Jazz Pharmaceuticals plc Q4 FY2022 Earnings Call

Good day, and welcome to the Jazz Pharmaceuticals Fourth Quarter and Full Year 2022 Financial Results Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Darren Fox, Executive Director of Investor Relations. You may begin.

Thank you, operator, and good afternoon, everyone. Today, Jazz Pharmaceuticals reported its fourth quarter and full year 2022 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 on 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 Chief Operating Officer; and Rob Iannone, Executive Vice President, Global Head of R&D. Kim Sablich, Executive Vice President and General Manager, United States, will join the team 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 developments 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 will discuss non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are included in today's press release and the slide presentation available on the Investors section of our website. I'll now turn the call over to Bruce.

Thanks, Darren. Good afternoon, everyone, and thank you for joining us today. I'm excited to share our strong fourth quarter and full year results, capping off an outstanding year of performance and execution for Jazz, providing us with significant momentum as we enter 2023 and continue to drive towards Vision 2025. I'll start on Slide 5. This year, Jazz is celebrating its 20th anniversary. Over those 20 years, we have remained focused on our purpose of improving the lives of patients and our commitment to being a great place to work, while delivering consistent top-line growth. In 2022, we've built on that foundation of strong execution, achieving record revenue, advancing multiple therapies in our pipeline, and adding several exciting molecules through corporate development, all while remaining focused on disciplined capital allocation and operational excellence. All of these accomplishments contributed to the ongoing transformation of our business to a high-growth global biopharma leader and position us well to achieve Vision 2025. Vision 2025 includes three components central to driving sustainable growth and enhanced value as we transform our company: commercial, pipeline, and operational excellence. I'll now highlight several of our accomplishments in each of those areas in 2022, starting with commercial. Based on our strong commercial performance, we continued to deliver significant revenue growth. In 2022, we recorded $3.7 billion in revenue, which represented an 18% increase compared to 2021. Our top-line growth was driven by the continued success of three recently launched products, Xywav, Zepzelca, and Rylaze, along with strong growth for Epidiolex. Xywav is now our largest product by revenue, annualizing at more than $1 billion. Based on our outstanding commercial execution, we achieved our 2022 total revenue guidance as well as guidance for each of our Neuroscience and Oncology franchises. Moving to the pipeline, we continue to advance our clinical portfolio and added three exciting new molecules to our pipeline during 2022. Within the past three months, our most recent Oncology pipeline addition, zanidatamab, has had positive data readouts in both of its initial target indications. Over the course of the year, we initiated seven new clinical trials, submitted four new INDs, generated multiple important datasets, and received regulatory approval for an important update to Rylaze dosing. Our pipeline has never been as robust or productive as it is right now, and we have multiple value inflection points over the next 12 to 24 months. On operational excellence, our continued focus on disciplined capital allocation and operating efficiency drove a 2022 adjusted operating margin of 48%, which represents a substantial increase from the 43% we recorded in 2021. We significantly reduced our net leverage ratio and continued to diversify our revenues in 2022, while also executing multiple strategic transactions that we believe will create sustainable value for patients and shareholders. These achievements on both the top- and bottom-line enabled us to significantly increase our operating cash flow and financial strength. We generated $1.3 billion in cash from operations and the overall health of our balance sheet is enabling us to be active in pursuing additional corporate development opportunities. Turning to Slide 6, we've made substantial progress since introducing Vision 2025 last January, and we remain focused on our transformation to a high-growth global biopharma leader. Our many accomplishments in 2022 have positioned us well for 2023. Despite the recent introduction of an authorized generic of Xyrem, which until recently was the company's largest product by net sales, we are entering the year with an expectation of achieving top-line revenue growth in 2023 and remain confident in our ability to achieve the important milestones underpinning Vision 2025. 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 then provide a financial overview, which will include a discussion of our 2023 guidance in addition to 2022 performance. We'll then open the call to Q&A.

Thanks, Bruce. I'm excited to share the continued progress across our commercial portfolio. I'll start on Slide 8, with Neuroscience and oxybate. As a leader in sleep medicine, we believe the approval of Xywav in mid-2020 marked a meaningful advance in patient care. As the lower-sodium oxybate, Xywav has offered patients with narcolepsy and idiopathic hypersomnia, who are taking a lifelong therapy to address their sleep disorders, a way to reduce sodium intake which is a known risk factor for cardiovascular disease. In the fourth quarter, average active oxybate patients increased to approximately 18,000, representing growth of approximately 11% compared to the same period last year. There were approximately 10,300 active Xywav patients exiting the quarter, resulting from strong adoption in both narcolepsy and idiopathic hypersomnia. Over the course of 2022, this compelling adoption continued to reinforce our confidence in the durability of Xywav, and we expect Xywav to grow and remain the oxybate of choice in 2023. As Bruce noted, Xywav became our largest product in net sales in the fourth quarter of '22, annualizing at more than $1 billion and on track to achieve blockbuster status in 2023. We continue to see robust uptake of Xywav for narcolepsy in the fourth quarter, and we exited the quarter with approximately 8,550 narcolepsy patients taking Xywav. There are now more narcolepsy patients on Xywav than Xyrem, indicating our sodium messaging is resonating with healthcare providers and patients. In addition to adoption of Xywav among current Xyrem patients, the large majority of new to oxybate narcolepsy patients are being prescribed Xywav. Xywav is the first and only FDA-approved therapy for idiopathic hypersomnia, and we're continuing to see increased enthusiasm among physicians for identifying appropriate patients and initiating therapy. Exiting the fourth quarter, there were approximately 1,750 IH patients taking Xywav. We remain focused on educating prescribers and patients about the compelling efficacy and established safety profile of Xywav and are confident in our ability to maximize Xywav's potential in this underserved market. I also want to comment on the evolving landscape for oxybate. In January 2023, an authorized generic to Xyrem was launched. We expect that Xywav will both grow and remain the oxybate of choice in 2023 even with one or more authorized generics on the market and branded competition potentially entering the marketplace this year. Xywav remains the only lower-sodium oxybate available to patients, and we expect it to be the only oxybate indicated for idiopathic hypersomnia for the foreseeable future. The FDA has recognized Xywav as clinically superior to Xyrem by means of greater safety. In addition, we have orphan drug exclusivity that extends to 2027 for narcolepsy and 2028 for idiopathic hypersomnia, as well as Orange Book-listed patents that extend out to 2033. All of these factors give us confidence that Xywav is a durable product that will continue to be a core growth driver for Jazz. Turning to Slide 9, and Epidiolex. Net product sales grew by 7% in the fourth quarter and 12% for the full year 2022, compared to the same periods in 2021 on a pro-forma basis, with growth driven primarily by underlying demand. Now that we're several years out from launch, we have visibility into seasonality trends. Inventory typically builds over the course of the second half of the year, which results in lower revenues in the first half. Our success in growing Epidiolex this year has been driven by a number of factors, including increased access to treatment centers and physician offices, leading to more face-to-face interactions. Given the promotionally sensitive nature of Epidiolex and the anti-epilepsy market as a whole, greater access to healthcare providers has been a key driver. We continue to add new prescribers, our volume of engagement with healthcare providers is increasing, and our market research indicates nearly 60% of prescribers are moving Epidiolex up in the treatment algorithm, all positive indicators for continued growth. There has been continued adoption of Epidiolex in ex-U.S. markets. With the recent launch in France, Epidiolex is fully reimbursed and commercially available in all five major European markets. We remain excited about the future growth and blockbuster potential of Epidiolex. We are confident that this, with its unique mechanism of action and ability to be combined with other therapies, along with increasing positive experiences in real-world settings, Epidiolex can become the standard of care in treatment-resistant epilepsies and achieve blockbuster status. Now moving to Slide 10, and Zepzelca. We have rapidly established Zepzelca as the treatment of choice in second-line small-cell lung cancer, achieving $607 million in revenue since launch in mid-2020. Year-over-Year revenue growth was 11% and 9% for the fourth quarter and full year, respectively. We have multiple ongoing efforts to further expand market share in the second-line setting by investing in real-world evidence and observational studies that we believe will generate additional data around Zepzelca's utility in a broad range of second-line small-cell lung cancer patients. Our robust development program, which Rob will outline in more detail shortly, is exploring the utility of Zepzelca in several new patient populations. Our nearest-term opportunity for meaningful growth comes from the potential of Zepzelca to be used in first-line treatment of small-cell lung cancer. We also have trials assessing the efficacy and safety of Zepzelca in other tumor types. As highlighted on Slide 11, the Rylaze launch has been incredibly successful with $367 million in revenue since launch in mid-2021, including 25% revenue growth in the fourth quarter of 2022 compared to the same period in 2021. Rylaze remains the only therapy available to patients in the U.S. who have a hypersensitivity reaction to E. coli-derived asparaginase. It has been adopted universally in pediatric oncology protocols and having solved for the supply constraints for non-E. coli-derived asparaginase. Healthcare professionals are reporting that they are returning to best clinical practice and switching ALL and LBL patients to Rylaze earlier when there has been an initial hypersensitivity reaction observed. We are encouraged to see that there is increasing use of Rylaze in the treatment of adolescents and young adults, a potential growth driver for 2023. To summarize, we are continuing to execute incredibly well on commercial and are maintaining the momentum to successful launches for our key products. Now, I will turn the call over to Rob for an update on our pipeline progress in 2022 and milestones for 2023.

Thanks, Dan. In recent years, we have enhanced the breadth and depth of our pipeline, as well as our R&D capabilities. Our acquisition of GW in 2021 accelerated that process, and in 2022, we added three promising candidates to our pipeline: zanidatamab, a novel late-stage oncology asset; JZP441, an orexin-2 receptor agonist for which we initiated a Phase 1 clinical program in 2022; and JZP898, a differentiated conditionally-activated interferon alpha INDUKINE molecule that will be entering the clinic later this year. Starting on Slide 13, I'll highlight the most recent addition to our pipeline, zanidatamab, a novel HER2-targeted bispecific antibody with biparatopic binding and the potential to transform the current standard of care in multiple HER2-expressing cancers. As an oncologist, I'm impressed to see monotherapy activity with zanidatamab across multiple HER2-expressing tumor types, including cases resistant to prior HER2 therapies. Based on its potential to benefit patients across multiple tumor types, we are committed to advancing this program as rapidly as possible. The most advanced clinical work with zanidatamab is in biliary tract cancer, or BTC, and metastatic gastroesophageal adenocarcinoma, or GEA. These are cancers with significant unmet need and poor outcomes with current standards of care. Our confidence in zanidatamab has only grown based on positive data in both of these settings. Continuing on to Slide 14, we were very encouraged by the positive top-line results from the recent pivotal trials of zanidatamab in BTC and the first overall survival data for zanidatamab from the Phase 2 first-line GEA study. In December, our partners Zymeworks announced positive top-line results from a pivotal Phase 2b open-label single-arm clinical trial called HERIZON-BTC-01, evaluating zanidatamab as monotherapy in patients with previously-treated HER2-amplified and expressing BTC. In the trial, 41% of these patients with HER2-amplified and expressing disease achieved an objective response as assessed by a blinded independent central review. The median duration of response at the time of data cut-off was 12.9 months. By contrast, standard of care chemotherapy in second-line BTC would be expected to have an objective response rate of less than 10%. The safety profile of zanidatamab in the trial was consistent with that observed in previously reported monotherapy studies. Currently, there are no HER2-targeted therapies approved for the treatment of BTC, and we plan to discuss the potential regulatory path forward for zanidatamab in BTC with the FDA. In January, at the ASCO GI conference, the first overall survival data for zanidatamab were presented from a Phase 2 trial, evaluating zanidatamab in combination with chemotherapy in first-line patients with HER2-expressing metastatic GEA. The preliminary results showed that zanidatamab in combination with chemotherapy is a highly active treatment regimen with the ability to generate significant and durable responses. At the time of the analysis, the median overall survival had not yet been reached, with a median duration of study follow-up of 26.5 months. The 18-month overall survival rate was 84%. The overall survival findings in this trial are compelling, given the historically reported overall survival rate for the currently approved standard of care has a median of 14 months. These results show zanidatamab's potential as a foundational treatment in patients with HER2-positive GEA, and we look forward to additional data from the ongoing pivotal Phase 3 GEA trial, expected to read out in 2024, which may support U.S. and global regulatory filings. Importantly, ongoing research efforts on zanidatamab will inform development and indications beyond BTC and GEA. Turning to Slide 15, we've detailed key clinical programs in our pipeline. Starting with Neuroscience, we have initiated a Phase 2 trial for the treatment of Parkinson's disease tremor with JZP385 or suvecaltamide. This is in addition to our ongoing Phase 2b trial in essential tremor for which we anticipate top-line data in the first half of 2024. For JZP150, enrollment is ongoing in our Phase 2 PTSD trial with top-line data expected later this year. In 4Q 2022, we initiated our Phase 1 program for the orexin-2 receptor agonist JZP441, and there are currently healthy volunteer trials in the clinic. We anticipate initial proof-of-concept in healthy volunteers this year. Moving to Oncology, as Dan mentioned, we are continuing to execute our robust development efforts for Zepzelca. This includes an ongoing Phase 3 trial in collaboration with Roche to evaluate Zepzelca in combination with Tecentriq in first-line extensive stage small-cell lung cancer. A confirmatory Phase 3 trial in second-line small-cell lung cancer is being run by our partner PharmaMar in our post-marketing observational trial in second-line small-cell lung cancer. We're also exploring Zepzelca in other solid tumors in a Phase 2 basket trial. With respect to our supplemental BLA submission for an IV formulation of Rylaze, we have received a complete response letter from the FDA requesting additional clinical data and the IV administration of Rylaze. I want to stress that there is no impact on the approved product labeling for Rylaze intramuscular administration. We are currently evaluating a complete response letter to determine the next steps. Our Marketing Authorization Application submission for JZP458 to the European Medicines Agency is currently under review with potential for approval in 2023. We are also advancing our program in Japan for potential submission, approval, and launch. While not listed on this slide, I'll also note that in October, we initiated our Phase 1 clinical trials for JZP815, our pan-RAF inhibitor for the treatment of solid tumors that have mutations in the MAP kinase pathway. The pan-RAF inhibitor program is part of a novel class of next-generation precision oncology therapies that has the potential to benefit cancer patients with high unmet needs in multiple different solid tumors. Also, recruitment is expected to begin shortly for our first clinical trial of JZP541, a cannabinoid from the GW platform, assessing its utility in treating irritability associated with autism spectrum disorder in adults. In summary, with the initiation of multiple clinical trials in 2022, we continue to expand our pipeline into disease areas with significant unmet patient need that provides strong opportunities for long-term sustainable growth. We expect to submit several investigational new drug applications throughout 2023. Increased investment, upcoming catalysts, and expanded capabilities in R&D give us confidence in our ability to deliver sustained long-term value to both patients and shareholders. Now, I'll pass the call off to Renee for a financial update.

Thanks, Rob. I'll start with our top-line results on Slide 17. As a reminder, our full financial results are available in our press release and 10-K. In 2022, we recorded significant year-over-year revenue growth of 18%, driven by our key products in both Neuroscience and Oncology. We achieved $3.66 billion in revenues for the year and almost $1 billion in revenues in the fourth quarter. Launching multiple products over the past three years, coupled with the acquisition of GW Pharmaceuticals, has enabled us to successfully diversify our revenue, meeting our 2022 diversification target of 60% to 65% of net product sales coming from products launched or acquired since 2019. Given our expectations regarding the durability and growth potential of these products, along with our continued focus on adding new products through corporate development, we believe we are well-positioned to achieve our Vision 2025 goal of $5 billion in revenue. Turning to Slide 18, our disciplined capital allocation and focus on operational excellence drove adjusted net income of $934 million, which includes $444 million of IPR&D expense related to corporate development. Contributing to IPR&D were upfront payments for key pipeline additions such as zanidatamab and JZP441, which have the potential to create sustainable long-term value for our company. Our efforts to improve adjusted operating margins to 48% in 2022 have given us additional flexibility to invest in our business and contributed to our significantly enhanced cash generation. In 2022, we generated almost $1.3 billion in cash from operations, an increase of $493 million, or 63%, compared to 2021. On Slide 19, we've highlighted our success in rapidly deleveraging our balance sheet following the GW transaction. By deleveraging two full turns since the deal closed in May of 2021, which we accomplished through both debt reduction and enhancing our adjusted EBITDA, we achieved our deleveraging target six months ahead of schedule. We exited the year with an adjusted net leverage ratio of 2.9 times, which reflects cash outflows of $375 million in the fourth quarter to fund the zanidatamab transaction. Our deleveraged balance sheet and strong cash flow position us with continued strategic flexibility to invest in our current business as well as corporate development opportunities. Our revenue guidance for 2023, outlined on Slide 20, reflects our confidence in the durability of our oxybate franchise and our expectations for continued growth across key products. Our 2023 guidance for Neuroscience of $2.675 billion to $2.825 billion encompasses our growth expectations for both Xywav and Epidiolex, and the continued decline in Xyrem due to strong Xywav adoption, authorized generics of Xyrem, and potential competition from an additional high-sodium, branded oxybate. For simplicity, our Neuroscience guidance also includes AG royalties, which will be recognized within total revenues under royalties, not under Neuroscience net product sales. Due to the royalty structures within our AG agreements, we expect our royalties to be higher in the second half of 2023 relative to the first half. We remain confident in the durability of our oxybate business now led by lower-sodium Xywav, which is our largest product by net sales and is expected to generate more than $1 billion in net sales in 2023. Our Oncology guidance of $950 million to $1.05 billion with a midpoint of $1 billion reflects expectations of continued double-digit growth for this franchise, driven by the expected performance of Rylaze and Zepzelca. Our total revenue guidance range for 2023 is $3.675 billion to $3.875 billion, positioning us for total revenue growth year-over-year. Turning now to OpEx and the bottom-line on Slide 21. Our SG&A guidance of $1.045 billion to $1.105 billion is a reduction compared to 2022. As we continue to focus on operational excellence and our operating margin, we are gaining greater leverage from our global footprint and commercialization expenses. Our R&D guidance of $675 million to $725 million represents enhanced investment over 2022, reflecting the growth and maturation of our pipeline. In 2023, we'll be investing in a robust pipeline with 23 novel candidates across Neuroscience, Oncology, and Cannabinoids, representing four times the number of projects we had in 2015. At the midpoint of our guidance, we'll be investing approximately 19% of revenue into R&D, which is indicative of our continuing transformation. Assumed in this spend are the zanidatamab and Zepzelca clinical programs, later-stage trials for suvecaltamide in both essential tremor and Parkinson's disease tremor, JZP150 in PTSD, as well as earlier-stage trials for Neuroscience programs like JZP441, and Oncology programs such as JZP815 and JZP898. As Bruce and Rob noted earlier, we have key value inflection points in 2023 and 2024 that have the potential to create meaningful long-term value. On the bottom-line, we expect to continue to deliver strong adjusted net income with 37% growth at the midpoint and a guidance range of $1.24 billion to $1.31 billion. The midpoints of our financial guidance imply an adjusted operating margin of approximately 46% for the year. We'll continue to prioritize commercial, R&D, and business development efforts that we believe will deliver the most value, leveraging our strong cash generation to invest in our business, improve our bottom line and continue to deliver strong shareholder returns. Looking ahead to 2023, with our strategic investments, expanding product portfolio, R&D progress and focus on operational excellence, we believe we are well-positioned to achieve Vision 2025 and deliver further diversification, sustainable growth and enhanced value to patients and shareholders. I'd now like to turn the call back to Bruce.

Thanks, Renee. I'll conclude our prepared remarks on Slide 23. 2022 was a transformative year for us. We achieved strong double-digit revenue growth and improved our operating margin significantly. Our commercial teams demonstrated strong performance across our portfolio. We're confident that Xywav will remain the oxybate of choice in 2023, entering the year with blockbuster status. We expect growth for Epidiolex, and that our Oncology franchise will continue to deliver. Our R&D organization has reached new levels of productivity and expanded its capabilities. We added three new molecules in 2022 and have trials for multiple products underway ranging from potentially pivotal trials to early-stage studies. We are employing greater discipline in our capital allocation strategy, which is aimed at the highest priority areas, including R&D programs and corporate development. With our strong cash flow, balance sheet, and adjusted operating margins, we have the flexibility to make significant investments across commercial, R&D, and corporate development to drive sustainable growth and enhanced value. We're excited about building on our current momentum in 2023 and expect growth across our key products. Vision 2025 provides a clear perspective on what we expect to achieve in the coming years. We're excited about the future and what we can deliver to patients and shareholders. I look forward to updating you on our progress as we advance. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open the line for Q&A.

Thank you. Our first question comes from Jessica Fye with J.P. Morgan. Your line is open.

Great. Thanks so much for taking the questions. Ideally two if you can. First, can you talk about how Xyrem dynamics are playing out relative to your expectations since the authorized generic entered? And second, understanding you're no longer guiding by product franchise here, can you speak a bit to your expectations for Epidiolex growth? Is it possible that growth for that business accelerates in 2023 relative to '22 with just increasing ability to be in the office, etc.? Thank you.

Thanks, Jess. On your question about Xyrem, let me first just put this in context. Our major focus for 2023 and going forward is growing Xywav, both in narcolepsy and idiopathic hypersomnia. That's been our focus. We've had competition for Xyrem for the past couple of years; it's been us with Xywav, and we've seen Xyrem sales coming down. As to what we're seeing with the AG, maybe I'll ask Kim to give a couple of thoughts on our experience thus far in '23, although we're obviously not reporting first-quarter results right here. And then, maybe Kim, you could just transition right into Epidiolex growth in dynamics there.

Sure, Bruce. Happy to do that. As Bruce said, it's really too early here in the early stages to comment on the overall impact of the AG on Xyrem, and as he said, our focus does remain on Xywav. And we're feeling that we're going to continue to expect in 2023 continued strong uptake of Xywav in both narcolepsy and idiopathic hypersomnia with continuous transition of narcolepsy patients from high-sodium oxybate, either that being Xyrem or later on from the AG, over to Xywav based on its differentiation as the only lower-sodium oxybate product. So as a result, we also continue to expect that Xywav will both grow and remain the oxybate of choice in 2023, even with one or more authorized generics on the market and potentially branded competition entering later on in the year. So overall, our guidance includes continued decline in Xyrem, both due to strong Xywav adoption and the AG entry and potential competition, and we feel very optimistic about the ability of Xywav to continue to grow through 2023. In terms of Epidiolex and the question about whether or not it can accelerate, what I'll basically say is that we're continuing to be very pleased with the Epidiolex net product sales and that it increased 12% on a pro forma basis in 2022 compared to 2021, and that we're very pleased that this has been driven primarily by demand. We're continuing to add new prescribers still to our active prescriber base, and our overall engagement, as Dan said, of HCPs continues to grow, which is really positive for this product in a very promotionally sensitive market. Dan also mentioned the driver of 60% of prescribers now indicating to us that they're using Epidiolex even earlier in the treatment algorithm. Heading into 2023, we have a new push in terms of payer coverage. We've talked for several years about the payer coverage being quite strong from a quantitative standpoint for patients, but we're really pleased that our contract-attracting efforts of last year really have paid off and that we're entering 2023 in an even stronger position with payers. We've seen several plans reduce at the start of 2023 their utilization management criteria, ultimately making it a bit easier for HCPs and patients to get access to Epidiolex. And then, we're going to continue to promote the synergistic effect of using Epidiolex in combination with clobazam. We've been out there doing that for a year, but HCPs are continuing to have a very impressed reaction to these data that have shown that we can reduce seizures effectively in LGS and Dravet and nearly 50% in TSC. So overall, we're very excited about the future potential of Epidiolex as a significant contributor to our top-line and to Vision 2025.

Thank you. Our next question comes from Marc Goodman with SVB Leerink. Your line is open.

Yes. Can you give us a flavor for the persistence of these patients, the IH patients, and how that's going? We know how many patients there are at the end of the quarter. I'm just kind of curious if there are a lot of patients that are already dropping off and you're getting a lot of new patients, so that's the net effect. So, just trying to get a sense of that. Maybe on an absolute basis, you can give us a sense, or even on a relative basis, relative to how the drug is used for narcolepsy and the persistence there? Just maybe give us a sense there. And then, just one quick question, just on the R&D guidance. Is there included any major milestones in there or is that just increased because of the clinical studies that you've already mentioned?

So, maybe Kim will come to you on what we're seeing in terms of patient staying on IH thus far in launch, although we're still pretty early. And then, Renee, maybe you can take the question on R&D guidance. Kim?

Got it. Had to come back off of mute. Yes, so we're 14 months into the launch, and we continue to be really pleased with the uptake and we're still seeing from the marketplace a lot of excitement about having the first, only-approved product for idiopathic hypersomnia. We have had compelling growth continue into this quarter with 1,750 active patients exiting the quarter, and we're expecting to continue to have strong growth here. In terms of persistence, I basically just say it's pretty consistent in terms of what we see in narcolepsy. So, the number we do report around active patients is that net number that includes both those coming on as well as those coming off. Our focus in idiopathic hypersomnia remains on educating prescribers on how to better diagnose IH and identify patients who would benefit from Xywav. We're reminding them that IH is a 24-hour condition and that Xywav is approved to treat the full condition and can address multiple symptoms of IH, not just the daytime symptom of excessive daytime sleepiness. And keep in mind, I think we caution for some while that we're building the market here. This is the first and only FDA-approved treatment for idiopathic hypersomnia in adults. Overall, in the long term, we feel as we build this market, we're really confident in our ability to ultimately maximize Xywav's potential in this very underserved marketplace.

Yes. And then I'll just chime in Marc with respect to the R&D milestones. So, our increased R&D guidance is really a reflection of an expanded, more robust pipeline. Clearly, you saw the expenses in Q4 come up a reflection of taking on the zanidatamab program, which we want to invest fully behind across 2023. So, it's a combination of zanidatamab and the clinical programs to support that, the later-stage studies for suvecaltamide, of course, JZP150 we expect to read out at the end of this year, and then the broader expansion altogether. I had mentioned on the call that we have a pipeline today that's four times the size of the one that we had not that long ago in 2015. So, the focus we've had on disciplined capital allocation has enabled us to be able to lean more into R&D as part of our spending in 2023.

Thank you. Our next question comes from Jason Gerberry of Bank of America. Your line is open.

Hey, guys. Thanks for taking my question. My question pertains to your sales guidance for 2023. It looks pretty conservative, especially in the context of Vision 2025, which ex-corp development, I think is $4.5 billion, which would imply like basically off your 2023 midpoint, you have to gain $350 million in sales in '24 and '25, respectively. But you're only modeling about plus $100 million in revenue in 2023. So, just wondering if you could shed a little bit more light on that dynamic, that'd be helpful. Thanks.

Yes. Thanks, Jason. I'll start and then invite Renee to jump in. What you're seeing in '23 and I think Renee did a nice job of this in laying out the guidance is real growth in all of our core products, offset by continuing significant decline in Xyrem. And I just think as you get out to later years, you're going to continue to see growth in our key products, but you've already suffered a lot of the loss in Xyrem, and so the net gain becomes a little clear. And I think one of the rationales of rolling out Vision 2025 to give people a little more context to the growth curve over time was to make sure people understood that we would be going through this transition in 2023.

To elaborate further, as Bruce mentioned, we have several dynamics at play. There's growth in Xywav, Epidiolex, Rylaze, and Zepzelca, but this is being countered by the ongoing decline in Xyrem, largely due to the strong uptake of Xywav and the introduction of AG, from which we earn royalties. Looking ahead, as Bruce has indicated, we anticipate continued growth in 2024 and 2025. In relation to our 2023 guidance, which shows more modest growth on a consolidated basis due to the factors we've discussed, this translates to low double-digit growth from our existing business and ongoing activity in business development, which we expect to maintain. We also foresee zanidatamab contributing to our revenue in 2025. Furthermore, we will need to remain proactive, as we have in previous years, consistently closing deals that lead to quick revenue generation. This is how we're approaching our overall guidance and we feel positive about our position.

Thank you. Our next question comes from Annabel Samimy with Stifel. Your line is open.

Hi. Thank you for taking my question. I want to ask about your new product, zanidatamab. Regarding the Phase 2 open-label data in first-line GEA in combination with chemotherapy, can you explain how this relates to the ongoing Phase 2 trial and the current Phase 3 data? How confident are you that this data could indicate potential success in the Phase 3 study? How similar are the different study arms, and can we extract meaningful insights from the data, or is the sample size too small at this stage? When can we expect to see this data? Additionally, you have many opportunities with anti-HER2 agents. How will you make decisions on new tumor types, and when can we expect updates on the programs you're planning to advance? What excites you about these opportunities? Thank you.

Annabel, Rob loves it when you say what gets him excited about our pipeline. So, on zanidatamab, we're in a really fortunate position of having had a couple of data readouts even since we signed the initial transaction that give us confidence, but I'll let Rob jump in on specific answers to your questions.

Yes. Thanks for the question. Thanks, Bruce. You have it, you have it right, I described the very strong data from the single-arm Phase 2 trial that's front-line zanidatamab in combination with standard of care. And that was meant to provide data in support of the ongoing pivotal program. I think the results give us a lot of reassurance about what we can expect in that Phase 3 pivotal program and confidence that it's likely to be the standard of care. So, you're thinking about that in the right way. In terms of where else to go with this, if you look at all the data published now, BTC, gastric, breast cancer data, other data from the Phase 1 trial, it's very clear that this is highly active anti-HER2 therapy and just about any tumor type that is overexpressing HER2. In fact, we see activity in patients progressed on other anti-HER2 therapies, which is very important as you think about where to position this next, different lines of therapy. And so, we're actively looking at different opportunities beyond our current strategy. As you know, we're planning a fast-to-market strategy with BTC and then our next pivotal trial in gastric, but looking at other opportunities.

Thank you. Our next question comes from David Amsellem with Piper Sandler. Your line is open.

Hey, thanks. So, I wanted to switch gears to one of your pipeline products. This is the orexin agonist 441. So, in the study, if I'm not mistaken, you're dosing it at night time. And I'm just trying to get a better sense as to the rationale here given that this is ostensibly a wakefulness or alertness drug. And do you think that there is something there that could set you apart from the other vaccines that are in development, be it the Takeda ones or the one from Alcami's or potentially others? Thank you.

Yes, Bruce. Rob, you want to jump in on that? Yes, happy to, Bruce. I'll answer the second part first, which is we looked at this molecule carefully before we did the deal preclinical data, emerging clinical data, and we do have a lot of confidence around it being differentiated potentially to other products that are in development. In terms of our approach to the study design, you asked specifically about dosing healthy volunteers at night; this is really a way for us to quickly in healthy volunteers establish the proof-of-concept around wake promotion. So, in healthy volunteers, when they are sleep deprived, you can then measure alerting effects in that population that would be harder to measure during the daytime in otherwise healthy population. So, as we do that comprising single-dose study, evaluating increasingly higher doses, we then have an opportunity to interrogate the relative wake-promoting effects across those doses, which then sets us up for the necessary downstream study. So, clearly, then we need multiple-dose safety and that will help to select the dose for the study that we just posted on clinicaltrials.gov, and then ultimately together help us to select the dose for the first patient studies.

Thank you. Our next question comes from Gary Nachman with BMO. Your line is open.

Thanks. So, my question is on Rylaze, which has been growing pretty nicely. So, how much will the Monday/Wednesday/Friday dosing help further uptake of that product? And then, what's the cadence for expanding Rylaze geographically, including the EU and Japan? And how much will those ex-U.S. markets ultimately contribute? And then, with the CRL for the IV, how important is that ultimately to the franchise? So, would there be a long-term impact if you don't move forward with it? I know, there won't be an impact in the near term, but what about the long term?

Thanks, Gary. I'm going to reorder your questions a little bit maybe have Kim take Monday/Wednesday/Friday dosing and then comment on any impact of not having IV. And then, Dan, maybe you can take the ex-U.S. piece of this. So, Kim?

Great. Thanks for asking about Rylaze. We're really pleased that the sales for Rylaze have exceeded the prior U.S. peak sales with Erwinaze, and we believe this is a really strong signal that the unmet needs of the market had never truly been satisfied. In terms of Monday/Wednesday/Friday dosing, we really believe when we put this out there that our customers were utilizing Rylaze and not denying any patients access to it because we had a label with every 48-hour dosing. So, we really were not expecting a lift in sales from the Monday/Wednesday/Friday dosing, but instead probably a lift in customer satisfaction in terms of customers who used to and this is the preferred route of dosing the product would be able to administer it in a way that was closer to what they're historically used to and prefer.

And then just following up on Kim. This is Dan. Regarding the CRL question, we don’t consider it a barrier to the uptake in the U.S. market. We're focused on providing additional data to healthcare professionals ideally through the label, though it has also been published and presented at ASH. The uptake for IM has been strong. Outside the U.S., we submitted our application to the EMA last year and expect to receive approval at some point. I can't recall if you mentioned a specific timeframe. In Japan, we plan to engage with the health authorities to differentiate our program from Erwinase in the marketplace. Currently, there is no non-E. coli-based Erwinia available in Japan. Overall growth is somewhat contingent on pricing. In Europe, the U.S., and Japan, we may need to consider lower pricing. Historically, 80% of Erwinase revenue came from the U.S. compared to Europe, where there are still many patients, but ultimately, it hinges on our ability to differentiate the product. Our immediate focus is on getting the product approved, and we anticipate potential approval in the EU later this year.

Thank you. Our next question comes from Balaji Prasad with Barclays. Your line is open.

Thank you for the questions. I have two. First, regarding Vision 2025, which includes about $2 billion of oxybate, could you elaborate on the relative contributions of narcolepsy and idiopathic hypersomnia to this vision? Second, concerning Epidiolex, I've noticed that we're receiving numerous inquiries from investors about the generic challenges facing Epidiolex with 10 to 11 filers. Can you provide any reassurance about the durability of Epidiolex? I want to ensure this isn't a long-term concern for the stock. Thank you.

Yes. So, maybe I'll take that second question first, and then we can have maybe Renee jump in a little bit on what we've said in terms of the oxybate revenue piece of Vision 2025. On Epidiolex, there's no new information out there on durability. We've said from the time we first announced the GW transaction that we did have a lot of confidence in the durability of this asset. We had predicted correctly the likely timing of first ANDA submissions, and of course, that's public now with our announcement of the Hatch-Waxman litigation. Since the time of the deal, we did have additional IP issues, including some with longer duration patents. That's not a surprise. We again predicted that at the time of the transaction. But I don't have new information to share other than all the things we've shared historically that give us confidence that this is not a short-duration product.

Yes. And then, Balaji, on your other question...

Yes, sure. I think your question was about what we see the long-term mix being between narcolepsy and idiopathic hypersomnia for Xywav. Overall, we see it as a very durable franchise, and we do expect Xywav to provide substantial value in both the near and the long term. And we expect that Xywav will both grow and remain the oxybate of choice in 2023. And that in addition to this, idiopathic hypersomnia is a very meaningful growth opportunity as the only FDA-approved treatment for IH. So, it's really a combination of the two contributing very meaningfully moving forward.

I'll quickly address the royalties. During my earlier remarks, I mentioned that for the royalties on authorized generics of Xyrem, you can expect them to be higher in the second half of the year compared to the first half. In the first six months, we only had Hikma on the market, and the tiered royalties were relatively low because they were selling a small percentage of the total oxybate volumes. These royalties can range from 10% to 90%, increasing as the volumes rise, and they are exclusive. In the second half of the year, we anticipate that the royalties will increase as the royalty rate with Hikma shifts to a fixed rate that benefits both parties significantly. Additionally, we expect three other limited-volume authorized generics to come in with low fixed-rate volumes and royalties for Jazz. Moving forward, after the first year, the royalties with Hikma are expected to accelerate to a much higher double-digit rate for Jazz and remain elevated throughout the duration of the royalty period.

Thank you. Our next question comes from Gregory Renza with RBC. Your line is open.

Great. Thanks. Hey, Bruce and team. Thanks for taking my question. Maybe, Bruce, just one for me. How is the current commercial performance across your products and segments really feeding back to the early pipeline selection that you, Rob, and the team are doing, the no-go decisions there and the risk tolerance? And just maybe thinking about the commercial products, how that actually is affecting or influencing what you see as diversification of the portfolio? Of course, as Renee mentioned that with the pipeline being four times the size, now are there particular areas where you'd like to see greater pipeline output from? Thanks so much.

Yes, love the question. I would say that we keep learning the same lesson over and over, which is if you have great products that really meet an unmet patient need that are differentiated from other products, those continue to have high value in the marketplace and get preferentially adopted. And I think the ways in which Xywav and Epidiolex and Rylaze and Zepzelca have all filled unique needs and are differentiated from other products has made a big difference in their success thus far and their future success. And I would say the same thing about the programs we have in the pipeline. We think the ones we're investing most heavily in, particularly in later stages where we have more data, fall into that category of meeting significant unmet patient need and are differentiated from other currently available or expected to be available therapies. In the earlier part of the pipeline, we're taking some bigger risks and shooting for some big targets. And some of those will work and some of those won't. We don't know which ones or which yet, but we're going to ride the winners, and the winners are going to be those ones that are highly differentiated. Dan, I want to give you a chance to weigh in here, too, if you'd like to add anything in particular about the translation of our commercial experience back to R&D choices.

Yes. Thanks, Bruce. So, I mean, one thing to take in mind is some of our pipeline is also evidence generation, new indications, and new formulations of our existing brands, so we want to continue to unlock the full potential of those brands, including broadly Epidiolex and oxybate, and even on the oncology side. I mean, zanidatamab is a pipeline within a product, of course. And so, how we kind of think that through and where we can get the most differentiation and PTRS, etc. So, it's a great set of challenges that we've got with the pipeline and the commercial portfolio. And clearly remaining and enhancing our category leadership, and now epilepsy, sleep medicine, and increasingly, some of these areas in both solid and liquid tumors is also an incentive for the way we think about building out the pipeline. And we have, under Rob's leadership, really created much more internal capability all the way from filing our own INDs through development to also a corporate development muscle, which I'd say is second to none, where we can really look at external innovation. And folks are knocking on our door because of the success we've done in some of these partnerships, whether late-stage or early pipeline. So, it's a good place to be, but we will move into some new areas, as Bruce referenced, where there's significant unmet need and we think we can get to some smart go-no-go decision points.

Thank you. Our next question comes from Brandon Folkes with Cantor Fitzgerald. Your line is open.

Hi, thanks for taking my question. Maybe just one on Zepzelca. Any updates on the enrollment and timeline expectations for LAGOON and IMforte? Any chance of getting the potential first-line move complete before or during 2025, just as you think about Vision 2025? Thank you.

Rob, do you want to talk about Zepzelca clinical trial expectations?

I would like to ask our team for a reminder about what has been communicated before. I want to emphasize that the trial is proceeding as expected, and we are very optimistic about the possibility of Zepzelca becoming a front-line treatment. This would allow us to treat patients earlier, involve more patients, and extend treatment duration. Additionally, we previously mentioned that we anticipate completing enrollment this year.

In the first-line trial.

Thank you. Our next question comes from Ash Verma with UBS. Your line is open.

Hi. Thank you for taking my question. I have two inquiries. First, regarding suvecaltamide, what is your level of confidence in the essential tremor mechanism, particularly the T-type calcium channel pathway? We know that Neurocrine has had a setback with this same mechanism, and Praxis data is expected soon. How does your molecule compare to some of these competitors? Secondly, could you provide some insight into what's happening in the marketplace for Xyrem AG? Are stable patients being switched to AG when they visit their physicians for regular checkups, or is the uptake of AG being driven by insurance providers without patients seeing their doctors? I'm trying to understand how quickly Hikma can capture market share here.

So, let's go first to Rob on the 385 question, on the suvecaltamide question. Yes. I would start just by saying that we had the benefit of a Phase 2a proof-of-concept study before initiating our current trial, which enabled us to see the fact there was the response that we expect to see based on the mechanism and consistent with our preclinical data. It also allowed us to identify what would ultimately be the right patient selection criteria and the right endpoints, of course, in agreement with the FDA for that trial. And so, we think the prior data that we had in our Phase 2 with our molecule gives us confidence about the outcome of the ongoing Phase 2b, which, as you know, is three doses with a once-daily formulation.

Yes. And I'll just add on the second part of your question. Probably too early for us to comment on payer dynamics. We saw obviously where Hikma put their WAC pricing at the time of launch. We're aware that there is some uptake of the AG as we would expect and as was built into our expectations coming into the year, and this is built into the guidance we've given you, but I don't think we've got enough data yet to get more specific.

Thank you. Our next question comes from Ami Fadia with Needham & Company. Your line is open.

Thank you for taking my question. First, regarding the IH market, since you've been involved for a while, could you share your updated perspective on the market size and the value of Xywav? Are you noticing an increase in patient diagnoses and treatments? Additionally, I have a follow-up on JZP385. Can you explain your thoughts about the essential tremor patient population compared to Parkinson's disease? Are there any similarities or differences we should consider? If we see positive results in essential tremor, should we feel more confident about the effectiveness of the Parkinson's disease drug as well? Thank you.

Yes, sure. I'll start by reiterating that we feel like we have compelling growth in idiopathic hypersomnia, already was 1,750 patients coming out of the end of the year and do expect it to grow nicely moving forward. But as we said, we are building a market here. There's quite a bit of education to do. So, we're still trying to estimate ultimately how big this will be. We feel very optimistic, but we know we need to still educate prescribers on how to better diagnose idiopathic hypersomnia. There are 37,000 patients out there we've been talking about that are diagnosed and actively seeking treatment. But the healthcare providers have kind of shown us that they tend to think fairly narrowly about the condition. It's being all that excessive daytime sleepiness. And we're reminding them that this is a 24-hour condition and that we're approved with Xywav to treat the full condition and address multiple symptoms of idiopathic hypersomnia, not just excessive daytime sleepiness. So, again, this is the first and only approved treatment that prescribers really haven't had to think much more beyond daytime sleepiness so far to date, but we really feel good about the way that they are coming along and starting patients. We’re confident in our ability to ultimately maximize the opportunity of the product in this really underserved market.

Yes. Regarding JZP385, it addresses a significant unmet need in essential tremor, where there have been no new approved therapies in 50 years and limited existing options. There is also no approved treatment for Parkinson's tremor. We believe there is shared underlying biology between these types of tremors and see potential in using T-type calcium channel blockers as a treatment. In terms of market potential, there are a few million diagnosed cases in Western markets, and we estimate that the total opportunity for essential tremor could reach up to 11 million. With the right drug, we could unlock substantial market growth. For Parkinson's, the patient population is more defined and easier to reach through treating physicians, with about 1 million patients diagnosed annually, 75% of whom experience tremors without approved treatment. We will determine how to configure our sales force if we are fortunate enough to secure both indications. From a pricing, value, market coverage, and interest perspective from healthcare providers and patients, we see substantial market potential.

Thank you. Our next question comes from Madhu Kumar with Goldman Sachs. Your line is open.

Good afternoon. This is Omari on for Madhu. So, our first question is how should we think about the ex-U.S. launch of Epidiolex in Europe as a like for future growth? And then, how should we think about potential opportunities for corporate development? So, you mentioned you'd all be open to seeking new areas. Would this be still within the core of Oncology and Neuroscience, or could you expand outside of that?

Okay, in a moment, we will hear from Dan regarding the international Epidiolex opportunity and then from Renee on corporate development. But first, I think we might have left a part of the last question unanswered, which pertains to how to consider the two clinical trial populations and their relationship, as well as the potential results in essential tremor and their relevance to Parkinson's tremors. Rob, could you elaborate on that?

Yes. Thanks, Bruce, and I do think Dan covered it with respect to, yes, these are two distinct clinical entities, but we have strong pre-clinical rationale that the mechanism of T-type calcium channel inhibitors could help block the tremor associated with each of these conditions. So, while certainly if we see a positive readout in either of these indications, it's going to give us increasing confidence around this molecule and working the way we think it should work. But I wouldn't have a direct read-through to say if it doesn't work in one, it won't work in the other.

We are observing strong continual growth for Epidiolex outside the U.S. for 2023, which we expect to contribute positively towards 2025. Notably, we experienced some challenges related to foreign exchange rates that we believe we will not encounter as directly moving forward. Additionally, we received approval in France towards the end of last year with full reimbursement, allowing us to fully launch in all five major European countries, and we plan to add smaller markets over time. Currently, we are operational in 15 out of the 35 approved markets. From a medium-term standpoint, we recognize significant opportunities in the Asia Pacific region, especially in Japan, where we have an ongoing Phase 3 study and are excited to develop our commercialization strategies for the Neuroscience portfolio.

And then, maybe just jumping in on corporate development, in terms of areas we're interested in, clearly, we're definitely focusing on neuro and oncology, but we're also looking more broadly at rare and orphan in general. This is a space that we're very comfortable in currently within our neuroscience and oncology therapeutic areas. But as we're looking at corporate development opportunities, we've tended to be technology-agnostic, meaning between small molecule, large molecule, botanicals. And as we continue to build and enhance our commercial capabilities, Bruce had mentioned earlier, the strong focus on patient need, when you can have a meaningful impact for patients to be able to apply our insights, it gives us confidence in looking at multiple types of molecules and potentially extending beyond neuro and oncology. But the primary focus is still in our neuroscience and oncology therapeutic areas. In terms of the stage of compounds, we're looking at commercial, near commercial, but also pipeline deals. You've heard us talk about our guidance today. We're investing heavily there, and we do think our increased capabilities that we've developed both organically but also with the acquisition of GW has set us up really well.

Thank you. Our last question comes from Greg Fraser with Truist. Your line is open.

Great. Thanks for squeezing me in. On Xywav, you're clearly confident in continued strong growth for both indications. On narcolepsy, do you expect the pace of new patient adds to potentially slow a bit this year, given the oxybate market dynamics? Last year, I think you added about 500 new patients each quarter. Curious whether you think that pace can continue with the various moving parts in the oxybate market this year. Thank you so much.

Yes. Just that we're still confident here that we've got clear differentiation based on the reduced sodium and that we're going to continue at a nice pace, both in terms of patient conversions as well as new patient starts, where we're already seeing the vast majority of patients being started on Xywav versus Xyrem. So overall, we feel really good about that momentum continuing throughout the year.

Thank you. There are no further questions. I'd like to turn the call back over to Bruce for any closing remarks.

Thank you, Operator. I want to close by recognizing the passion and innovation of our 2,800 talented employees around the globe who come to work each day, dedicating themselves to improving the lives of more patients than before. I also want to thank our partners and shareholders for their continued confidence and support. Thanks, everyone, for joining us today and stay well.

Thank you for your participation. You may now disconnect. Everyone, have a great day.