Jazz Pharmaceuticals plc — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2019. Jazz is a global biopharmaceutical company focused on sleep medicine and hematology/oncology. Its key marketed products include Xyrem, Erwinaze/Erwinase, Defitelio/defibrotide and Vyxeos. Sunosi was FDA-approved in March and launched in the U.S. in July 2019, after quarter-end.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $534.1 million | $500.5 million | $1,042.3 million | $945.1 million |
| Operating income | $204.3 million | $153.2 million | $338.0 million | $241.0 million |
| Net income | $261.9 million | $92.3 million | $347.1 million | $138.3 million |
| Diluted earnings per share | $4.56 | $1.50 | $6.01 | $2.26 |
| Operating cash flow | Not provided by quarter in this filing | $351.1 million | $359.3 million |
Q2 revenue increased 7% year over year; first-half revenue increased 10%. Product sales were $523.4 million in Q2 (+6%) and $1,026.8 million in the first half (+10%). Product gross margin was 94.7% for Q2 and 94.0% for the first half, versus 93.0% and 92.7%, respectively, in 2018.
Cash and cash equivalents were $637.7 million at June 30; investments were $245.0 million, for combined cash and investments of $882.7 million. Current assets were $1.37 billion and current liabilities $369.5 million. Debt principal was approximately $1.784 billion: $634.3 million term loan and $575.0 million principal on each of the 2021 and 2024 exchangeable notes. Debt carrying value was $1.601 billion. No revolver borrowings were outstanding; reported borrowing availability was $1.6 billion.
First-half investing cash flow was positive $163.4 million, largely reflecting investment maturities; financing cash outflow was $186.5 million, including $171.1 million of share repurchases and $16.7 million of term-loan repayments. The company repurchased 1.3 million shares at an average $131.17 and had $208.0 million remaining under its authorization at June 30.
Material changes versus prior comparable periods
- Xyrem sales rose 16% in both Q2 and the first half, to $413.2 million and $781.5 million, respectively, driven by higher average net price and modestly higher volume.
- Erwinaze/Erwinase sales fell 53% in Q2 and 19% in the first half, primarily due to constrained supply. Defitelio/defibrotide sales rose 14% and 16%; Vyxeos sales rose 12% and 11%, respectively.
- SG&A rose 11% in Q2, including Sunosi launch and higher compensation costs. First-half SG&A fell 6%, primarily because the 2018 period included a $57.0 million loss-contingency charge.
- Q2 2018 included a $42.9 million impairment charge related to Prialt assets; none was recorded in 2019. First-half 2019 included $58.2 million of acquired in-process R&D, principally a Codiak upfront payment.
- Net income benefited substantially from a $112.3 million discrete deferred tax benefit related to an intra-entity intellectual-property transfer. The filing’s reported earnings growth therefore is not solely indicative of operating performance.
Outlook, management commentary and risks
- Management expected 2019 product sales to exceed 2018, primarily from growth in Xyrem, Defitelio and Vyxeos; it expected higher royalties and contract revenues and higher SG&A and R&D expenses. No specific numeric revenue or earnings guidance is provided in the text.
- Management expected positive operating cash flow in 2019 and believed cash, investments, expected operating cash generation and revolver availability would fund operations and existing obligations for the foreseeable future. It also anticipated increased R&D spending for trials, data readouts and regulatory submissions.
- Xyrem represented 79% of Q2 and 76% of first-half product sales. Generic/authorized-generic entry, alternative narcolepsy therapies, pricing and reimbursement pressure, and changes to the Xyrem REMS could materially affect this key revenue source. Under settlements, the earliest stated authorized-generic launch absent acceleration events was January 1, 2023.
- Erwinaze supply remained constrained, and the PBL license and supply agreement was scheduled to expire December 31, 2020 absent a replacement agreement. Management expected further supply disruptions in 2019 and 2020.
- The company finalized a $57.0 million DOJ/OIG settlement in April 2019, plus interest, and paid it. A five-year corporate integrity agreement applies; breach could result in penalties or exclusion from federal health programs. The settlement was not an admission of wrongdoing.
- French tax authorities proposed approximately $47 million in additional tax, interest and penalties for 2012, 2013 and 2015 transfer-pricing matters; the company disputed and was contesting the assessments.
- Other material risks include reliance on single-source suppliers, product-development and regulatory uncertainty, reimbursement and drug-pricing pressures, substantial debt and related covenants, foreign-exchange exposure, and competition. Management said disclosure controls were effective as of June 30, 2019.
Important facts for investors to verify
- Underlying growth and sustainability of Xyrem sales, including price, volume, payer access and the timing or acceleration of generic entry.
- Progress toward resolving Erwinaze supply and the PBL agreement’s December 2020 expiration; assess the resulting revenue exposure.
- Sunosi’s post-quarter launch, commercial uptake, payer coverage and European regulatory status.
- How much reported earnings improvement reflects operations versus the $112.3 million tax benefit, prior-year impairment and contingency charges, and acquired R&D spending.
- Debt repayment and refinancing capacity, revolver availability and compliance with credit-agreement covenants, alongside continued repurchases and planned investment needs.
- Developments in the disputed French tax assessments, corporate integrity agreement compliance, and other litigation or regulatory matters.