Jazz Pharmaceuticals plc — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are U.S. dollars; financial statement amounts are unaudited. Celator’s results are consolidated only from its July 12, 2016 acquisition date, so year-over-year comparisons do not reflect a full-period contribution from Celator.
Business context
Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology. Xyrem was its largest product; other key marketed products included Erwinaze/Erwinase and Defitelio/defibrotide. The July 2016 Celator acquisition added worldwide rights to investigational AML treatment Vyxeos and the CombiPlex technology platform.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $374.2 million | $340.9 million | $1,091.4 million | $983.9 million |
| Operating income | $136.3 million | $131.5 million | $426.2 million | $401.6 million |
| Net income attributable to Jazz | $87.1 million | $88.0 million | $272.5 million | $246.8 million |
| Diluted EPS | $1.41 | $1.39 | $4.40 | $3.91 |
| Gross margin on product sales | 93.5% | 91.6% | 93.4% | 92.0% |
- Product sales rose 10% in Q3 and 11% for the nine months. Xyrem sales grew 18% and 16%, respectively, to $285.9 million and $816.4 million, primarily on higher net price and, to a lesser extent, volume.
- Defitelio/defibrotide sales increased 43% in Q3 and 52% for the nine months, to $28.1 million and $79.3 million, reflecting the U.S. launch and higher sales outside the U.S. Erwinaze/Erwinase sales fell 24% and 6%, to $43.0 million and $143.9 million, primarily due to supply-constrained volumes.
- Operating expenses included $15.0 million of acquired in-process R&D in Q3 and $23.8 million for the nine months. SG&A increased 20% in Q3, in part due to Celator transaction/integration costs and higher compensation. Nine-month R&D rose 12%, despite comparison against a $25 million Defitelio milestone expense in 2015.
- Operating cash flow was $409.8 million for the nine months, versus $412.2 million in 2015. Investing cash outflow was $1.747 billion, primarily for Celator ($1.5 billion), a $150 million Defitelio milestone payment, investments and acquired development assets. Financing cash inflow was $713.0 million, including approximately $994.8 million of net debt proceeds and $259.8 million of share repurchases.
- At September 30, cash and cash equivalents were $366.6 million, with $59.4 million of investments; revolving-facility availability was $249.5 million. Debt principal totaled approximately $2.297 billion: $1.0 billion revolver, $721.9 million term loan and $575 million exchangeable notes. Debt carrying value was $2.183 billion, reflecting the notes’ unamortized discount. The company reported compliance with credit covenants.
- Cash, cash equivalents and investments declined from $988.8 million at year-end 2015 to $426.0 million, largely reflecting the acquisition and share repurchases. Current assets were $744.2 million and current liabilities $232.9 million at quarter-end.
Material changes and outlook
- Celator was acquired for approximately $1.5 billion in cash. The preliminary purchase allocation included $1.825 billion of acquired intangible assets, principally Vyxeos in-process R&D; the valuation and related tax items remained subject to finalization. No Celator revenue was recognized in the period.
- The amended credit agreement increased the revolving facility to $1.25 billion, added/continued a $750 million term facility, and extended facility maturities to July 2021. $1.0 billion was drawn to help fund the acquisition. Variable-rate borrowings were 2.52% at September 30; management estimated a 1 percentage-point rate increase would add about $4 million of net interest expense for the remainder of 2016.
- Management expected 2016 total product sales to exceed 2015, mainly from Xyrem and Defitelio growth, partly offset by declines in certain other products. It expected higher SG&A, R&D and interest expense versus 2015; no specific full-year revenue or earnings guidance was provided in the filing text.
- Management expected positive operating cash flow in 2016 and believed cash, operating cash generation and revolver availability would fund operations and existing obligations for the foreseeable future, while noting that acquisitions, development spending and business performance could change funding needs.
- Vyxeos: rolling U.S. NDA submission began in Q3, with completion expected in Q1 2017; European submission was planned for the second half of 2017. JZP-110 trial readouts were expected in Q1 and Q2 2017, subject to which an NDA was anticipated in late 2017. The company also planned further sleep-product development and a Phase 3 defibrotide prevention trial.
Principal risks, contingencies and unusual items
- Xyrem concentration and patent exposure: Xyrem accounted for 77% of Q3 and 75% of nine-month net product sales. Seven companies had filed generic ANDAs. Two cases were settled with licenses generally permitting generic entry on or after December 31, 2025, subject to earlier-entry conditions. Remaining litigation included a trial scheduled for Q2 2017. In July, the PTAB found claims of six Xyrem distribution-system patents unpatentable; Jazz expected to appeal. Generic entry or changes to the Xyrem REMS could materially affect sales.
- Erwinaze supply: Jazz relied on single-source manufacturer PBL, whose capacity was fully utilized. U.S. supply interruptions occurred late in Q3 and in October; another interruption was expected in Q4 2016. Manufacturing quality and regulatory observations, limited inventory and lack of backup supply increased risk.
- Acquired and pipeline execution: Vyxeos remained investigational, with approval, manufacturing, reimbursement and commercial adoption uncertain. The filing cited batch failures at its sole-source manufacturer and the need to qualify additional API sources. Defitelio’s U.S. launch was early-stage and subject to reimbursement, adoption and post-marketing requirements.
- Government investigation: The U.S. Attorney’s Office for the District of Massachusetts issued subpoenas in May and October 2016 concerning support to charitable organizations providing Medicare patient assistance and related assistance for company products. Jazz was cooperating, could not predict the outcome, and expected continuing significant costs.
- Tax contingency: French authorities proposed approximately $42.9 million of additional tax, interest and penalties relating to 2012–2013 transfer-pricing adjustments. Jazz disputed the assessment and intended to contest it. Potential Medicaid/340B pricing liabilities for previously sold Quadramet and ProstaScint could not be reasonably estimated.
- Other notable items included a $150 million Defitelio milestone payment triggered by FDA approval, a $259.8 million completed share-repurchase program, a new $300 million repurchase authorization approved in November, and $2.6 million of restructuring termination benefits incurred to date.
Most important facts for investors to verify
- Progress and outcomes of Xyrem ANDA litigation, appeals of the PTAB decisions, FDA action on REMS, and any generic-entry timing implications of settlements.
- Whether Erwinaze supply interruptions continue and whether PBL resolves capacity, quality and regulatory issues.
- Vyxeos NDA timing, regulatory outcome, manufacturing reliability and the final Celator purchase-price allocation, including tax assumptions and potential impairment exposure.
- Defitelio U.S. adoption, reimbursement and sales trajectory, alongside required post-marketing commitments.
- Developments in the Medicare patient-assistance investigation, French tax assessment and any radiopharmaceutical pricing liabilities.
- Debt levels, variable-rate exposure, covenant headroom, cash generation and the effect of future repurchases or acquisitions on liquidity.