Jazz Pharmaceuticals Plc quarterly report, Q2 FY2017

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Jazz Pharmaceuticals plc — Q2 2017 Form 10-Q

Business context and period. International biopharmaceutical company focused on sleep and hematology/oncology products. This unaudited report covers the quarter and six months ended June 30, 2017; amounts below are in U.S. dollars unless noted. Vyxeos received FDA approval on August 3, 2017, after quarter-end.

Financial performance and liquidity

MetricQ2 2017Q2 2016Six months 2017Six months 2016
Total revenue$394.4m$381.2m$770.4m$717.2m
Operating income$165.0m$168.7m$301.2m$289.9m
Net income$105.6m$114.5m$192.1m$190.3m
Diluted EPS$1.72$1.85$3.13$3.05
Operating cash flow—$299.6m$278.7m
  • Revenue growth was 3% for Q2 and 7% for the first half. Product sales rose 3% and 7%, respectively.
  • Q2 net income fell year over year, while first-half net income was slightly higher. Q2 interest expense rose 51% to $18.3m; first-half interest expense rose 53% to $37.1m. Foreign-exchange losses were $5.4m in Q2 and $6.9m in the first half.
  • Gross margin on product sales was 92.6% in Q2 and 93.0% for the first half, versus 93.7% and 93.3%, respectively, in 2016; management attributed the decrease to product mix.
  • At June 30, cash and cash equivalents were $239.2m and investments were $80.0m. Total current assets were $662.5m and current liabilities $250.4m.
  • Debt principal was approximately $1.77bn: $694.8m term loan, $500m revolving-credit borrowings and $575m of 1.875% exchangeable notes due 2021. Debt carrying value was $1.67bn. The revolving facility had $750m available; the company reported compliance with its financial covenants.
  • First-half investing cash use was $33.7m; financing cash use was $396.2m, including $350m repayment of revolving borrowings and $30.9m share repurchases. Cash declined by $126.8m during the half.

Revenue mix and material changes

  • Xyrem: $298.0m in Q2, up 6%; $570.4m in the first half, up 8%. Higher average net price, including a January 2017 increase, was the primary driver, with some volume growth. Xyrem represented 76% of Q2 and 75% of first-half product sales.
  • Erwinaze/Erwinase: $49.0m in Q2, down 1%; $100.4m in the first half, down 1%. Supply constraints reduced volume.
  • Defitelio/defibrotide: $30.2m in Q2, down 9%, partly reflecting prior-year U.S. launch stocking; $66.1m in the first half, up 29%, reflecting the U.S. launch and higher non-U.S. sales.
  • Prialt sales declined 30% in Q2 and 6% in the first half. Other product sales declined 5% and 19%, respectively, including from generic competition in psychiatry products.
  • SG&A increased 8% in Q2 and 10% in the first half; R&D increased 3% and 21%. R&D growth primarily reflected higher personnel expense and development activity.

Outlook, commentary and principal risks

  • Management expected 2017 product sales to increase over 2016, primarily from Xyrem and Defitelio growth and Vyxeos sales. It also expected higher royalty and contract revenue, SG&A, R&D and interest expense. No numerical full-year guidance was provided in the supplied filing text.
  • Vyxeos was approved by the FDA on August 3 for certain newly diagnosed high-risk AML patients. The company expected U.S. shipments to begin in August, subject to product testing, and planned an EU marketing application in Q4 2017.
  • Key pipeline plans included a late-2017 NDA submission for JZP-110, a Q4 2017 supplemental filing for pediatric Xyrem, and an NDA for JZP-507 by Q1 2018. Management expected R&D spending to continue rising.
  • Xyrem concentration and competition: West-Ward’s settlement permits authorized-generic sales beginning January 1, 2023, or earlier under specified circumstances; its own generic could follow as early as six months later. Other generic patent litigation continued, and appeals were pending after adverse patent-review decisions. The timing of generic or alternative sodium oxybate competition remained uncertain and could materially affect Xyrem sales.
  • Supply and regulatory exposure: Erwinaze faced ongoing supply disruptions and constrained capacity. Its sole supplier, PBL, had received an FDA warning letter citing cGMP violations; further 2017 disruptions were expected. Vyxeos also depended on a sole-source manufacturer, with prior batch failures noted as a risk.
  • Investigations and contingencies: The U.S. Attorney’s Office for the District of Massachusetts was investigating support for charitable patient-assistance organizations; Jazz was cooperating and expected further costs. French tax authorities proposed approximately $43.7m in additional tax, interest and penalties for 2012–2013 transfer-pricing matters; the company disputed the assessment and planned to contest it.
  • Additional risks include drug-pricing and reimbursement pressure, FDA/DEA requirements and post-marketing commitments, foreign-exchange exposure, acquisition integration, and substantial debt. A 1% interest-rate change was estimated to alter remaining-2017 interest expense by $4.6m on unhedged variable-rate borrowings.

Important facts for investors to verify

  • Progress and outcomes in Xyrem generic litigation, patent appeals, FDA REMS decisions and the West-Ward settlement’s potential early-entry triggers.
  • Whether PBL remediates the FDA findings and whether Erwinaze supply disruptions affect sales or market access.
  • Vyxeos launch timing, supply reliability, uptake, reimbursement and progress toward the planned EU filing.
  • Developments in the Medicare patient-assistance investigation and the disputed French tax assessment.
  • Cash generation, debt repayments, variable-rate exposure and capacity to fund planned development and commercial investment.