Jazz Pharmaceuticals plc — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparative periods are the same periods in 2017. Amounts below are in U.S. dollars. Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology products.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $469.4 million | $411.9 million | $1,414.5 million | $1,182.3 million |
| Operating income | $188.8 million | $86.5 million | $429.8 million | $387.6 million |
| Net income | $149.3 million | $63.5 million | $287.6 million | $255.6 million |
| Diluted earnings per share | $2.41 | $1.03 | $4.68 | $4.17 |
| Gross margin on product sales | 94.3% | 92.4% | 93.2% | 92.7% |
- Revenue drivers: Q3 product sales rose 14%; nine-month product sales rose 20%. Xyrem revenue was $357.3 million for Q3 and $1,030.0 million for nine months, up 18% year over year in both periods. Vyxeos sales increased following its August 2017 U.S. launch; Defitelio sales also grew. Erwinaze sales fell 16% in Q3, primarily due to supply constraints.
- Profit and costs: Higher Q3 operating income and net income partly reflect the absence of the $75.0 million acquired in-process R&D charge recorded in Q3 2017. Nine-month results included a $42.9 million Prialt impairment; the 2017 comparison included $77.0 million of acquired in-process R&D. Nine-month SG&A rose 30%, including a $57.8 million DOJ-related accrual and higher commercial and compensation costs. R&D rose 28%.
- Cash flow: Nine-month operating cash flow was $574.6 million, versus $488.5 million in 2017. Investing used $428.2 million, including $915.0 million of investment purchases, $111.1 million for a priority review voucher, and $15.2 million of capital spending; proceeds included $565.0 million from investment maturities and $48.1 million from the Prialt sale. Financing used $32.7 million, including $77.0 million of share repurchases and $17.4 million of term-loan repayments. Cash increased $113.0 million to $499.0 million.
- Liquidity and debt: Cash, cash equivalents and investments totaled $1.064 billion at September 30, 2018. The $1.6 billion revolving facility was undrawn. Debt principal was approximately $1.809 billion: $659.4 million term loan and $1.150 billion of exchangeable notes due 2021 and 2024. Balance-sheet debt carrying value was $1.594 billion after discounts and issuance costs. The term loan and revolver mature in 2023; the company reported compliance with credit-facility covenants.
- Other balance-sheet items: Total assets were $5.486 billion and shareholders’ equity was $3.027 billion. Accrued liabilities included the $57.8 million estimated DOJ contingency.
Material changes, outlook and significant developments
- Management expected 2018 total product sales to exceed 2017, primarily on anticipated growth in Xyrem, Vyxeos and Defitelio; royalties and contract revenues were also expected to increase. It expected gross margin to remain broadly similar to 2017, while SG&A and R&D expenses were expected to rise.
- Solriamfetol’s FDA application was accepted for standard review, with a PDUFA target action date of December 20, 2018. The company was preparing for a potential U.S. launch and expected to submit a European marketing application in late 2018. Approval, controlled-substance scheduling, market uptake and reimbursement remained uncertain.
- In August 2018, the European Commission authorized Vyxeos; Jazz began a rolling EU launch and was pursuing country-level pricing and reimbursement. U.S. Centers for Medicare and Medicaid Services also approved a New Technology Add-on Payment for Vyxeos.
- Jazz sold substantially all Prialt-related assets to TerSera for $80.0 million: $50.0 million at closing and, subject to conditions, $15.0 million due in 2019 and $15.0 million in 2020. The sale closed September 27, 2018; the impairment was $42.9 million.
- After quarter-end, the company settled its remaining Xyrem patent litigation with Amneal in October 2018, completing settlements with nine ANDA filers. Agreements generally permit authorized generic or generic entry beginning in 2023 or 2025, with earlier entry possible under specified conditions. The FDA also approved pediatric Xyrem labeling for patients age seven and older in October, with six months of pediatric exclusivity added to applicable patent terms; settlement entry dates were not changed.
- In November 2018, the board increased the share-repurchase authorization by $320 million. Through September, Jazz had repurchased $77.0 million of shares; $105.7 million remained under the prior authorization at quarter-end.
Risks, contingencies and unusual items
- Xyrem concentration: Xyrem represented 77% of Q3 and 73% of nine-month net product sales. Generic entry or competing narcolepsy treatments, earlier-than-scheduled market entry, pricing and reimbursement pressure, REMS changes, supply limitations or DEA quota constraints could materially affect results. The Federal Circuit upheld decisions invalidating certain Xyrem REMS patent claims.
- Supply and manufacturing: Erwinaze supply disruptions were expected to continue through Q4 2018 and 2019. Its sole supplier, PBL, faced FDA and UK regulator manufacturing findings; Jazz also disclosed uncertainty around extension of its PBL agreement, which expires in December 2020 subject to extension provisions. Vyxeos likewise relies on a sole-source manufacturer and had experienced batch failures and specification issues.
- Government investigation: Jazz had reached an agreement in principle for a $57.0 million civil DOJ settlement regarding patient-assistance matters and accrued $57.8 million including interest. A final settlement was not assured and could include a corporate integrity agreement; otherwise, enforcement action remained possible.
- Tax matter: French tax authorities issued revised assessments for 2012–2013 transfer-pricing matters totaling approximately $43 million including interest and penalties. Jazz disagreed and was contesting the assessments.
- Debt, execution and market risks: The company identified substantial debt, variable-rate exposure, dependence on key products, acquisition and development execution, regulatory approval, competition, reimbursement and foreign-exchange risks. It also relied on single-source suppliers for most products and APIs. Management said existing cash, expected operating cash flow and revolver availability should fund operations and existing obligations for the foreseeable future, while noting this depended on assumptions and business performance.
Important facts for investors to verify
- Whether Xyrem revenue and patient demand remain durable, and whether generic or competing-product entry could accelerate under the settlement terms.
- Whether Erwinaze supply and PBL compliance improve, and whether the supply and licensing arrangements continue on acceptable terms.
- Solriamfetol’s regulatory outcome, scheduling, launch timing and reimbursement prospects; and Vyxeos’s manufacturing reliability and EU market access.
- The final DOJ settlement amount and terms, including any corporate integrity agreement, and the outcome of the French tax assessments.
- Debt principal, liquidity, covenant headroom and planned capital allocation, including the expanded repurchase authorization and any acquisitions or in-licensing.