Business context and reporting period
Jazz Pharmaceuticals plc is a global biopharmaceutical company focused on neuroscience and oncology medicines. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. Comparisons with 2021 are affected by the GW Pharmaceuticals acquisition, whose results were included only from May 5, 2021.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $932.9 million | $751.8 million | $1,746.6 million | $1,359.4 million |
| Operating income (loss) | $85.5 million | $(69.6) million | $173.1 million | $92.5 million |
| Net income (loss) | $34.7 million | $(363.3) million | $36.3 million | $(241.5) million |
| Diluted EPS | $0.55 | $(6.11) | $0.57 | $(4.17) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $512.0 million | $326.7 million |
- Q2 revenue increased 24%; first-half revenue increased 28%. Neuroscience revenue was $696.8 million in Q2, up 20%; oncology revenue was $229.8 million, up 40%.
- Key Q2 product sales: Xyrem $269.4 million, down 19%; Xywav $235.0 million, up 89%; Epidiolex/Epidyolex $175.3 million; Zepzelca $68.3 million, up 22%; and Rylaze $73.0 million. Epidiolex/Epidyolex and Rylaze comparisons are affected by acquisition timing and launch timing, respectively.
- Gross margin was 86.6% in Q2 versus 84.1%; for the first half it was 86.2% versus 88.2%. The first-half decline primarily reflected acquired-inventory fair-value step-up expense.
- Q2 operating expenses included $69.1 million of acquired in-process R&D charges, primarily upfront license payments, and $40.8 million loss on the Sunosi disposal in SG&A. First-half intangible amortization was $320.6 million, up from $208.7 million.
- Q2 net interest expense was $63.2 million; first-half net interest expense was $133.9 million. First-half foreign-exchange loss was $11.9 million. Foreign-currency translation drove $705.8 million of first-half other comprehensive loss.
- At June 30, cash and cash equivalents were $711.3 million and investments were $60.0 million. Current assets were $2.591 billion and current liabilities $705.4 million.
- Debt carrying value was $6.021 billion, including $5.990 billion long-term debt and $31.0 million current portion. Management reported $6.1 billion of debt principal and $500 million available under the revolving facility. First-half debt repayments were $266.5 million.
- Cash from operations was $512.0 million; investing activities used $126.5 million and financing activities used $260.0 million. Cash increased $119.8 million during the first half.
Material changes versus the prior comparable period
- Growth in Xywav, Epidiolex/Epidyolex, Rylaze and other oncology products more than offset declining Xyrem sales. Oxybate sales overall rose 10% in Q2 and 8% in the first half, as Xywav adoption partly reflected patients transitioning from Xyrem.
- Q2 reported profitability improved from a loss in 2021. The 2021 comparison included a $251.4 million tax expense from remeasurement of the U.K. deferred tax liability following a tax-rate change; this makes the net-income comparison unusually favorable in 2022.
- Adoption of ASU 2020-06 increased reported debt at January 1, 2022 and reduced interest expense, increasing Q2 net income by approximately $12 million and first-half net income by approximately $24 million. It increased EPS by approximately $0.19 and $0.38, respectively, and did not affect cash flows or debt-covenant compliance.
- First-half operating cash flow rose $185.3 million, primarily because of lower GW acquisition-related transaction and integration costs. Investing cash use fell sharply from 2021, which included the GW acquisition.
- Jazz completed the U.S. Sunosi divestiture in May for $53 million upfront and retained rights to royalties on U.S. sales; the ex-U.S. divestiture was expected later in 2022.
Outlook, management commentary, risks and contingencies
- Management expected 2022 total product sales to increase over 2021, driven primarily by Xywav, a full year of Epidiolex and Rylaze sales, and growth in Zepzelca; expected declines in Xyrem, Erwinaze and Sunosi were offsets. No numerical full-year sales guidance is provided in the supplied filing text.
- Management expected 2022 SG&A to decrease, R&D to increase, cost of product sales to increase due partly to a full year of acquired-inventory step-up expense, and net interest expense to be broadly in line with 2021. It expected adequate global product supply for 2022 and positive operating cash flow to support operations and gradual deleveraging.
- Management said cash, expected operating cash flow and revolving-credit availability should fund operations and existing obligations for the foreseeable future, while warning that assumptions could prove wrong and substantial debt could constrain investment and flexibility.
- COVID-19 continued to weigh on new patient starts, provider access and clinical-trial activity, although management reported improving healthcare-system practices. Pricing and reimbursement pressure, generic and branded competition, and dependence on oxybate sales are key commercial risks.
- Supply risk includes reliance on single-source suppliers for many products or active ingredients. The company also cited manufacturing, regulatory, clinical-development, foreign-exchange, variable-rate-debt and acquisition-integration risks.
- Legal matters include purchaser antitrust claims alleging unlawful Xyrem patent settlements, with potential damages or injunctive relief; Xyrem/Xywav patent disputes; Avadel litigation concerning its oxybate candidate; and an Otsuka dispute over alleged royalties on Epidiolex. The filing states outcomes cannot be predicted.
- After quarter-end, the company disclosed a July 11, 2022 subpoena from the U.S. Attorney’s Office for the District of Massachusetts seeking documents relating to Xyrem, a patent, labeling, FDA and patent-office communications, pricing and related matters. Jazz said it was cooperating and could not predict the investigation’s duration or outcome.
- In June, a Phase 3 nabiximols trial in MS-related spasticity did not meet its primary endpoint; the company said it was assessing the results. Other pipeline programs and regulatory applications remain subject to clinical and review risks.
Important facts for investors to verify
- Whether Xywav growth can offset continuing Xyrem declines and anticipated sodium-oxybate generic or authorized-generic competition, including the timing of potential launches.
- Whether growth in Epidiolex/Epidyolex, Rylaze and oncology products continues, and whether Rylaze applications and Zepzelca confirmatory development meet regulatory expectations.
- How much reported earnings reflect recurring operations versus tax comparisons, acquisition-related costs, amortization, inventory step-up and the ASU 2020-06 accounting change.
- Debt service, variable-rate exposure, repayment progress and covenant headroom, alongside the company’s ability to maintain liquidity and fund pipeline investment.
- Developments and potential financial effects of the Xyrem antitrust litigation, Avadel disputes and the Massachusetts U.S. Attorney’s Office investigation.
- Whether COVID-related access and trial disruptions, reimbursement pressure and single-source supply dependencies materially affect sales or product availability.