color on our R&D efforts for Zepzelca and across our portfolio later in the call. On June 30, we were pleased to announce approval of Rylaze under FDA's real-time oncology review. While we're early in the launch, we believe that Rylaze will become the standard of care for patients who need a non-E. coli-derived asparaginase. With respect to our financial performance, our third quarter delivered a 39% increase in total revenues compared to the same quarter last year. We continue to diversify our revenue with more than 50% of net product sales coming from products launched or acquired since 2019, in stark contrast to a year ago when the same metric was just 8%. These newer products are not only innovative medicines that address critical needs for patients with neurologic disorders and cancer. They are also durable, long-lived therapies that support our strategy of building a diversified high-growth commercial portfolio. Our strong cash flow and disciplined capital allocation is enabling us to invest in the growth of our business while staying on track to meet our deleveraging goal. With a strong foundation, exciting new opportunities and continued execution against our plan, I remain highly confident in Jazz's future. I'll now turn the call over to Dan for an overview of our commercial performance, after which Rob will share an update on progress across our R&D programs. Renee will provide a financial overview, and then we'll open the call to Q&A. Dan, over to you.

Thanks, Bruce. Well, I'm excited to share the progress across our commercial portfolio. So starting with neuroscience, we saw strong momentum during the third quarter for our oxybate franchise. Average active oxybate patients increased to approximately 16,000 in the quarter, a 6% increase over the same period last year. And we exited the quarter with approximately 6,000 active Xywav patients, up from approximately 5,100 at the end of the second quarter. We see significant opportunity for Xywav to continue to grow in narcolepsy and remain focused on educating physicians and patients about the lifelong burden of high sodium intake, particularly in a patient population like this one with an increased risk of cardiovascular comorbidities. In addition to the strong adoption of Xywav from existing Xyrem patients, we continue to see the large majority of oxybate naive patients being prescribed Xywav as opposed to Xyrem. As Slide 7 illustrates, we've achieved market-leading adoption for Xywav in narcolepsy relative to launches of other next-generation neuroscience products. This speaks to the strong product profile, which includes the FDA's published findings of the clinical superiority of Xywav to Xyrem based on greater safety because of reduced sodium as well as our deep understanding of the sleep space and our ability to successfully drive adoption of new therapies. We believe the IH indication will drive further growth of Xywav. Our commercial launch began on November 1, and a replay of our October webcast discussing the commercial launch strategy of Xywav for IH is available on our corporate website for those who missed it. As we roll out this launch, our initial focus is on driving awareness and adoption among existing oxybate prescribers and the approximately 37,000 people who have been diagnosed with IH and are actively seeking health care. Expanding the market beyond diagnosed IH patients who are actively seeking treatment provides us with a longer-term growth opportunity. And we estimate that the total diagnosed IH patient population is likely close to that of the diagnosed narcolepsy market, which is approximately 70,000 to 80,000 patients. As a reminder, beginning with our fourth quarter and 2021 year-end reporting, we will share the breakdown of the number of Xywav patients based on their diagnosis of either narcolepsy or IH. Moving to Epidiolex. This is our first full quarter with the product since the close of the GW acquisition. Epidiolex net product sales were $160.4 million, a 21% increase over the same quarter in 2020 despite the ongoing impact of COVID-19. COVID-19 continues to put short-term pressure on Epidiolex growth. There are several factors related to the pandemic that are at play. On a macro level, pediatric new prescriptions have been disproportionately impacted by COVID relative to other specialties over the last 12 months, as the chart on Slide 8 illustrates. Epidiolex growth has been affected by this trend. Reports from the field indicate that due to COVID-19 and the lack of access to vaccines, especially for children under 12 years of age, many parents are hesitant to bring their children into an office setting and risk COVID exposure or change antiepilepsy treatment regimens and risk breakthrough seizures. These dynamics have negatively impacted new patient starts, the majority of which are pediatric patients. At the same time, promotional visits to institutional centers in the U.S. are down across the industry. We see this playing out with Epidiolex. Through the first three quarters of 2021 relative to 2019, our average number of total monthly sales interactions with health care providers were down 44% overall, with face-to-face interactions down 71%. This has a notable negative impact on the growth rate of a newer product like Epidiolex, where education and in-office support for physicians with little or no product experience help expand trial usage and adoption. The impact here is not limited to Epidiolex, as sales across other antiepileptic drugs with similar indications to Epidiolex have been flat in recent quarters. While there are challenges, our team has made steady progress in driving adoption in our three current indications: Dravet syndrome, Lennox-Gastaut syndrome and tuberous sclerosis complex, or TSC. We continue to have high persistency rates among patients who begin therapy, and we see opportunity for additional patient growth across these indications. There has been strong adoption of Epidiolex in large epilepsy centers, and we have increased our reach now to smaller centers and general neurology practices. As we expect COVID-19 pressures to ease in the U.S. and now with younger children becoming eligible to receive COVID vaccines, we expect to see an upturn in both patients visiting their health care providers to discuss new treatment options and our ability to provide in-person education to physicians, the combination of which we believe will contribute significantly to Epidiolex growth. Based on positive trends in new and unique prescribers as well as feedback from our prescribers, we are confident that we will continue to grow the Epidiolex prescriber base. In response to the current environment, we've implemented a number of virtual educational initiatives for health care providers and patients to further their understanding of Epidiolex's unique product profile and mechanism of action in the anti-epileptic drug class. In recent market research among prescribers, approximately 40% of respondents indicate they are moving Epidiolex up in their treatment algorithm. We believe this is underpinned by more prescribers having experience with Epidiolex over time and gaining confidence in the product. There's also a very large unmet need in refractory epilepsies. In the U.S. alone, there are approximately 160,000 treatment-resistant pediatric epilepsy patients and approximately 1 million treatment-resistant epilepsy patients overall. Many of these patients have rare pediatric onset epilepsy syndromes for which no FDA-approved treatment exists specific to that particular syndrome. Epidiolex has the potential to treat a broad range of seizure types. The goal of our development program is to add to that existing body of evidence. Our planned registrational trial in epilepsy with myoclonic-atonic seizures, or EMAS, will provide data in this seizure type. In addition, we continue to invest in company-sponsored trials and to support investigator-initiated studies to evaluate the efficacy and safety of Epidiolex in different epilepsy subtypes and across different end points. We also see a significant opportunity for Epidiolex growth coming from markets outside the U.S. Looking at Slide 10, we have been extremely pleased with our progress in Europe. We have secured favorable pricing and access to date, and national reimbursement is in place in four of the five largest European markets, including Germany, the U.K., Italy and Spain. In those four markets, pricing is greater than 70% of the U.S. wholesale acquisition price. In addition, we anticipate commercial launch in France next year. Overall, we remain excited about the future growth potential of Epidiolex. While we are currently navigating short-term headwinds, we are confident that with Epidiolex's unique mechanism of action, its ability to be combined with other therapies and increasing positive experiences in real-world settings, Epidiolex can become a standard of care for treatment-resistant epilepsies. Now turning to oncology and Zepzelca. Our team has done an outstanding job on the launch of this innovative therapy. As the graph on Slide 11 shows, net sales of Zepzelca substantially outperformed the launches of other comparable oncology products. We continue to see strong growth in demand for Zepzelca in the third quarter with net product sales of $71.7 million. As noted in our press release, we have lowered our return provision to reflect actual experience. This had the effect of increasing the quarter's net sales number by approximately $10 million. Excluding this adjustment, third quarter net product sales increased approximately 10% compared to the second quarter. As you can see on the chart on Slide 12, Zepzelca is now the treatment of choice in second-line small cell lung cancer, and we're pleased that Zepzelca's share in this setting continues to increase, taking market share from topotecan and immuno-oncology products used as monotherapy. We continue to see near-term growth opportunities as we expect Zepzelca will continue to gain share among patients being rechallenged with platinum-based chemotherapies or receiving other chemotherapy regimens. Now moving to Rylaze on Slide 13, our internally developed recombinant erwinia asparaginase therapy launched in mid-July. Third quarter net product sales were $20.7 million. Initial feedback from accounts is encouraging, and we have received positive reports on the ease of both ordering and dose preparation as well as our support services. In terms of the market dynamics, Erwinaze was still available in the supply channel through mid-September, which included the last imported batch of Erwinaze sold by Clinigen that FDA allowed the importation of in May. We believe the overwhelming majority of Erwinaze supply was used up by the end of August, and there was a notable uptick in Rylaze orders beginning in September. To support the launch, we're executing numerous commercialization activities to educate health care professionals about the clinical profile and the administration of Rylaze. And we're working to place Rylaze on institutional formularies and into their regular ordering systems. In summary, having delivered on the Xywav for narcolepsy and Zepzelca launches, we are confident in our commercialization team's ability to achieve successful launches for Rylaze and Xywav in IH. And while we've been facing some near-term headwinds from COVID for Epidiolex, we expect to be able to drive growth for this brand and across our product portfolio in future quarters and to deliver meaningful value as we transform the lives of patients and their families. I'm now going to turn the call over to Rob for an update on our development programs. Rob?

Thank you, Dan. On Slide 15, we've detailed key clinical programs in our pipeline. Starting with our neuroscience development programs, the integration between our Jazz and GW R&D teams is progressing really well. We are advancing multiple therapies across our neuroscience portfolio, including a number of programs emerging from the GW cannabinoid platform. Epidiolex is currently approved to treat seizures associated with three refractory epilepsy disorders. We remain on track to initiate a registrational Phase III trial for a fourth indication, epilepsy with myoclonic-atonic seizures, or EMAS, in the first half of 2022. EMAS is characterized by generalized myoclonic-atonic seizures. This trial will provide the first randomized, controlled clinical data with Epidiolex in this seizure type, which we believe will provide further data on the potential effectiveness of Epidiolex in treating a broad range of seizure disorders. Turning to nabiximols. The program has three active clinical trials focused on multiple sclerosis-related spasticity. We expect data from the first trial, which is a smaller, shorter trial relative to the other two, in the first half of 2022. If results from this first trial are positive, there is the potential for a regulatory submission in the U.S. in the next 18 to 24 months. We expect data from the other two trials, which have larger sample sizes, to read out in late 2022 and early 2023. On JZP-385, we recently initiated our Phase II clinical trial for JZP-385 in essential tremor and expect data to read out in the first half of 2024. In the U.S. and top five European markets, it's estimated that there are approximately 2 million people diagnosed with essential tremor, with about 0.5 million being drug treated. We are on track to initiate our Phase II trial for JZP-150, a fatty acid amide hydrolase, or FAAH inhibitor, in post-traumatic stress disorder by the end of this year. Now moving to oncology. I'd like to start with Zepzelca and update our development plans in small cell lung cancer and other potential indications. This includes four clinical trials that are underway or will be initiated in early 2022. In collaboration with our partner Roche, we are supporting a Phase III trial to evaluate first-line use of Zepzelca in combination with atezolizumab, or Tecentriq, compared to Tecentriq alone as maintenance therapy in patients with extensive-stage small cell lung cancer after completion of induction chemotherapy. This trial has already been initiated and is now listed on clinicaltrials.gov. We anticipate the first patient will be enrolled later this year. Other trials include a confirmatory trial in second-line small cell lung cancer being run by our partner PharmaMar, expected to initiate later this year; a Phase II basket trial to explore efficacy and safety of lurbinectedin monotherapy in patients with select advanced and metastatic solid tumors that we expect to initiate in early 2022; and a Phase IV observational study in small-cell lung cancer that is underway. We expect the Phase IV observational study to provide additional data regarding the efficacy of Zepzelca in certain populations, including those patients considered to be platinum-sensitive, who are often re-treated with platinum-based chemotherapy in the second line. These patients did particularly well with Zepzelca as seen in the cohort of patients that supported accelerated approval. Further evidence of improved outcomes across a large number of platinum-sensitive patients would provide even stronger rationale for expanding the use of Zepzelca in this key second-line setting as platinum re-treatment is the second most used therapy behind Zepzelca. Moving to Rylaze. We received FDA approval in June prior to the completion of our clinical trial through the real-time oncology review process, which allowed us to prioritize making this therapy available to patients. We took Rylaze from first-in-human trials to approval in just 2.5 years. We have that same urgency as we advance the development program. We are very pleased to have received real-time oncology review status yet again, this time to submit an sBLA to update our label to intramuscular Monday, Wednesday, Friday dosing schedule, a schedule that is more in line with current clinical practice, and this is a high priority for the program. We expect to complete the sBLA submission in early 2022. The ongoing trial is also assessing intravenous administration of Rylaze, which is common for asparaginase in Europe and other geographies. We anticipate the data from our current development program will support regulatory submissions in Europe. We are moving rapidly to submit in mid-2022 for both the IM and IV routes of administration, with potential approvals in Europe beginning in 2023. We are presenting data from the Rylaze trial at the upcoming American Society of Hematology Annual Meeting in December, including findings from the important 25, 25, 50 milligram IM dosing regimen from 52 patients. I'll wrap up by highlighting that we have significantly advanced our combined R&D capabilities and productivity and we have an incredibly talented team in place. As I've outlined here today, multiple late-stage trials and registrational trials are ongoing or expected to begin soon. As we enter 2022, we look forward to sharing updates on our earlier-stage development programs and research initiatives. I'll now turn the call over to Renee.

Thanks, Rob. Full financial results are available in our press release and 10-Q and several key metrics are highlighted on Slides 17 and 18. On today's call, I'll discuss our overall financial performance and provide additional color around our updated guidance. We have made significant strides in transforming our business through the first three quarters of 2021. We're well positioned to finish the year with positive momentum entering 2022. We remain on track for substantial annual revenue growth this year and for the first time expect to exceed $3 billion in annual revenue. This growth was demonstrated in our third quarter revenue results of $838 million, which represented 39% growth over the same period last year. Our strong performance is underpinned by commercial execution, financial discipline and strategic allocation of capital as well as prioritization of commercial and R&D opportunities that have the most impact on our future growth. Launching multiple products over the past two years, coupled with the acquisition of GW Pharmaceuticals, has enabled us to significantly advance our objective of diversifying revenue. Fifty-two percent of net product sales in the third quarter were generated from products which we have launched or acquired since 2019. Given our expectations regarding the durability and growth potential of these products, we remain confident in reaching our goal of at least 65% of net product sales coming from these newer products in 2022. Focusing specifically on the GW acquisition, we are demonstrating our ability to execute on the corporate development front. We successfully closed this transformative transaction in approximately 90 days post signing, issuing over $5 billion of new debt with attractive and flexible terms to support the deal. The broad commercial and R&D portfolio we gained in the GW acquisition has accelerated our transformation, not only in terms of revenue diversification and R&D expansion but also increased expectations for future top and bottom line growth. As Bruce mentioned earlier, we're very pleased with the progress of the GW integration. In bringing our companies together, not only have we enhanced our capabilities, expanded our footprint and retained key talent across both organizations, but we are locking in our synergy targets and optimizing the way we operate and invest through transformation initiatives that are driving greater effectiveness and focus on our most important priorities. Since closing the transaction, our strong cash generation, driven by our continued financial and operational performance, has enabled us to achieve a 4.4x net leverage ratio at the end of the third quarter. This represents a half turn decrease in net leverage in just five months following the close of the transaction. Importantly, we're on track to achieve our stated net leverage target of being below 3.5x by the end of 2022. In addition to reducing debt, we are investing in our business to drive future growth and durability. This includes focused investments in the ongoing commercial launches of Xywav, Zepzelca and Rylaze, realizing the blockbuster potential of Epidiolex and advancing our R&D pipeline and the GW cannabinoid platform. As our newly launched commercial portfolio matures and our business scales, we expect to realize further operating leverage and associated improvements in our underlying operating margins. Now turning to guidance. We are raising our full year earnings guidance for non-GAAP adjusted net income, or ANI, to a range of $925 million to $965 million, up from our prior range of $830 million to $910 million. Our updated non-GAAP ANI range exceeds the upper end of the prior range on both an absolute and a per share basis, which reflects both our financial discipline and strategic capital allocation. On the top line, we are narrowing our total revenue guidance range to $3.02 billion to $3.1 billion from $3.02 billion to $3.18 billion. Reducing the midpoint of total revenue guidance reflects our updated oncology revenue expectations, which we have narrowed to $715 million to $735 million from $715 million to $835 million. Our current oncology guidance reflects ongoing impacts of COVID on our legacy products and the Rylaze competitive landscape in the third quarter. We have also narrowed our neuroscience revenue guidance to $2.275 billion to $2.345 billion while keeping the same midpoint as our previous guidance. On the expense side, we have reduced our total OpEx guidance by approximately $115 million at the midpoint primarily to reflect the following three factors: one, a thoughtful approach to integrating the Jazz and GW operations; two, prioritization of R&D activities to invest in those opportunities that we believe will deliver maximum value; and three, the extended duration of COVID-19, which pushed out a portion of our planned commercial spend for in-person interactions. I'll also note that included in our implied fourth quarter OpEx guidance is the launch of Xywav in IH and three important clinical trial initiations with JZP-385, JZP-150 and Zepzelca. The integration of Jazz and GW has been a catalyst for transforming our business. We are becoming a highly efficient and effective organization poised to emerge as a nimble enterprise with the ability to scale rapidly as we continue to increase our revenue diversification and growth. Our commercial portfolio now consists of multiple high-growth, long-lived medicines, which is complemented by an amplified R&D organization that is advancing multiple mid- and late-stage programs and a corporate development strategy with a track record of valuable contributions to our commercial and development efforts. We will continue to prioritize commercial, R&D and business development efforts that drive value and growth, leveraging our strong cash generation to invest in our business, improve our bottom line and continue to deliver strong shareholder returns. I'd now like to turn the call back to Bruce.

Thanks, Renee. I'll conclude our prepared remarks on Slide 19. Building on our current momentum, we expect to finish 2021 on strong footing, which will position us well going into 2022. With FDA approval of Xywav for IH, we achieved our goal of five product launches in two years. Our commercial teams have demonstrated strong performance on the launches of Xywav for narcolepsy and Zepzelca. We expect that successful execution will carry forward to the launches of Rylaze and Xywav for IH. The GW team orchestrated an excellent launch for Epidiolex. Its addition to our commercial portfolio provides us with the opportunity to deliver an important therapy to patients with refractory epilepsies. Our R&D organization continues to evolve and expand its capabilities. Trials for nabiximols, JZP-385, Rylaze and Zepzelca are now underway, and we are planning to initiate multiple mid- and late-stage clinical trials in the next 12 months. Our disciplined capital allocation has enabled us to expand our pipeline and diversify our revenues, and we are in a position to invest in those assets and opportunities that hold the highest potential to drive sustainable long-term growth and shareholder value. We have the ability to generate strong cash flow that allows us to make appropriate investments in our business while also achieving our deleveraging targets. That concludes our prepared remarks. I'll now turn the call over to the operator to open the line for Q&A.

Operator instructions. Your first question comes from the line of Marc Goodman from SVB Leerink.

Rob, I heard that there's been some R&D activities that have kind of gone away. That's what Renee said. Can you talk about some of the programs that have stopped? I'm just kind of curious. There was GW had an autism program. They had a product for schizophrenia. They had a next-generation Epidiolex that they showed some early data on before the merger. Just curious, have those all been stopped? Or just give us a sense of that. And then if you guys could just give us a little more color on Rylaze and how to think about what's backlog versus what's real demand and whether we should expect a massive step up this quarter.

Renee, I'm not sure if you want to comment on what you were specifically referring to. But the way I would answer that question is in coming together with GW, we've had the opportunity to continue to invest in the highest value opportunities. We've prioritized certain things, as we've described in this call tonight. There were many smaller studies that may have been investigated or initiated or that we've supported along the way, either on the GW or Jazz side, that may not ultimately progress in the pipeline. But by and large, we've continued to invest heavily in all the key areas that we were investing in in the legacy companies.

Yes. I was just going to add that this is also about how we bring our organizations together—the how as much as the what. We've seen a lot of complementary skill sets coming from both areas. In some cases, as we put together hiring plans and looked at the skill sets needed, we've seen these two groups come together and offer more versus what was originally anticipated. That's not something you'd have a really good idea of, Marc, until you get the groups together and start integrating. We've also seen examples of certain programs that would be duplicative across both pipelines. That's a good problem to have as you look at where to invest your capital, to ensure you're putting your capital behind your highest value activities.

Kim, maybe I can ask you to jump in on the Rylaze question?

Sure. I'll start by saying we've laid a really strong foundation and Rylaze growth is continuing to accelerate. We've gotten initial feedback from our accounts that's very encouraging. We've received positive reports on the ease of both ordering and dose preparation as well as the JazzCare support services. Regarding ordering, when Rylaze was made commercially available in mid-July, there was still Erwinaze on the market in hospital pharmacies that they were looking to utilize before placing orders. The temporary importation of U.K. Erwinaze in June ran through its stock by September. That's where we saw a notable uptick in Rylaze orders beginning in September from customers. Overall, we're encouraged by feedback from accounts and think we're in a strong place from an order standpoint.

Your next question comes from the line of Jason Gerberry from Bank of America.

So mine's on Xywav and thinking about the progression of the launch here. Do you think there are accelerants to the rate of quarterly additions that are moving onto Xywav? In your latest thoughts on Hikma, I think last quarter, you framed it as a possible risk of market entry in 2022. Just curious if that's still the case. And ultimately curious, Bruce, your comment about 4Q and providing an update there. I guess what materially changes in the contracts that could allow you to talk about Hikma timing in February versus not being able to talk about it today in November?

Maybe I'll take the back half of your question, Jason, and ask Kim to comment on Xywav progression. What will change in the fourth quarter earnings announcement is we'll be giving full guidance for 2022 across our business, including neuroscience and oxybate. I can give you a better sense of how we expect the year to play out. It's not a comment specifically on contractual terms. Although the contract says entry no later than January 1, 2023, there is a market decline provision that we believe could be tripped in 2022, but that's not different from what we've said before. Kim?

As Dan shared, Xywav has achieved market-leading adoption in narcolepsy and we continue to see solid growth through the third quarter. We've seen very strong adoption among high-volume oxybate prescribers and are now increasing our focus on HCPs who have either not yet adopted Xywav or have not transitioned the majority of their narcolepsy patients. Among those that have transitioned, most of their patients were previously oxybate naive. We anticipate adoption rates among these HCPs will be slower than we saw in the first three quarters, but we remain focused on educating these HCPs and patients about the lifelong burden of high sodium intake. We feel confident that HCPs will see the value in lower sodium oxybate as the majority of oxybate naive patients today are being prescribed Xywav rather than Xyrem. The FDA recognized the importance of lower sodium options by granting Xywav orphan drug exclusivity in June and found Xywav clinically superior to Xyrem by means of greater safety due to its greatly reduced chronic sodium burden compared to Xyrem. We launched Xywav for the treatment of IH last week, the first and only FDA-approved treatment for adults with idiopathic hypersomnia. We see this launch as a significant value driver, with approximately 37,000 adult patients diagnosed with IH who are actively seeking treatment in the health care system. Our commercial teams are educating about Xywav for IH while continuing to encourage transitioning narcolepsy patients to Xywav due to the benefits of lower sodium. Specifically in IH, we're executing a targeted launch strategy that includes both disease education and branded efforts, supported by digital and in-person efforts to demonstrate IH is a unique medical condition and to explain Xywav's clinical benefits and safety profile. Moving forward, we'll continue to provide the average number of oxybate patients, the total number of patients on Xywav, and starting in Q4, the breakdown of Xywav patients by diagnosis of either narcolepsy or IH.

Your next question comes from the line of Jessica Fye from JPMorgan.

Renee, you talked about how, as the newly launched commercial portfolio matures and scales, that you expect to realize further operating leverage. Can you talk about if we should expect operating margin improvement in 2022 over 2021?

Thanks for the question, Jess. Stay tuned for 2022 guidance. We'll give that specific guidance in early 2022 when we're reporting our year-end results; that will be more appropriate after we've completed our full budget and goals process with our Board of Directors. More broadly, yes, as our newer products mature beyond the initial launch phase and are off to a strong start, you should expect over time that operating margin—whether specific to SG&A or our broader cost structure—will improve.

Okay. Got it. I'm just trying to figure out if next year counts as one of the years of those launch products beginning to mature or still kind of more of an investment year?

Jess, what I would say is—

I'd say without giving specific guidance, we'll be focused on ensuring that in 2022 we're positioned to achieve our goal of having 65% of our revenues associated with those newer products—Xywav, Epidiolex, Zepzelca, Rylaze. As those products mature, you should expect improvements in operating margins over time. With the transaction, we said we expected accretion in the first full year and we've also talked about investing in our pipeline. So while we'll be focused on improving margins, we'll also ensure sufficient investment behind our R&D portfolio and pipeline to create greater durability.

Your next question comes from the line of Jeff Hung from Morgan Stanley.

You mentioned high persistency for the Epidiolex indications. From here on out, which of the indications do you see as the bigger potential drivers for Epidiolex sales? And what kind of impact do you expect going forward potentially from off-label indications?

Happy to start. As I mentioned, especially as COVID pressures ease and based on real-world experiences from physicians who have adopted the therapy, we see plenty of room for patient growth across all three indications. More broadly, there's a large pool of treatment-resistant patients—pediatric and adult—many with syndromes that have no FDA-approved therapies. Physicians often look at seizure types, and because Epidiolex has a broad range of activity and good market access to support physicians and patients, we believe Epidiolex will become a cornerstone of therapy across multiple seizure types beyond the indicated label.

I think Dan covered the points well.

Your next question comes from the line of Ami Fadia from Needham.

Just more on Epidiolex. Can you give us more color on where you are with the patent application? You indicated that you expect it to be issued by the end of the year. Any more color there? And then regarding the myoclonic-atonic seizures, why did you pick that? What was the basis on which you thought there was applicability in that seizure type? If you could give us a preliminary sense of the target market potential if it works in that seizure type?

Ami, nothing more to add on the timing of the new patent issuance and Orange Book listing at this point. I'll ask Rob to talk about why we elected to go into the EMAS trial next, and then Dan or Kim can talk about potential market opportunity. Rob?

It's an important unmet medical need in EMAS among pediatric epilepsies. Based on prior data and other seizure disorders, we think there's a high probability of working in that setting, which would provide direct benefit to those patients. It also adds evidence of broad antiepileptic activity by studying a syndrome with a seizure type different than our current indications, complementing the seizure types we've already addressed. Physicians treat seizure types, and so this will provide additional data for efficacy in the patients they're intending to treat. While we wouldn't promote off-label use, these are the kinds of data that physicians look for to provide evidence of efficacy in their patients.

EMAS represents approximately 2% of childhood epilepsies, so not insignificant. More importantly, it rounds out our data set, which includes strong activity, combinability and safety in tonic, atonic and now myoclonic seizure types. This paints a broader evidence base across multiple seizure types typically seen in treatment-resistant epilepsy. Along with other studies, both company-sponsored and investigator-initiated, this is part of our overall evidence plan.

Your next question comes from the line of Gary Nachman from BMO Capital.

Could you talk about the overall reimbursement and access for Xywav? How has net pricing been trending for the narcolepsy indication? What has the initial status been for IH? How you've been managing that? And then what might change when an authorized generic of Xyrem is available next year? How much visibility do you have on that at this point? Also, on Sunosi, there was a big acceleration in the third quarter. How much of that is net pricing versus actual demand volumes?

With Xywav, we're pleased to have greater than 80% commercial coverage for patients in narcolepsy, which sets us up well for IH. We expect payers to add utilization management criteria specific to IH to the existing contract and coverage for Xywav, and we anticipate that will happen as fast, if not faster, than it did with narcolepsy. In the meantime, patients can pursue medical exceptions for coverage and we have patient access and support programs available from day one of launch. Regarding the authorized generic, we feel confident we will continue to enjoy strong coverage based on our conversations with payers. We don't anticipate payers to change coverage in a way that would advantage the authorized generic over Xywav. On Sunosi, in the third quarter sales more than doubled compared to the same period last year and prescriptions increased by 8% in Q3 over Q2. Since launch, we've seen encouraging reactions from physicians and patients, with positive feedback on Sunosi's impact on excessive daytime sleepiness among patients who have often been frustrated by prior wake-promoting agents. I don't have the breakdown of growth between demand and price in front of me.

I don't have the price breakdown in front of me, but gross-to-net stabilized a few quarters after launch. What you're seeing now almost exclusively represents volume growth.

To reiterate, we're encouraged by the volume trends for Sunosi, and the feedback indicates patients are having a good experience and better control of excessive daytime sleepiness. That aligns with the volume-driven growth we're seeing.

Your next question comes from the line of Akash Tewari from Jefferies.

Apologies if late. What is the current market penetration for Epidiolex in Dravet, LGS and TSC and other refractory epilepsies? On guidance, it looks like full year guidance was lowered: SG&A by about $70 million and R&D by about $45 million. You talked about three reasons for the OpEx decrease. How much of the OpEx decrease was spend that was supposed to occur in 2021 moving to 2022 due to COVID? And how much was GW integration and R&D prioritization? Can we expect a Q4-like cost base going forward into next year?

We're pleased with penetration rates, though we didn't share specific percentages. There is substantial room for growth, particularly in LGS and our newest indication, TSC. We remain encouraged about the growth opportunity across the indications.

While there is some use outside the labeled disorders, overall penetration into the treatment-resistant pool is still small—both pediatric and adult. Real-world experience and the data set will continue to support strong growth going forward.

Do we know what percent of sales is in the other refractory epilepsies as a percent of total sales for Epidiolex right now?

We're not providing that level of detail at this point.

On OpEx, the shifts largely reflect three items I mentioned earlier: a thoughtful approach to integrating Jazz and GW, prioritization of R&D activities around highest-value opportunities, and the extended duration of COVID-19 which pushed out some planned commercial spend for in-person interactions. We've reduced overall OpEx guidance to be more thoughtful and deliberate as we integrate operations and prioritize investments. Regarding Q4, I wouldn't immediately apply implied Q4 numbers to future rates; we'll provide specific 2022 guidance when we report year-end results. Note in Q4 we'll be launching IH and initiating multiple clinical studies, which will add expense associated with those initiatives.

Your next question comes from the line of Balaji Prasad from Barclays.

On Epidiolex: I'm struggling to understand the lack of vaccine access impact. I'm surprised that parents with kids suffering from epilepsy are not accessing treatment. Some qualitative or quantitative comments? Secondly, do you have a better understanding of the current market size of Lennox-Gastaut or Dravet syndrome—how many patients are out there and penetration?

Based on conversations with parents and treaters, many parents with kids who have refractory seizure disorders are cautious about changing medications because changes can trigger breakthrough seizures and might require hospital visits. Given vaccine access limitations for younger children during parts of the pandemic, parents and physicians have been hesitant to bring children into medical settings and risk exposure. We believe this is a broader dynamic in pediatric care during COVID and not unique to Epidiolex.

Your next question comes from the line of Esther Rajavelu from UBS.

For ex-U.S., any early feedback from prescribers and families—trying to gauge pent-up demand in developed EU markets. In the U.S. among Dravet patients, are newer drugs like Fintepla used in combination with Epidiolex? Lastly, what proportion of the GW sales force continues to be employed by Jazz, and have you had to expand hiring efforts in the U.S. for this product?

On ex-U.S., we inherited a strong GW team in the major markets. The gating factor is favorable reimbursement and we've achieved that in four of the five major countries. That opens the gate to full promotion and rollout. We've seen strong pricing and access, with pricing in those markets greater than 70% of U.S. WAC. We're targeting France for a 2022 commercial launch, which could be a significant growth market.

Regarding the sales force, the North American GW team was brought over in its entirety to Jazz, so there has been no reduction in that effort. We're building on GW's success. On combination use with Fintepla, we do see combination use of products for these conditions. We hear positive feedback about combining Epidiolex with other agents. I don't have detailed quantitative data on Fintepla specifically at this point, but feedback suggests physicians are using Epidiolex in combination settings where appropriate.

A couple of proof points: in market research roughly 40% of respondents indicated they are moving Epidiolex up in their treatment algorithm, which we take as a positive signal as clinicians gain experience. Also, persistence is strong—once patients start Epidiolex, they tend to stay on it, which points to satisfaction among prescribers and patients.

Your next question comes from the line of Ronnie (Aaron) Gal from Bernstein.

About Rylaze: the Erwinaze market was around $200 million and came down to around $170 million during the supply-constrained period. As you now have more information from the Rylaze launch, where do you see the end of the initial ramp-up where you simply replace Erwinaze versus where you'll have to start building demand further with marketing? Help us look at the shape of that product for the next couple of years.

Good question. We don't yet know how big the market could become because supply constraints in previous years led to pulled-back promotion, limiting broader adoption. There's opportunity to retrain physicians and caregivers that at early signs of hypersensitivity they can switch to a non-E. coli-based asparaginase without risking shortages. With Rylaze, we have a robust supply chain and confidence among institutions and COG that they can monitor for hypersensitivity and silent inactivation and grow the market. There's additional opportunity in adolescent and young adult patients, and geographies like Japan that had unmet need due to prior supply issues. We see Rylaze as a growth driver and will provide further color as the launch progresses.

Your next question comes from the line of Brandon Folkes from Cantor Fitzgerald.

I want to circle back to the goal of having more than 50% of oxybate patients on Xywav by 2023. You seem on your way, but how dependent is achieving that goal on the IH launch from here?

We picked 2023 because we wanted to address where we'll be even in the face of competition from a generic or higher sodium oxybate. It's not just a continuation of current trends; it's intended to capture our position after potential other entrants. We see a significant opportunity in idiopathic hypersomnia, which had no indicated treatments prior to the Xywav launch. IH patients are naive to oxybate therapy and will be titrated over time, which creates a different uptake dynamic than narcolepsy. IH is a new launch and education is required, but the opportunity is meaningful and could be sizable over time.

Your next question comes from the line of David Amsellem from Piper Sandler.

On Epidiolex, with evidence of some off-label use beyond the three label indications, can you share your thoughts on payer contracting—how to be more aggressive with payers to facilitate less utilization management? And did you disclose ex-U.S. contribution from Epidiolex during the quarter?

We haven't provided a specific U.S. versus ex-U.S. breakdown product by product. We're excited about the Epidiolex rollout in Europe with good pricing and access, and that is a significant opportunity relative to the U.S. over time.

We're pleased that Epidiolex enjoys 98% commercial coverage across commercial lives for indicated patients. We view broadening coverage as a strategic priority and are focused on expanding coverage, including in the Medicaid space where we've been successful and continuing to work on commercial coverage expansion.

Your next question comes from the line of Ken Cacciatore from Cowen & Company.

Bruce and team, can you provide more nuance on the composition-of-matter-like patents you referenced for Epidiolex? Was this being worked on at GW and you were aware during diligence? Any more specificity?

This is something GW was working on and had referenced publicly. We're getting more specific now about timing, but we'll say more when the patent is visible publicly. We're communicating that the IP continues to broaden with different pieces and different expirations, including potentially out to 2039. We'll provide more when it's in the public domain.

Your next question comes from the line of Greg Fraser from Truist Securities.

What percentage of new-to-oxybate patients are being prescribed Xywav versus Xyrem? You mentioned a large majority, but can you be more specific? And what are the reasons you hear for oxybate naïve patients still being prescribed Xyrem? Is it access-related? Are physicians not aware of Xywav yet? Any color would be helpful.

Greg, that's a good question—why some patients remain on Xyrem when Xywav is available. Kim?

A couple of reasons. While we have very strong commercial coverage—over 80%—there are still patients who don't have immediate access to Xywav, and that can account for some prescriptions of Xyrem. The main reason, though, is that both patients and HCPs have familiarity and comfort with Xyrem; many patients are satisfied with it. We have ongoing educational efforts to motivate the remaining segments of physicians to adopt Xywav because of its lower sodium burden, and we are making strong progress. We expect these smaller segments will continue to transition over time to join the high-volume oxybate prescribers who already see the benefits of switching to Xywav.

Your next question comes from the line of Navann Ty from Citi.

A follow-up on the lower-than-expected SG&A and R&D: can you tell us which products will be impacted by the lower selling and R&D expenses or which will be prioritized? And my second question is on your latest thoughts on the litigation versus Avadel FT218 after the action date was delayed?

On the litigation with the FT218 situation, we don't have additional comment beyond what's public; we intend to defend our IP as appropriate. On expenses, the reductions relate to how we are integrating the two organizations and prioritizing investments. Renee, I'll let you expand.

The cost reductions are not tied to a single product but reflect broader shifts in how we operate as a combined company. We are prioritizing commercialization dollars behind new product launches—Xywav, Epidiolex, Zepzelca, Rylaze and Sunosi—and focusing R&D on the highest-value opportunities. Much of the integration work has already been completed. As we scale and revenues grow, we'll aim to be more effective and efficient, which is why we reduced OpEx guidance. As noted, Q4 will include launches and clinical starts that will add some expense. We'll provide specific 2022 guidance with year-end results.

This concludes our question-and-answer session. I would now like to turn the conference back to Mr. Bruce Cozadd for the closing remarks.

Thanks, operator, and thanks to all of you for the good questions. We're happy with where we are this year—kicking off our fifth launch, continuing progress in the launches of Rylaze and Zepzelca, and initiating mid- and late-stage trials at the end of the year. You saw our deleveraging: a half turn in the first five months post-close, which is excellent progress. As a combined, more agile company, we can bring more to the bottom line. We're excited about 2022 and look forward to speaking with many of you at the upcoming investor conferences. I'd like to recognize all our Jazz colleagues for delivering these new therapeutic options to patients and to thank our partners and shareholders for their continued confidence and support. Thank you for joining us today. Stay well, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.