Jazz Pharmaceuticals plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Jazz is a global biopharmaceutical company focused on neuroscience and oncology, with marketed products including Xyrem, Sunosi, Defitelio, Erwinaze and Vyxeos.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $534.7 million | $508.2 million | +5% |
| Operating income (loss) | $(189.7) million | $133.7 million | Turned to loss |
| Net income (loss) | $(157.8) million | $85.2 million | Turned to loss |
| Diluted earnings (loss) per share | $(2.82) | $1.47 | Turned to loss |
| Operating cash flow | $273.0 million | $202.3 million | +$70.7 million |
| Cash, cash equivalents and investments | $981.6 million | $1,077.3 million at Dec. 31, 2019 | Down $95.7 million |
| Debt principal | Approximately $1.8 billion |
Net product sales were $530.2 million, up 5%. Gross margin on product sales increased to 94.6% from 93.3%. The reported operating and net losses reflect, chiefly, a $200.0 million upfront lurbinectedin license payment recorded as acquired in-process R&D and a $136.1 million impairment charge related to defibrotide development. The income tax benefit was $51.3 million, versus a $29.1 million provision in Q1 2019.
- Product trends: Xyrem sales rose 11% to $407.9 million, driven by price increases and 5% volume growth. Erwinaze/Erwinase fell 38% to $37.7 million amid supply constraints. Defitelio/defibrotide rose 14% to $47.4 million; Vyxeos rose 13% to $32.7 million. Sunosi generated $1.9 million in sales.
- Cash and liquidity: Quarter-end cash and cash equivalents were $701.6 million, with investments of $280.0 million. At March 31, the $1.6 billion revolving credit facility was undrawn. Jazz drew $500.0 million under it in April as a precautionary liquidity measure.
- Debt: Debt carrying value was $1.61 billion; principal outstanding was approximately $1.76 billion. Scheduled principal maturities include $608.4 million in 2021 and $575.0 million in 2024.
- Capital allocation: Jazz repurchased 1.13 million shares for $139.1 million, averaging $122.91 per share; $438.7 million remained authorized at quarter-end.
Material changes versus Q1 2019
- Revenue growth was led by Xyrem, Defitelio and Vyxeos; Erwinaze supply limitations drove a substantial sales decline.
- SG&A rose 24% to $208.4 million, primarily from commercial and pre-launch activity; R&D rose 43% to $86.1 million, including higher clinical and personnel costs.
- Acquired in-process R&D increased to $202.3 million from $56.0 million, reflecting the PharmaMar transaction and the prior-year Codiak payment. The new $136.1 million impairment also weighed on results.
- Operating cash flow increased, primarily due to changes in operating assets and liabilities, including timing of customer receipts. Investing cash flow shifted to a $60.1 million outflow, largely reflecting the PharmaMar payment.
Outlook, commentary and risks
- Management expected 2020 total product sales to be consistent with 2019, while warning that COVID-19 would pressure demand and sales growth. It expected positive operating cash flow in 2020 and said existing cash, expected cash generation and credit availability should fund operations and obligations for the foreseeable future.
- Management expected 2020 gross margin to remain broadly consistent with 2019. It forecast higher SG&A in 2020 for product launches; the MD&A said R&D expense was expected to be consistent with 2019 in 2020 and increase from 2021 onward. Interest expense was expected to rise following the April revolver draw.
- COVID-19 had limited financial impact in Q1, but reduced new patient starts and demand, disrupted in-person commercial activity, delayed some European Sunosi reimbursement reviews, and affected clinical trial enrollment. Management said later-quarter impacts were uncertain and could adversely affect results and growth prospects.
- FDA accepted the JZP-258 NDA with priority review and a July 21, 2020 action date; lurbinectedin had a priority-review action date of August 16, 2020. Management cautioned that pandemic-related factors could affect reviews or launches. The company expected to submit a JZP-458 application as early as Q4 2020, with enrollment potentially slowed by site constraints.
- In April, Jazz reported stopping enrollment in a Phase 3 defibrotide prevention study because it was highly unlikely to meet a primary endpoint; the impairment was recorded in Q1. The decision did not affect the approved indication or other ongoing defibrotide studies. Jazz was also supporting two Phase 2 studies of defibrotide in COVID-19 patients.
- Erwinaze faces continuing single-source supply disruptions, and the PBL license and supply agreement expires December 31, 2020; PBL announced a new commercialization partner. Jazz warned that future Erwinaze sales and supply could be adversely affected.
- Key risks include reliance on Xyrem, potential generic and branded competition, pricing and reimbursement pressure, single-source manufacturing, COVID-19 effects, pipeline and regulatory uncertainty, and substantial debt. French tax assessments totaling approximately $52.7 million, including interest and penalties, are being contested; management said it disagrees and is vigorously challenging them. The company also reported $90.5 million in noncancelable purchase commitments due within one year.
Important facts for investors to verify
- Whether COVID-19-related reductions in diagnoses, treatment starts, procedures and clinical-trial activity persisted or changed after Q1.
- Progress and outcomes for the JZP-258 and lurbinectedin regulatory reviews, and the JZP-458 development and filing timeline.
- Erwinaze supply availability and the commercial transition after the PBL agreement expires.
- Defibrotide study developments and any effect on other indications or trials beyond the impairment already recorded.
- Cash generation, debt maturities and costs following the $500 million April revolver draw, alongside continued share repurchases and investment plans.
- Status and potential financial consequences of the French tax assessments and other disclosed contingencies.