Business context and reporting period
Jazz Pharmaceuticals plc is a global biopharmaceutical company focused on neuroscience and oncology. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Its portfolio included Xyrem, Sunosi, Defitelio, Erwinaze, Vyxeos and newly launched Zepzelca. Xywav was FDA-approved in July and launched in the U.S. in November 2020, after the quarter.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $600.9 million | $537.7 million | $1,698.1 million | $1,580.0 million |
| Net income | $148.2 million | $102.3 million | $105.2 million | $449.4 million |
| Diluted earnings per share | $2.64 | $1.78 | $1.87 | $7.80 |
| Operating cash flow | Not separately stated for the quarter | $713.4 million | $688.6 million |
Product sales rose 12% in Q3 and 8% year to date. Gross margin as a percentage of product sales was 92.9% in Q3 and 94.1% year to date, versus 94.1% in both 2019 comparison periods. Q3 operating income was $196.2 million versus $133.1 million; nine-month operating income was $204.7 million versus $471.1 million.
Q3 sales growth included Xyrem (+5%), Defitelio (+34%), Vyxeos (+4%) and $36.9 million of Zepzelca sales. Erwinaze sales fell 41% amid supply limitations. Year-to-date, Sunosi sales were $19.6 million and Erwinaze sales fell 26%. Xyrem remained the largest product, with $447.8 million of Q3 sales and $1,302.5 million year-to-date.
At September 30, cash and cash equivalents were $741.9 million and investments were $1.175 billion. The company reported $1.6 billion of undrawn revolving-credit availability. Debt principal was approximately $2.4 billion; balance-sheet debt carrying value was $2.088 billion, including $244.0 million current and $1.844 billion long-term. Operating cash flow exceeded the prior-year period, while investing cash outflow was $1.081 billion, principally reflecting investment purchases and acquisition-related payments.
Material changes versus the prior comparable period
- Nine-month net income fell substantially, partly because 2019 included a $112.3 million discrete tax benefit from an intra-entity intellectual-property transfer. 2020 also included $215.3 million of acquired in-process R&D expense and a $136.1 million impairment charge.
- 2020 R&D expense increased 20% year to date to $243.7 million, while SG&A increased 16% to $607.1 million, reflecting development activity, headcount and commercial launch investment.
- Interest expense rose 34% year to date to $72.1 million, including higher non-cash interest expense following the June issuance of $1.0 billion of 2.00% exchangeable notes due 2026 and costs related to repurchasing 2021 notes.
- In June, the company issued the 2026 notes and used part of the proceeds to repurchase 2021 notes; it repurchased a further $23.3 million principal amount in Q3. It also drew and repaid $500 million under its revolving facility during the period.
Outlook, commentary, risks and unusual items
- Management expected 2020 product sales to exceed 2019, primarily from Xyrem growth, Sunosi and Zepzelca. It expected gross margin to remain materially unchanged, SG&A to rise with launches, and R&D expense to continue increasing. Royalties and contract revenue were expected to decline. No numerical full-year revenue or earnings guidance is provided in the filing text.
- Management said COVID-19 was adversely affecting demand, new patient starts, healthcare access and commercial activity, and expected ongoing effects. Sleep-lab closures impeded new narcolepsy diagnoses; the company also cited slower-than-expected Sunosi growth and continuing pressure on Defitelio and Vyxeos utilization. It reported strong initial physician reception and uptake for Zepzelca.
- Erwinaze faced global supply disruptions expected to continue through 2020. Its supply and marketing agreement with PBL was due to expire December 31, 2020; PBL had selected a new commercial partner. The company cited uncertainty over supply, transition and replacement of future Erwinaze revenue.
- A $136.1 million impairment followed the decision to stop enrollment in a Phase 3 defibrotide prevention study, judged highly unlikely to meet a primary endpoint. The company also recorded $200 million of upfront PharmaMar license expense for Zepzelca; a separate $100 million FDA-approval milestone was capitalized.
- Multiple class actions filed in 2020 allege antitrust and consumer-protection violations concerning Xyrem and patent-litigation settlements. Plaintiffs seek monetary and injunctive relief; the company states an adverse outcome could materially affect its business.
- Key commercial risks include dependence on oxybate sales, Xywav payer coverage and acceptance, potential generic or authorized-generic competition for sodium oxybate, pricing and reimbursement pressure, and reliance on single-source suppliers. The company reported that two customers represented 81% of gross receivables at quarter-end.
- After quarter-end, the company announced positive top-line Phase 3 results for Xywav in idiopathic hypersomnia and expected to submit an sNDA in Q1 2021, with a potential approval and launch in Q4 2021. It also acquired a FAAH-inhibitor program, paying $35 million upfront with potential milestone payments up to $375 million plus royalties.
Important facts for investors to verify
- Whether Xywav gains payer coverage and patient and prescriber adoption, and how its launch affects Xyrem sales and exposure to future generic competition.
- Whether Erwinaze supply and the PBL contract transition allow continuity of patient access and how much revenue can be replaced by JZP-458 or other products.
- Progress and commercial performance of Zepzelca and Sunosi, including COVID-19 effects and reimbursement access.
- Developments in the Xyrem antitrust class actions and any related government inquiries.
- Cash generation, debt service and refinancing needs, including the 2021-note maturity and contingent milestone and royalty obligations.
- Clinical and regulatory outcomes for key pipeline programs, including JZP-458, Xywav in idiopathic hypersomnia and the defibrotide prevention program.