Jazz Pharmaceuticals plc — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Comparative periods are the three and nine months ended September 30, 2014. Amounts below are in U.S. dollars.
Business context and performance
Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology products. Results are highly dependent on Xyrem, its largest-selling product. The company reported that Xyrem represented 71.7% of net product sales in Q3 and 71.9% for the first nine months of 2015.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $340.9 million | $306.6 million | $983.9 million | $844.7 million |
| Net product sales | $338.8 million | $304.4 million | $977.9 million | $838.5 million |
| Operating income | $131.5 million | $58.0 million | $401.6 million | $65.7 million |
| Net income (loss) attributable to Jazz | $88.0 million | $25.8 million | $246.8 million | $(23.2) million |
| Diluted EPS | $1.39 | $0.41 | $3.91 | $(0.39) |
| Gross margin on net product sales | 91.6% | 91.1% | 92.0% | 89.4% |
Product sales: Xyrem sales were $242.9 million in Q3 and $703.4 million year to date, up 19% and 26%, respectively. Erwinaze/Erwinase sales were $56.3 million and $152.8 million, up 8% and 4%. Defitelio/defibrotide sales were $19.6 million and $52.3 million, up 4% and 2%. Year-to-date Prialt sales increased 21%; psychiatry sales declined 13%, and other sales declined 40%.
Adjusted results: Company-defined non-GAAP adjusted net income was $159.3 million in Q3 and $436.6 million year to date, versus $143.9 million and $369.4 million. Adjusted diluted EPS was $2.52 and $6.92, respectively, versus $2.30 and $5.91. These measures exclude specified costs and other items; they are not GAAP measures.
Cash flow, debt and liquidity
- Cash and cash equivalents were $998.9 million at September 30, up from $684.0 million at December 31, 2014.
- Operating cash flow for the first nine months was $412.2 million, versus $273.3 million in 2014. Investing activities provided $1.1 million, including $33.7 million net proceeds from a business sale, offset mainly by $32.6 million of capital spending. Financing activities used $90.5 million.
- Debt carrying value was $1.290 billion, including $575 million principal amount of 1.875% exchangeable notes due 2021, term loans, and $80 million drawn on the revolving facility. The filing also describes aggregate debt principal of approximately $1.4 billion. At quarter end, $668.9 million of revolving capacity was available, excluding a $1.1 million letter of credit. The company repaid the $80 million revolver balance in October 2015.
- In June 2015, Jazz refinanced its prior credit agreement with a $750 million term loan and a $750 million revolving facility, both maturing in 2020. The term loan carried a 2.09% rate at quarter end. The company reported compliance with financial covenants. Term-loan amortization was scheduled to begin in December 2015.
Material changes and unusual items
- Revenue growth was driven principally by Xyrem, reflecting higher average net selling price and increased volume. Q3 Xyrem sales were affected by delays in prescription fills and refills during the transition to its final FDA-approved REMS.
- Research and development expense rose 126% in Q3 and 75% year to date, including a $25 million milestone triggered by FDA acceptance of the defibrotide NDA. The prior-year comparison included $75 million of acquired in-process R&D in Q3 and $202 million year to date, plus a $32.8 million impairment charge year to date.
- The June refinancing generated a $16.8 million loss on extinguishment and modification of debt. Year-to-date interest expense increased 24%, mainly reflecting a larger debt balance, although Q3 interest expense declined following refinancing.
- Foreign-currency translation reduced accumulated other comprehensive income by $109.2 million year to date, primarily from U.S.-dollar strengthening against the euro.
- Jazz sold certain acquired products and related business in March for approximately $33 million net cash proceeds. The sale was not reported as a discontinued operation.
Outlook, risks and contingencies
- Management expected 2015 total product sales to exceed 2014, primarily from growth in lead products; expected gross margin to be slightly higher; and expected royalties and contract revenue to be lower. It anticipated higher SG&A and substantially higher R&D spending than historical levels. No specific full-year revenue or EPS guidance is provided in the filing text.
- Management expected positive operating cash flow in 2015 and believed cash, operating cash generation and revolver capacity would fund operations and existing obligations for the foreseeable future, while noting this depends on sales, expenses and other risks.
- Seven generic applicants had filed ANDAs for Xyrem. Patent litigation was ongoing; some trial activity against the first filer could occur as early as Q1 2016, and the PTAB had instituted reviews of six distribution-system patents. Management warned that generic or competing sodium oxybate entry could materially harm results. Fourth-quarter operating metrics at the central pharmacy had improved from Q3, but further REMS-related disruption remained possible.
- Erwinaze supply is constrained: demand nearly absorbs manufacturing capacity, inventory is limited, and the product relies on a single source. Manufacturing capacity or quality problems could interrupt supply.
- The FDA accepted the defibrotide NDA for priority review, with a PDUFA target of March 31, 2016. Approval remained uncertain; a manufacturer had received FDA Form 483 observations that could affect timing or approval. European launches also depend on country-level pricing and reimbursement decisions.
- Development risks include hypersensitivity-like reactions that led to suspension of JZP-416 enrollment, and discontinuation of Leukotac development after Phase 3 analysis. JZP-110 Phase 3 trials had begun.
- Potential contingencies include a $10.5 million and an additional $25 million claim, plus unspecified damages and fees, in the Cutler litigation, with trial scheduled for March 2016; and uncertain potential retroactive Medicaid/340B liabilities relating to previously sold Quadramet and ProstaScint, for which the company could not reasonably estimate a loss range.
- After quarter end, the board authorized a new share repurchase program of up to $300 million. The company had completed its prior $200 million program in August.
Important facts for investors to verify
- Progress and outcomes of Xyrem ANDA litigation and PTAB reviews, and the commercial impact of the final REMS transition.
- Whether Xyrem’s Q3 prescription-fill disruption continues to ease, and the effects of pricing, reimbursement pressure and customer concentration.
- Erwinaze manufacturing capacity, quality and inventory; and defibrotide FDA review, manufacturing remediation and European reimbursement progress.
- Debt principal, repayment requirements, variable-rate exposure and covenant headroom; confirm the October revolver repayment and post-repayment liquidity.
- Resolution or updated estimates for the Cutler claim and potential radiopharmaceutical Medicaid/340B liabilities.
- Underlying GAAP performance alongside non-GAAP adjustments, particularly milestone, share-based compensation, amortization and refinancing charges.