Jazz Pharmaceuticals plc — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Unless noted, amounts are U.S. dollars.
Business context
Jazz is a global biopharmaceutical company focused on neuroscience and hematology/oncology. Its marketed portfolio includes Xyrem, Sunosi, Defitelio, Erwinaze and Vyxeos. Xyrem remained the principal revenue driver, representing approximately 77% of 2019 net product sales.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $2.162 billion | $1.891 billion |
| Net product sales | $2.136 billion | $1.869 billion |
| Income from operations | $532.4 million | $614.8 million |
| Net income | $523.4 million | $447.1 million |
| Diluted earnings per share | $9.09 | $7.30 |
| Cash from operating activities | $776.4 million | $798.9 million |
| Cash, cash equivalents and investments at year-end | $1.077 billion | $824.6 million |
| Working capital at year-end | $1.266 billion | $888.5 million |
Net product sales grew 14%. Cost of product sales, excluding acquired-technology amortization, was $127.9 million; gross margin on that basis was 94.0%, versus 93.5% in 2018. Operating income declined 13%, as R&D, SG&A and intangible amortization increased. Net income rose 17%, helped by a $73.2 million income tax benefit; this included a $112.3 million discrete deferred tax benefit from an intra-entity intellectual-property transfer. The 2018 period included an $80.2 million tax provision.
Fourth quarter: Revenue was $581.7 million versus $476.5 million in Q4 2018. Net income was $74.0 million versus $159.5 million; Q4 2019 included $111.1 million of PRV amortization, while Q4 2018 results included different tax and other items.
Product sales: Xyrem $1.643 billion (+17%); Erwinaze/Erwinase $177.5 million (+2%); Defitelio/defibrotide $172.9 million (+16%); Vyxeos $121.4 million (+20%); Sunosi $3.7 million (launched in the U.S. in July 2019). Xyrem growth reflected higher net price and 6% higher sales volume. Erwinaze sales benefited from improved availability versus 2018, but supply remained constrained.
Cash, debt and capital allocation: Operating cash flow was $776.4 million. Year-end debt principal was approximately $1.8 billion, comprising a $617.7 million term loan and $1.15 billion of exchangeable notes; debt carrying value was $1.607 billion. The $1.6 billion revolving facility was undrawn. The company reported compliance with credit-agreement financial covenants and stated available liquidity and expected operating cash flow should fund operations and obligations for the foreseeable future. It repurchased $301.5 million of shares in 2019; $577.7 million remained authorized at year-end. No dividends were paid.
Material changes versus the prior comparable period
- Revenue increased 14%, led by Xyrem, alongside growth in Defitelio and Vyxeos; Sunosi began U.S. commercialization.
- Operating income fell from $614.8 million to $532.4 million as R&D rose 32% to $299.7 million, SG&A rose 8% to $736.9 million, and intangible amortization rose 76% to $354.8 million. Amortization included the full $111.1 million PRV cost and an increased Erwinaze charge following notice affecting its license term.
- R&D and pipeline investment expanded, including JZP-385, JZP-458, lurbinectedin and Codiak collaboration programs. The company also acquired Cavion and licensed U.S. rights to lurbinectedin.
- Cash and investments increased to $1.077 billion; operating cash flow was modestly lower. The company repurchased fewer shares than in 2018 ($301.5 million versus $523.7 million).
Outlook, commentary and risks
- Management expected 2020 total product sales to increase, primarily from anticipated growth in Xyrem and Sunosi. No numerical sales or earnings guidance is provided in the supplied filing text.
- Management expected R&D expenses to continue rising. SG&A was also expected to increase with Sunosi launches in the U.S. and Europe and planned U.S. launches of JZP-258 and lurbinectedin, subject to approvals. Royalties and contract revenues were expected to decline in 2020 due primarily to lower out-licensing milestones.
- Key pipeline milestones included FDA review of JZP-258, priority review of the lurbinectedin NDA with an August 16, 2020 PDUFA date, and an anticipated JZP-458 BLA submission as early as Q4 2020. These were forward-looking expectations, not guaranteed outcomes.
- Xyrem concentration and expected generic/authorized-generic competition are significant risks. Settlements permit an authorized generic to enter as early as 2023, with other entry dates potentially accelerated under specified conditions.
- Erwinaze faces single-source supply constraints and its exclusive license and supply agreement with PBL expires December 31, 2020 unless renewed. Vyxeos also depends on a single-site supplier with a history of batch failures and manufacturing issues.
- Other material risks include pricing and reimbursement pressure, product and pipeline execution, regulatory and clinical uncertainty, substantial debt and covenants, foreign exchange and LIBOR transition exposure, and reliance on third-party manufacturers. The company finalized a DOJ/OIG settlement in April 2019 and entered a five-year corporate integrity agreement. It reported no litigation expected to have a material adverse effect.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The audit highlighted judgment in impairment assessments for Vyxeos and Erwinaze/Erwinase intangible assets and in recoverability of deferred tax assets.
Important facts for investors to verify
- Whether Xyrem can sustain sales and pricing as generic competition approaches, and how entry timing may change under settlement terms.
- Progress on the PBL agreement, Erwinaze supply reliability and the potential effect on sales and intangible-asset carrying value.
- Sunosi uptake, European pricing and reimbursement, and the net sales impact of payer rebates and discounts.
- Regulatory decisions, launch timing, costs and commercial prospects for JZP-258, lurbinectedin and JZP-458.
- Debt repayment and refinancing needs, including the $575 million 2021 notes maturity, covenant headroom and the effect of variable interest rates.
- Assumptions supporting the $2.3 billion finite-lived intangible-asset balance and deferred-tax-asset recoverability, including forecast sales and Erwinaze supply.