Jazz Pharmaceuticals plc — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2018, compared with the same period in 2017. Jazz is an international biopharmaceutical company focused on sleep and hematology/oncology products. Xyrem is its largest product and a major driver of results.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $444.6 million | $376.1 million |
| Product sales, net | $440.8 million | $373.7 million |
| Income from operations | $87.8 million | $136.1 million |
| Net income | $46.0 million | $86.5 million |
| Diluted EPS | $0.75 | $1.41 |
| Operating cash flow | $162.4 million | $164.5 million |
| Cash and cash equivalents, March 31 | $453.2 million | $347.0 million |
| Investments, March 31 | $255.0 million | $60.0 million |
Gross margin on product sales was 92.3%, down from 93.3%, primarily due to product mix. Cash, cash equivalents and investments totaled $708.2 million at March 31. The balance sheet showed $1.582 billion of debt carrying value; principal debt was approximately $1.8 billion. No amounts were drawn on the $1.25 billion revolving credit facility, which was available for borrowing. Current assets were $1.126 billion and current liabilities were $375.6 million.
Material changes versus Q1 2017
- Revenue rose 18%, led by Xyrem and the contribution from Vyxeos, launched in the U.S. in August 2017.
- Xyrem sales increased 16% to $316.8 million, reflecting 9% volume growth and a higher average net selling price. Xyrem represented 72% of net product sales.
- Vyxeos contributed $26.2 million in sales. Erwinaze/Erwinase declined 1% to $50.6 million; Defitelio/defibrotide declined 2% to $35.1 million; and Prialt declined 21% to $6.1 million.
- Operating income and net income fell despite revenue growth. SG&A increased 44% to $207.2 million, including a $57.0 million estimated loss contingency. R&D rose 39% to $62.7 million, including an $11.0 million solriamfetol milestone. Amortization more than doubled to $53.0 million, mainly because Vyxeos amortization began after approval.
- Operating cash flow was broadly stable. Investing cash use increased to $47.1 million, primarily reflecting net investment purchases and capital spending; financing cash use fell to $47.6 million, compared with $181.7 million, which included $150.0 million of revolving-credit repayments in Q1 2017.
Outlook, commentary, risks and unusual items
- Management expected 2018 product sales to increase over 2017, primarily from Xyrem, Vyxeos and Defitelio; it expected R&D, SG&A and intangible amortization to increase. It expected gross margin percentage and royalty/contract revenue to remain broadly stable, and positive operating cash flow in 2018.
- The FDA accepted the solriamfetol NDA for standard review, with a PDUFA target date of December 20, 2018. Approval, DEA scheduling, reimbursement and commercial uptake remain uncertain. Jazz submitted an Xyrem pediatric supplemental application in April 2018.
- In April 2018, Jazz reached an agreement in principle with the DOJ for a proposed $57.0 million civil settlement related to an investigation of patient-assistance support. The company accrued $57.0 million in Q1 SG&A; the settlement remained subject to a definitive agreement, interest and other contingencies, and could include a corporate integrity agreement.
- Xyrem patent settlements with Par and Teva set future generic entry or authorized-generic terms, generally beginning in 2023 or later, subject to specified acceleration events. Litigation with other generic applicants and appeals concerning Xyrem REMS patents remained unresolved. Generic or competing products could materially affect Xyrem sales.
- Supply and manufacturing are significant risks: Erwinaze had constrained supply and supplier regulatory issues; most products rely on single-source suppliers, including Vyxeos. Xyrem also depends on supplier capacity and DEA quotas. Five customers represented 93% of gross receivables; Express Scripts accounted for 72% and McKesson 19%.
- Other matters include a disputed French transfer-pricing assessment of approximately $47 million, and an April agreement to purchase a priority review voucher for $110 million, subject to closing conditions. The filing identifies substantial debt, pricing and reimbursement pressure, foreign-exchange exposure, and clinical, regulatory and intellectual-property risks.
Investor verification priorities
- Track Xyrem volume, pricing, competitive entry dates, litigation and REMS developments, given its concentration in sales.
- Confirm the final DOJ settlement amount, interest, timing and any corporate integrity agreement or other obligations.
- Monitor Erwinaze and Vyxeos supply reliability, supplier compliance and the effect of any disruption on sales and launches.
- Follow solriamfetol’s FDA review, target action date, DEA scheduling and expected launch-related costs.
- Reconcile debt principal with carrying value, review facility availability and covenants, and assess cash needs including the proposed $110 million voucher purchase.
- Assess whether sales growth can offset higher SG&A, R&D, amortization and interest costs, and whether cash generation remains resilient.