Jazz Pharmaceuticals plc — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone Q4 report. Comparisons with 2011 are not like-for-like: Jazz merged with Azur Pharma in January 2012 and acquired EUSA Pharma in June; their results are included only from their respective closing dates. The women’s health business was sold in October and reported as discontinued operations.
Business context
Jazz is a specialty biopharmaceutical company focused on commercializing and developing medicines for unmet needs. Its portfolio expanded substantially in 2012, including the addition of Erwinaze/Erwinase, Prialt, FazaClo and other products. Xyrem remained the leading product and accounted for 65% of 2012 net product sales.
Financial results and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $586.0 million | $272.3 million |
| Net product sales | $580.5 million | $266.5 million |
| Income from operations | $197.8 million | $127.8 million |
| Income from continuing operations | $261.1 million | $125.0 million |
| Net income | $288.6 million | $125.0 million |
| Diluted earnings per share | $4.79 | $2.67 |
| Cash flow from operations | $249.8 million | $151.6 million |
| Cash, cash equivalents and marketable securities | $387.2 million | $157.9 million |
- Revenue increased 115%; product sales increased 118%. Growth reflects the acquisitions as well as increased Xyrem sales, so reported growth does not represent solely organic growth.
- Xyrem sales were $378.7 million, up 62%; Erwinaze/Erwinase sales were $72.1 million from the June acquisition date; Prialt sales were $26.4 million. Luvox CR sales were $42.4 million, up 28%. FazaClo LD and HD contributed $22.0 million and $12.0 million, respectively.
- Company-presented gross margin was 86.5%, versus 94.8% in 2011. The decrease reflected acquired-product mix and $16.8 million of acquisition-related inventory fair-value step-up charges in cost of sales. Reported gross margin excludes amortization of acquired developed technology.
- 2012 net income included an $83.8 million income tax benefit, principally from a $104.2 million release of the valuation allowance on substantially all U.S. deferred tax assets. Discontinued operations contributed $27.4 million, including a $35.2 million gain on the women’s health sale. These items materially lifted reported earnings.
- Q4 2012 revenue was $183.7 million; income from continuing operations was $166.2 million and net income was $200.6 million. The quarter included the tax benefit and women’s health sale gain described above.
- Operating cash flow was $249.8 million. Investing cash outflow was $395.3 million, primarily reflecting the EUSA acquisition, partly offset by $93.9 million of net proceeds from the women’s health sale. Financing provided $448.5 million, mainly from acquisition-related borrowing.
- At year-end, working capital was $360.0 million. Principal outstanding under the term loan was $463.1 million (carrying amount $456.8 million); the $100 million revolving facility was undrawn. The company reported compliance with its debt covenants.
Material changes and outlook
- Transactions: the January Azur merger was accounted for as a reverse acquisition; EUSA was acquired for $678.4 million in cash in June. The company also agreed to a further $50 million payment if Erwinaze U.S. sales reach $124.5 million in 2013. In October it sold six women’s health products for $95.0 million plus $2.6 million for inventory.
- Management expected 2013 product sales to increase, led by Xyrem, Erwinaze/Erwinase and Prialt, partly offset by declines in other products. It expected gross margin to increase slightly, while R&D and SG&A expenses would be higher. The filing provides no clear numerical 2013 revenue or earnings guidance.
- Development programs included Erwinaze studies, Phase I development of Asparec and Phase III development of Leukotac. The FDA approved Versacloz in February 2013; Jazz expected to begin marketing it in 2013.
- Management believed existing cash, operating cash generation and the undrawn revolver would fund operations and existing obligations for the foreseeable future. This assessment depends on product sales and other assumptions disclosed in the filing.
Risks, contingencies and unusual items
- Xyrem concentration and generic challenge: Xyrem represented about 65% of product sales. Roxane and Amneal had filed generic applications, and Jazz was litigating both matters. The FDA denied two company citizen petitions concerning generic application requirements; timing and outcome of litigation and potential generic entry remained uncertain.
- Regulatory and safety matters: FDA discussions on updated Xyrem REMS documents were ongoing. The FDA had issued a warning letter concerning Xyrem adverse-event reporting and a 2012 inspection Form 483; Jazz said it had taken corrective actions and requested closeout, but outcome and timing were uncertain. The Xyrem label was updated in December 2012 to contraindicate use with alcohol.
- Supply dependence: The company relied on single-source suppliers and manufacturers and held limited inventory of certain products. Xyrem manufacturers had received only partial DEA quota allocations for 2013 and needed additional quota. Erwinaze depended on the Health Protection Agency as sole supplier, with prior European supply disruption and no ordinary backup-supplier right.
- Debt and commitments: The term loan carries variable-rate exposure, secured leverage and other covenants, and scheduled principal payments. Contractual obligations totaled $714.7 million, including $463.1 million principal, estimated interest, purchase obligations, leases and the unadjusted potential $50 million Erwinaze payment. The company also disclosed up to $170 million of potential future milestone payments, plus unquantified royalties.
- Other uncertainties: FazaClo faced generic competition and patent re-examination; the Cutler dispute asserted contingent payments of $10.5 million or $25.0 million plus unspecified damages and fees. The company cited reimbursement and pricing pressure, integration and international-operation risks, foreign-exchange exposure, and tax-position uncertainty.
- The filing also disclosed one shipment of Kidrolase to an Iranian entity under a pre-existing EUSA contract, with anticipated gross revenue of approximately €92,000; payment had not been received as of the filing.
Most important facts for investors to verify
- Whether Xyrem generic applicants advance, and the results and timing of the patent litigation and any FDA REMS decisions.
- Whether Jazz and its suppliers obtain sufficient 2013 DEA quotas for Xyrem, and whether sole-source supply—particularly Erwinaze—can meet demand.
- Actual 2013 sales, including progress toward the $124.5 million Erwinaze threshold and the related contingent payment.
- How much of reported earnings and growth is supported by recurring operations versus the tax valuation-allowance release, acquisition accounting and divestiture gain.
- Debt repayment, cash generation, covenant headroom and the effect of higher interest rates or weaker product sales.
- Integration results and whether expected portfolio growth offsets generic pressure, reimbursement constraints and declines in other products.
The company reported effective disclosure controls and internal control over financial reporting at December 31, 2012; KPMG issued unqualified opinions on the 2012 financial statements and internal controls.