Jazz Pharmaceuticals plc — FY2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone Q4 filing. Jazz is a specialty biopharmaceutical company. Sales are led by Xyrem for narcolepsy and Erwinaze/Erwinase for acute lymphoblastic leukemia. The 2013 comparison with 2012 is affected by acquisitions, including the Azur merger and EUSA acquisition, whose results were included only from their respective 2012 closing dates.
Financial results and liquidity
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Total revenue | $872.4 million | $586.0 million | Up 49% |
| Net product sales | $865.4 million | $580.5 million | Up 49% |
| Income from operations | $340.3 million | $197.8 million | Up 72%; 2013 operating margin was approximately 39% |
| Net income | $216.3 million | $288.6 million | Down 25%; 2012 included a $104.2 million deferred-tax valuation-allowance release and $27.4 million income from discontinued operations |
| Diluted EPS | $3.51 | $4.79 | 2012 included discontinued-operation income; continuing-operations diluted EPS was $4.34 in 2012 |
| Non-GAAP adjusted net income | $388.3 million | $290.4 million | Adjusted diluted EPS: $6.31 versus $4.82; company-defined measure excluding specified items |
| Gross margin on product sales | 88.2% | 86.5% | Increase primarily reflected lower acquisition inventory fair-value step-up costs |
| Cash from operations | $283.6 million | $249.8 million | Up; working-capital movements included a $48.8 million increase in receivables |
| Cash and cash equivalents | $636.5 million | $387.2 million | At December 31, 2013 |
| Working capital | $660.6 million | $360.0 million | At December 31, 2013 |
| Term-loan principal | $554.4 million | — | At December 31, 2013; January 2014 financing increased funded debt |
Product concentration remained high: Xyrem generated $569.1 million, or 65.8% of 2013 net product sales; Erwinaze/Erwinase generated $174.3 million, or 20.1%. Express Scripts accounted for 65% of total revenue in 2013, reflecting the concentration of U.S. Xyrem distribution.
Q4 snapshot
Unaudited fourth-quarter 2013 revenue was $235.8 million and net income was $55.3 million, or $0.90 per diluted share. Fourth-quarter 2012 revenue was $183.7 million; net income of $200.6 million was unusually elevated by the tax valuation-allowance release and women’s-health business sale gain.
Material changes versus the prior comparable period
- Xyrem sales rose 50% to $569.1 million. Sales volume increased 12%, alongside higher average net selling prices.
- Erwinaze/Erwinase sales rose 142% to $174.3 million, largely because 2013 included a full year after the 2012 EUSA acquisition; on a pro forma basis, sales grew 32%.
- Psychiatry product sales fell 36% to $49.2 million, reflecting generic competition for Luvox CR and the continuing impact of an authorized generic FazaClo LD.
- Research and development expense increased 128% to $46.6 million; selling, general and administrative expense increased 36% to $304.3 million. Amortization of acquired intangible assets rose to $79.0 million.
- Operating cash flow improved, but receivables increased materially following revised payment terms with a large customer. Management said it did not expect collectability difficulties or a material liquidity effect.
Outlook, management commentary, risks and unusual items
- Management expected 2014 product sales to increase, primarily from Xyrem and Erwinaze/Erwinase and the addition of Gentium product sales, partly offset by declines in certain other products. It expected royalties and contract revenue to be broadly consistent with 2013.
- Management expected R&D expense to increase substantially as clinical programs advanced; SG&A and intangible amortization were also expected to rise. Gross margin percentage was expected to increase slightly, primarily due to product mix. The filing does not provide a numeric 2014 revenue or earnings forecast.
- After year-end, Jazz acquired approximately 98% of Gentium for approximately $993 million, adding Defitelio, authorized in the EU for severe VOD in HSCT patients. The planned 2014 EU launch depended on patient-registry recommendations and country pricing and reimbursement approvals. U.S. approval remained uncertain after Gentium withdrew a prior NDA to address FDA issues.
- In January 2014, Jazz acquired JZP-110 rights for a $125 million upfront payment, with up to $272 million in development, regulatory and sales milestones plus royalties. Jazz also announced an Ireland manufacturing and development facility, with expected investment of €45–€50 million ($61–$68 million).
- Following the Gentium transaction, the credit facility provided $904.4 million in term loans and a $425 million revolving facility; $300 million had been drawn under the revolver for the acquisition. These post-year-end amounts are not included in the December 31, 2013 balance sheet. A $50 million Erwinaze sales-milestone payment was due in Q1 2014.
- Key risks include three pending generic Xyrem ANDA cases, unresolved FDA negotiations over Xyrem’s REMS and distribution, DEA quota limits, and reliance on single-source suppliers. Erwinaze supply was nearly fully absorbed by demand in 2013, and a European supply disruption followed a failed batch.
- Other items to monitor include the Cutler claim alleging contingent payments of $10.5 million or $25 million plus damages; Gentium-related shareholder litigation; and potentially retroactive Medicaid/340B pricing liabilities for ProstaScint and Quadramet, which the company said it could not reasonably estimate.
- The company reported effective disclosure controls and internal control over financial reporting, with no material weaknesses identified; KPMG issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Progress and outcomes in the Xyrem patent litigation and FDA REMS dispute, including any effect on generic-entry timing and branded sales.
- Whether Erwinaze supply can meet demand, and whether the supplier resolves manufacturing constraints and batch-quality issues.
- Defitelio launch timing, patient-registry requirements, pricing and reimbursement outcomes, and the eventual path to possible U.S. approval.
- Post-acquisition leverage, covenant compliance, debt-service capacity and remaining revolver availability; reconcile these with the 2013 year-end cash and debt figures.
- Whether product growth can reduce dependence on Xyrem and large distribution customers, while absorbing planned R&D, integration and facility investment.
- Updates on the unquantified radiopharmaceutical pricing exposure, Cutler litigation and Gentium shareholder suit.