Business context and reporting period
Jazz Pharmaceuticals, Inc. (the registrant named in this filing) reported unaudited results for the three and six months ended June 30, 2011, compared with the same 2010 periods. The specialty pharmaceutical company marketed Xyrem for narcolepsy and Luvox CR for obsessive-compulsive disorder; it reported one business segment. Xyrem generated 87% of first-half product sales.
Financial performance and liquidity
- Revenue: Second-quarter revenue was $64.6 million, up 59% year over year; first-half revenue was $115.4 million, up 53%. Product sales were $63.5 million in Q2 and $113.4 million in the first half. Xyrem sales were $56.2 million in Q2 (+67%) and $99.0 million in the first half (+58%); Luvox CR sales were $7.3 million (+26%) and $14.4 million (+27%), respectively.
- Profit and margins: Q2 operating income was $33.9 million versus $10.6 million; net income was $33.2 million versus a $6.4 million loss. First-half operating income was $56.5 million versus $17.8 million; net income was $55.0 million versus a $4.9 million loss. Operating margin was approximately 52% for Q2 and 49% for the first half; net margin was approximately 51% and 48%, respectively. Diluted EPS was $0.71 for Q2 and $1.19 for the first half, versus losses per share in 2010.
- Cash flow: Operating cash flow was $37.4 million in Q2 and $61.9 million for the first half, versus $17.6 million for the first half of 2010. First-half investing cash use was $2.0 million and financing cash use was $2.3 million. Cash and cash equivalents rose to $102.4 million from $44.8 million at year-end 2010.
- Debt and liquidity: At June 30, the company had $33.3 million of term debt classified as current and $4.0 million drawn on its revolving facility, with $14.4 million of additional availability. Current assets were $136.1 million and current liabilities $81.3 million. On July 1, it repaid the term loan and revolver borrowing; the term-loan repayment included a $0.3 million prepayment penalty, with a further $1.1 million extinguishment loss expected in Q3.
- Other metrics: Cost of product sales was 5% of product sales in the first half, down from 8% in the prior-year period. The effective income tax rate was 0%, primarily due to tax-loss carryforwards and deferred state tax benefits. GAAP results included no debt-extinguishment loss in 2011, compared with $12.3 million in first-half 2010.
Material changes versus the prior comparable period
Growth was led by Xyrem, reflecting price increases and higher sales volume (11.6% higher for the first half); Luvox CR also benefited from volume and price increases. SG&A rose 24% for the first half, primarily from headcount, stock-based compensation and legal expenses. R&D fell 50%, mainly because of lower development spending. Interest expense declined 86%, reflecting lower debt balances and rates. First-half cash increased substantially, and stockholders’ equity rose to $101.6 million from $30.6 million at year-end.
Outlook, commentary and key risks
- Management expected total product sales to increase significantly in 2011 versus 2010 and royalty income to grow modestly. It expected product-cost ratios to remain consistent with the first half, SG&A to be higher, R&D spending significantly lower and interest expense significantly lower than in 2010. Management believed cash and expected operating cash generation would fund operations and existing obligations for the foreseeable future; no numeric full-year revenue or earnings guidance was provided.
- The company had no product candidates in clinical development. It was assessing the feasibility of the JZP-8 intranasal clonazepam program and seeking product licensing or acquisition opportunities.
- Xyrem concentration and generic litigation: The business depended heavily on Xyrem. Roxane had filed an ANDA seeking to market generic Xyrem; Jazz sued and sought an injunction, but stated that the outcome could not be predicted. U.S. orphan exclusivity for one Xyrem indication was due to expire in November 2012.
- Safety and regulatory matters: Jazz disclosed previously unreported deaths of patients prescribed Xyrem, which it and its specialty pharmacy identified and reported to the FDA in May 2011. The company said it believed the adjusted annual all-cause mortality rate was consistent since launch, but could not confirm whether cases were related to Xyrem or rule out further FDA action. An FDA Form 483 cited adverse-event reporting and drug-safety procedure deficiencies; corrective actions were underway. The company also described pending discussions with FDA about converting Xyrem’s risk-management program to a REMS.
- Operating and legal risks: Express Scripts accounted for 86% of Q2 revenue and 82% of accounts receivable at June 30. Jazz relied on sole-source suppliers and manufacturers, including DEA quotas for sodium oxybate. Other risks included Xyrem’s boxed warning and distribution controls, reimbursement and healthcare-policy changes, generic competition for Luvox CR, patent litigation, and the government settlement liability. The filing stated no other pending litigation was expected to have a material adverse effect.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during Q2. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress, timing and potential effect of Roxane’s Xyrem ANDA litigation and the approaching November 2012 exclusivity expiration.
- FDA follow-up to the Form 483, the reported patient deaths, corrective actions and the planned REMS conversion.
- Sustainability of Xyrem growth, including the contribution from price increases versus volume, and the effects of reimbursement or generic competition.
- Supplier continuity and adequate DEA quotas for sodium oxybate, as well as dependence on Express Scripts for distribution and collections.
- Post-quarter debt repayment, the expected Q3 $1.1 million debt-extinguishment loss, and the financial flexibility available under the remaining revolving facility and covenants.