Business context and reporting period
Jazz Pharmaceuticals plc is a specialty biopharmaceutical company. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. Results include Gentium from January 23, 2014, when Jazz acquired control; prior-year comparisons therefore exclude Gentium. Jazz reported one operating segment.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $291.2 million | $208.3 million | $538.1 million | $404.5 million |
| Operating income | $74.3 million | $77.1 million | $7.6 million | $145.3 million |
| Net income (loss) attributable to Jazz | $43.7 million | $42.2 million | $(49.0) million | $85.6 million |
| Diluted EPS | $0.70 | $0.69 | $(0.83) | $1.39 |
Revenue growth was 40% in Q2 and 33% for the half year, led by Xyrem and the addition of Defitelio/defibrotide. Xyrem sales were $191.4 million in Q2 and $351.7 million for the half year; Erwinaze/Erwinase sales were $47.9 million and $94.8 million, respectively. Xyrem represented 65.9% of first-half product sales.
Q2 gross margin was 89.4% of net product sales, versus 87.9% a year earlier; first-half gross margin was 88.5%, versus 87.0%. Management attributed the improvement mainly to product mix, including Defitelio. First-half GAAP results included $127.0 million of acquired in-process R&D expense for JZP-110 and a $32.8 million intangible-asset impairment. The impairment related to certain EUSA-acquired products following a European operations reorganization. Q2 adjusted net income, a company-defined non-GAAP measure, was $127.8 million ($2.05 per diluted share); first-half adjusted net income was $228.6 million ($3.66 per diluted share). These measures exclude specified items and are not GAAP results.
Operating cash flow was $143.6 million for the first half, compared with $78.6 million in 2013. Investing cash outflow was $970.3 million, primarily reflecting Gentium and JZP-110 transactions; financing cash inflow was $458.2 million. Cash declined from $636.5 million at year-end to $268.3 million at June 30. Current assets were $544.9 million and current liabilities $197.8 million.
At June 30, total debt carrying value was $1.196 billion, including $894.3 million of term loans and $300.0 million drawn on the revolver; $125.0 million remained available under the $425.0 million facility. The company reported compliance with its secured-leverage covenant. Debt is secured by substantially all assets and includes restrictive covenants. Interest expense increased 48% year over year for the half, principally due to higher borrowings.
Material changes versus the prior comparable period
- Gentium’s acquisition added Defitelio/defibrotide revenue and substantially increased intangible assets, goodwill, amortization, operating scope and debt. Gentium contributed $35.9 million of revenue and a $29.1 million net loss from the acquisition date through June 30.
- First-half revenue growth was driven especially by Xyrem, up 40%, and the newly consolidated Defitelio/defibrotide business. Erwinaze/Erwinase grew 9%; psychiatry product sales declined 27% for the half, mainly reflecting generic Luvox CR competition and the authorized generic FazaClo LD.
- SG&A increased 40% and R&D increased 139% for the half, reflecting expanded headcount, commercialization and integration costs, and greater development activity. First-half GAAP operating income fell sharply, principally due to JZP-110 acquired R&D expense, increased amortization and the impairment charge.
- Jazz repurchased $23.5 million of shares in the first half; $40.1 million remained under its repurchase authorization at June 30.
Outlook, management commentary and risks
Management expected 2014 product sales to increase over 2013, mainly from Xyrem and Erwinaze growth and Gentium products; it expected royalties and contract revenue to be relatively consistent with 2013. Management also expected a slight increase in gross margin, higher SG&A, substantially higher R&D, and higher interest expense. No numerical full-year revenue or earnings guidance is provided in the filing. Management expected positive operating cash flow in 2014 and considered cash, expected operating cash generation and revolver availability sufficient for foreseeable needs, subject to business assumptions and risks.
- Xyrem concentration and competition: Four generic applicants had filed ANDAs, with related patent litigation ongoing; certain applicants also sought PTAB review of distribution-system patents. Jazz highlighted potential material effects from generic or competing sodium oxybate products. A Roxane trial on some patents could occur as early as Q1 2015. FDA discussions over Xyrem’s REMS remained unresolved; Jazz had appealed the denial of its initial dispute submission.
- Supply and regulation: Erwinaze supply was constrained by reliance on a sole manufacturer and prior manufacturing issues. Jazz also relied on single-source suppliers for products and active ingredients. An April 2014 FDA Form 483 cited pharmacovigilance observations, including 92 late reports among approximately 3,500 serious and unexpected adverse-event reports; the company described corrective actions but said further FDA action remained possible.
- Defitelio/defibrotide: European launches depended in part on country-level pricing and reimbursement. U.S. approval was uncertain; management said an NDA might be submitted in the first half of 2015 if FDA discussions and data remediation were successful and no additional trial was required. After quarter-end, Jazz completed its acquisition of Americas rights for $75 million, funded with cash; further milestones of up to $175 million may be payable.
- Development and integration: JZP-110 Phase 3 was planned for the first half of 2015, subject to a preclinical study and clinical-material availability. Management expected higher development spending and identified trial, regulatory, acquisition-integration and manufacturing risks.
- Other contingencies: Potential Medicaid and 340B price-reporting liabilities for ProstaScint and previously sold Quadramet could not be reasonably estimated. The filing also describes Xyrem and FazaClo patent disputes, a FazaClo-related contractual claim, and shareholder litigation concerning the Gentium tender offer; outcomes were uncertain.
Important facts for investors to verify
- Progress and outcomes of Xyrem ANDA litigation, PTAB petitions, and FDA REMS negotiations, including any generic-entry or distribution changes.
- Whether Xyrem growth, pricing, reimbursement and supply remain sustainable given its share of product sales and the concentration of receivables: Express Scripts accounted for 65% of gross receivables at June 30.
- Erwinaze supply capacity and the status of the FDA’s review of the intravenous-administration supplemental BLA, with a stated PDUFA date of December 28, 2014.
- Defitelio launch, pricing and reimbursement progress, U.S. regulatory path, and the financial impact of the post-quarter Americas-rights acquisition and potential milestones.
- Debt service, covenant headroom, liquidity after acquisition spending, and the outcome or estimability of the radiopharmaceutical pricing contingencies and other disclosed legal matters.