Jazz Pharmaceuticals plc — Q1 2014 Form 10-Q
Business context and period: Specialty biopharmaceutical company; unaudited quarter ended March 31, 2014, compared with Q1 2013. Results include Gentium from its January 23, 2014 acquisition, so year-over-year comparisons are not fully like-for-like.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $246.9 million | $196.2 million; up 26% |
| Net product sales | $245.0 million | $194.7 million; up 26% |
| GAAP operating income (loss) | $(66.7) million | $68.2 million |
| GAAP net income (loss) attributable to Jazz | $(92.7) million; $(1.58) per diluted share | $43.4 million; $0.71 per diluted share |
| Non-GAAP adjusted net income | $100.8 million; $1.61 per diluted share | $84.4 million; $1.37 per diluted share |
| Gross margin on product sales | 87.4% | 86.0% |
| Operating cash flow | $68.7 million | $69.9 million |
| Cash and short-term investments | $251.4 million at March 31 | $636.5 million cash at December 31, 2013 |
| Total debt | $1.20 billion | $550.0 million at December 31, 2013 |
The GAAP loss primarily reflects a $127 million JZP-110 acquired in-process R&D charge, alongside higher amortization, operating costs and interest. Adjusted net income is a company-defined non-GAAP measure and excludes specified items; it is not a substitute for GAAP results. Operating cash flow was positive, but cash fell by $390.6 million as acquisition and investment outflows substantially exceeded operating inflows. At quarter-end, $125 million remained available under the revolving facility.
Revenue trends and material changes
- Xyrem: $160.4 million, up 36%; approximately 65.5% of net product sales. Growth reflected higher average net price and, to a lesser extent, 5% higher sales volume.
- Erwinaze/Erwinase: $46.9 million, up 12%, driven mainly by volume growth.
- Defitelio/defibrotide: $12.2 million included from Gentium since acquisition; no comparable reported sales in Q1 2013. European commercial launch began in Germany and Austria in March.
- Psychiatry product sales declined 44%, mainly due to generic Luvox CR and the continuing impact of an authorized generic FazaClo LD; Prialt sales fell 14%.
- SG&A rose 51% to $106.4 million, reflecting transaction and integration costs, higher personnel, professional services and promotional spending. R&D rose to $18.1 million from $6.7 million, including expanded clinical and development work.
Acquisitions, outlook and management commentary
- Jazz acquired approximately 98% of Gentium for an aggregate cost of $976.3 million, adding European Defitelio, development programs and an Italian manufacturing operation. Gentium contributed $13.5 million revenue and a $17.9 million net loss after closing.
- Jazz paid $125 million upfront for worldwide JZP-110 rights, plus a $2 million milestone; potential future milestone payments of up to $272 million and tiered royalties are also provided for.
- Management expected 2014 product sales to increase over 2013, primarily from Xyrem and Erwinaze growth and the addition of Defitelio. It expected 2014 R&D, SG&A, amortization and interest expense to be higher than in 2013. It expected royalties and contract revenues to be relatively consistent and gross margin to increase slightly.
- Management expected positive operating cash flow in 2014 and believed cash, operating cash generation and revolver availability would fund operations and existing obligations for the foreseeable future. This outlook depends on sales, costs and other assumptions.
- Defitelio launches in additional European countries were planned on a rolling basis during 2014–2015, subject to pricing and reimbursement. Management was discussing a possible U.S. defibrotide NDA strategy with FDA and believed submission might be possible without another clinical trial; approval was uncertain.
- Planned development included JZP-110 Phase 3 preparation, JZP-386 human study planning, JZP-416 and Leukotac trials, and additional Erwinaze and pediatric Xyrem studies. The company also expected to invest approximately €45–€50 million ($61–$68 million) in an Irish manufacturing and development facility.
Risks, contingencies and unusual items
- Xyrem concentration and competition: Three generic ANDAs were being litigated. Roxane litigation could reach trial as early as late Q4 2014; Amneal and Par proceedings were consolidated, with FDA approval stays described as extending to May 20, 2016, subject to earlier court resolution. Generic entry could materially harm sales.
- Xyrem REMS dispute: Jazz disputed FDA-proposed changes that could permit broader distribution. It initiated FDA dispute resolution in February 2014. Changes could raise distribution costs, affect sales or make generic entry easier.
- Regulatory inspection: In April 2014, FDA issued a Form 483 concerning pharmacovigilance processes, including 92 serious and unexpected adverse-event reports filed beyond the 15-day deadline and deficiencies in procedures and investigations. Jazz described corrective actions; further FDA action remained possible.
- Supply dependence: The company relies on single-source suppliers for products and ingredients. Erwinaze supply was constrained historically, and manufacturing or quota issues could limit sales; defibrotide production was concentrated at one Italian facility, with one finished-product processor at the time.
- Defitelio execution: European commercial uptake, reimbursement, exceptional-circumstances post-marketing obligations and U.S. approval remained uncertain.
- Debt and interest risk: Approximately $1.2 billion debt, secured by substantially all relevant assets, with financial and operating covenants; Jazz reported compliance at March 31. A 1 percentage-point rate increase above the term-loan LIBOR floor was estimated to add about $6.9 million interest for the remainder of 2014, and the same increase on revolver borrowings about $2.3 million.
- Unquantified contingency: Possible Medicaid/340B pricing and rebate liabilities for ProstaScint and previously sold Quadramet could not be reasonably estimated.
- Other disclosed proceedings included FazaClo patent litigation, a dispute over alleged FazaClo-related contingent payments ($10.5 million and $25 million claimed, plus unspecified damages), and Gentium acquisition shareholder litigation. Outcomes were uncertain.
Important facts for investors to verify
- Whether Xyrem growth, pricing and patient volume persist, and the outcomes and timing of generic litigation and FDA REMS proceedings.
- Whether FDA takes further action following the Form 483 and whether corrective measures satisfy regulators.
- Whether Erwinaze supply can meet demand and whether Defitelio launches achieve expected uptake and reimbursement.
- Integration costs and Gentium’s contribution after the acquisition, including progress on manufacturing and development plans.
- Debt repayment, interest-rate exposure, covenant headroom and cash available after acquisition-related spending.
- Potential radiopharmaceutical Medicaid/340B liabilities and the resolution of material legal proceedings.