Jazz Pharmaceuticals plc — Q2 2013 Form 10-Q
Business context and period. Specialty biopharmaceutical company; quarter and six months ended June 30, 2013. The portfolio includes Xyrem, Erwinaze/Erwinase, Prialt and psychiatry and other products. Comparisons are affected by acquisitions: EUSA Pharma results were included from June 12, 2012, and the women’s health business sold in 2012 is reported as discontinued operations.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | 208.3 | 124.2 | 404.5 | 226.8 |
| Operating income | 77.1 | 39.4 | 145.3 | 75.2 |
| Net income | 42.2 | 27.1 | 85.6 | 54.8 |
| Diluted EPS | $0.69 | $0.45 | $1.39 | $0.92 |
| Gross margin on product sales | 87.9% | 90.0% | 87.0% | 91.1% |
- Q2 total revenue rose 68%; six-month revenue rose 78%. Product sales increased 68% and 79%, respectively.
- Xyrem sales were $133.7 million in Q2 and $251.3 million for six months, up 50% and 55%. Management attributed growth to higher average net price and increased volume; Xyrem represented 65% of Q2 product sales.
- Erwinaze/Erwinase sales were $44.9 million in Q2 and $86.7 million for six months. On a pro forma basis, sales rose 36% and 32%, respectively; reported comparisons also reflect EUSA acquisition timing. Erwinaze/Erwinase represented 22% of product sales in both 2013 periods.
- Prialt sales fell 15% in Q2 and 36% for six months; psychiatry sales fell 41% and 22%, respectively. Management cited the Prialt distribution transition and generic Luvox CR competition.
- For the six months, operating cash flow was $74.6 million, down from $101.3 million. Investing cash use was $6.0 million versus $478.7 million, largely reflecting the prior-year EUSA acquisition. Financing provided $50.6 million versus $450.4 million. Cash increased $117.1 million to $504.3 million.
- At June 30, cash was $504.3 million; current assets were $734.2 million and current liabilities $184.3 million. Long-term debt carrying value was $552.3 million, including $5.6 million current; principal was $557.2 million. The company had an undrawn $200 million revolving facility and reported compliance with its debt covenants.
Material changes and unusual items
- June refinancing replaced $457.2 million of prior term loans with $557.2 million of new term loans and increased the revolver from $100 million to $200 million. The new term loans carried a 3.5% stated rate at quarter-end, with a June 2018 maturity. The refinancing generated a $3.7 million loss; interest expense also rose year over year.
- The effective tax rate from continuing operations increased to 35.9% for Q2 and 32.5% for six months, from 17.5% and 16.5%. Management cited higher U.S.-taxable profits, acquired operations and the prior-year release of a valuation allowance.
- Gross margin declined, primarily due to product mix, including acquired products with lower margins. Management expected a slight full-year 2013 gross-margin increase, primarily from lower inventory fair-value step-up effects and product mix.
- The company repurchased 0.8 million shares for $53.6 million at an average $63.32 per share under a $200 million authorization; $146.4 million remained authorized at June 30.
- A potential $50 million payment is due if 2013 U.S. Erwinaze sales reach $124.5 million. Fair value was recorded at $42.7 million; the contractual-obligations table lists the undiscounted, unprobability-adjusted $50 million.
Outlook, commentary and risks
- Management expected 2013 product sales to increase over 2012, mainly on Xyrem and Erwinaze growth, partially offset by declines in some other products. It expected higher R&D, SG&A, amortization and interest expense versus 2012. No specific full-year revenue or earnings guidance was provided in the filing text.
- Xyrem concentration and generic exposure are major risks. Roxane’s 30-month FDA approval stay had expired in April 2013; its patent litigation continued. Amneal’s FDA approval stay was expected to run until June 2015, subject to earlier court action. FDA decisions on Xyrem’s final REMS could affect distribution, costs and generic entry. The filing also reports a supplemental Amneal patent certification received August 2, after quarter-end.
- Erwinaze supply was tight and inventory limited. A recent batch failed certain specifications; management described corrective steps and a plan for potential use under special handling, but warned that a supply interruption could occur if efforts failed. The company relies on single-source suppliers for products.
- Additional development plans included Erwinaze studies, Phase 1 Asparec and Phase 3 Leukotac programs, and planned regulatory filing by year-end 2013 to enable a first-in-human study of JZP-386. Asparec received FDA Fast Track designation in June; this does not assure faster approval or success.
- Other disclosed exposures include patent and contract disputes, reimbursement and pricing pressure, regulatory oversight, customer concentration (five customers held 87% of gross receivables; Express Scripts 70%), foreign exchange, and substantial debt. The company reported a close-out letter for an FDA warning letter in August 2013, after the reporting period.
Most important facts for investors to verify
- Progress and potential outcomes in the Roxane and Amneal Xyrem patent cases, including whether any generic launch or REMS decision changes the timing or economics of competition.
- Erwinaze production, quality and supply updates; demand versus available supply; and whether the $50 million sales milestone is achieved.
- Whether Xyrem and Erwinaze growth continues, and how pricing, prescription volume, reimbursement and product concentration affect results.
- Cash conversion and working-capital movements, especially receivables, alongside debt service, covenant headroom and the remaining share-repurchase authorization.
- Developments in the Cutler dispute, which alleges contingent payments of $10.5 million or $25 million plus unspecified damages; the filing does not state a clear expected loss value.