Jazz Pharmaceuticals plc — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts below are in U.S. dollars; financial statement figures are unaudited. The 2012 comparison is affected by the 2012 Azur merger, EUSA acquisition, and women’s health business divestiture.
Business context and results
Jazz is a specialty biopharmaceutical company. Its largest product is Xyrem; Erwinaze/Erwinase is its second-largest. Results reflect continuing operations unless otherwise noted.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $232.2 million | $175.5 million | $636.6 million | $402.3 million |
| Income from operations | $100.6 million | $55.3 million | $245.8 million | $130.5 million |
| Net income | $75.4 million | $33.2 million | $161.0 million | $88.0 million |
| Diluted earnings per share | $1.23 | $0.55 | $2.62 | $1.47 |
| Gross margin on product sales | 89.5% | 81.3% | 87.9% | 86.8% |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $204.4 million | $145.4 million |
Revenue, expenses, liquidity and debt
- Product sales: Q3 grew 32% and nine-month sales grew 58%. Xyrem sales were $153.7 million in Q3 and $404.9 million for nine months, up 50% and 53%, respectively. Management attributed growth to higher average net price and 13% higher volume in both periods.
- Other products: Erwinaze/Erwinase sales increased 39% in Q3; nine-month reported growth of 247% includes a full 2013 period versus partial-year 2012. On a pro forma basis, nine-month growth was 34%. Prialt Q3 sales rose 104%, partly due to a $5.7 million distributor sale; psychiatry sales fell 49% in Q3, principally due to generic Luvox CR and authorized generic FazaClo LD competition.
- Costs: SG&A was $75.0 million in Q3 and $223.0 million for nine months; R&D was $12.8 million and $32.8 million. Nine-month R&D growth reflected increased development activity, acquired operations and license fees. Nine-month interest expense was $20.7 million, and a $3.7 million debt refinancing charge was recorded.
- Cash and liquidity: Cash and equivalents were $588.5 million at September 30, versus $387.2 million at year-end 2012. Current assets were $810.1 million and current liabilities $203.4 million. The company reported $200 million available under its undrawn revolver and said cash, operating cash generation and credit availability should fund operations and obligations for the foreseeable future.
- Debt: Long-term debt carrying value was approximately $551.1 million, including $5.6 million current and $545.6 million non-current; principal outstanding was $555.8 million. The June refinancing established term loans maturing in June 2018 and a $200 million revolver maturing in June 2017. Term-loan interest was 3.5% at quarter-end; the company said it was in compliance with covenants.
- Cash uses and obligations: Nine-month share repurchases totaled $102.4 million, leaving $97.6 million authorized. The company also had $68.1 million of purchase commitments due within a year and a potential $50 million Erwinaze milestone payment if 2013 U.S. sales reach $124.5 million.
Material changes and management outlook
- Management expected 2013 product sales to exceed 2012, primarily from growth in Xyrem and Erwinaze. It also expected slightly higher royalty and contract revenue and a slight increase in gross margin percentage; SG&A, R&D, amortization and interest expense were expected to be higher than in 2012. The filing provides no specific numerical revenue or earnings guidance.
- Management linked higher gross margin largely to lower acquisition-related inventory fair-value step-up charges. Nine-month SG&A increases included compensation, contingent consideration remeasurement, sales and promotional spending, and facilities costs.
- Pipeline and lifecycle plans included a submitted FDA application amendment for intravenous Erwinaze administration following a study that met its primary endpoint; Phase 1 development of Asparec and Phase 3 development of Leukotac; and planned regulatory filing by year-end 2013 to enable a first-in-human study of JZP-386. Versacloz had FDA approval, with launch planned for Q1 2014.
- Other unusual items include a $12.9 million nine-month increase in the fair value of contingent consideration, related to the probability of meeting the Erwinaze sales milestone, and foreign currency translation gains in other comprehensive income.
Key risks and contingencies
- Xyrem concentration and generic risk: Xyrem represented 67% of Q3 and 64% of nine-month net product sales. Patent litigation with Roxane and Amneal was ongoing. The Roxane 30-month FDA approval stay had expired; the Amneal stay was expected to run until June 2015 unless earlier ended by a court decision. Outcomes and timing were uncertain.
- Xyrem REMS: The company and FDA had not agreed on significant terms of final REMS documents, including pharmacy distribution. Potential changes or a shared system could affect distribution costs, competition and sales. The FDA had closed out its prior Xyrem warning letter in August 2013.
- Erwinaze supply: Supply was nearly fully absorbed by demand in 2013. The company relied on a single manufacturer and maintained limited inventory, creating risk of interruption and constrained growth.
- Other exposures: The filing identifies dependence on single-source suppliers, regulatory and reimbursement changes, product development uncertainty, intellectual-property disputes, substantial debt and covenant restrictions, customer concentration, and foreign exchange exposure. Five customers accounted for 88% of gross receivables, including Express Scripts at 73%.
- Legal matters: A former FazaClo owner alleged contractual contingent payments of $10.5 million or $25.0 million, plus unspecified damages; the case remained unresolved. The filing states other ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Progress, timing and potential outcome of Roxane and Amneal Xyrem ANDA litigation, including the expired Roxane stay and status of FDA review.
- Final Xyrem REMS terms, possible shared-system requirements, and implications for branded distribution and generic entry.
- Erwinaze 2013 U.S. sales relative to the $124.5 million threshold and resulting $50 million contingent payment, alongside manufacturer supply capacity.
- Underlying Xyrem volume and pricing trends, and whether growth in other products can reduce dependence on Xyrem.
- Cash conversion, including rising receivables tied to changed customer payment terms, and capacity to fund repurchases, debt service and business development.
- Development and regulatory milestones for Erwinaze, Asparec, Leukotac, JZP-386 and Versacloz, and the associated costs and risks.