Jazz Pharmaceuticals plc — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Comparisons are with the corresponding 2014 periods unless noted. The company is an international biopharmaceutical business focused on sleep and hematology/oncology products.
Financial performance
| Metric | Q2 2015 | Six months 2015 |
|---|---|---|
| Total revenue | $333.7 million, up 15% | $643.1 million, up 19% |
| Operating income | $153.3 million | $270.1 million |
| GAAP net income attributable to Jazz | $88.1 million | $158.8 million |
| Diluted GAAP EPS | $1.40 | $2.52 |
| Gross margin on product sales | 93.4% | 92.2% |
| Operating cash flow | Not separately reported for the quarter | $237.1 million |
Q2 operating margin was approximately 45.9% and net margin approximately 26.4%; six-month operating and net margins were approximately 42.0% and 24.7%, respectively. These are calculated from reported revenue and operating or attributable net income.
- Product mix: Xyrem sales were $247.8 million in Q2 (+30%) and $460.5 million for six months (+31%). Erwinaze/Erwinase sales were $46.2 million in Q2 (-4%) and $96.5 million for six months (+2%). Defitelio/defibrotide sales were $15.3 million in Q2 (-25%) and $32.6 million for six months (+1%).
- Q2 growth was led by Xyrem, reflecting higher average net price and increased patient volume; Xyrem volume rose 7% in Q2 and 10% for six months. Gross margin improved from 89.4% and 88.5% in the comparable periods, mainly from product mix and lower acquisition-related inventory step-up costs.
- R&D expense increased 39% in Q2 and 44% for six months, driven principally by clinical development costs. SG&A rose 7% and 6%, respectively.
- Q2 net income increased from $43.7 million; six-month results improved from a $49.0 million attributable net loss in 2014. The prior-year period included $127.0 million of acquired in-process R&D expense and $32.8 million of impairment charges.
Cash, debt and liquidity
- Cash and cash equivalents were $921.6 million at June 30, 2015, up from $684.0 million at year-end 2014. Current assets were $1.245 billion and current liabilities $225.2 million.
- Six-month operating cash flow was $237.1 million, versus $143.6 million in 2014. Investing activities provided $6.3 million, including $33.7 million of net sale proceeds, offset mainly by $27.4 million of capital spending. Financing activities provided $4.0 million.
- Debt principal was approximately $1.486 billion, including a $750 million term loan, $160 million drawn on a $750 million revolving facility, and $575 million of 1.875% exchangeable notes due 2021. The balance-sheet carrying amount was $1.366 billion, reflecting the notes’ unamortized discount. Revolver availability was $588.9 million, net of a letter of credit.
- In June, the company refinanced its prior credit agreement, extending term-loan and revolver maturities to June 2020. The term-loan rate was 2.04% at June 30; revolving borrowings were at 1.94%. The company reported compliance with financial covenants. A 1 percentage-point increase in rates was estimated to raise net interest expense by $4.7 million for the remainder of 2015.
Changes, outlook and notable developments
- Management expects 2015 product sales to exceed 2014, primarily from growth in lead products; gross margin is expected to be slightly higher. SG&A is expected to increase, and R&D expense to rise substantially as clinical programs advance. Management expected positive operating cash flow for 2015. No numerical full-year revenue or earnings guidance is provided in the filing text.
- Q2 included a $16.8 million loss on debt extinguishment and modification associated with the refinancing. Six-month foreign-currency translation loss was $126.0 million in other comprehensive income, primarily reflecting the stronger U.S. dollar against the euro.
- The company sold certain EUSA-acquired products and related business in March for approximately $33 million net cash proceeds, recognizing a $0.2 million disposal loss. It also reported $27.4 million of first-half capital expenditures, primarily for an Irish manufacturing and development facility.
- Pipeline updates: Phase 3 trials of JZP-110 for narcolepsy and obstructive sleep apnea began in Q2; the defibrotide U.S. NDA rolling submission was completed in July 2015. JZP-416 enrollment was suspended after hypersensitivity-like reactions, and further development was under evaluation. Leukotac Phase 3 results were to be analyzed; no results are reported here.
Principal risks and contingencies
- Xyrem concentration and competition: Xyrem represented 74.6% of Q2 net product sales and 72.1% for six months. Seven generic applications were pending; patent litigation continued, and the PTAB instituted reviews of six distribution-system patents in July 2015. The company said generic or competing sodium oxybate entry could materially harm results.
- REMS and access: FDA approved the final Xyrem REMS in February 2015, retaining single-pharmacy distribution but noting concerns about patient-access burdens and the possibility of future modifications. Implementation was expected by late August 2015; timing and regulatory acceptance were not assured.
- Supply exposure: Erwinaze depended on a single manufacturer with capacity nearly fully absorbed by demand and limited inventory. The manufacturing facility transferred from Public Health England to Porton BioPharma in April 2015. The filing also disclosed a likely temporary interruption in one Prialt vial size due to manufacturing delay.
- Defitelio execution: European launches depended on pricing and reimbursement approvals. U.S. approval was uncertain despite completion of the NDA submission in July; potential review conditions, narrower labeling, or additional studies could affect commercial prospects.
- Legal and pricing contingencies: A former FazaClo owner claimed $35.5 million in contingent payments plus unspecified damages; trial was scheduled for October 2015. The company could not estimate potential liabilities if Medicaid price reporting or rebates are required for previously sold Quadramet and ProstaScint.
- Other material risks include single-source manufacturing, reimbursement and pricing pressure, substantial debt and variable interest rates, clinical and regulatory uncertainty, foreign-exchange exposure, and possible further impairment of significant goodwill and intangible assets.
Investor verification priorities
- Track Xyrem generic litigation, PTAB decisions, FDA REMS implementation and any change in access or reimbursement conditions.
- Verify whether Erwinaze supply capacity and manufacturing quality improve, and whether the Prialt vial interruption is resolved.
- Follow the FDA’s acceptance, review and decision on the defibrotide NDA, along with European pricing and reimbursement launches.
- Assess whether Xyrem-led growth can sustain expected sales and cash generation as R&D, SG&A and debt-service costs increase.
- Monitor the Cutler litigation and CMS discussions on potential legacy pricing liabilities; the filing does not provide a clear estimate for the latter.