Jazz Pharmaceuticals plc — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unless otherwise noted, dollar amounts below are in millions.
Business context and comparability
Jazz is a specialty biopharmaceutical company. On January 18, 2012, it completed the Azur Pharma merger, accounted for as a reverse acquisition with Jazz Pharmaceuticals, Inc. as the accounting acquirer. Q1 2012 includes Azur’s results only from January 18 onward; the 2011 comparison is Jazz Pharmaceuticals, Inc. alone. Accordingly, reported year-over-year changes are not like-for-like. The merger added psychiatry, pain, women’s health and other products to a business still substantially reliant on Xyrem.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $108.4 | $50.9 |
| Product sales | $107.3 | $49.9 |
| Operating income | $33.2 | $22.6 |
| Net income | $27.7 | $21.8 |
| Diluted EPS | $0.48 | $0.48 |
| Operating cash flow | $24.3 | $24.4 |
- Product sales increased 115% as reported. Xyrem sales were $73.4 million, up 72% (primarily price increases, with volume up 10%); Luvox CR sales were $9.6 million, up 34%. Products added with Azur contributed $24.3 million in sales after the merger date.
- Xyrem represented 68% of product sales. Express Scripts accounted for 67% of revenue, and five customers represented 88% of gross receivables.
- Gross margin was 90%, compared with 94%. Management attributed the decline mainly to Azur products and $2.4 million of purchase-accounting inventory step-up costs.
- SG&A was $47.0 million, R&D $4.0 million and acquired-intangible amortization $13.5 million. SG&A included elevated professional, transaction and integration costs.
- Cash and cash equivalents were $170.7 million and marketable securities $73.6 million, totaling $244.2 million. Current assets were $327.1 million and current liabilities $104.6 million.
- Operating cash flow was nearly flat year over year. Investing cash flow was positive $82.5 million, largely reflecting $81.8 million of cash acquired in the merger. Financing cash flow was negative $18.2 million, including $25.3 million of employee tax withholding payments related to share exercises.
- No debt was reported on the March 31 balance sheet; the former term loan had been repaid in July 2011. The filing does not report a separate debt balance at quarter-end.
Unaudited pro forma results, assuming the Azur merger had occurred January 1, 2011, showed revenue of $109.3 million and net income of $36.1 million for Q1 2012, versus $72.3 million and $11.2 million for Q1 2011. These figures include specified transaction, inventory step-up, integration and amortization adjustments and exclude potential synergies. Management also reported non-GAAP adjusted net income of $53.0 million, or $0.91 per diluted share, versus $26.8 million, or $0.59; these measures exclude specified amortization, share compensation, transaction and other items.
Material changes, outlook and unusual items
- The Azur merger had $576.5 million of acquisition consideration and added $325.0 million of intangible assets and $201.5 million of goodwill. The purchase price allocation was preliminary. Q1 included $2.4 million of Azur merger transaction costs; the filing also reports approximately $1.2 million of costs related to the proposed EUSA acquisition.
- Management expected 2012 product sales to exceed 2011, reflecting Xyrem growth and the expanded portfolio; completion of the EUSA acquisition was expected to add further sales. It expected royalty and contract revenue to decrease slightly, gross margin percentage to decline, and SG&A, R&D and amortization to rise. Full-year 2012 effective tax rate guidance was 14%–18%; Q1’s rate was 16.6%.
- On April 26, 2012, Jazz agreed to acquire EUSA Pharma for $650 million cash, subject to working-capital and cash adjustments, plus a possible $50 million contingent payment tied to Erwinaze 2013 U.S. sales. Closing was expected in June, subject to customary conditions. Jazz said it did not have sufficient capital to complete the deal without financing, and the acquisition agreement had no financing contingency.
- Barclays committed, subject to conditions and definitive documentation, to a $500 million six-year term loan and a $100 million five-year revolver. Jazz expected to use cash and term-loan proceeds; financing availability and terms were not assured. Management warned that failure to obtain the committed financing could require alternative funding, potentially including dilutive equity.
- Key risks include Xyrem generic litigation and product concentration; FDA oversight of Xyrem’s risk-management program and the October 2011 warning letter regarding adverse-event reporting; controlled-substance quota and sole-source supply dependencies; and integration, financing and execution risks from acquisitions. Roxane’s Xyrem ANDA litigation remained ongoing, with FDA approval stayed until the earlier of April 18, 2013 or a qualifying court decision.
- After quarter-end, Jazz settled Luvox CR patent litigation with Actavis and Torrent, granting royalty-free generic sublicenses expected to begin April 15, 2014 or earlier under specified conditions. An authorized generic of FazaClo LD was anticipated from July 2012 under a prior settlement. The filing also disclosed a FazaClo-related contingent-payment claim seeking $10.5 million or $25.0 million plus unspecified damages; the dispute was directed to arbitration and the litigation stayed.
- Jazz reported effective disclosure controls, while noting that integration of Azur’s internal controls was ongoing. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Xyrem sales growth can persist, given price increases, generic litigation, November 2012 expiration of U.S. orphan exclusivity for one indication, and regulatory and supply risks.
- Whether the EUSA acquisition closed on the anticipated terms and timetable, and whether the Barclays facilities became available on acceptable terms; track resulting debt, covenants and interest costs.
- How actual post-merger results compare with the unaudited pro forma figures, including integration costs, acquired-product performance and realization of any expected synergies.
- Whether acquired intangible-asset valuations and useful lives, the preliminary purchase-price allocation, and future amortization or impairment assumptions remain supportable.
- Customer and receivable concentration, product return and rebate accruals, sole-source manufacturing transitions, and outcomes of the Xyrem, FazaClo and contingent-payment legal matters.