Business context and reporting period
Jazz Pharmaceuticals plc is an international biopharmaceutical company focused on sleep and hematology/oncology treatments. This is its Form 10-K for the fiscal year ended December 31, 2014, not a standalone fourth-quarter filing. Year-over-year comparisons are affected by the Gentium acquisition, consolidated from January 23, 2014.
Key products are Xyrem, Erwinaze/Erwinase and, following the Gentium acquisition, Defitelio/defibrotide. Xyrem accounted for 67.0% of 2014 net product sales.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $1.173 billion | $872.4 million |
| Net product sales | $1.163 billion | $865.4 million |
| Operating income | $195.6 million | $340.3 million |
| Net income attributable to Jazz | $58.4 million | $216.3 million |
| Diluted EPS | $0.93 | $3.51 |
| Operating cash flow | $405.8 million | $288.6 million |
| Gross margin on product sales | 89.9% | 88.2% |
FY 2014 GAAP net income fell despite revenue growth, reflecting $202.6 million in acquired in-process R&D, $39.4 million in impairment charges, higher SG&A, amortization, interest and taxes. The company also reported non-GAAP adjusted net income of $527.6 million, or $8.43 per diluted share; this measure excludes substantial acquisition-related and other expenses and is not a substitute for GAAP results.
Product sales: Xyrem $778.6 million, up 37%; Erwinaze/Erwinase $199.7 million, up 15%; Defitelio/defibrotide $70.5 million from the acquisition date (2014 pro forma sales were $73.4 million); Prialt $26.4 million, down 3%; psychiatry products $40.9 million, down 17%.
At December 31, 2014, cash and cash equivalents were $684.0 million, working capital was $799.0 million, and total assets were $3.339 billion. Long-term debt carrying value was $1.342 billion; principal debt was approximately $1.472 billion, comprising $895.4 million of term loans, $575 million of 1.875% exchangeable notes due 2021 and other borrowings. The $425 million revolving facility was undrawn. Management said cash, expected operating cash flow and available revolver capacity should fund operations and obligations for the foreseeable future, subject to business assumptions and risks.
Quarterly data show Q4 2014 revenue of $328.1 million, net income attributable to Jazz of $81.6 million and diluted EPS of $1.30, versus Q4 2013 revenue of $235.8 million, net income of $55.3 million and diluted EPS of $0.90.
Material changes versus the prior comparable period
- Total revenue increased 34%, mainly from Xyrem and Erwinaze growth and the addition of Defitelio/defibrotide following Gentium.
- Operating expenses increased to $977.3 million from $532.1 million. R&D rose to $85.2 million from $41.6 million; SG&A rose to $406.1 million from $304.3 million; acquired IPR&D was $202.6 million versus $5.0 million.
- Interest expense nearly doubled to $52.7 million as acquisition financing and new notes increased debt. Cash from operations increased 41%.
- Cash and cash equivalents rose to $684.0 million from $636.5 million, while debt increased substantially to fund Gentium and other strategic investments.
- Foreign currency translation reduced accumulated other comprehensive income by $178.3 million in 2014, primarily due to U.S. dollar strength against the euro.
Outlook, commentary, risks and unusual items
- Management expected 2015 product sales to increase over 2014, primarily through growth in lead products; expected product gross margin to remain consistent with 2014; and forecast higher SG&A, R&D and interest expense. R&D spending was expected to rise substantially as trials advanced.
- Planned development included Phase 3 studies of JZP-110 for narcolepsy and obstructive sleep apnea, further JZP-386 work, and a pediatric Xyrem trial. The defibrotide U.S. NDA rolling submission began in December 2014, with completion expected mid-2015. Leukotac preliminary Phase 3 data were expected mid-2015.
- JZP-416 enrollment was suspended in February 2015 after hypersensitivity-like reactions in some patients; the company was evaluating data before deciding whether to resume development. The FDA also issued a Form 483 with manufacturing observations after inspecting sole Erwinaze supplier PHE in January 2015.
- Xyrem remains highly concentrated in one product and exposed to five generic ANDA challenges, patent litigation, potential changes to its FDA-mandated risk-management program and DEA quota constraints. Management said the FDA dispute over REMS terms remained unresolved at filing.
- Single-source manufacturing and limited inventories create supply exposure, particularly for Erwinaze, whose manufacturing capacity was nearly fully absorbed by demand. Xyrem’s U.S. supply also depends on a single central pharmacy and controlled-substance suppliers.
- Defitelio’s European authorization is under exceptional circumstances and requires post-marketing commitments, including a patient registry. U.S. approval, completion of the NDA submission, pricing and reimbursement, and launch timing remain uncertain.
- Other unusual items included $39.4 million of impairment charges and a planned sale of certain EUSA-acquired products for approximately $34 million, subject to conditions and working-capital adjustments; closing was expected in the first half of 2015. A separate 2012 women’s-health business sale is reflected as discontinued operations in 2012 only.
- Potential contingencies include uncertain Medicaid/340B price-reporting and rebate liabilities for ProstaScint and previously sold Quadramet; the company could not reasonably estimate a loss. A claim seeking $35.5 million plus unspecified damages relating to FazaClo contingent payments was scheduled for trial in October 2015. The Gentium shareholder lawsuit was dismissed with prejudice in January 2015.
- Management reported effective disclosure controls and internal control over financial reporting, with no identified material weaknesses. KPMG issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether Xyrem generic litigation, FDA REMS proceedings or DEA quota changes alter the timing, economics or continuity of the company’s largest revenue stream.
- Whether Erwinaze supply capacity and remediation at PHE support demand, and the implications of the January 2015 FDA inspection observations.
- Progress and regulatory outcomes for the defibrotide NDA, European reimbursement and launches, and the required post-marketing registry.
- Whether JZP-416 development resumes, and whether JZP-110 and other pipeline programs meet clinical and supply timelines.
- Debt service, covenant compliance, exchange-note cash settlement exposure and the company’s capacity to fund acquisitions and development while maintaining liquidity.
- Resolution and potential magnitude of radiopharmaceutical pricing and rebate exposures, tax uncertainties, and remaining litigation or transaction obligations.
- Reconcile GAAP earnings with non-GAAP adjusted earnings and assess the recurring cash and expense impact of acquisition accounting, impairments, amortization and stock-based compensation.