Jazz Pharmaceuticals plc — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless noted, amounts are in U.S. dollars. Gentium results are included from January 23, 2014, limiting comparability with 2013.
Business context
Jazz is a specialty biopharmaceutical company. Its largest product is Xyrem; the 2014 Gentium acquisition added Defitelio/defibrotide and expanded its hematology/oncology business. Management’s strategy emphasizes growth of marketed products, acquisitions and targeted pipeline development.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $306.6 million | $232.2 million | $844.7 million | $636.6 million |
| Operating income | $58.0 million | $100.6 million | $65.7 million | $245.8 million |
| Net income (loss) attributable to Jazz | $25.8 million | $75.4 million | ($23.2 million) | $161.0 million |
| Diluted GAAP EPS | $0.41 | $1.23 | ($0.39) | $2.62 |
| Gross margin on product sales | 91.1% | 89.5% | 89.4% | 87.9% |
| Operating cash flow | Not presented separately | Not presented separately | $273.3 million | $209.4 million |
Non-GAAP adjusted diluted EPS was $2.33 for Q3 (versus $1.78) and $5.99 for the nine months (versus $4.59). These company-defined measures exclude multiple items, including amortization, share-based compensation and acquisition-related costs, and should not be treated as substitutes for GAAP results.
- Product sales: Xyrem was $204.3 million in Q3 and $556.1 million year to date, up 33% and 37%, respectively. Erwinaze/Erwinase was $52.1 million and $146.9 million, up 18% and 12%. Defitelio/defibrotide contributed $18.9 million and $51.3 million, respectively, from the acquisition close onward.
- Cash and liquidity: Cash and equivalents were $575.0 million at September 30, down from $636.5 million at year-end. The company reported $425.0 million available under its revolving facility, with no revolver borrowings outstanding.
- Debt: Balance-sheet debt was $1.341 billion carrying value; principal included $897.6 million of term loans and $575.0 million of 2021 exchangeable notes, plus $1.9 million of other borrowings. Term loans bore 3.25% interest at quarter-end. The company reported compliance with its secured leverage covenant.
Material changes and unusual items
- Revenue growth reflected Xyrem and Erwinaze growth and Gentium/Defitelio sales. Xyrem growth came mainly from higher average net price, with 9% higher sales volume in both comparison periods; Erwinaze growth reflected volume and price increases.
- Operating expenses rose substantially: nine-month SG&A increased 35% and R&D increased 118%. Acquired IPR&D expense was $202.0 million year to date, including $125.0 million for JZP-110 rights and $77.0 million for defibrotide Americas rights and a related milestone. The nine-month period also included a $32.8 million intangible impairment.
- Lower nine-month GAAP earnings reflected these charges, higher amortization, greater interest expense and the acquisition’s inclusion. Q3 interest expense was $14.5 million versus $6.2 million; nine-month interest expense was $36.0 million versus $20.7 million.
- Foreign currency translation adjustments were a $113.3 million loss for the nine months, contributing to a $136.5 million comprehensive loss attributable to Jazz.
- Operating cash flow increased year over year, while investing cash outflow reached $1.053 billion, primarily for Gentium and acquired product rights. Financing cash inflow was $721.5 million, principally from debt issuance, partly offset by acquisition and repayment-related outflows.
Outlook, management commentary and risks
- Management expected 2014 product sales to exceed 2013, driven by Xyrem and Erwinaze growth and Defitelio launches; it expected a slight improvement in gross margin. No specific numerical revenue or earnings guidance was provided.
- Management expected higher SG&A and substantially higher R&D spending, and expected positive operating cash flow during 2014. It planned additional European Defitelio launches in late 2014 and 2015, and a rolling U.S. defibrotide NDA submission by year-end 2014 with completion targeted in the first half of 2015. The planned JZP-110 Phase 3 program was expected to begin in the first half of 2015, subject to clinical supply.
- Xyrem represented 66.3% of nine-month net product sales. Five generic ANDAs had been filed by late October 2014; litigation and patent-review challenges were ongoing. The FDA dispute over Xyrem’s REMS, including potential distribution changes or a shared system, remained unresolved.
- Erwinaze supply capacity was nearly fully utilized, with limited inventory and dependence on a single supplier. Defitelio’s outlook depended on European pricing and reimbursement, successful commercialization and U.S. regulatory approval.
- Other notable exposures include substantial debt and restrictive covenants, integration and execution risks from Gentium, single-source manufacturing dependencies, and an unquantified potential liability related to Medicaid/340B price reporting for ProstaScint and Quadramet. The filing did not provide a reasonably estimable loss range for that contingency.
- The FDA’s April 2014 pharmacovigilance inspection identified reporting and procedure deficiencies; Jazz reported corrective actions and that the inspection was closed in August 2014.
Important facts for investors to verify
- Progress and potential outcomes of Xyrem generic litigation, patent challenges and FDA REMS discussions, including any effect on exclusivity or distribution.
- Whether Xyrem sales growth and pricing remain sustainable, given the product’s high contribution to revenue and generic risk.
- Erwinaze production capacity, quality performance and inventory availability, and whether additional supply sources or capacity become available.
- Defitelio launch uptake, country-level reimbursement and pricing, and timing and regulatory prospects for the U.S. NDA.
- R&D program milestones and clinical-material availability, particularly for JZP-110 and JZP-416, against management’s stated timelines.
- Cash generation, debt service and covenant headroom as acquisition spending, development investment and other obligations continue; also monitor resolution of the radiopharmaceutical pricing contingency.