Jazz Pharmaceuticals plc — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures below are from the unaudited quarterly data included in the 10-K. Amounts are in U.S. dollars.
Business context
Jazz is a global biopharmaceutical company focused on sleep medicine and hematology/oncology. Its principal marketed products are Xyrem, Erwinaze/Erwinase, Defitelio/defibrotide and Vyxeos. Xyrem remained the dominant product, accounting for 75% of 2018 net product sales. Solriamfetol was under regulatory review, and JZP-258 was in Phase 3 development.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $1.891 billion | $1.619 billion |
| Net product sales | $1.869 billion | $1.601 billion |
| Operating income | $614.8 million | $528.8 million |
| Net income | $447.1 million | $487.8 million |
| Diluted earnings per share | $7.30 | $7.96 |
| Operating cash flow | $798.9 million | $693.1 million |
| Cash, cash equivalents and investments at year-end | $824.6 million | $601.0 million |
| Working capital at year-end | $888.5 million | $674.3 million |
| Debt carrying value at year-end | $1.596 billion | $1.581 billion |
- Revenue grew 17% year over year, principally from Xyrem growth and a full year of Vyxeos sales. Operating income increased, but net income and diluted EPS declined, partly reflecting the 2017 tax benefit associated with U.S. tax reform.
- Gross margin, measured against net product sales and excluding intangible amortization, was 93.5%, versus 93.1% in 2017. Operating margin was approximately 32.5% and net margin approximately 23.6%, calculated from reported figures.
- Cash provided by operating activities rose to $798.9 million. Investing activities used $394.5 million and financing activities used $479.1 million; financing outflows included $523.7 million of share repurchases.
- Year-end debt principal was approximately $1.8 billion: a $651.0 million term loan and $575.0 million each of exchangeable notes due 2021 and 2024. The $1.6 billion revolving facility was undrawn, and the company reported compliance with its debt covenants.
- Fourth-quarter 2018 revenue was $476.5 million and net income was $159.5 million; diluted EPS was $2.64. In Q4 2017, revenue was $436.4 million, net income $232.2 million and diluted EPS $3.79. The prior-year quarter included a substantial U.S. tax reform benefit.
Product trends and material changes
- Xyrem: Sales increased 18% to $1.405 billion, mainly from higher volume and, to a lesser extent, a higher average net selling price. Average active U.S. patients were approximately 14,300 in Q4. FDA approval expanded use to pediatric narcolepsy patients age seven and older in October 2018.
- Erwinaze/Erwinase: Sales fell 11% to $174.7 million amid persistent single-supplier manufacturing and supply constraints. Further global disruptions were expected in 2019. The PBL license and supply agreement expires December 31, 2020; replacement terms had not been agreed.
- Defitelio/defibrotide: Sales rose 12% to $149.4 million, mainly on higher volume. The company continued trials for potential additional indications.
- Vyxeos: Sales rose to $100.8 million from $33.8 million as the U.S. launch continued and the EU rolling launch began following EC authorization in August 2018. EU pricing and reimbursement submissions were underway.
- Prialt sales were $20.8 million before the company sold substantially all related assets in September 2018. The sale produced a $42.9 million impairment charge; $50 million was received at closing, with additional contingent payments scheduled for 2019 and 2020.
- SG&A increased 26% to $683.5 million, including a $58.2 million accrued loss contingency related to the DOJ matter, launch preparation and higher compensation costs. R&D increased 14% to $226.6 million.
Outlook, contingencies and key risks
- Management expected 2019 total product sales to increase, primarily from Xyrem and Vyxeos; royalties and contract revenue were expected to decrease as milestone revenue declined. Gross margin was expected to remain broadly stable, while R&D and SG&A were expected to rise.
- The solriamfetol NDA had a March 20, 2019 FDA action date after a three-month extension; an EU marketing application was submitted in Q4 2018. Any U.S. launch would also depend on DEA scheduling. Management expected to submit a JZP-258 NDA as early as the end of 2019, subject to Phase 3 results.
- Xyrem concentration is a major exposure: generic and authorized-generic entry under settlements was generally scheduled from 2023 onward, but could occur earlier under specified circumstances. The product is also subject to a restrictive FDA REMS and payor pricing and coverage pressure.
- Supply risk is material across the portfolio: Erwinaze relies on PBL, which had FDA and UK regulator manufacturing findings; Vyxeos relies on a sole-source manufacturer and had experienced batch failures. Xyrem API and Defitelio finished product also have key single-source dependencies.
- The company had reached an agreement in principle for a $57.0 million DOJ civil settlement concerning support for charitable organizations assisting Medicare patients; the recorded accrual was $58.2 million including interest. A final settlement and expected corporate integrity agreement remained subject to completion and other contingencies.
- Other exposures include product competition and reimbursement, clinical and regulatory uncertainty, patent challenges, foreign exchange and variable-rate debt, the French tax assessments of approximately $47 million including interest and penalties (which Jazz contested), and potential impairment of substantial acquired intangible assets and goodwill.
Important facts for investors to verify
- Progress and terms of the DOJ settlement and any corporate integrity agreement.
- Erwinaze supply recovery and whether Jazz and PBL reach a post-2020 commercial agreement.
- Solriamfetol FDA and EU decisions, labeling, DEA scheduling, launch timing and access conditions.
- Vyxeos adoption, EU reimbursement and manufacturing reliability; and progress and results for JZP-258 trials.
- Xyrem sales, pricing and payor trends, REMS developments, patent challenges and any triggers that could accelerate generic entry.
- Cash generation, debt service and covenant headroom, alongside continued share repurchases and planned R&D and commercial spending.
- Status and potential financial impact of the French tax assessments and other disclosed contingencies.