Jazz Pharmaceuticals Plc quarterly report, Q3 FY2019

Jazz Pharmaceuticals plc — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Jazz is a global biopharmaceutical company focused on sleep medicine and hematology/oncology.

Financial performance

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Total revenue	$537.7	$469.4	$1,580.0	$1,414.5
Operating income	$133.1	$188.8	$471.1	$429.8
Net income	$102.3	$149.3	$449.4	$287.6
Diluted earnings per share	$1.78	$2.41	$7.80	$4.68
Cash provided by operations	Not separately stated for quarter	Not separately stated for quarter	$688.6	$580.8

• Quarterly revenue grew 15%; nine-month revenue grew 12%. Net product sales rose 14% and 11%, respectively. Product gross margin was 94.1% in both 2019 periods; the filing reports 94.3% for Q3 2018 and 93.2% for the first nine months of 2018.
• Q3 operating income fell 30% and net income fell 32%, despite higher revenue, largely amid higher R&D, amortization, and $51.8 million of acquired in-process R&D expense. Nine-month operating income rose 10% and net income rose 56%.
• Nine-month 2019 income tax benefit was $38.6 million, including a $112.3 million deferred tax benefit from an intra-entity intellectual-property transfer. This significantly affected the year-over-year net-income comparison; it was not an operating cash receipt.

Products and changes versus prior period

• Xyrem sales were $425.6 million in Q3 and $1,207.2 million for nine months, up 19% and 17%, respectively. Growth reflected higher average net price and volume; volume increased 6%. Xyrem represented 80% of Q3 and 77% of nine-month net product sales.
• Erwinaze/Erwinase sales fell 17% in Q3 and 19% for nine months, primarily due to limited supply. Defitelio sales rose 4% and 12%, primarily on higher volume. Vyxeos sales rose 41% and 20%, with the EU launch contributing to growth.
• Sunosi, launched in the U.S. in July 2019, generated $1.0 million of sales in Q3 and for the nine-month period. Other product sales declined, primarily following the 2018 sale of Prialt rights.
• R&D expense increased 56% in Q3 and 19% for nine months. SG&A increased 15% in Q3; nine-month SG&A was approximately flat, partly because 2018 included a $57.0 million loss contingency.

Cash, debt, and liquidity

• At September 30, cash and cash equivalents were $795.2 million and investments were $275.0 million, totaling $1.070 billion. Cash and investments at December 31, 2018 totaled $824.6 million.
• Nine-month operating cash flow was $688.6 million. Investing activities provided $3.8 million, and financing activities used $206.0 million; cash increased $485.6 million to $795.2 million.
• Debt principal totaled approximately $1.776 billion: $626.0 million term loan and $575.0 million principal for each of the 2021 and 2024 exchangeable notes. No amount was drawn under the $1.6 billion revolving credit facility. Management said existing liquidity, expected operating cash flow, and revolver availability should fund operations and obligations for the foreseeable future, subject to business risks.
• The balance sheet included $141.9 million of operating lease assets and $165.1 million of lease liabilities following adoption of the new lease standard in 2019. Debt carrying value was $1.604 billion.

Outlook, management commentary, and material risks

• Management expected 2019 product sales to exceed 2018, primarily from Xyrem, Vyxeos, and Defitelio; royalties and contract revenues were also expected to increase. It expected gross margin to remain broadly stable, SG&A to increase, and R&D to continue rising. The filing provides no specific numerical full-year revenue or earnings guidance.
• Jazz expected to submit an NDA for JZP-258, an oxybate candidate with 92% less sodium than Xyrem, in January 2020, using its priority review voucher. In October 2019 it notified FDA of the planned voucher redemption and expected to amortize the voucher’s $111.1 million carrying value in full in Q4 2019.
• Key commercial exposure is Xyrem concentration. Generic and authorized-generic entry dates under settlements could be accelerated in certain circumstances; absent acceleration, the earliest authorized-generic entry described is January 1, 2023. New competitors, including Sunosi and pitolisant, payer restrictions, pricing pressure, REMS changes, and supply or pharmacy disruption could affect Xyrem sales.
• Erwinaze is supplied by a single source, Porton Biopharma (PBL), which has faced manufacturing and quality problems and ongoing supply disruptions. Jazz said further disruptions were expected in 2019 and 2020. Its license and supply agreement was due to expire December 31, 2020, and replacement terms had not been agreed; without a new agreement, Jazz expected to lose its rights after expiration, subject to a limited inventory sell-off period.
• Other risks include reliance on single-source suppliers, uncertainty in new-product launches and clinical development, reimbursement and drug-pricing pressure, and substantial debt. The filing reports proposed French transfer-pricing assessments of approximately $53 million in total, including interest and penalties through the assessment dates; Jazz disputed and was contesting them.
• In April 2019, Jazz finalized a $57.0 million settlement with the DOJ and HHS OIG related to patient-assistance matters and entered a five-year corporate integrity agreement. The company also reported a $500 million additional share-repurchase authorization approved in October 2019; $191.1 million had been spent on repurchases during the first nine months.
• The Cavion acquisition added JZP-385 to the pipeline for essential tremor, for $52.5 million upfront and up to $260 million in potential milestone payments. The Codiak collaboration involved a $56 million upfront payment and potential future milestones and royalties.

Important facts for investors to verify

• Whether Xyrem growth can persist amid payer negotiations, competition, and the potential for accelerated generic or authorized-generic entry.
• Progress toward JZP-258’s planned NDA submission, the priority-review timing, and the expected Q4 2019 voucher amortization.
• Erwinaze supply reliability and whether Jazz and PBL reach a replacement agreement before the December 2020 expiration.
• Sunosi’s U.S. launch uptake, European regulatory decision, and formulary access; Q3 sales were only $1.0 million.
• The recurring cash-generation outlook and ability to meet debt obligations while funding pipeline investment and share repurchases.
• Resolution and potential financial impact of the French tax assessments, and ongoing compliance with the corporate integrity agreement.