Business context and reporting period
Jazz Pharmaceuticals plc, an international biopharmaceutical company focused on sleep and hematology/oncology, reported unaudited results for the three months ended March 31, 2017, compared with the same 2016 quarter. Its key marketed products include Xyrem, Erwinaze/Erwinase and Defitelio/defibrotide. Results are reported in one operating segment.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $376.1 | $336.0 | +12% |
| Net product sales | $373.7 | $333.9 | +12% |
| Operating income | $136.1 | $121.2 | +12% |
| Net income | $86.5 | $75.8 | +14% |
| Diluted earnings per share | $1.41 | $1.21 | +17% |
| Operating cash flow | $164.5 | $151.7 | +$12.9 |
Gross margin on product sales was 93.3%, versus 93.0%. Operating and net margins were approximately 36.2% and 23.0%, respectively, based on reported figures.
Product sales were led by Xyrem at $272.3 million (+9%), Erwinaze/Erwinase at $51.4 million (approximately flat), Defitelio/defibrotide at $35.9 million (+101%), and Prialt at $7.7 million (+24%). Xyrem represented about 73% of net product sales. Defitelio’s growth mainly reflected its U.S. launch in April 2016; Xyrem’s increase reflected higher average net price, including a January 2017 price increase, and some volume growth.
At March 31, cash and cash equivalents were $347.0 million and investments were $60.0 million, totaling $407.0 million. Current assets were $752.9 million against current liabilities of $392.8 million. Debt principal was approximately $1.979 billion; the balance-sheet carrying amount was $1.876 billion, including the discount on exchangeable notes. Revolver availability was $550 million. The company repaid $150 million under the revolver during the quarter and said a further $100 million classified as current was repaid in April. Cash declined $19.0 million to $347.0 million, principally reflecting financing outflows, including debt repayment, share repurchases and employee tax withholding.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Xyrem and Defitelio; other product sales fell 30%, mainly because of generic competition in psychiatry products.
- Research and development expense rose 44% to $44.9 million, reflecting higher personnel and clinical-development costs, including Vyxeos and sleep-product programs. Selling, general and administrative expense rose 12% to $144.3 million.
- Interest expense increased 55% to $18.8 million, primarily due to higher average debt and borrowing rates following the amended credit agreement and Celator acquisition financing.
- The tax provision fell to $29.2 million from $32.3 million; the effective tax rate declined to 25.2% from 29.9%, primarily due to changes in the mix of income across jurisdictions.
- Financing cash use was $181.7 million, versus $152.5 million a year earlier. Share repurchases were $13.9 million, compared with $134.4 million in Q1 2016.
Outlook, commentary, risks and unusual items
- Management expected 2017 total product sales to increase over 2016, primarily from Xyrem and Defitelio and the anticipated U.S. launch of Vyxeos, subject to regulatory approval. It expected royalties and contract revenue to increase, gross margin to remain broadly stable, and R&D, SG&A and interest expense to rise.
- Vyxeos’s rolling U.S. NDA submission was completed in March 2017; a European application was expected in the second half of 2017. The company requested FDA priority review, which had not been confirmed in the filing. The anticipated commercial launch remained conditional on approval.
- After quarter-end, Jazz settled West-Ward’s Xyrem patent litigation on April 5, 2017. West-Ward received rights to sell an authorized generic beginning January 1, 2023, or earlier under specified conditions, and may launch its own generic as early as six months after the authorized-generic sales period. Four other ANDA litigations remained pending; generic entry timing and outcome were uncertain. The company warned that competing sodium oxybate products could materially reduce Xyrem sales.
- Erwinaze faces constrained, single-source supply. The supplier, Porton Biopharma, received an FDA warning letter in January 2017 and responded in March; the company reported supply disruptions outside the U.S. in Q1 and expected further disruptions during 2017.
- The U.S. Attorney’s Office for the District of Massachusetts had issued subpoenas concerning patient-assistance support and Medicare patients. Jazz was cooperating, could not predict the outcome, and expected continuing significant costs.
- French tax authorities proposed approximately $40.9 million in additional tax, interest and penalties related to 2012–2013 transfer pricing. Jazz disputed the assessment and intended to contest it.
- Other key exposures include Xyrem dependence, pricing and reimbursement pressure, single-source manufacturing and DEA quota constraints, clinical and regulatory execution, and substantial debt. The company reported compliance with its credit-agreement financial covenants at March 31, 2017. A $300 million interest-rate swap fixed the rate on a portion of term-loan borrowings at 1.895% plus the borrowing spread through July 2021.
Most important facts for investors to verify
- Track Xyrem’s revenue concentration, price-versus-volume trends, generic litigation and settlement-triggered entry conditions, and the status of REMS patent appeals.
- Monitor Erwinaze supply continuity, Porton’s remediation progress and FDA response, given the product’s limited inventory and single-source manufacturing.
- Confirm Vyxeos regulatory review, manufacturing readiness, approval timing and launch expectations; assess whether pipeline spending and commercial investment affect margins and cash generation.
- Reconcile debt principal with its reported carrying amount, monitor debt repayments and revolver availability, and assess interest-rate exposure and covenant headroom.
- Follow the patient-assistance investigation and French tax dispute for potential financial, operational or reputational consequences.