Jazz Pharmaceuticals plc — Q2 2016 Form 10-Q
Business context and reporting period. International biopharmaceutical company focused on sleep and hematology/oncology products. This unaudited filing covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Xyrem remained the largest product. The Celator acquisition closed after quarter-end, on July 12, 2016.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $381.2 (+14%) | $333.7 | $717.2 (+12%) | $643.1 |
| Operating income | $168.7 | $153.3 | $289.9 | $270.1 |
| Net income attributable to Jazz | $111.3 | $88.1 | $185.4 | $158.8 |
| Diluted EPS | $1.80 | $1.40 | $2.98 | $2.52 |
| Operating cash flow | Not separately provided | Not separately provided | $273.3 | $237.1 |
| Gross margin on product sales | 93.7% | 93.4% | 93.3% | 92.2% |
Q2 net product sales were $379.1 million, up 14%. Xyrem sales were $281.0 million (+13%), Erwinaze/Erwinase $49.7 million (+8%), and Defitelio/defibrotide $33.2 million (+118%). Xyrem represented 74% of net product sales in both the quarter and first half. Six-month interest expense, net, was $24.3 million, down from $32.1 million; income tax expense was $79.4 million, with a 30.0% effective rate versus 28.3%.
At June 30, cash and cash equivalents were $868.0 million and investments were $48.4 million. Current assets were $1.231 billion and current liabilities $226.7 million. Balance-sheet debt carrying value was $1.179 billion; principal debt was approximately $1.297 billion, comprising a $721.9 million term loan and $575.0 million of 1.875% exchangeable notes. Cash, cash equivalents and investments totaled $916.4 million. The company reported $749.5 million of borrowing availability under its then-existing revolver. Six-month investing cash outflow was $216.4 million and financing cash outflow was $178.7 million; cash declined $120.8 million to $868.0 million.
Material changes and notable items
- Revenue growth was driven chiefly by Xyrem and the U.S. Defitelio launch following FDA approval in March. Xyrem sales growth reflected a higher average net selling price, including a February 2016 price increase, and 4% higher sales volume.
- Q2 SG&A increased 14% to $122.6 million and R&D increased 40% to $39.1 million. For the first half, SG&A rose 15% and R&D 28%; higher clinical-study costs, particularly for three Phase 3 JZP-110 trials, contributed to R&D growth. First-half acquired IPR&D expense was $8.8 million for recombinant crisantaspase rights.
- First-half investing cash use included a $150.0 million Defitelio milestone payment triggered by FDA approval. The company repurchased $163.2 million of shares during the first half and suspended the program in June in connection with the Celator transaction.
- On July 12, Jazz completed its approximately $1.5 billion Celator acquisition, obtaining worldwide rights to investigational Vyxeos and the CombiPlex platform. It funded the transaction with $1.0 billion of revolving borrowings and cash on hand. The credit facility was amended to a $1.25 billion revolver and $750 million term loan facility, with maturity extended to July 2021. Debt was approximately $2.3 billion after the transaction.
- In June, the FDA approved Jazz’s Ireland manufacturing and development facility.
Outlook, commentary and risks
- Management expected 2016 total product sales to exceed 2015, primarily on anticipated Xyrem and Defitelio growth; it also expected slightly higher royalty and contract revenue. Management expected R&D and SG&A to increase, and interest expense to be higher following the acquisition-related debt increase. It expected positive operating cash flow in 2016 and said existing cash, operating cash flow and revolver capacity should fund operations and obligations for the foreseeable future.
- Development milestones included preliminary JZP-110 Phase 3 data expected in Q1 2017 for obstructive sleep apnea and mid-2017 for narcolepsy; completion of a rolling Vyxeos NDA submission was expected in late 2016 or early 2017. FDA Breakthrough Therapy designation had been granted for specified adult AML populations. A Phase 3 defibrotide prevention trial was expected to begin enrollment in Q4 2016.
- Xyrem concentration and patent exposure are material: seven companies had filed ANDAs. Jazz settled with Wockhardt and Ranbaxy, licensing generic entry on or after December 31, 2025, subject to earlier-entry conditions. Remaining litigation continued, with a Roxane trial set for Q2 2017. In July 2016, the PTAB found claims in six Xyrem distribution-system patents unpatentable; Jazz expected to appeal. Generic entry, REMS changes, pricing pressure, or supply constraints could materially affect results.
- Erwinaze relied on a single supplier, with capacity fully absorbed by demand, limited inventory and prior supply disruptions. The supplier received an FDA Form 483 in March 2016 and remediation was required. Defitelio’s commercial growth depended on market uptake, reimbursement and post-marketing obligations. Vyxeos remained unapproved and depended on regulatory approval and reliable third-party manufacturing.
- Other contingencies include a disputed French tax assessment of approximately $42.4 million, including interest and penalties; potential retroactive Medicaid/340B liabilities for previously sold Quadramet and ProstaScint that the company could not reasonably estimate; and a May 2016 U.S. Attorney subpoena concerning charitable assistance to Medicare patients. The company expected investigation-related costs but could not predict the outcome. Celator-related shareholder litigation had an agreement in principle to settle, subject to court approval and other steps.
- Variable-rate debt creates interest-rate exposure: the filing estimated that a 1 percentage-point rate increase would raise net interest expense by approximately $8.2 million for the remainder of 2016, based on July 12 indebtedness. Management reported compliance with credit covenants at June 30 and currently. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Progress and outcome of Xyrem ANDA litigation, appeals of the PTAB decisions, and the timing and conditions of any generic entry.
- Post-acquisition debt, interest costs, covenant headroom, and the impact of Celator integration and Vyxeos development or approval.
- Whether Xyrem growth and Defitelio commercialization meet management’s 2016 expectations, including pricing, reimbursement and volume trends.
- Erwinaze supply continuity and supplier remediation, as well as manufacturing readiness for Defitelio and Vyxeos.
- Resolution and potential financial exposure from the French tax assessment, radiopharmaceutical price-reporting matter, and Medicare patient-assistance investigation.