Jazz Pharmaceuticals plc — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology products. Its results are substantially dependent on Xyrem.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $336.0 million | $309.3 million | +9% |
| Operating income | $121.2 million | $116.8 million | +4% |
| Net income | $74.1 million | $70.7 million | +5% |
| Diluted EPS | $1.19 | $1.12 | +6% |
| Operating cash flow | $143.7 million | $96.6 million | +$47.2 million |
| Cash, cash equivalents and investments, March 31 | $980.5 million | — | — |
Gross margin on product sales increased to 93.0% from 90.8%, primarily due to product mix. Operating margin was approximately 36.1%, compared with 37.7%; net margin was approximately 22.1%, compared with 22.9%. Operating cash flow improved; working-capital movements included higher receivables and inventories, partly offset by changes in tax payables.
Product sales were $333.9 million. Xyrem contributed $249.5 million (+17%); Erwinaze/Erwinase $51.2 million (+2%); Defitelio/defibrotide $17.9 million (+3%); Prialt $6.2 million (-8%); psychiatry products $7.0 million (-23%); and other products $2.1 million (-81%). Xyrem represented 75% of product sales. U.S. revenue rose to $305.9 million from $269.2 million, while European revenue declined to $25.0 million from $32.6 million.
Financial position and capital allocation
At March 31, cash and investments totaled $980.5 million. Debt had a $1.184 billion carrying value, including $575 million principal of 1.875% exchangeable notes due 2021 and term loans; management described total long-term debt principal as approximately $1.3 billion. The company had $748.9 million available under its revolving facility, net of a letter of credit. The term loan interest rate was 2.38%; the company reported compliance with its credit-agreement covenants. Current liabilities rose to $398.8 million from $226.6 million, largely reflecting a $150 million Defitelio milestone payable and higher accrued liabilities.
Jazz repurchased 1.1 million shares for $134.4 million during the quarter at an average $123.77 per share, under a $300 million authorization. Cash declined by $9.0 million to $979.8 million after financing outflows, principally share repurchases. The $150 million milestone triggered by FDA approval of Defitelio was paid in April 2016. Management said cash, expected operating cash generation and revolver availability should fund operations and obligations for the foreseeable future.
Changes, outlook and management commentary
- Revenue growth was principally driven by Xyrem: sales volume rose 4%, and a February 2016 price increase lifted average net selling price. Erwinaze sales benefited from price increases but remained affected by supply constraints.
- On March 30, 2016, the FDA approved Defitelio for specified VOD/SOS patients following stem-cell transplantation; Jazz launched it in the U.S. shortly afterward. The approval triggered the $150 million milestone payment and capitalization of related intangible assets.
- Q1 expenses included $8.8 million acquired in-process R&D for recombinant crisantaspase rights. SG&A increased 15%, R&D increased 15%, and legal/restructuring costs were also higher. Reported net income was $74.1 million; company-defined non-GAAP adjusted net income was $141.0 million, versus $125.1 million.
- Management expected 2016 product sales to increase over 2015, primarily from Xyrem and Defitelio; royalties and contract revenue to increase slightly; SG&A and R&D to rise; and interest expense to decline. These are directional expectations, not numerical guidance. Management expected positive operating cash flow in 2016.
- Pipeline timing: preliminary Phase 3 JZP-110 data targeted by Q4 2016, with a potential NDA submission in H2 2017 subject to results; pediatric Xyrem enrollment completion expected in H2 2016; defibrotide prevention-trial enrollment expected by Q4 2016.
Risks, contingencies and unusual items
- Xyrem concentration and competition: Seven companies had filed generic Xyrem ANDAs. Patent litigation and patent reviews were ongoing; the company anticipated some trial activity as early as Q3 2016 and expected initial PTAB decisions in July 2016. Two litigation settlements were reached in Q2 2016, after the reporting period, granting licenses no earlier than December 31, 2025, subject to specified conditions. Generic or alternative sodium oxybate competition could materially harm results. REMS requirements, DEA quotas, sole-source supply, reimbursement pressure and pricing scrutiny are additional risks.
- Erwinaze supply: Manufacturing is dependent on a single supplier with capacity nearly fully utilized and limited inventory. Supply disruptions had affected markets. The FDA issued the supplier a Form 483 after a March 2016 inspection; remediation was required.
- Defitelio execution: Commercial uptake, reimbursement, physician familiarity, limited eligible patients, product supply and post-marketing obligations could constrain results. European pricing and reimbursement approvals remained in process in some markets.
- Tax and legal contingencies: French tax authorities proposed approximately $43.3 million of additional tax, interest and penalties for 2012–2013 transfer-pricing adjustments; Jazz disputed the assessment. Potential Medicaid/340B liabilities for previously sold Quadramet and ProstaScint could not be reasonably estimated. In May 2016, after quarter-end, the company received a U.S. Attorney subpoena concerning support for charitable organizations providing Medicare patient assistance; outcome and potential costs were uncertain.
- Management cited single-source manufacturing dependencies, reimbursement and drug-pricing pressures, clinical and regulatory uncertainty, foreign-exchange exposure, acquisition risks and substantial debt as material risks. Q1 foreign-currency translation produced $45.2 million of other comprehensive income, while the income statement included a $0.8 million foreign-currency loss.
Investor verification priorities
- Track Xyrem generic-litigation and IPR outcomes, settlement terms and any FDA action on the REMS or generic approvals.
- Verify Xyrem growth drivers, including volume, net pricing, payer rebates and reimbursement restrictions.
- Monitor Erwinaze manufacturing remediation, capacity, inventory and any further supply interruptions.
- Assess U.S. Defitelio launch, reimbursement, sales contribution and the $150 million milestone’s cash impact.
- Review the French tax assessment, radiopharmaceutical pricing liabilities and Medicare-assistance subpoena developments.
- Compare subsequent results with management’s 2016 directional outlook and evaluate debt service, cash generation and capital allocation.