Jazz Pharmaceuticals plc — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Jazz is a specialty biopharmaceutical company. Comparisons with Q1 2012 are affected by acquisitions: EUSA Pharma was acquired in June 2012, and the 2012 period includes Azur Pharma results only from the January 18, 2012 merger date. The women’s health business sold in 2012 is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $196.2 million | $102.5 million | Up 91% |
| Net product sales | $194.7 million | $101.5 million | Up 92% |
| Income from operations | $68.2 million | $35.7 million | Operating margin approximately 34.8%, versus 34.9% |
| Net income | $43.4 million | $27.7 million | 2012 included a $2.6 million discontinued-operations loss |
| Diluted EPS | $0.71 | $0.48 | 2012 continuing-operations diluted EPS was $0.52 |
| Gross margin on net product sales | 86.0% | 92.4% | Lower mainly from acquired-product mix |
| Operating cash flow | $65.9 million | $24.3 million | Up $41.6 million |
| Cash and cash equivalents | $450.5 million | $387.2 million at Dec. 31, 2012 | Quarter-end balance |
| Term-loan principal outstanding | $457.2 million | Not directly comparable | 5.25% interest rate; no revolver borrowings and $100 million availability |
Q1 net income was $43.4 million; non-GAAP adjusted net income was $84.4 million, or $1.37 per diluted share, versus $51.7 million and $0.89 in Q1 2012. The company’s adjustments exclude specified items including amortization, share-based compensation, acquisition-related costs, contingent-consideration remeasurement and upfront license fees; these measures are not substitutes for GAAP results.
At March 31, 2013, total assets were $2.01 billion and current liabilities were $243.7 million, including $39.3 million of current contingent consideration. The company reported compliance with its credit-agreement covenants. Contractual obligations included $57.0 million of purchase commitments and $22.9 million of operating lease payments; a new Palo Alto lease entered in April, with $6.9 million of payments, was not included in that table.
Material changes and drivers
- Xyrem sales rose 60% to $117.5 million, driven by a higher average net selling price and 15% higher sales volume. Xyrem represented 60% of net product sales.
- Erwinaze/Erwinase sales were $41.8 million; management reported 27% growth versus Q1 2012 on a pro forma basis, primarily from volume. The acquired product materially expanded revenue, but also contributed to lower gross margin.
- Prialt sales fell 48% to $5.0 million, largely because a $4.6 million European supply sale recorded in Q1 2012 did not recur. Psychiatry sales were nearly flat at $17.7 million; a generic Luvox CR launch in March led Jazz to stop marketing it.
- SG&A rose 59% to $70.5 million, reflecting higher staffing and compensation, commercial spending and a $4.5 million contingent-consideration charge. R&D rose to $10.7 million, including $4.0 million of upfront license fees. Intangible amortization increased to $19.6 million.
- Income tax expense increased to $17.6 million and the effective tax rate rose to 28.9% from 15.4%, principally due to more U.S.-taxable profit, the prior-year release of a U.S. deferred-tax valuation allowance and acquired EUSA operations.
- Cash from operations increased; investing used $2.4 million in Q1 2013, compared with $82.5 million provided in Q1 2012, which included cash acquired in the Azur merger. Financing provided $3.1 million, including $9.6 million from option and warrant exercises, partly offset by $5.9 million of debt repayment.
Outlook, risks and unusual items
- Management expected 2013 product sales to exceed 2012, primarily from Xyrem and Erwinaze/Erwinase growth, partly offset by declines in some other products. It expected R&D, SG&A, amortization and interest expense to be higher than in 2012. No numerical full-year revenue or earnings guidance is provided in the filing.
- Management stated that cash, expected operating cash generation and the undrawn revolver should fund operations and obligations for the foreseeable future, subject to sales, expense and other assumptions.
- Erwinaze supply is a material execution risk: a recent manufactured batch did not meet certain specifications. The company was working with its sole supplier and warned that an interruption later in 2013 was possible if corrective efforts were unsuccessful. Limited inventory and single-source manufacturing also expose other products to supply risk.
- Xyrem is the largest product and faces two generic ANDA challenges. The Roxane 30-month FDA approval stay expired April 18, 2013; Jazz said Roxane’s application status was unknown and generic launch timing and litigation outcomes could not be predicted. The Amneal stay runs until June 10, 2015, absent an earlier court decision. FDA denials of Jazz’s two citizen petitions add uncertainty; the filing warns generic competition could materially harm results.
- The FDA was reviewing updated Xyrem REMS documents. Potential changes could affect distribution, costs, generic entry and sales. Jazz also disclosed prior FDA scrutiny of Xyrem adverse-event reporting and was awaiting FDA review/reinspection relating to a warning letter and Form FDA 483.
- Jazz recorded a $39.3 million fair value liability for a potential $50 million Erwinaze payment if 2013 U.S. sales reach at least $124.5 million. Management also identified ongoing patent disputes, reimbursement and pricing pressure, regulatory and development risks, and foreign-exchange exposure.
- After quarter-end, in May 2013, the board authorized up to $200 million for share repurchases. In March, selling shareholders—including director-affiliated entities—sold 5.4 million shares for approximately $314.4 million gross; Jazz received no sale proceeds.
Most important facts for investors to verify
- Progress and outcome of the Roxane and Amneal patent cases, and whether either generic obtains FDA approval or launches.
- Erwinaze production remediation, supply continuity, and the likelihood of reaching the $124.5 million sales milestone that would trigger the $50 million payment.
- Xyrem REMS requirements, DEA quotas for 2013, and any FDA actions concerning prior safety-reporting observations.
- Whether forecast growth in Xyrem and Erwinaze/Erwinase offsets declines in other products, and whether the acquired business integration delivers expected results.
- Debt repayment and covenant headroom, cash generation, and the effect of the share-repurchase authorization on liquidity and capital allocation.
- Comparability of year-over-year results, given acquisition timing, product mix, one-time and non-cash adjustments, and the discontinued women’s health business.