Jazz Pharmaceuticals, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The filing is by Jazz Pharmaceuticals, Inc.; it describes a proposed merger with Azur Pharma that was expected to create Jazz Pharmaceuticals plc.
Business context and results
The company marketed Xyrem for narcolepsy and Luvox CR for obsessive compulsive disorder. It reported one business segment and had no product candidates in clinical development. Unless noted otherwise, financial amounts below are in millions of dollars.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $73.3 | $44.8 | $188.7 | $120.4 |
| Net product sales | $72.2 | $43.8 | $185.6 | $117.6 |
| Operating income | $33.7 | $14.4 | $90.2 | $32.3 |
| Net income | $32.5 | $13.2 | $87.5 | $8.3 |
| Diluted EPS | $0.69 | $0.32 | $1.88 | $0.22 |
| Operating margin | 46.0% | 32.3% | 47.8% | 26.8% |
| Net margin | 44.3% | 29.6% | 46.4% | 6.9% |
For the nine-month period, operating cash flow was $107.9 million, investing cash flow was negative $15.6 million, and financing cash flow was negative $35.9 million. Cash and cash equivalents were $101.2 million and marketable securities $12.1 million at September 30, for combined cash and securities of $113.3 million. The company had repaid its $33.3 million term loan in July; no debt or revolver borrowings were outstanding at quarter-end, and $14.7 million remained available under its revolving facility. Current assets were $152.1 million versus current liabilities of $57.5 million.
Changes and drivers versus prior periods
- Q3 revenue rose 64% year over year; nine-month revenue rose 57%. Xyrem sales increased 68% in Q3 and 62% for nine months, primarily from price increases and also from volume growth of 11.4% and 11.5%, respectively.
- Luvox CR sales grew 46% in Q3 and 34% for nine months, reflecting higher volume and prices. Xyrem represented 87% of year-to-date net product sales.
- SG&A increased 69% in Q3 and 40% for nine months, including $6.0 million of merger-related legal and professional costs in each 2011 period. R&D declined 55% in Q3 and 52% for nine months, mainly due to lower development spending.
- Nine-month interest expense fell to $1.6 million from $11.7 million. A $1.1 million debt-extinguishment loss in 2011 related to repayment of the term loan; the 2010 comparable period included a $12.3 million loss.
- The effective tax rate was 0%, as net operating loss carryforwards and deferred state tax benefits offset tax expense.
Outlook, risks, and unusual items
- Management expected 2011 total product sales to increase significantly over 2010, modest royalty growth, and R&D spending significantly below 2010. It expected higher SG&A in 2011 from merger costs, Xyrem legal expenses, and headcount-related costs. Management believed available cash and expected operating cash generation would fund operations and existing obligations for the foreseeable future; results to date were not represented as a guarantee of future performance.
- The proposed stock merger with Azur Pharma was anticipated to close in Q1 2012, subject to shareholder, regulatory, and other customary conditions. Former Jazz stockholders were expected to own slightly less than 80% of the combined company. A $1.5 million banker fee would be payable at closing, in addition to $1.5 million already expensed.
- The FDA had issued a warning letter following a Form 483 concerning deficiencies in adverse-event reporting and drug-safety procedures, including previously unreported deaths of patients prescribed Xyrem. The company said it had responded and was implementing corrective actions; it could not assure FDA satisfaction or rule out further regulatory action. It reported that its review to date had not identified a new Xyrem safety signal.
- Xyrem faces generic patent litigation with Roxane; the company could not predict the outcome. Management identified generic entry, the Xyrem boxed warning and controlled-substance restrictions, DEA quota and sole-source supply dependence, and FDA oversight as material risks. Orphan-drug exclusivity for one Xyrem indication was due to expire in November 2012.
- Torrent had filed an ANDA for generic Luvox CR, and Jazz and Alkermes sued in October 2011. An earlier settlement with Anchen permitted generic entry from February 15, 2013, or earlier under specified conditions.
- Express Scripts accounted for 85% of revenue and 82% of gross accounts receivable at quarter-end, creating significant customer concentration. The company also disclosed government-settlement liabilities and continuing scheduled payments.
Most important facts for investors to verify
- Whether Xyrem sales growth can continue, given heavy product and customer concentration, pricing reliance, and generic and regulatory risks.
- Progress and consequences of FDA-required corrective actions, including any subsequent FDA findings or changes to Xyrem’s distribution or labeling.
- Outcomes and timing of the Roxane and Torrent patent cases, and the potential timing of generic competition for both products.
- Completion terms, approvals, costs, and timing of the proposed Azur Pharma merger.
- Cash generation, product-sales deductions and rebates, and the company’s ability to fund acquisitions or licensing while maintaining liquidity.