Jazz Pharmaceuticals plc — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter report; quarterly figures are noted separately below. Jazz is an international biopharmaceutical company focused mainly on sleep and hematology/oncology products.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $1,488.0 million | $1,324.8 million | +12% |
| Net product sales | $1,477.3 million | $1,316.8 million | +12% |
| Operating income | $591.7 million | $508.2 million | +16% |
| Net income | $396.8 million | $329.5 million | +20% |
| Diluted EPS | $6.41 | $5.23 | +23% |
| Cash from operations | $590.5 million | $531.9 million | +11% |
| Cash, cash equivalents and investments at year-end | $426.0 million | $988.8 million | Down $562.8 million |
| Working capital at year-end | $490.7 million | $1,031.0 million | Down $540.4 million |
| Debt carrying amount at year-end | $2,029.6 million | $1,188.4 million | Up $841.2 million |
Gross margin, measured against net product sales and excluding intangible amortization and impairment, was 92.9%, versus 92.2% in 2015. Operating margin was approximately 39.8% and net margin approximately 26.7%. The filing reports no standalone EBITDA measure. Cash used in investing was $1,749.3 million, principally reflecting the Celator acquisition and Defitelio milestone payment; financing provided $541.0 million.
Year-end debt comprised $850.0 million drawn on a $1.25 billion revolving facility, $712.9 million principal on the term loan, and $575.0 million principal of 1.875% exchangeable notes due 2021. Revolver availability was approximately $399.5 million. The company reported compliance with its credit agreement covenants. A 1 percentage-point increase in rates was estimated to increase 2017 interest expense by approximately $16 million on variable-rate borrowings.
Fourth-quarter 2016 revenue was $396.6 million and net income was $116.7 million, compared with $340.9 million and $82.8 million, respectively, in fourth-quarter 2015.
Revenue drivers and changes versus prior year
- Xyrem: $1,107.6 million, up 16%; approximately 75% of net product sales. Growth reflected higher net prices and 6% higher sales volume.
- Erwinaze/Erwinase: $200.7 million, down 1%, primarily reflecting lower volume amid supply challenges, partly offset by price increases.
- Defitelio/defibrotide: $109.0 million, up 54%, driven by the U.S. launch following FDA approval in March 2016 and higher international volume.
- Prialt: $29.1 million, up 10%, primarily due to higher volume. Psychiatry sales fell 52% and other product sales fell 45%, mainly reflecting generic competition and the 2015 divestiture of certain products.
Cost of product sales increased 3%; SG&A rose 12% to $502.9 million, and R&D increased 20% to $162.3 million. Higher SG&A included acquisition and integration costs, legal expenses, expanded commercial support, and an $11.6 million contract termination charge related to Vyxeos. The effective tax rate was 25.4%, versus 24.4%. The 2016 results include Celator from its July 12 acquisition date.
Outlook, developments and material risks
- Outlook: Management expected 2017 net product sales to increase over 2016, primarily from growth in marketed products and a potential U.S. Vyxeos launch, subject to regulatory approval. No numerical revenue or earnings guidance is provided in the filing. Management expected R&D, SG&A and interest expense to rise; gross margin was expected to remain broadly stable.
- Pipeline: The Vyxeos FDA NDA rolling submission began in 2016; completion was expected by the end of Q1 2017, with an EU filing planned for the second half of 2017. JZP-110 trial results were expected in early and mid-2017, with a potential NDA filing in late 2017 subject to results. Other planned milestones include a pediatric Xyrem filing in Q4 2017, a JZP-507 NDA by Q1 2018, and initiation of JZP-258 Phase 3 trials in 2017. These are expectations, not assured outcomes.
- Xyrem concentration and generic exposure: Xyrem generated 75% of net product sales. The FDA approved Roxane’s generic ANDA in January 2017 and tentatively approved two others; timing of commercial launch remained uncertain. Patent litigation was ongoing, and the PTAB had found claims in six of seven REMS patents unpatentable, with appeals pending. Management warned generic or other sodium oxybate competition could materially harm Xyrem sales.
- Supply and manufacturing: Erwinaze had limited inventory, constrained single-source production, and U.S. and international supply interruptions in Q3 and Q4 2016. In January 2017, the FDA issued a warning letter to sole supplier PBL citing significant cGMP violations and deviations. The filing says further supply impacts and regulatory actions were uncertain. Xyrem also depends on a single API supplier and DEA quotas; Vyxeos relies on a single-site manufacturer.
- Celator and debt: Jazz paid approximately $1.5 billion for Celator, principally to obtain Vyxeos and CombiPlex technology. The acquisition substantially increased debt and reduced cash and working capital; Vyxeos remained unapproved and its commercialization and manufacturing plans carried execution risk.
- Regulatory and legal matters: The company received U.S. Attorney subpoenas in May and October 2016 and February 2017 concerning support for charitable organizations assisting Medicare patients. Jazz said it was cooperating and could not predict the investigation’s outcome. A French tax assessment proposal sought approximately $40.3 million, including interest and penalties; Jazz disputed it. Celator acquisition-related shareholder litigation had a settlement in principle, subject to approvals and other steps.
- Other risks: Pricing and reimbursement pressure, product safety and REMS requirements, clinical-trial and approval uncertainty, intellectual-property challenges, foreign exchange, tax uncertainty, and dependence on a limited number of customers and suppliers remain significant risks.
Important facts for investors to verify
- Progress and financial impact of generic Xyrem entry, patent appeals and litigation, and any changes to the Xyrem REMS.
- Resolution of PBL’s FDA warning letter, Erwinaze production capacity, inventory and subsequent supply reliability.
- Vyxeos regulatory progress, manufacturing readiness, launch timing, uptake and returns relative to the $1.5 billion Celator investment.
- Whether 2017 growth expectations are achieved while Xyrem remains highly concentrated in the product portfolio.
- Cash generation, debt repayment, revolving-credit availability, covenant compliance and sensitivity to interest rates.
- Outcome and potential financial or operational consequences of the Medicare patient-assistance investigation and French tax dispute.