Jazz Pharmaceuticals plc — Q1 2015 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology products. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Total revenue | $309.3 million | $246.9 million | Up 25% |
| Product sales, net | $307.0 million | $245.0 million | Up 25% |
| Operating income (loss) | $116.8 million | $(66.7) million | 2014 included $127.0 million of acquired in-process R&D expense |
| Net income (loss) attributable to Jazz | $70.7 million | $(92.7) million | Diluted EPS was $1.12 versus $(1.58) |
| Operating margin | 37.7% | Not meaningful | Calculated as operating income divided by revenue |
| Gross margin on product sales | 90.8% | 87.4% | Improved mainly because Q1 2014 included acquisition-accounting inventory step-up costs |
| Operating cash flow | $96.6 million | $68.7 million | Up $27.8 million |
| Cash and cash equivalents | $782.6 million | $684.0 million at Dec. 31, 2014 | Quarter-end balance |
| Total debt, principal | About $1.5 billion | — | Includes $893.1 million term loans and $575.0 million 2021 notes |
Q1 2015 net income was offset in comprehensive income by a $156.5 million foreign-currency translation loss; total comprehensive loss attributable to Jazz was $85.8 million. The income tax provision was $32.1 million, or a 31.2% effective rate.
Revenue mix
- Xyrem: $212.7 million, up 33%; 69.3% of net product sales. Growth reflected price increases and 12% higher sales volume.
- Erwinaze/Erwinase: $50.4 million, up 7%, primarily from volume growth and, to a lesser extent, price increases.
- Defitelio/defibrotide: $17.4 million; up 15% on a pro forma basis versus Q1 2014, which reflects the Gentium acquisition closing in January 2014.
- Prialt: $6.8 million, up 57%, partly due to shipment timing in Q1 2014. Psychiatry sales were $9.1 million, down 8%, mainly due to generic competition.
Material changes and liquidity
- Revenue growth and return to GAAP profitability followed Q1 2014’s $127.0 million JZP-110 acquired in-process R&D charge. Q1 2015 R&D expense rose 50% to $27.2 million as development activity expanded.
- Interest expense increased 61% to $16.2 million, primarily reflecting higher debt after the August 2014 issuance of $575 million of 1.875% exchangeable notes.
- Cash increased by $98.6 million during the quarter. Investing cash flow was $18.3 million, including $32.7 million net proceeds from the sale of certain EUSA-acquired products and $14.4 million of property and equipment purchases. Financing cash flow was $(3.3) million.
- Available revolving-credit capacity was $423.9 million. Jazz reported compliance with its secured-leverage covenant. Management said cash, expected operating cash generation and revolver availability should fund operations and existing obligations for the foreseeable future.
- On March 20, 2015, Jazz completed the sale of certain EUSA-acquired products for approximately $33 million cash after adjustments, recognizing a $0.2 million disposal loss.
Outlook, management commentary and principal risks
- Management expected 2015 total product sales to increase over 2014, primarily from growth in lead products; expected gross margin to be slightly higher than 2014; and expected higher SG&A, R&D and interest expense. It expected positive operating cash flow in 2015. The filing does not provide a numerical full-year revenue or earnings forecast.
- R&D expense was expected to increase substantially as trials and development programs advance. Planned milestones included Phase 3 trials of JZP-110, completion of the U.S. defibrotide NDA rolling submission in mid-2015, and preliminary Leukotac Phase 3 data in mid-2015.
- Xyrem concentration and competition: Five companies had filed generic applications, with patent litigation ongoing; trial in part of the Roxane case could occur as early as Q4 2015. Patent-review petitions were pending before the PTAB. The FDA approved the final Xyrem REMS in February 2015; implementation was expected by late August, but FDA review, potential REMS changes, generic access and possible antitrust scrutiny posed risks.
- Supply and regulatory risk: Erwinaze relied on a single manufacturer, had constrained capacity and limited inventory; the manufacturing facility transferred from Public Health England to Porton BioPharma in April 2015. The FDA had issued a Form 483 with manufacturing observations following a January 2015 inspection. Xyrem supply also depended on DEA quotas; requested quotas for 2015 were not fully allocated.
- Development uncertainty: Jazz terminated the Erwinaze young-adult study because it could not enroll patients. Enrollment and treatment in the JZP-416 Phase 2 trial were suspended after hypersensitivity-like reactions; next steps remained under evaluation. JZP-110 trials depended on clinical-material availability.
- Defibrotide: U.S. approval remained uncertain despite a rolling NDA submission. European growth depended partly on country-level pricing and reimbursement approvals. Approval, labeling, additional-trial requirements and commercialization outcomes were uncertain.
- Contingencies: Potential retroactive Medicaid/340B pricing liabilities for ProstaScint and previously sold Quadramet could not be reasonably estimated. The Cutler litigation sought $35.5 million in contingent payments plus unspecified damages; trial was scheduled for October 2015. Other patent litigation was ongoing, while the Gentium shareholder case was dismissed with prejudice in January 2015.
- The company also disclosed substantial acquisition-related intangible assets and goodwill, foreign-exchange exposure, dependence on single-source suppliers and customers, and approximately $1.5 billion of debt. These may constrain flexibility or affect results.
Investor verification priorities
- Track Xyrem generic litigation, PTAB decisions, FDA REMS implementation and any changes to the single-pharmacy distribution requirements.
- Confirm Xyrem sales durability, including volume, net pricing, payer restrictions and the effect of price increases.
- Monitor Erwinaze manufacturing capacity, quality findings, inventory and supply continuity under the new facility operator.
- Assess progress and regulatory outcomes for the defibrotide NDA and European pricing and reimbursement submissions, as well as JZP-416 and JZP-110 development.
- Reconcile cash generation and planned investment against debt maturities, covenant requirements and the remaining share-repurchase authorization.
- Seek updates on unquantified radiopharmaceutical pricing liabilities and the Cutler matter; the filing does not provide a clear estimate of potential exposure.