Jazz Pharmaceuticals plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018 unless otherwise noted. Jazz is a global biopharmaceutical company focused on sleep medicine and hematology/oncology. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $508.2 million | $444.6 million | +14% |
| Operating income | $133.7 million | $87.8 million | +52% |
| Net income | $85.2 million | $46.0 million | +85% |
| Diluted EPS | $1.47 | $0.75 | +96% |
| Operating cash flow | $202.3 million | $167.4 million | +$34.9 million |
| Gross margin on product sales | 93.3% | 92.3% | +1.0 percentage point |
Product sales were $503.3 million, up 14%; royalties and contract revenue were $4.9 million. Gross margin is reported as a percentage of net product sales. Operating margin was approximately 26.3%, versus 19.7% in Q1 2018; net margin was approximately 16.8%, versus 10.3%.
- Product revenue: Xyrem $368.3 million (+16%); Erwinaze/Erwinase $60.9 million (+20%); Defitelio/defibrotide $41.5 million (+18%); Vyxeos $28.9 million (+10%); other products $3.7 million (down 70%). Xyrem represented 73% of net product sales.
- Expenses and unusual items: SG&A was $167.9 million, down 19%, mainly because Q1 2018 included a $57.0 million DOJ-related loss contingency. Q1 2019 included $56.0 million of acquired in-process R&D expense for the Codiak collaboration. Amortization was $56.9 million, including a $10.2 million increase from shortening the Erwinaze intangible asset’s estimated remaining life; management reported this reduced Q1 net income by $6.9 million, or $0.12 per share.
- Cash and liquidity: Cash and cash equivalents were $547.5 million and investments $285.0 million at March 31, 2019, totaling $832.5 million. The company also reported $1.6 billion of availability under its revolving credit facility, with no borrowings outstanding.
- Debt: Debt principal was approximately $1.8 billion: $642.7 million term loan and $575.0 million each of 1.875% exchangeable notes due 2021 and 1.50% notes due 2024. Balance-sheet debt carrying value was $1.599 billion. Net interest expense was $17.9 million, down from $20.6 million.
- Cash movements: Investing activities provided $166.1 million, primarily reflecting net investment maturities; financing activities used $130.3 million, including $111.2 million of share repurchases. Cash increased by $237.8 million during the quarter.
Material changes and business developments
- Revenue growth was led by Xyrem, reflecting higher average net selling price and 5% higher sales volume; Defitelio growth reflected higher use, and Vyxeos benefited from its European launch.
- In March, the FDA approved Sunosi (solriamfetol) for adults with excessive daytime sleepiness associated with narcolepsy or obstructive sleep apnea. U.S. launch awaited DEA scheduling review; an EU application was pending.
- Jazz reported positive top-line Phase 3 results for JZP-258, an oxybate candidate with 92% less sodium than Xyrem, and expected to submit an NDA as early as year-end 2019.
- Jazz entered a Codiak collaboration for exosome cancer therapeutics, paying $56.0 million upfront. Potential milestone payments include up to $20 million for preclinical development and up to $200 million per target for specified development, regulatory and sales milestones, plus royalties.
- Adoption of the new lease standard in January 2019 added operating lease assets and liabilities; at March 31, lease assets were $147.4 million and lease liabilities $162.7 million. The adoption also removed build-to-suit assets and related financing obligations from the balance sheet.
- Jazz repurchased 858,000 shares for $111.2 million at an average $129.66 per share; $267.9 million remained authorized at quarter-end.
Outlook, risks and contingencies
- Management expected 2019 total product sales to increase over 2018, primarily from Xyrem, Vyxeos and Defitelio. It expected royalties and contract revenue to decline, SG&A and R&D expenses to rise, and Erwinaze-related amortization to increase. It expected gross margin as a percentage of product sales to remain broadly stable and net interest expense to be lower.
- Management expected positive operating cash flow in 2019 and considered existing cash, expected operating cash generation and revolver availability sufficient for foreseeable needs, while noting that this depends on sales, expenses and other assumptions.
- Xyrem dependence and competition: Xyrem generated 73% of Q1 product sales. Generic and authorized-generic entry under settlements is generally scheduled from 2023 onward, but specified events could accelerate entry. Price pressure, reimbursement restrictions, REMS requirements and competing narcolepsy therapies could affect sales.
- Erwinaze supply and rights: PBL’s termination notice means the license and supply agreement is due to expire December 31, 2020 unless replaced; Jazz may sell certain inventory for a 12-month post-termination period. Ongoing PBL manufacturing and supply problems were expected to continue during 2019.
- DOJ settlement: Jazz finalized a $57.0 million civil settlement, plus interest, in April 2019 concerning support for a charitable foundation assisting Medicare patients. The settlement is not an admission of wrongdoing. A five-year corporate integrity agreement applies; breach could result in stipulated penalties or exclusion from federal health programs.
- Tax contingency: Jazz disputed French transfer-pricing assessments proposing approximately $42 million for 2012–2013 and $4 million for 2015, including interest and penalties through the assessment dates.
- Other material risks include product and API single-source dependencies, clinical and regulatory uncertainty, pricing and reimbursement changes, substantial debt and variable-rate exposure, and foreign-exchange fluctuations. Management reported disclosure controls were effective as of March 31, 2019.
Key facts for investors to verify
- Whether growth in Xyrem volume and pricing can continue, and the potential commercial impact and timing of generic or competing products.
- Whether Jazz can secure continued Erwinaze rights after 2020 and whether PBL can reliably supply the product before then.
- Timing of DEA scheduling and U.S. launch for Sunosi, EU regulatory progress, and the commercial uptake and reimbursement outlook.
- Progress toward the JZP-258 NDA, including completion of required chemistry, manufacturing and controls work and regulatory review.
- Cash generation, debt-service capacity and compliance with credit-agreement covenants, alongside continued share repurchases and investment needs.
- Resolution and financial exposure relating to the French tax assessments, and compliance with the DOJ settlement and corporate integrity agreement.