Jazz Pharmaceuticals plc — Q2 2018 Form 10-Q
Business context and period. Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology products. This unaudited report covers the quarter and six months ended June 30, 2018; financial comparisons are with the corresponding 2017 periods. Figures below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $500.5m | $394.4m | $945.1m | $770.4m |
| Operating income | $153.2m | $165.0m | $241.0m | $301.2m |
| Net income | $92.3m | $105.6m | $138.3m | $192.1m |
| Diluted earnings per share | $1.50 | $1.72 | $2.26 | $3.13 |
| Operating cash flow | Not separately reported for the quarter | $354.0m | $299.6m |
- Revenue rose 27% in Q2 and 23% in the first half, driven mainly by Xyrem growth and U.S. Vyxeos sales following its 2017 launch. Product sales were $496.1m in Q2 and $936.9m for the first half.
- Q2 product sales included Xyrem $356.0m, Erwinaze/Erwinase $58.7m, Defitelio/defibrotide $40.5m, Vyxeos $28.0m and Prialt $8.9m. Xyrem represented 72% of net product sales in both 2018 periods.
- Despite revenue growth, operating income fell 7% in Q2 and 20% for the first half; net income fell 13% and 28%, respectively. Higher SG&A, R&D and amortization, plus a $42.9m Prialt impairment, weighed on results.
- Gross margin on product sales was 93.0% in Q2 and 92.7% for the first half, versus 92.6% and 93.0% in 2017. The filing gives no separate net-income margin guidance.
- First-half operating cash flow was $354.0m. Investing used $237.4m, including $111.1m for a priority review voucher and net investment purchases of $115.0m; financing used $18.7m. Cash and cash equivalents increased $99.0m.
- At June 30, cash and cash equivalents were $485.1m and investments $330.0m, or $815.1m combined. Current assets were $1.307bn and current liabilities $348.0m.
- Debt principal was approximately $1.818bn: $667.7m term loan and $1.150bn exchangeable notes. No revolving-credit borrowings were outstanding; $1.6bn was available. The company reported compliance with credit-facility covenants.
Changes, outlook and material items
- Xyrem sales increased 19% in Q2 and 18% for the first half; management attributed growth to higher volume and net price. Vyxeos generated $28.0m in Q2 and $54.2m in the first half. Defitelio sales rose 34% and 14%, respectively; Erwinaze/Erwinase rose 20% and 9%.
- SG&A increased 20% in Q2 and 32% for the first half; the half-year increase included a $57.4m accrued loss contingency, including interest, related to DOJ discussions. R&D increased 40% in both periods, including an $11.0m milestone expense following FDA acceptance of the solriamfetol NDA. Intangible amortization more than doubled, primarily due to Vyxeos.
- The company agreed in principle to a $57.0m civil settlement with the DOJ concerning patient-assistance-program matters. A definitive agreement and approvals remained outstanding; a corporate integrity agreement was considered likely if finalized. The company recorded $57.4m including interest.
- Under an agreement signed June 29, TerSera is to acquire substantially all Prialt-related assets for $80.0m, subject to closing conditions; closing was expected in Q3 2018. Jazz recorded a $42.9m impairment and classified $78.0m of net assets as held for sale.
- Management expected 2018 total product sales to exceed 2017, primarily from Xyrem, Vyxeos and Defitelio, and expected positive operating cash flow. It expected R&D and SG&A expenses to increase and gross margin to remain broadly stable. The filing provides no specific full-year revenue or earnings target.
- Key development milestones included FDA target action dates of October 27, 2018 for the pediatric Xyrem supplement and December 20, 2018 for solriamfetol. The EMA’s CHMP had issued a positive opinion on Vyxeos; EU approval and launch remained uncertain. In August 2018, the company reported CMS approval of a Vyxeos New Technology Add-on Payment.
- In June, the company increased its revolving facility from $1.25bn to $1.60bn, extended facility maturities to June 2023 and reduced applicable borrowing margins. First-half share repurchases totaled $55.6m.
Principal risks and contingencies
- High product and channel concentration: Xyrem is the leading product; Express Scripts and McKesson together represented 91% of Q2 revenue, and five customers accounted for 93% of gross receivables.
- Xyrem faces patent and generic-entry uncertainty. Eight of nine ANDA litigants had settled, while Amneal litigation remained pending; the Federal Circuit in July 2018 upheld decisions finding certain Xyrem REMS patent claims unpatentable. The company warned that generic or competing products could enter earlier under specified circumstances.
- Supply is a material risk: Erwinaze depends on single-source supplier PBL, with constrained capacity, recent disruptions and continuing FDA/MHRA manufacturing concerns. Vyxeos also relies on a single-site supplier and has experienced batch failures and specification issues. Other products and APIs also have single-source dependencies.
- Other risks include pricing and reimbursement pressure, regulatory and post-marketing obligations, clinical and approval uncertainty, foreign-exchange movements, and substantial debt. The company disclosed a proposed French transfer-pricing assessment of approximately $45m, which it is contesting.
Investor verification priorities
- Track Xyrem growth, pricing, payer restrictions, generic-entry timing and the remaining Amneal litigation, including implications of the REMS patent ruling.
- Verify completion and final terms of the DOJ settlement, including any corporate integrity agreement and final cash cost.
- Monitor PBL remediation, regulatory inspections and Erwinaze supply availability; assess Vyxeos manufacturing reliability and commercialization progress.
- Confirm the TerSera Prialt transaction closed on the expected terms and assess the resulting cash proceeds and any further accounting effects.
- Review FDA decisions on the pediatric Xyrem supplement and solriamfetol, and EU authorization and launch timing for Vyxeos.
- Assess cash generation, debt service and covenant headroom alongside the company’s continued investment and repurchase plans.