Jazz Pharmaceuticals plc — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it also presents unaudited fourth-quarter results. Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology. Its principal products are Xyrem, Erwinaze/Erwinase and Defitelio/defibrotide. Xyrem remained the dominant product, accounting for 72.5% of 2015 net product sales.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1,324.8 million | $1,172.9 million | +13% |
| Net product sales | $1,316.8 million | $1,162.7 million | +13% |
| Operating income | $508.2 million | $195.6 million | +160% |
| Net income attributable to Jazz | $329.5 million | $58.4 million | Higher; prior year included substantial acquired IPR&D expense |
| Diluted EPS | $5.23 | $0.93 | — |
| Operating cash flow | $531.9 million | $405.8 million | +31% |
| Gross margin on net product sales | 92.2% | 89.9% | +2.3 percentage points |
Product sales were led by Xyrem at $955.2 million (+23%); Erwinaze at $203.3 million (+2%); and Defitelio/defibrotide at $70.7 million (approximately flat as reported). Prialt sales were $26.4 million, psychiatry sales $37.1 million, and other product sales $24.1 million. Xyrem sales growth reflected higher average net selling prices and 6% volume growth. The company reported fourth-quarter revenue of $340.9 million and attributable net income of $82.8 million, versus $328.1 million and $81.6 million, respectively, in fourth-quarter 2014.
Operating expenses included SG&A of $449.1 million (+11%) and R&D of $135.3 million (+59%). The 2015 effective tax rate was 24.4%, compared with 62.2% in 2014; management attributed the 2014 rate largely to the treatment of acquisition-related payments. Cash and cash equivalents were $988.8 million at year-end, working capital was $1,031.0 million, and total assets were $3,359.7 million.
Debt, liquidity and capital allocation
Year-end debt carrying value was $1,204.5 million, including $738.0 million of term loans and $466.0 million carrying value for $575.0 million principal amount of 1.875% exchangeable notes due 2021. The term loan’s stated interest rate was 2.36%; $750.0 million of revolving credit capacity was available, less $1.1 million committed for a letter of credit. The company reported compliance with its credit agreement covenants. Management said cash, expected operating cash flow and revolving capacity should fund operations and existing obligations for the foreseeable future, while noting that acquisitions and development could require additional capital.
2015 investing cash outflow was $2.3 million, reflecting $36.0 million of capital expenditures offset by $33.7 million of sale proceeds. Financing cash outflow was $214.3 million, including debt repayments and $61.6 million of share repurchases. The November 2015 repurchase authorization was up to $300 million, with $259.8 million remaining at year-end. No dividends were paid, and none were expected in the foreseeable future.
Changes, outlook and material items
- Management expected 2016 total product sales to increase, primarily from growth in lead products, and gross margin to rise with higher sales. It expected R&D and SG&A expenses to increase, including spending on clinical trials and a potential U.S. defibrotide launch. The filing does not provide numerical revenue or earnings guidance.
- Xyrem’s final FDA-approved REMS was implemented in August 2015. Prescription delays disrupted third-quarter sales; management reported improved operating metrics and stabilization in the fourth quarter but cautioned that further disruption remained possible.
- Defibrotide’s U.S. NDA received priority review; the PDUFA target date was March 31, 2016. Approval, timing, labeling and launch were uncertain. An FDA inspection of Jazz’s manufacturing facility passed, while Patheon Italia had received an FDA Form 483 with observations concerning the finished-product facility.
- JZP-110 Phase 3 trials began in 2015, with preliminary data expected in fourth-quarter 2016. Enrollment completion for the pediatric Xyrem trial was expected in the second half of 2016; a defibrotide prevention trial was planned to begin enrollment in third-quarter 2016.
- Jazz discontinued Leukotac development in late 2015 and terminated the JZP-416 pivotal trial in January 2016 after hypersensitivity-like reactions. It recorded a $31.5 million impairment in 2015 related to JZP-416. A one-time $18.0 million contract-claim settlement charge was also recorded; the settlement was reached in February 2016. Debt refinancing produced a $16.8 million loss, and a $25.0 million defibrotide milestone was recorded in R&D.
Key risks and contingencies
- Product concentration and generic exposure: Seven companies had filed Xyrem generic applications; related patent litigation and patent-review proceedings were ongoing. Management warned generic or competing sodium oxybate entry could materially harm results.
- Supply concentration: Each marketed product and key ingredient depended on single-source suppliers. Erwinaze manufacturing capacity was nearly fully utilized, with limited inventory and prior supply disruptions. Xyrem supply also depended on DEA quotas; suppliers had received most, but not all, requested 2016 quotas.
- Regulatory, reimbursement and pricing: Xyrem REMS requirements, controlled-substance regulation, payor restrictions, government rebates and drug-pricing scrutiny could constrain sales or margins. Defitelio’s European expansion depended on country-level pricing and reimbursement.
- Tax and other contingencies: French authorities proposed approximately $41.8 million of additional tax, interest and penalties for 2012–2013 transfer-pricing adjustments; Jazz disputed the assessment and intended to contest it. Potential retroactive Medicaid/340B liabilities for divested Quadramet and ProstaScint could not be reasonably estimated.
- Other exposures: Variable-rate debt, euro currency movements, clinical-trial outcomes, product safety, intellectual-property litigation and manufacturing compliance remained significant risks. The filing reports audited financial statements with an unqualified opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Progress and outcomes of Xyrem ANDA litigation and PTAB reviews, and any change in the FDA’s REMS position.
- Whether Xyrem prescription fulfillment remains stable and whether patient volume and net pricing continue to support growth.
- Erwinaze supply, manufacturing-capacity expansion and any resulting market availability constraints.
- FDA’s defibrotide decision, final label, supplier remediation, launch timing and reimbursement prospects.
- Cash generation, debt repayment and covenant headroom alongside planned R&D, potential launch costs and repurchases.
- Resolution and financial impact of the French tax assessment and any Medicaid/340B liability for the divested radiopharmaceutical products.