Jazz Pharmaceuticals plc — Q3 2017 Form 10-Q
Business context and period. International biopharmaceutical company focused on sleep and hematology/oncology. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Vyxeos was FDA-approved on August 3, 2017, and launched in the U.S. in August.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Total revenue | $411.9 million | $374.2 million | +10% |
| Operating income | $86.5 million | $136.3 million | −37% |
| Net income | $63.5 million | $89.8 million | −29% |
| Diluted EPS | $1.03 | $1.45 | −29% |
| Gross margin on product sales | 92.4% | 93.5% | −1.1 percentage points |
Nine months: Revenue was $1.182 billion (+8%); operating income was $387.6 million (−9%); net income was $255.6 million (−9%); diluted EPS was $4.17 versus $4.51. Product gross margin was 92.7%, down from 93.4%.
Revenue mix: Q3 Xyrem sales were $303.9 million (+6%), Erwinaze/Erwinase $49.2 million (+14%), Defitelio/defibrotide $31.2 million (+11%), and Vyxeos $9.7 million. Xyrem represented 74% of Q3 net product sales. Prialt sales declined 10% to $7.9 million.
Cash, debt and liquidity: Nine-month operating cash flow was $488.5 million, up from $411.7 million. Cash and cash equivalents were $252.6 million and investments $200.0 million at quarter-end. Debt principal totaled approximately $1.836 billion: $685.8 million term loan and $1.150 billion exchangeable notes; no revolver borrowings remained, with $1.25 billion available. The reported debt carrying value was $1.580 billion. The company reported compliance with credit-agreement covenants and said available liquidity and expected operating cash flows should cover foreseeable needs.
Material changes and unusual items
- Q3 operating expenses rose substantially, including acquired in-process R&D expense of $75 million for ImmunoGen collaboration rights and higher intangible amortization following FDA approval of Vyxeos. These items contributed to lower operating and net income despite revenue growth.
- Q3 tax provision fell to $1.2 million from $26.4 million; the nine-month effective tax rate was 20.5% versus 26.5%, primarily reflecting releases of certain foreign tax valuation allowances and unrecognized-tax-benefit reserves.
- The company issued $575 million principal amount of 1.50% exchangeable notes due 2024. Net proceeds were used mainly to repay revolving-credit borrowings and related costs. Nine-month financing cash flows also included $56.4 million of share repurchases.
- Foreign-currency translation contributed $159.3 million of other comprehensive income for the nine months. The company recorded a proposed French tax assessment of approximately $45.2 million, which it disputes and plans to contest.
Guidance, commentary and principal risks
- Management expected 2017 product sales to exceed 2016, primarily on anticipated growth in Xyrem and Defitelio and Vyxeos sales; it expected 2017 royalties and contract revenue to increase. It expected gross margin to remain broadly unchanged, while SG&A, R&D and intangible amortization were expected to rise. These are management expectations, not guarantees.
- Management planned to submit an NDA for JZP-110 in Q4 2017, an NDA for JZP-507 by mid-2018, and an Xyrem pediatric supplemental NDA in mid-2018. A Vyxeos European marketing application was submitted November 2, 2017, after quarter-end.
- Xyrem concentration is a major risk: eight companies had filed generic applications. Settlements permitted certain generic entry dates, including West-Ward authorized-generic entry beginning January 1, 2023, potentially earlier under specified circumstances; other settled filers generally had licenses from December 31, 2025, potentially earlier. Litigation with remaining filers and appeals challenging Xyrem REMS patent decisions remained unresolved.
- Erwinaze faced constrained, single-source supply and Q3 disruptions. Its manufacturer, Porton Biopharma, was addressing an FDA warning letter citing manufacturing-practice violations; further supply or regulatory problems could impair sales.
- The company was cooperating with a U.S. Attorney’s Office investigation into charitable patient-assistance support following subpoenas. Potential outcomes and financial exposure were uncertain. Other material risks include pricing and reimbursement pressure, product-launch and development uncertainty, reliance on single-source suppliers, debt obligations, and regulatory and patent litigation.
Most important facts for investors to verify
- Whether Xyrem generic litigation, REMS-patent appeals, settlements or competing sodium-oxybate products alter expected timing of competition.
- Whether Erwinaze supply and PBL’s FDA remediation improve, and whether any further interruptions affect shipments or demand.
- Vyxeos launch uptake, manufacturing reliability, reimbursement, and progress of its European review.
- Progress and regulatory outcomes for JZP-110, JZP-507 and other pipeline programs, including timing and development spending.
- Resolution and potential cost of the patient-assistance investigation and the disputed French tax assessment.
- Cash generation, debt-service capacity and covenant headroom as the company funds development, commercialization and potential acquisitions.