Jazz Pharmaceuticals plc — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011. Although filed by Jazz Pharmaceuticals plc, the financial statements reflect Jazz Pharmaceuticals, Inc. (the accounting acquirer and predecessor); they do not include Azur Pharma’s pre-merger results. The companies completed their merger on January 18, 2012. Jazz’s business centered on Xyrem and Luvox CR; the merger added FazaClo, Prialt, Elestrin and other products.
Financial performance and condition
Unless otherwise stated, amounts are in millions of dollars. Annual comparisons are 2011 versus 2010.
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $272.3 | $173.8 | Up 57% |
| Net product sales | $266.5 | $170.0 | Up 57% |
| Xyrem sales | $233.3 | $142.6 | Up 64%; principal growth driver |
| Luvox CR sales | $33.2 | $27.4 | Up 21% |
| Operating income | $127.8 | $57.8 | Operating margin 46.9%, versus 33.2% |
| Net income | $125.0 | $32.8 | Diluted EPS $2.67, versus $0.83 |
| Operating cash flow | $151.6 | $58.9 | Up $92.7 |
| Cash, equivalents and marketable securities | $157.9 | $44.8 | At December 31 |
| Working capital | $146.3 | $14.5 | At December 31 |
| Debt | None | $40.7 | Year-end 2011; term loan and revolver repaid and credit agreement terminated |
Product gross margin, calculated before acquired-technology amortization, was approximately 94.8% in 2011 versus 92.0% in 2010, reflecting higher average selling prices. This is not the same as operating margin. Investing cash outflow was $81.2 million, chiefly for marketable securities and product-rights payments; financing cash outflow was $33.1 million, including debt repayments.
Fourth quarter: revenue was $83.5 million versus $53.4 million in Q4 2010; net income was $37.5 million versus $24.5 million. Diluted EPS was $0.79 versus $0.56. Q4 2011 included $5.3 million in merger transaction costs and $7.3 million in accelerated stock-based compensation expense.
Material changes, outlook and key risks
- Management described 2011 as the company’s second consecutive profitable year, driven mainly by Xyrem sales growth. Xyrem sales rose due to price increases and, to a lesser extent, volume growth (11% in 2011); Luvox CR also benefited primarily from pricing.
- Management expected 2012 total product sales to increase, reflecting continued Xyrem growth and the addition of Azur products after the merger. It expected royalty and contract revenue to decline slightly, while cost of product sales as a share of revenue, SG&A, R&D and intangible amortization would rise. These are qualitative expectations, not numerical guidance.
- At year-end Jazz reported $157.9 million of cash, equivalents and marketable securities and no debt. Management expected existing cash and operating cash generation to fund operations and existing obligations for the foreseeable future, while noting that acquisitions, development spending or weaker sales could require additional financing or expense reductions. A separate Azur filing reported $80.3 million of cash at December 31; that amount is not included in Jazz’s historical financial statements.
- Xyrem concentration is material: it represented about 86% of Jazz’s 2011 total revenue, and Express Scripts accounted for 85% of revenue and 79% of gross accounts receivable. A generic Xyrem applicant, Roxane, was in patent litigation; the outcome and timing were uncertain. U.S. orphan exclusivity for Xyrem’s excessive-daytime-sleepiness indication was due to expire in November 2012.
- In 2011 Jazz disclosed that certain deaths reported to its Xyrem central pharmacy had not been reported promptly to Jazz and the FDA. The FDA issued a Form 483 in May and a warning letter in October concerning adverse-event reporting and drug-safety procedures. Jazz said it was taking corrective action and believed its review did not indicate a new mortality safety signal; the FDA’s assessment and any resulting actions remained uncertain.
- Generic-entry settlements set potential launch dates of July 2012 for FazaClo LD, May 2015 for FazaClo HD, and February 2013 for Luvox CR, subject to earlier-trigger provisions and regulatory approval. Generic Gastrocrom had launched after FDA approval of an ANDA in October 2011.
- Other notable exposures include a disputed FazaClo-related contingent-payment lawsuit seeking $10.5 million or $25.0 million plus other relief; $12.0 million of Prialt-related payments due in 2012 under Azur’s acquisition agreement; and single-source manufacturing and supply risks. Jazz also anticipated significant acquisition accounting adjustments and higher amortization following the merger.
Important facts for investors to verify
- Review the separate Azur Pharma 2011 Form 10-K and subsequent combined-company results; this filing’s historical statements exclude Azur’s pre-merger operations.
- Track Xyrem sales, pricing, patient volume, generic-litigation developments, DEA quotas, supply continuity and FDA follow-up on the warning letter and safety reporting.
- Confirm the timing and commercial impact of agreed or potential generic launches for Xyrem, FazaClo and Luvox CR, and assess FazaClo patent re-examination and the Cutler litigation.
- Assess post-merger integration costs, acquired-asset valuations and amortization, and whether the company’s cash-generation outlook supports its stated funding needs.