Jazz Pharmaceuticals plc — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Jazz is a global biopharmaceutical company focused on neuroscience and oncology. Its portfolio includes Xyrem, Sunosi, Defitelio, Erwinaze, Vyxeos and, following FDA approval in June, Zepzelca. Results are reported under U.S. GAAP.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Total revenue | $562.4 million | $534.1 million | $1,097.2 million | $1,042.3 million |
| Operating income | $198.1 million | $204.3 million | $8.5 million | $338.0 million |
| Net income (loss) | $114.8 million | $261.9 million | ($43.0 million) | $347.1 million |
| Diluted earnings (loss) per share | $2.06 | $4.56 | ($0.77) | $6.01 |
| Operating cash flow | Not separately stated | Not separately stated | $455.5 million | $351.1 million |
Q2 revenue rose 5% year over year, while net income fell. H1 revenue also increased 5%, but the company reported a loss, chiefly reflecting a $200.0 million Zepzelca license upfront payment recorded as acquired in-process R&D expense and a $136.1 million impairment charge for defibrotide prevention research. H1 2019 also included a $112.3 million discrete tax benefit related to an intra-entity intellectual-property transfer, making earnings comparisons less like-for-like.
Gross margin as a percentage of net product sales was 95.0% in Q2 and 94.8% in H1, compared with 94.7% and 94.0%, respectively, in 2019. Q2 SG&A increased 9% and R&D increased 27% year over year; H1 increases were 16% and 35%, respectively. H1 interest expense, net, rose 24% to $44.7 million.
Revenue mix and notable product trends
- Xyrem generated $446.8 million in Q2, up 8%, and $854.7 million in H1, up 9%; increases primarily reflected higher average net price and, to a lesser extent, volume.
- Q2 Defitelio/defibrotide sales fell 7% to $42.7 million, and Vyxeos sales fell 15% to $26.6 million; the filing cites COVID-related reductions or delays in transplants and a shift toward outpatient AML treatments.
- Erwinaze/Erwinase sales rose 18% in Q2 to $32.7 million but fell 20% in H1 to $70.4 million, with H1 affected by limited manufacturer supply.
- Sunosi sales were $8.6 million in Q2 and $10.5 million in H1. Zepzelca launched in the U.S. in July 2020, after the reporting period.
- ESSDS accounted for 79% of Q2 revenue and McKesson for 10%, underscoring customer concentration.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $786.1 million and investments were $910.0 million, totaling $1.696 billion, versus $1.077 billion at December 31, 2019.
- H1 operating cash flow was $455.5 million. Investing cash outflow was $801.2 million, primarily reflecting investment purchases and Zepzelca-related payments; financing cash inflow was $494.9 million.
- Total debt principal was approximately $2.418 billion; reported debt carrying value was $2.103 billion. The company had $1.6 billion of revolving-credit availability and no revolver borrowings at June 30.
- Jazz issued $1.0 billion principal amount of 2.00% exchangeable notes due 2026, used part of the proceeds to repurchase $332.9 million principal amount of 2021 notes, and repaid a temporary $500.0 million revolver draw. The company also repurchased $146.5 million of shares in H1.
Outlook, risks and unusual items
- Management expected 2020 product sales to exceed 2019, primarily on Xyrem and Sunosi growth and Zepzelca sales. It expected royalties and contract revenue to decline, SG&A and R&D to increase, and interest expense to rise following the 2026 notes issuance. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
- Management expected positive operating cash flow in 2020 and believed available cash, investments, operating cash flow and revolver capacity would fund operations and existing obligations for the foreseeable future; it cautioned that these expectations depend on assumptions and uncertain conditions.
- COVID-19 was negatively affecting demand, new patient starts, healthcare access and product utilization. The company cited effects on Xyrem diagnoses, Sunosi growth and European reimbursement reviews, Defitelio transplant volumes, and Vyxeos treatment patterns. Management expected adverse effects to continue, with duration and scale uncertain.
- Management expected adequate 2020 supply for most major products, but anticipated continued global Erwinaze supply disruptions. Erwinaze’s license and supply agreement with PBL was scheduled to expire December 31, 2020, and PBL had announced a new commercialization partner.
- The company stopped enrollment in a Phase 3 defibrotide prevention study because it judged the study highly unlikely to meet a primary endpoint, recording the $136.1 million impairment. This did not affect the approved treatment indication, according to the filing.
- After quarter-end, FDA approved Xywav on July 21, 2020; Jazz expected a U.S. launch in Q4 2020. Management also reported strong initial physician reception for Zepzelca following its July launch.
- Multiple class actions filed in June and July 2020 allege antitrust, consumer-protection or unfair-competition violations related to Xyrem and patent-settlement conduct. Plaintiffs seek damages and injunctive or other relief; the company said an adverse outcome could be material. A proposed $17.7 million French tax-audit settlement was accrued at June 30, subject to formal finalization.
Most important facts for investors to verify
- Whether Xyrem growth and pricing can offset future generic competition, and the timing and commercial uptake of Xywav.
- Whether COVID-19-related constraints persist or worsen, particularly for patient starts, oncology utilization, reimbursement and launches.
- Erwinaze supply continuity, the PBL contract transition and the revenue impact after the agreement expires.
- Zepzelca launch performance, access and reimbursement, and potential milestone and royalty obligations to PharmaMar.
- Progress and financial exposure from Xyrem-related litigation, the French tax settlement and other contingencies.
- Debt service capacity and cash generation given approximately $2.4 billion of debt principal, planned investment needs and reliance on Xyrem.