JAZZ 2013 Q3 DOC
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
FORM 10-Q
 
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2013
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission File Number: 001-33500
JAZZ PHARMACEUTICALS PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter) 
Ireland
98-1032470
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Fourth Floor, Connaught House,
One Burlington Road, Dublin 4, Ireland
011-353-1-634-7800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of October 29, 2013, 57,789,719 ordinary shares of the registrant, nominal value $0.0001 per share, were outstanding.


Table of Contents


JAZZ PHARMACEUTICALS PLC
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013

INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.

We own or have rights to various copyrights, trademarks, and trade names used in our business in the United States and/or other countries, including the following: Jazz Pharmaceuticals®, Xyrem® (sodium oxybate) oral solution, Xyrem Success Program®, FazaClo® (clozapine, USP), Luvox CR® (fluvoxamine maleate) Extended-Release Capsules, Luvox® (fluvoxamine maleate), VersaclozTM (clozapine, USP) oral suspension, Prialt® (ziconotide) intrathecal infusion, Niravam® (orally disintegrating tablet presentation of alprazolam), Parcopa® (orally disintegrating tablet presentation of carbidopa/levodopa), Erwinaze® (asparaginase Erwinia chrysanthemi), Erwinase®, Asparec (mPEG-r-crisantaspase), Leukotac (inolimomab), ProstaScint® (capromab pendetide), Quadramet® (samarium sm 153 lexidronam injection), Caphosol® (supersaturated calcium phosphate rinse), Collatamp (lyophilized collagen implant impregnated with the aminoglycoside antibiotic gentamicin), Fomepizole, Kidrolase (Escherichia coli L-asparaginase), Xenazine® (tetrabenazine), Custodiol® (solution HTK) and NAVIGATOR Reimbursement and Access ProgramTM. This report also includes trademarks, service marks, and trade names of other companies.



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PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
588,462

 
$
387,196

Accounts receivable, net
113,271

 
75,480

Inventories
24,868

 
26,525

Prepaid expenses
19,350

 
7,445

Deferred tax assets, net
45,565

 
35,813

Other current assets
18,551

 
19,113

Total current assets
810,067

 
551,572

Property and equipment, net
12,060

 
7,281

Intangible assets, net
823,724

 
869,952

Goodwill
446,823

 
442,600

Deferred tax assets, net, non-current
70,976

 
74,850

Deferred financing costs
15,458

 
16,576

Other non-current assets
6,391

 
3,662

Total assets
$
2,185,499

 
$
1,966,493

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
22,434

 
$
15,887

Accrued liabilities
106,390

 
104,666

Current portion of long-term debt
5,572

 
29,688

Income taxes payable
19,850

 
39,884

Contingent consideration
47,700

 

Deferred tax liability, net
275

 
275

Deferred revenue
1,138

 
1,138

Total current liabilities
203,359

 
191,538

Deferred revenue, non-current
6,001

 
6,776

Long-term debt, less current portion
545,564

 
427,073

Contingent consideration, non-current

 
34,800

Deferred tax liability, net, non-current
170,127

 
178,393

Other non-current liabilities
16,747

 
6,621

Commitments and contingencies (Note 7)

 


Shareholders’ equity:

 
 
Ordinary shares
6

 
6

Non-voting euro deferred shares
55

 
55

Capital redemption reserve
471

 
471

Additional paid-in capital
1,201,221

 
1,151,010

Accumulated other comprehensive income
44,622

 
31,046

Accumulated deficit
(2,674
)
 
(61,296
)
Total shareholders’ equity
1,243,701

 
1,121,292

Total liabilities and shareholders’ equity
$
2,185,499

 
$
1,966,493

The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Product sales, net
$
230,386

 
$
174,130

 
$
631,602

 
$
398,585

Royalties and contract revenues
1,774

 
1,385

 
5,047

 
3,691

Total revenues
232,160

 
175,515

 
636,649

 
402,276

Operating expenses:
 
 
 
 

 
 
Cost of product sales (excluding amortization of acquired developed technologies)
24,252

 
32,629

 
76,503

 
52,662

Selling, general and administrative
74,970

 
60,924

 
223,004

 
162,505

Research and development
12,814

 
6,920

 
32,811

 
13,200

Intangible asset amortization
19,564

 
19,742

 
58,518

 
43,444

Total operating expenses
131,600

 
120,215

 
390,836

 
271,811

Income from operations
100,560

 
55,300

 
245,813

 
130,465

Interest expense, net
(6,202
)
 
(7,750
)
 
(20,743
)
 
(9,199
)
Foreign currency loss
(614
)
 
(1,099
)
 
(728
)
 
(1,357
)
Loss on extinguishment and modification of debt

 

 
(3,749
)
 

Income from continuing operations before income tax provision
93,744

 
46,451

 
220,593

 
119,909

Income tax provision
18,335

 
12,856

 
59,574

 
24,966

Income from continuing operations
75,409

 
33,595

 
161,019

 
94,943

Loss from discontinued operations

 
(386
)
 

 
(6,908
)
Net income
$
75,409

 
$
33,209

 
$
161,019

 
$
88,035

Basic income (loss) per ordinary share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.30

 
$
0.59

 
$
2.76

 
$
1.69

Loss from discontinued operations

 
(0.01
)
 

 
(0.12
)
Net income
$
1.30

 
$
0.58

 
$
2.76

 
$
1.57

Diluted income (loss) per ordinary share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.23

 
$
0.56

 
$
2.62

 
$
1.59

Loss from discontinued operations

 
(0.01
)
 

 
(0.12
)
Net income
$
1.23

 
$
0.55

 
$
2.62

 
$
1.47

Weighted-average ordinary shares used in per share computations:
 
 
 
 
 
 
 
Basic
58,217

 
57,703

 
58,437

 
56,198

Diluted
61,519

 
60,883

 
61,532

 
59,846

The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
75,409

 
$
33,209

 
$
161,019

 
$
88,035

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
25,402

 
14,248

 
13,576

 
13,860

Available-for-sale securities:
 
 
 
 
 
 
 
Net unrealized gain on available-for-sale securities, net of income taxes

 

 

 
8

Reclassification adjustments for gains included in earnings, net of income taxes

 

 

 
23

Other comprehensive income
25,402

 
14,248

 
13,576

 
13,891

Total comprehensive income
$
100,811

 
$
47,457

 
$
174,595

 
$
101,926

 
 
 
 
 
 
 
 
Total comprehensive income arises from:
 
 
 
 
 
 
 
Continuing operations
$
100,811

 
$
47,843

 
$
174,595

 
$
108,834

Discontinued operations

 
(386
)
 

 
(6,908
)
Total comprehensive income
$
100,811

 
$
47,457

 
$
174,595

 
$
101,926

The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended
September 30,
 
2013
 
2012
Operating activities
 
 
 
Net income
$
161,019

 
$
88,035

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of intangible assets
58,518

 
51,014

Depreciation
2,065

 
789

Loss on disposal of property and equipment
47

 
146

Share-based compensation
32,139

 
15,151

Excess tax benefit from share-based compensation
(82
)
 
(4,266
)
Acquisition accounting inventory fair value step-up
3,143

 
17,822

Change in fair value of contingent consideration
12,900

 
1,100

Deferred income taxes
(17,962
)
 
(8,768
)
Provision for losses on accounts receivable and inventory
1,758

 
2,696

Loss on extinguishment and modification of debt
3,749

 

Other non-cash transactions
4,435

 
1,771

Changes in assets and liabilities:
 
 
 
Accounts receivable
(37,649
)
 
(17,773
)
Inventories
(3,445
)
 
1,715

Prepaid expenses and other current assets
(11,300
)
 
(3,843
)
Other long-term assets
(3,421
)
 
(2,297
)
Accounts payable
6,670

 
(2,543
)
Accrued liabilities
1,562

 
(15,812
)
Income taxes payable
(19,086
)
 
28,139

Deferred revenue
(776
)
 
(48
)
Other non-current liabilities
10,125

 
(301
)
Liability under government settlement

 
(7,320
)
Net cash provided by operating activities
204,409

 
145,407

Investing activities
 
 
 
Acquisitions, net of cash acquired

 
(542,531
)
Purchases of marketable securities

 
(37,443
)
Proceeds from sale of marketable securities

 
81,246

Proceeds from maturities of marketable securities

 
31,988

  Acquisition of intangible assets
(1,300
)
 

Purchases of property and equipment
(6,874
)
 
(4,993
)
Purchase of product rights

 
(10,750
)
Net cash used in investing activities
(8,174
)
 
(482,483
)
Financing activities
 
 
 
Net proceeds from issuance of debt
553,425

 
450,916

Proceeds from employee equity incentive and purchase plans and exercise of warrants
23,577

 
20,995

Share repurchases
(102,397
)
 

Payment of employee withholding taxes related to share-based awards
(5,303
)
 
(25,299
)
Excess tax benefit from share-based compensation
82

 
4,266

Repayment of long-term debt
(464,517
)
 
(5,938
)
Net cash provided by financing activities
4,867

 
444,940

Effect of exchange rates on cash and cash equivalents
164

 
(147
)
Net increase in cash and cash equivalents
201,266

 
107,717

Cash and cash equivalents, at beginning of period
387,196

 
82,076

Cash and cash equivalents, at end of period
$
588,462

 
$
189,793


The condensed consolidated statements of cash flows include the activities of discontinued operations.
The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAZZ PHARMACEUTICALS PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. The Company and Summary of Significant Accounting Policies
Jazz Pharmaceuticals plc, a public limited company formed under the laws of Ireland, is a specialty biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing innovative products that address unmet medical needs. Our strategy is to continue to create shareholder value by:
Growing sales of the existing products in our portfolio, including by identifying new growth opportunities;
Acquiring additional marketed specialty products or products close to regulatory approval to leverage our existing expertise and infrastructure; and
Pursuing targeted development of a pipeline of post-discovery specialty product candidates.
On January 18, 2012, the businesses of Jazz Pharmaceuticals, Inc. and Azur Pharma Public Limited Company, or Azur Pharma, were combined in a merger transaction, or the Azur Merger, accounted for as a reverse acquisition under the acquisition method of accounting for business combinations, with Jazz Pharmaceuticals, Inc. treated as the acquiring company for accounting purposes. As part of the Azur Merger, a wholly-owned subsidiary of Azur Pharma merged with and into Jazz Pharmaceuticals, Inc., with Jazz Pharmaceuticals, Inc. surviving the Azur Merger as a wholly-owned subsidiary of Jazz Pharmaceuticals plc. Prior to the Azur Merger, Azur Pharma changed its name to Jazz Pharmaceuticals plc.
On June 12, 2012, we completed the acquisition of EUSA Pharma Inc., or EUSA Pharma, which we refer to as the EUSA Acquisition.
Throughout this report, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the registrant,” “we,” “us,” and “our” refer to Jazz Pharmaceuticals plc and its consolidated subsidiaries, including its predecessor Jazz Pharmaceuticals, Inc. All references to “Azur Pharma” are references to Jazz Pharmaceuticals plc (f/k/a Azur Pharma Public Limited Company) and its consolidated subsidiaries prior to the effective time of the Azur Merger on January 18, 2012. All references to “EUSA Pharma” are references to EUSA Pharma Inc. and its consolidated subsidiaries prior to the effective time of the EUSA Acquisition on June 12, 2012.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission, or SEC, for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by U.S. generally accepted accounting principles, or GAAP, can be condensed or omitted. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the annual consolidated financial statements and accompanying notes of Jazz Pharmaceuticals plc included in its Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations of the acquired Azur Pharma and EUSA Pharma businesses, along with the estimated fair values of the assets acquired and liabilities assumed in each transaction, have been included in our condensed consolidated financial statements since the effective dates of the Azur Merger and the EUSA Acquisition, respectively.
In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of our financial position and operating results. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013, for any other interim period or for any future period.
Certain prior period amounts presented in the accompanying footnotes have been reclassified to conform to current period presentation, as described in Note 2.
These condensed consolidated financial statements include the accounts of Jazz Pharmaceuticals plc and our wholly-owned subsidiaries and intercompany transactions and balances have been eliminated.
Significant Risks and Uncertainties
Our financial results are significantly influenced by sales of Xyrem® (sodium oxybate) oral solution. Maintaining or increasing sales of Xyrem in its approved indications is subject to a number of risks and uncertainties, including the potential introduction of generic competition, changed or increased regulatory restrictions, and continued acceptance of Xyrem as safe

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and effective by physicians and patients. Two abbreviated new drug applications, or ANDAs, have been filed with the United States Food and Drug Administration, or FDA, by third parties seeking to market generic versions of Xyrem. We have sued both third parties for infringement of our patents, and the litigation proceedings are ongoing. We cannot predict the timing or outcome of these proceedings. We expect that the approval of an ANDA that results in the launch of a generic version of Xyrem would have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We are continuing our efforts on various regulatory matters, including working with the FDA on updated documents that we have submitted to the FDA on our risk management and controlled distribution system for Xyrem, which we refer to as the Xyrem Risk Management Program, and potential modifications to this program. We are engaged in ongoing communications with the FDA with respect to our risk evaluation and mitigation strategies, or REMS, documents for Xyrem, but we have not reached agreement on certain significant terms. For example, we disagree with the FDA’s current position that, as part of the current REMS process, the Xyrem deemed REMS should be modified to enable the distribution of Xyrem through more than one pharmacy. We expect that final REMS documents for Xyrem will include modifications to, and/or requirements that are not currently implemented in, the Xyrem Risk Management Program. Any such modifications or additional requirements could potentially make it more difficult or expensive for us to distribute Xyrem, make it easier for future generic competitors to enter the market and/or negatively affect sales of Xyrem. We cannot predict whether, or on what terms, we will reach agreement with FDA on final REMS documents for Xyrem, whether we will initiate dispute resolution or other proceedings with FDA prior to finalizing the REMS documents, or, if any such proceedings are initiated, the outcome or timing thereof.
In addition, the FDA is seeking to schedule an initial meeting with us and ANDA applicants to facilitate the development of a single shared system REMS for Xyrem (sodium oxybate). Also, we may face pressure to license or share our Xyrem Risk Management Program, which is the subject of multiple issued patents, or elements of it, with generic competitors. We cannot predict the outcome or impact on our business of any discussions with the FDA and/or any ANDA applicant with respect to the potential creation of a single shared system REMS for Xyrem, any future action that may be taken by a third party to seek to license or share our REMS, or the FDA’s response to a certification that a third party has been unable to obtain a license.
Our financial results are increasingly influenced by sales of our second largest product, Erwinaze® (asparaginase Erwinia chrysanthemi), which have continued to grow. We seek to maintain and increase sales of Erwinaze, as well as to make Erwinaze more widely available through ongoing research and development activities. However, our ability to successfully and sustainably grow sales of Erwinaze is subject to a number of risks and uncertainties, including assuring sufficient supply of Erwinaze on a timely basis, the limited population of patients with acute lymphoblastic leukemia, or ALL, and the incidence of hypersensitivity reactions to E. coli-derived asparaginase within that population, and our need to apply for and receive marketing authorizations in certain additional countries so we can launch promotional efforts in those countries. We maintain very limited inventory of Erwinaze and, in 2013, our supply of Erwinaze was nearly completely absorbed by demand for the product. While we have been able to resolve potential supply shortages and meet product demand to date, if our continued efforts to avoid supply shortages are not successful, we could experience Erwinaze supply interruptions in the future, which could have a material adverse effect on our sales of and revenues from Erwinaze and limit our potential future maintenance and growth of the market for this product.
In addition to risks related specifically to Xyrem and Erwinaze, we are subject to other challenges and risks specific to our business, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations, including: the challenges of protecting our intellectual property rights; delays or problems in the supply or manufacture of our products, particularly because we maintain limited inventories of certain products, including products for which our supply demands are growing, and we are dependent on single source suppliers to continue to meet our ongoing commercial needs; the need to obtain appropriate pricing and reimbursement for our products in an increasingly challenging environment due to, among other things, the attention being paid to health care cost containment and other austerity measures in the United States and worldwide; the ongoing regulation and oversight by the FDA, the U.S. Drug Enforcement Administration, or DEA, and non-U.S. regulatory agencies, including with respect to product labeling, requirements for distribution, obtaining sufficient DEA quotas where needed, marketing and promotional activities, adverse event reporting and product recalls or withdrawals; the challenges of achieving and maintaining commercial success of our products, such as obtaining sustained acceptance of our products by patients, physicians and payors; and the difficulty and uncertainty of pharmaceutical product development and the uncertainty of clinical success and regulatory approval. Other risks and uncertainties related to our ability to execute on our strategy include: our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business; and possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations.
Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash equivalents and marketable securities. Our investment policy permits investments in U.S. federal government and federal agency securities,

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corporate bonds or commercial paper issued by U.S. corporations, money market instruments, certain qualifying money market mutual funds, certain repurchase agreements, and tax-exempt obligations of U.S. states, agencies and municipalities and places restrictions on credit ratings, maturities, and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and marketable securities and issuers of investments to the extent recorded on the balance sheet.
We are also subject to credit risk from our accounts receivable related to our product sales. We monitor our exposure within accounts receivable and record a reserve against uncollectible accounts receivable as necessary. We extend credit to hospitals, pharmaceutical wholesale distributors and specialty pharmaceutical distribution companies, primarily in the United States, and to other international distributors. Customer creditworthiness is monitored and collateral is not required. We monitor deteriorating economic conditions in certain European countries which may result in variability of the timing of cash receipts and an increase in the average length of time that it takes to collect accounts receivable outstanding. Historically, we have not experienced significant credit losses on our accounts receivable and we do not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on our financial position, liquidity or results of operations. As of September 30, 2013, five customers accounted for 88% of gross accounts receivable, including Express Scripts Specialty Distribution Services, Inc. and its affiliate CuraScript, Inc., or Express Scripts, which accounted for 73% of gross accounts receivable, and Accredo Health Group, Inc., or Accredo, which accounted for 7% of gross accounts receivable. As of December 31, 2012, five customers accounted for 78% of gross accounts receivable, including Express Scripts, which accounted for 51% of gross accounts receivable, and Accredo, which accounted for 11% of gross accounts receivable. 
We depend on single source suppliers and manufacturers for each of our products, product candidates and their active pharmaceutical ingredients.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.
Net Income per Ordinary Share
Basic net income per ordinary share is based on the weighted-average number of ordinary shares outstanding. Diluted net income per ordinary share is based on the weighted-average number of ordinary shares outstanding and potentially dilutive ordinary shares outstanding. Basic and diluted net income per ordinary share were computed as follows (in thousands, except per share amounts): 

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
75,409

 
$
33,595

 
$
161,019

 
$
94,943

Loss from discontinued operations

 
(386
)
 

 
(6,908
)
Net income
$
75,409

 
$
33,209

 
$
161,019

 
$
88,035

Denominator:
 
 
 
 
 
 
 
Weighted-average ordinary shares - basic
58,217

 
57,703

 
58,437

 
56,198

Dilutive effect of employee equity incentive and purchase plans
1,852

 
1,404

 
1,587

 
1,557

Dilutive effect of warrants
1,450

 
1,776

 
1,508

 
2,091

Weighted-average ordinary shares - diluted
61,519

 
60,883

 
61,532

 
59,846

 
 
 
 
 
 
 
 
Basic income (loss) per ordinary share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.30

 
$
0.59

 
$
2.76

 
$
1.69

Loss from discontinued operations

 
(0.01
)
 

 
(0.12
)
Net income
$
1.30

 
$
0.58

 
$
2.76

 
$
1.57

Diluted income (loss) per ordinary share:
 
 
 
 
 
 
 
Income from continuing operations
$
1.23

 
$
0.56

 
$
2.62

 
$
1.59

Loss from discontinued operations

 
(0.01
)
 

 
(0.12
)
Net income
$
1.23

 
$
0.55

 
$
2.62

 
$
1.47

Potentially dilutive ordinary shares from employee equity plans and warrants are determined by applying the treasury stock method to the assumed exercise of warrants and share options, the assumed vesting of outstanding restricted stock units, or RSUs, and the assumed issuance of ordinary shares under our employee stock purchase plan, or ESPP. The following table represents the weighted-average ordinary shares that were excluded from the computation of diluted net income per ordinary share for the periods presented because including them would have an anti-dilutive effect (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Options to purchase ordinary shares and RSUs
1,028

 
1,785

 
2,074

 
1,314

Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”, or ASU No. 2013-11, which concludes that, under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU No. 2013-11 will be effective for us beginning January 1, 2014. We do not anticipate that the adoption of this standard will have a material impact on our financial position.
In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”, or ASU No. 2013-05. The objective of ASU No. 2013-05 is to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 will be effective for us beginning January 1, 2014. We do not anticipate that the adoption of this standard will have a material impact on our results of operations or financial position, absent any material transactions involving the derecognition of subsidiaries or groups of assets within a foreign entity.


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2. Inventories
Inventories consisted of the following (in thousands): 
 
September 30,
2013
 
December 31,
2012
Raw materials
$
4,474

 
$
4,979

Work in process
6,523

 
5,410

Finished goods
13,871

 
16,136

Total inventories
$
24,868

 
$
26,525

Inventories of $4.2 million previously classified as raw materials as of December 31, 2012 have been reclassified to work in process to conform to current period presentation. As of September 30, 2013 and December 31, 2012, the fair value of inventories acquired included a step-up in the value of inventories of $0.8 million and $4.0 million, respectively.

3. Fair Value Measurement
Cash and cash equivalents consisted of the following (in thousands): 
 
September 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
$
295,970

 
$

 
$

 
$
295,970

 
$
295,970

 
$

Time deposits
292,492

 

 

 
292,492

 
292,492

 

Totals
$
588,462

 
$

 
$

 
$
588,462

 
$
588,462

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
$
343,548

 
$

 
$

 
$
343,548

 
$
343,548

 
$

Money market funds
43,648

 

 

 
43,648

 
43,648

 

Totals
$
387,196

 
$

 
$

 
$
387,196

 
$
387,196

 
$

Cash equivalents are considered available-for-sale. We use the specific-identification method for calculating realized gains and losses on securities sold and include them in interest expense, net in the condensed consolidated statements of income. All available-for-sale securities held as of September 30, 2013 and December 31, 2012 were cash equivalents.
The following table summarizes, by major security type, our available-for-sale securities and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands): 
 
September 30, 2013
 
December 31, 2012
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Estimated
Fair Value    
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Estimated
Fair Value    
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits
$

 
$
292,492

 
$

 
$
292,492

 
$

 
$

 
$

Money market funds

 

 

 

 
43,648

 

 
43,648

Totals
$

 
$
292,492

 
$

 
$
292,492

 
$
43,648

 
$

 
$
43,648

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
47,700

 
$
47,700

 
$

 
$
34,800

 
$
34,800

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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As of September 30, 2013, our available-for-sale securities included time deposits and their carrying values were approximately equal to their fair values. As of December 31, 2012, our available-for-sale securities included money market funds. There were no transfers between the different levels of the fair value hierarchy in 2013 or in 2012.
As part of the EUSA Acquisition, we agreed to make an additional contingent payment of $50.0 million in cash if Erwinaze achieves U.S. net sales of $124.5 million or greater in 2013. The fair value measurement of this contingent consideration obligation is determined using unobservable Level 3 inputs. These inputs include the probability of 2013 U.S. net sales of Erwinaze equaling or exceeding the $124.5 million threshold and the discount rate. A significant increase or decrease in the estimated probability of meeting the milestone threshold would result in a significantly higher or lower fair value measurement, respectively. The range of the estimated contingent payment is from zero if 2013 U.S. net sales of Erwinaze are less than $124.5 million to $50.0 million if 2013 U.S. net sales of Erwinaze equal or exceed $124.5 million.
The change in fair value of the contingent consideration payable was estimated as follows (in thousands):
 
Level 3
Balance at December 31, 2012
$
34,800

Fair value adjustment recorded within selling, general and administrative expenses
12,900

Balance at September 30, 2013
$
47,700

In 2013, the fair value adjustment reflects a change in the estimated probability of meeting the milestone threshold and the impact of discounting as a result of the passage of time.
As of September 30, 2013, the estimated fair value of the $555.8 million principal amount of our new term loans was $555.1 million and the carrying amount was $551.1 million. The fair value was determined using quotes from the administrative agent of our credit facility that are based on the bid/ask prices of our new term loans (Level 2). For additional information related to our new term loans, see Note 6.

4. Certain Balance Sheet Items
Property and equipment consisted of the following (in thousands):
 
 
September 30,
2013
 
December 31,
2012
Computer software
$
7,670

 
$
4,292

Computer equipment
5,059

 
3,687

Leasehold improvements
4,303

 
3,899

Construction-in-progress
2,638

 
1,135

Furniture and fixtures
1,966

 
1,953

Machinery and equipment
186

 
94

Subtotal
21,822

 
15,060

Less accumulated depreciation and amortization
(9,762
)
 
(7,779
)
Property and equipment, net
$
12,060

 
$
7,281

Accrued liabilities consisted of the following (in thousands): 
 
September 30,
2013
 
December 31,
2012
Rebates and other sales deductions
$
37,125

 
$
29,235

Employee compensation and benefits
26,263

 
24,900

Sales returns reserve
21,756

 
26,385

Royalties
3,139

 
3,271

Professional fees
1,944

 
2,163

Other
16,163

 
18,712

Total accrued liabilities
$
106,390

 
$
104,666



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5. Goodwill and Intangible Assets
The gross carrying amount of goodwill was as follows (in thousands):
Balance at December 31, 2012
$
442,600

Foreign exchange
4,223

Balance at September 30, 2013
$
446,823

The gross carrying amounts and net book values of our intangible assets were as follows (in thousands): 
 
September 30, 2013
 
December 31, 2012
 
Remaining
Weighted-
Average Useful
Life
(In years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Acquired developed technologies
11.7
 
$
946,595

 
$
(157,423
)
 
$
789,172

 
$
930,834

 
$
(97,578
)
 
$
833,256

Trademarks
1.3
 
2,600

 
(2,259
)
 
341

 
2,600

 
(2,054
)
 
546

Total finite-lived intangible assets
 
 
949,195

 
(159,682
)
 
789,513

 
933,434

 
(99,632
)
 
833,802

Acquired IPR&D assets
 
 
34,211

 

 
34,211

 
36,150

 

 
36,150

Total intangible assets
 
 
$
983,406

 
$
(159,682
)
 
$
823,724

 
$
969,584

 
$
(99,632
)
 
$
869,952

Based on finite-lived intangible assets recorded as of September 30, 2013, and assuming the underlying assets will not be impaired in the future and that we will not change the expected lives of the assets, future amortization costs were estimated as follows (in thousands): 
Year Ending December 31,
Estimated
Amortization  
Expense
2013 (remainder)
$
19,872

2014
79,284

2015
73,238

2016
68,908

2017
68,816

Thereafter
479,395

Total
$
789,513


6. Long-Term Debt
Amendment of Credit Facility and Term Loan Refinancing
On June 13, 2013, Jazz Pharmaceuticals plc, as guarantor, and certain of its wholly-owned subsidiaries, as borrowers, entered into an amendment of our original credit agreement, dated as of June 12, 2012, with Barclays Bank PLC, as administrative agent, and certain other lenders.
The amended credit agreement provides for $557.2 million principal amount of new term loans and a new revolving credit facility of $200.0 million that replaced the revolving credit facility of $100.0 million provided for under the original credit agreement. We used a portion of the proceeds from the new term loans to refinance in full the outstanding term loans under the original credit agreement in an aggregate principal amount of $457.2 million, or the original term loans. The new term loans have the same June 12, 2018 maturity date that was applicable to the original term loans. Future loans under the new revolving credit facility, if any, will have the same June 12, 2017 maturity date that was applicable under the original credit agreement.
The new term loans bear interest, at our option, at a rate equal to either the LIBOR rate, plus an applicable margin of 2.75% per annum (subject to a 0.75% LIBOR floor), or the prime lending rate, plus an applicable margin equal to 1.75% per annum (subject to a 1.75% prime rate floor). Borrowings under the new revolving credit facility bear interest, at our option, at a rate equal to either the LIBOR rate, plus an applicable margin of 2.50% per annum, or the prime lending rate, plus an

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applicable margin equal to 1.50% per annum, subject to reduction by 0.25% or 0.50% based upon our secured leverage ratio. The new revolving credit facility has a commitment fee payable on the undrawn amount ranging from 0.25% to 0.50% per annum based upon our secured leverage ratio.
The borrowers’ obligations under the amended credit agreement and any hedging or cash management obligations entered into with a lender or an affiliate of a lender are guaranteed by Jazz Pharmaceuticals plc and certain of its subsidiaries, referred to below as restricted subsidiaries, and are secured by substantially all of their assets.
We may make voluntary prepayments of principal at any time without payment of a premium, except that a 1% premium would apply to any repricing of the new term loans effected on or prior to December 13, 2013. We are required to make mandatory prepayments of the new term loans (without payment of a premium) with (1) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (2) net cash proceeds from issuances of debt (other than certain permitted debt), (3) beginning with the fiscal year ending December 31, 2014, 50% of our excess cash flow as defined in the amended credit agreement (subject to decrease to 25% if our secured leverage ratio is equal to or less than 2.25 to 1.00 and greater than 1.25 to 1.00 or 0% if our secured leverage ratio is equal to or less than 1.25 to 1.00), and (4) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions).
Principal repayments of the new term loans, which are due quarterly, began in September 2013 and are equal to 1.0% of the original principal amount with any remaining balance payable on the final maturity date. Scheduled maturities with respect to the new term loans are as follows (in thousands):
Year Ending December 31,
Scheduled New Term Loan Maturities
2013 (remainder)
$
1,393

2014
5,572

2015
5,572

2016
5,572

2017
5,572

Thereafter
532,114

Total
$
555,795

The amended credit agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to Jazz Pharmaceuticals plc and its restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. The amended credit agreement contains a financial covenant that requires Jazz Pharmaceuticals plc and its restricted subsidiaries to maintain a maximum secured leverage ratio. We are currently in compliance with our financial covenants.
The refinancing of the original term loans involved multiple lenders who were considered members of a loan syndicate. In determining whether the refinancing was to be accounted for as a debt extinguishment or modification, we considered whether the creditors remained the same or changed and whether the change in debt terms was substantial. The debt terms were considered substantially different if the present value of the cash flows of the new term loans was at least 10% different from the present value of the remaining cash flows of the original term loans, or the 10% Test. We performed a separate 10% Test for each individual creditor participating in the loan syndication. The loans of creditors who did not participate in the amended credit agreement were accounted for as a debt extinguishment. When there was a change in principal balance for individual creditors, in applying the 10% Test, we used the cash flows related to the lowest common principal balance, or the Net Method. Under the Net Method, any principal in excess of a creditor’s reinvested principal balance was treated as a new, separate debt issuance, and any decrease in principal was treated as a partial extinguishment of debt.
For debt considered to be extinguished, the unamortized deferred financing costs and unamortized original issue discount associated with the extinguished debt were expensed. For debt considered to be modified, the unamortized deferred financing costs and unamortized original issue discount associated with the modified debt continue to be amortized, new creditor fees were capitalized and new third party fees were expensed. For new creditors, new creditor fees and new third party fees were capitalized. Deferred financing costs of $11.7 million and an original issue discount of $4.9 million were associated with modified and new debt and will be amortized to interest expense using the interest method over the life of the new term loans.
As the borrowing capacity relating to each creditor under the new revolving credit facility was greater than that under the original revolving credit facility, unamortized deferred financing costs, new creditor fees and new third party fees, totaling $4.7 million, were associated with the new arrangement and were deferred and are being amortized to interest expense on a straight-line basis over the life of the facility. We did not borrow under the original revolving credit facility and, as of September 30,

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2013, we had not borrowed under the new revolving credit facility.
The refinancing resulted in a $3.7 million charge in the nine months ended September 30, 2013, which was comprised of $2.7 million related to the expensing of unamortized deferred financing costs and unamortized original issue discount associated with extinguished debt and $1.0 million related to new third party fees associated with modified debt.
As of September 30, 2013, the interest rate on the new term loans was 3.5%. Interest expense associated with the new term loans is recorded using the interest method and includes non-cash interest related to the amortization of the debt discount and debt issuance costs. As of September 30, 2013, the effective interest rate on the new term loans was 4.3%. As of September 30, 2013, the current portion of the carrying amount of the new term loans was $5.6 million and the non-current portion was $545.6 million.

7. Commitments and Contingencies
Indemnification
In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification, including indemnification associated with product liability or infringement of intellectual property rights. Our exposure under these agreements is unknown because it involves future claims that may be made but have not yet been made against us. To date, we have not paid any claims or been required to defend any action related to these indemnification obligations.
We have agreed to indemnify our executive officers, directors and certain other employees for losses and costs incurred in connection with certain events or occurrences, including advancing money to cover certain costs, subject to certain limitations. The maximum potential amount of future payments we could be required to make under the indemnification obligations is unlimited; however, we maintain insurance policies that may limit our exposure and may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage and the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, we believe the fair value of these indemnification obligations is not significant. Accordingly, we did not recognize any liabilities relating to these obligations as of September 30, 2013 and December 31, 2012. No assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case we may incur substantial liabilities as a result of these indemnification obligations.
Lease and Other Commitments
We have noncancelable operating leases for our office buildings and we are obligated to make payments under noncancelable operating leases for automobiles used by our sales force. Future minimum lease payments under our noncancelable operating leases at September 30, 2013 were as follows (in thousands): 
Year Ending December 31,
Lease
  Payments  
2013 (remainder)
$
2,391

2014
9,496

2015
8,832

2016
5,404

2017
2,606

Thereafter
163

Total
$
28,892

In April 2013, we entered into a new operating lease agreement for additional office space in Palo Alto for a term of three years with an option to extend for one additional year.
As of September 30, 2013, we had $68.1 million of noncancelable purchase commitments due within one year, primarily related to agreements with third party manufacturers.
Legal Proceedings
We are involved in several legal proceedings, including the following matters:
Xyrem ANDA Matters: On October 18, 2010, we received a Paragraph IV Patent Certification notice, or Paragraph IV Certification, from Roxane Laboratories, Inc., or Roxane, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. Roxane’s Paragraph IV Certification alleged that all five patents then listed for Xyrem in the FDA’s publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” or Orange Book, on the date of

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the Paragraph IV Certification are invalid, unenforceable or not infringed by Roxane’s proposed generic product. On November 22, 2010, we filed a lawsuit against Roxane in response to Roxane’s Paragraph IV Certification in the United States District Court for the District of New Jersey, or the District Court. We are seeking a permanent injunction to prevent Roxane from introducing a generic version of Xyrem that would infringe our patents. Two additional method of use patents covering the distribution system for Xyrem were issued in December 2010 and February 2011, respectively, and were listed in the Orange Book, and we filed lawsuits against Roxane in February 2011 and again in May 2011 to include these additional patents in the litigation in response to Roxane’s Paragraph IV Certifications against each of these patents, and also to include another issued patent in the litigation which is not listed in the Orange Book. These additional lawsuits were subsequently consolidated with the action filed on November 22, 2010. On April 26, 2012, the District Court held a Markman hearing, a pretrial hearing following which the trial judge construes the claims of the patents at issue in a lawsuit, and the District Court issued a Markman order construing the claims of the patents then involved in the litigation in September 2012. Two additional patents, one covering a formulation of Xyrem and the other covering use of Xyrem for treatment of narcolepsy (Patent Nos. 8,263,650 and 8,324,275), or the ’650 patent and the ’275 patent, were issued in September 2012 and December 2012, respectively, and were listed in the Orange Book. In October 2012, we filed a new lawsuit in the District Court against Roxane in response to Roxane’s Paragraph IV Certification against the ’650 patent, or the ’650 case, and in December 2012, we filed a lawsuit in the District Court against Roxane alleging infringement of the ’275 patent, or the ’275 case. In April 2013, the District Court issued an order consolidating the three lawsuits and an order scheduling discovery and other deadlines for the consolidated case. Under the current scheduling order, fact discovery concerning the ’650 and ’275 patents will remain open until November 2013, and expert discovery involving all ten of the patents involved in the consolidated case will close in May 2014. Although no trial date for the consolidated case has been scheduled, based on the current scheduling order, we anticipate that trial in the consolidated case could occur as early as mid-2014. However, the actual timing of events in this litigation may be significantly earlier or later than contemplated by the scheduling order, and we cannot predict the timing or outcome of events in this litigation. In accordance with the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, as a result of our having filed a timely lawsuit against Roxane, FDA approval of Roxane’s ANDA had been stayed until April 18, 2013, which was 30 months after our October 18, 2010 receipt of Roxane’s Paragraph IV Certification, but that stay has expired. On September 30, 2013, we received a Paragraph IV Certification from Roxane alleging that a tenth patent listed in the Orange Book for Xyrem would not be infringed by Roxane’s proposed generic product.
On December 10, 2012, we received a Paragraph IV Certification from Amneal Pharmaceuticals, LLC, or Amneal, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. Amneal’s Paragraph IV Certification alleged that seven patents listed for Xyrem in the Orange Book are not infringed by Amneal’s proposed generic product. Amneal’s Paragraph IV Certification further alleged that an eighth patent listed in the Orange Book for Xyrem is invalid. On December 13, 2012, we received a supplemental Paragraph IV Certification alleging that a ninth patent listed in the Orange Book for Xyrem is invalid. On January 18, 2013, we filed a lawsuit against Amneal in response to Amneal’s Paragraph IV Certifications in the District Court. On August 2, 2013 we received a Paragraph IV Certification alleging that a tenth patent listed in the Orange Book for Xyrem would not be infringed by Amneal’s proposed generic product. On September 12, 2013, we filed a lawsuit against Amneal alleging infringement of this patent as well as another issued patent which is not listed in the Orange Book. We are seeking a permanent injunction to prevent Amneal from introducing a generic version of Xyrem that would infringe our patents. In accordance with the Hatch-Waxman Act, as a result of having filed a timely lawsuit against Amneal, FDA approval of Amneal’s ANDA will be stayed until the earlier of (i) June 10, 2015, which is 30 months after our receipt of Amneal’s Paragraph IV Certification on December 10, 2012, or (ii) a District Court decision finding that the identified patents are invalid, unenforceable or not infringed. We cannot predict the outcome of this matter.
On May 18, 2012, we submitted a Citizen Petition to the FDA that addressed the legal and scientific bases for requiring in vivo bioequivalence studies for generic formulations of Xyrem. Among other actions requested of the FDA, this petition requested that the FDA (i) not accept for review, review, or approve any ANDA referencing Xyrem unless and until the FDA has published bioequivalence requirements in the Orange Book specifying whether in vitro bioequivalence studies, in vivo bioequivalence studies, or both, are required for such ANDAs and (ii) require in vivo bioequivalence studies for any sodium oxybate drug product for which approval is sought in an ANDA referencing Xyrem to the extent such drug product differs from Xyrem in manufacturing process, pH, excipients, impurities, degradants or contaminants.  On November 13, 2012, the FDA denied this Citizen Petition.  On July 10, 2012, we submitted a second Citizen Petition to the FDA that addressed the requirements for submission of any ANDA referencing Xyrem. This petition focused on our view that any ANDA referencing Xyrem must contain a proposed risk management system at the time it was or is filed in order to demonstrate, as required by law, that the new generic drug product would have the same labeling and conditions of use as Xyrem. Among other actions requested of the FDA, this petition asked the FDA to rescind the acceptance of any previously-accepted ANDA referencing Xyrem, including the Roxane ANDA, that did not contain a proposed risk management system at the time it was accepted for review.  On December 13, 2012, the FDA denied this Citizen Petition.  We continue to evaluate the FDA’s responses to both Citizen Petitions and potential further actions that we may take with respect to the issues raised in, and the FDA’s denials of, the Citizen Petitions. The FDA’s denial of the Citizen Petitions does not have a direct impact on the merits of our ongoing lawsuits with Roxane and Amneal.  However, we cannot predict the effect of the denial of either of our Citizen Petitions, or the

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FDA’s stated positions in its responses to the Citizen Petitions, on the timing of the potential introduction of a generic version of Xyrem.
FazaClo ANDA Matters: Azur Pharma received Paragraph IV Certifications from three generics manufacturers, Barr Laboratories, Inc.; Novel Laboratories, Inc.; and Mylan Pharmaceuticals, Inc., indicating that ANDAs had been filed with the FDA requesting approval to market generic versions of FazaClo® (clozapine, USP) LD orally disintegrating clozapine tablets. Azur Pharma and CIMA Labs Inc., or CIMA, a subsidiary of Teva Pharmaceutical Industries Limited, or Teva, our licensor and the entity whose drug-delivery technology is incorporated into FazaClo LD, filed a lawsuit in response to each certification claiming infringement based on such certification: against Barr Laboratories, Inc. on August 21, 2008, against Novel Laboratories, Inc. on November 25, 2008, and against Mylan Pharmaceuticals, Inc. on July 23, 2010. Each case was filed in the United States District Court for the District of Delaware. On July 6, 2011, CIMA, Azur Pharma and Teva, which had acquired Barr Laboratories, Inc., entered into an agreement settling the patent litigation and Azur Pharma granted a sublicense to an affiliate of Teva of Azur Pharma’s rights to have manufactured, market and sell a generic version of both FazaClo LD and FazaClo HD, as well as an option for supply of authorized generic product. The sublicense for FazaClo LD commenced in July 2012, and the sublicense for FazaClo HD will commence in May 2015, or earlier upon the occurrence of certain events. Teva exercised its option for supply of an authorized generic product for FazaClo LD and launched the authorized generic product at the end of August 2012. The Novel Laboratories, Inc. and Mylan Pharmaceuticals, Inc. matters have been stayed pending reexamination of the patents in the lawsuits. In May 2013, a decision was issued by the U.S. Patent and Trademark Office, or the USPTO, in one of the two reexamination proceedings, which held certain claims patentable, and there was no appeal of this decision. The second reexamination proceeding is still ongoing. We cannot predict the outcome of the matters with Novel Laboratories, Inc. and Mylan Pharmaceuticals, Inc., the timing or outcome of the second reexamination proceeding, or when the stays will be lifted.
Cutler Matter: On October 19, 2011, Dr. Neal Cutler, one of the original owners of FazaClo, filed a complaint against Azur Pharma and one of its subsidiaries, as well as Avanir Pharmaceuticals, Inc., or Avanir, in California Superior Court in the County of Los Angeles, or the Superior Court. The complaint alleges that Azur Pharma and its subsidiary breached certain contractual obligations. Azur Pharma acquired rights to FazaClo from Avanir in 2007. The complaint alleges that as part of the acquisition of FazaClo, Azur Pharma’s subsidiary agreed to assume certain contingent payment obligations to Dr. Cutler. The complaint further alleges that certain contingent payments are due because revenue thresholds have been achieved, entitling Dr. Cutler to either a $10.5 million or $25.0 million contingent payment, plus unspecified punitive damages and attorneys’ fees. On March 14, 2012, the Superior Court granted our petition to compel arbitration of the dispute in New York and stayed the Superior Court litigation. We submitted a complaint in arbitration alleging that Dr. Cutler’s suit had been improperly filed in Los Angeles and seeking a declaratory judgment that we have complied with all contractual obligations to Dr. Cutler. On July 25, 2012, the arbitrator dismissed the arbitration on the grounds that the parties’ dispute falls outside of the scope of the arbitration clause in the applicable contract. We have asked the Superior Court to vacate the arbitrator’s dismissal of the arbitration and appealed the Superior Court’s denial of our motion to the California Court of Appeal. In addition, on November 7, 2012, we filed challenges to the sufficiency of the complaint in the Superior Court, but the Superior Court case has been stayed pending the outcome of our appeal.  This matter, like all litigation, carries certain risks, and there can be no assurance of the outcome.
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.


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8. Shareholders’ Equity
The following table presents a summary of ordinary shares issued or repurchased and related cash proceeds and payments (in thousands): 
 
Nine Months Ended
September 30, 2013
 
Nine Months Ended
September 30, 2012
 
Shares
 
Cash
 
Shares
 
Cash
Proceeds from employee equity incentive and purchase plans and warrant exercises
1,448

 
$
23,577

 
2,943

 
$
20,994

Share repurchases
(1,449
)
 
(102,397
)
 

 

Employee withholding taxes related to share-based awards (1)

 
(5,303
)
 

 
(25,299
)
Azur Merger

 

 
12,360

 

Directors' deferred compensation plan

 

 
45

 

Totals
(1
)
 
$
(84,123
)
 
15,348

 
$
(4,305
)
 ____________________
(1)
During the nine months ended September 30, 2013, we paid $5.3 million of income tax withholdings on behalf of employees related to the net share settlement of vested RSUs. During the nine months ended September 30, 2012, we paid $25.3 million of income tax withholdings on behalf of certain employees of Jazz Pharmaceuticals, Inc. related to the net share settlement of exercised share options in connection with the Azur Merger. The income tax withholdings paid were recorded as a reduction to additional paid-in capital.
Share Repurchase Program
In May 2013, our board of directors authorized a share repurchase program pursuant to which we may repurchase a number of ordinary shares having an aggregate repurchase price of up to $200 million, exclusive of any brokerage commissions. The authorization became effective immediately and has no set expiration date. Under this authorization, we may repurchase our ordinary shares through open market purchases, privately negotiated purchases or a combination of these transactions. The timing and amount of repurchases will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, restrictions under the amended credit agreement, corporate and regulatory requirements and market conditions. Share repurchases may be suspended or discontinued at any time without prior notice. We initiated purchases under this program in May 2013. In the three months ended September 30, 2013, we spent a total of $48.8 million to repurchase 0.6 million of our ordinary shares at an average total purchase price, including commissions, of $80.91 per share. In the nine months ended September 30, 2013, we spent a total of $102.4 million to repurchase 1.4 million of our ordinary shares at an average total purchase price, including commissions, of $70.64 per share. All ordinary shares repurchased by the company were canceled. As of September 30, 2013, the remaining amount authorized under the share repurchase program was $97.6 million.
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income as of September 30, 2013 and December 31, 2012 were as follows (in thousands): 
 
Foreign
Currency
Translation
Adjustments
 
Total
Accumulated
Other
Comprehensive
Income
Balance at December 31, 2012
$
31,046

 
$
31,046

Other comprehensive income
13,576

 
13,576

Balance at September 30, 2013
$
44,622

 
$
44,622


During the nine months ended September 30, 2013, other comprehensive income reflects foreign currency translation adjustments which are primarily due to the strengthening of the Euro against the U.S. dollar.
Additional Paid-in Capital
In April 2013, the Irish High Court approved a $1.6 billion reduction of the share premium account of Jazz Pharmaceuticals plc to offset its accumulated deficit, with the resulting reserve to be treated as distributable reserves of our

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parent company. This transaction impacted our parent company balance sheet only and had no impact on our U.S. GAAP consolidated balance sheet.

9. Share-Based Compensation
Share-based compensation expense related to share options, RSUs and grants under our ESPP was as follows (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Selling, general and administrative
$
9,354

 
$
5,330

 
$
25,898

 
$
11,967

Research and development
1,931

 
681

 
4,453

 
1,718

Cost of product sales
591

 
344

 
1,788

 
999

Total share-based compensation expense, pre-tax
11,876

 
6,355

 
32,139

 
14,684

Tax benefit from share-based compensation expense
(3,502
)
 

 
(9,850
)
 

Total share-based compensation expense, net of tax
$
8,374

 
$
6,355

 
$
22,289

 
$
14,684

Share Options
The table below shows the number of shares underlying options granted to purchase our ordinary shares, the weighted-average assumptions used in the Black-Scholes option pricing model and the resulting weighted-average grant date fair value of share options granted: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Shares underlying options granted (in thousands)
105

 
1,157

 
1,277

 
2,077

Grant date fair value
$
37.17

 
$
23.13

 
$
28.49

 
$
25.23

Black-Scholes option pricing model assumption information:
 
 
 
 
 
 
 
Volatility
57
%
 
64
%
 
59
%
 
64
%
Expected term (years)
4.4

 
4.2

 
4.4

 
4.6

Range of risk-free rates
1.0-1.4%

 
0.5-0.6%

 
0.5-1.4%

 
0.5-1.1%

Expected dividend yield
%
 
%
 
%
 
%
Restricted Stock Units
The table below shows the number of RSUs granted covering an equal number of our ordinary shares and the weighted-average grant date fair value of RSUs granted:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
RSUs granted (in thousands)
46

 
550

 
568

 
1,002

Grant date fair value
$
80.35

 
$
46.83

 
$
60.73

 
$
48.98

The fair value of RSUs is determined on the date of grant based on the market price of our ordinary shares as of that date. The fair value of RSUs is recognized as expense ratably over the vesting period of four years.
As of September 30, 2013, compensation cost not yet recognized related to unvested share options and RSUs was $58.3 million and $46.3 million, respectively, which is expected to be recognized over a weighted-average period of 2.7 years and 3.0 years, respectively.

10. Related Party Transactions
In March 2013, we entered into an underwriting agreement with an underwriter and certain selling shareholders, pursuant to which the selling shareholders sold to the underwriter 5.4 million of our ordinary shares, resulting in aggregate gross

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proceeds to the selling shareholders of approximately $314.4 million, before deducting underwriting discounts, commissions and other offering expenses. The selling shareholders included entities affiliated with certain members of our board of directors and one of our directors. We did not receive any proceeds from the sale of our ordinary shares by the selling shareholders in the offering and, consistent with our obligations under existing registration rights agreements with those shareholders, we paid expenses of approximately $0.5 million in connection with the offering.

11. Segment and Other Information
Our operating segment is reported in a manner consistent with the internal reporting provided to the chief operating decision maker or, CODM. Our CODM has been identified as our chief executive officer. We have determined that we operate in one business segment, which is the development and commercialization of specialty pharmaceutical products. The following table presents a summary of total revenues (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Xyrem® (sodium oxybate) oral solution
$
153,664

 
$
102,615

 
$
404,932

 
$
265,149

Erwinaze® (asparaginase Erwinia chrysanthemi)/Erwinase®
44,078

 
31,652

 
130,754

 
37,660

Prialt® (ziconotide) intrathecal infusion
11,046

 
5,413

 
20,726

 
20,491

Psychiatry
10,679

 
21,032

 
40,093

 
58,518

Other
10,919

 
13,418

 
35,097

 
16,767

Product sales, net
230,386

 
174,130

 
631,602

 
398,585

Royalties and contract revenues
1,774

 
1,385

 
5,047

 
3,691

Total revenues
$
232,160

 
$
175,515

 
$
636,649

 
$
402,276

The following table presents a summary of total revenues attributed to geographic sources (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
United States
$
209,299

 
$
159,947

 
$
577,484

 
$
375,658

Europe
19,332

 
12,164

 
46,769

 
21,252

All other
3,529

 
3,404

 
12,396

 
5,366

Total revenues
$
232,160

 
$
175,515

 
$
636,649

 
$
402,276

The following table presents a summary of the percentage of total revenues from customers that represented more than 10% of our total revenues: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Express Scripts
66
%
 
58
%
 
63
%
 
66
%
Accredo
16
%
 
14
%
 
17
%
 
7
%

The following table presents total long-lived assets by location (in thousands): 
 
September 30,
2013
 
December 31,
2012
Ireland
$
4,057

 
$
2,437

United States
7,394

 
4,451

Other
609

 
393

Total long-lived assets (1)
$
12,060

 
$
7,281

_________________________
(1)
    Long-lived assets consist of property and equipment.


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12. Restructuring
Termination Benefits
In June 2012, we initiated a restructuring plan to re-align certain support functions across the company following the Azur Merger and the EUSA Acquisition. In connection with this restructuring we incurred costs of severance for terminated employees as well as retention bonus costs for certain employees retained to assist with the transition process which was completed in June 2013. The one-time termination benefits were recorded over the remaining service period where employees were required to stay through their termination date to receive the benefits. We recorded costs related to these one-time termination benefits of $1.0 million in the nine months ended September 30, 2013 and $2.2 million in the nine months ended September 30, 2012, which are recorded within selling, general and administrative expenses in our condensed consolidated statements of income. To date, we have incurred one-time termination benefit costs under this plan of $3.8 million. We do not expect to incur any additional one-time termination benefit costs in connection with this plan.
Facility Closure Costs
In connection with our restructuring plan, we vacated our Langhorne, Pennsylvania facility in June 2013. We incurred facility closure costs of $0.4 million in the nine months ended September 30, 2013 for the remaining operating lease obligations related to this facility, net of estimated sublease rentals that could be reasonably obtained. Facility closure costs are recorded within selling, general and administrative expenses in our condensed consolidated statements of income. We do not expect to incur any additional facility closure costs in connection with this plan.

The following table summarizes the amounts related to restructuring for the nine months ended September 30, 2013 (in thousands):
 
Termination Benefits
 
Facility Closure Costs
 
Total
Balance at December 31, 2012
$
1,227

 
$

 
$
1,227

Costs incurred during the period
1,045

 
412

 
1,457

Cash payments
(2,272
)
 
(104
)
 
(2,376
)
Balance at September 30, 2013
$

 
$
308

 
$
308


The balance at September 30, 2013 was included within accrued liabilities in our condensed consolidated balance sheet.

13. Discontinued Operations
In 2012, we sold the women’s health business, a component of the acquired Azur Pharma business, to Meda Pharmaceuticals Inc. and Meda Pharma, Sàrl, or collectively, Meda. As part of the transaction, Meda purchased six women’s health products from us and offered positions to approximately 60 of our employees who directly supported the women’s health business. 
Net revenue and loss from discontinued operations were as follows (in thousands):
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Product sales, net
$
8,086

 
$
19,277

 
 
 
 
Loss from discontinued operations (1)
$
(386
)
 
$
(6,908
)
____________________
(1)
There was no income tax on the loss from discontinued operations.
    

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14. Income Taxes
Our income tax provision was $18.3 million and $59.6 million for the three and nine months ended September 30, 2013, respectively, compared to $12.9 million and $25.0 million for the same periods in 2012. Our effective tax rate from continuing operations was 19.6% and 27.0% for the three and nine months ended September 30, 2013, respectively, compared to 27.7% and 20.8% for the same periods in 2012. The decrease in the effective tax rate for the three months ended September 30, 2013 compared to the same period in 2012 was primarily due to estimated changes in the profit mix among the various tax jurisdictions in which we operate as well as higher taxes in 2012 related to acquisition restructuring. The increase in the effective tax rate for the nine months ended September 30, 2013 compared to the same period in 2012 was primarily due to a higher level of profits subject to U.S. federal and state income taxes in 2013, the release of a valuation allowance against substantially all of our U.S federal and state deferred tax assets in the fourth quarter of 2012 and a provision for income taxes on operations we acquired as part of the EUSA Acquisition. The effective tax rates for the 2013 periods were higher than the Irish statutory rate of 12.5% primarily due to income taxable at a rate higher than the Irish statutory rate, certain uncertain tax positions, current year losses in some jurisdictions for which no tax benefit is available, and various expenses not deductible for tax purposes, partially offset by benefits from certain originating income tax credits. Our income tax provision reflects our estimate of the effective tax rate expected to be applicable for the full year and we re-evaluate this estimate each quarter based on our forecasted tax expense for the full year. No provision for income tax in Ireland has been recognized on undistributed earnings of our foreign subsidiaries because we consider such earnings to be indefinitely reinvested.
Our deferred tax assets are composed primarily of U.S. federal and state net operating loss carryforwards and tax credit carryforwards, foreign net operating loss carryforwards and other temporary differences. We maintain a valuation allowance against certain U.S. state and foreign deferred tax assets. Each reporting period, we evaluate the need for a valuation allowance on our deferred tax assets by jurisdiction.
We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. As a result, we have established a liability for certain tax benefits which we judge may not be sustained upon examination. We file income tax returns in Ireland, in the U.S. (both at the federal level and in various state jurisdictions) and in certain other foreign jurisdictions, all of which typically have three to four tax years open at any point in time. Because of our net operating loss carryforwards and tax credit carryforwards, substantially all of our tax years remain open to federal, state, and foreign tax examination. Certain of our subsidiaries are currently under examination by the U.S. Internal Revenue Service and by the French tax authorities.

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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in Part II, Item 1A “Risk Factors” included elsewhere in this report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the “Cautionary Note Regarding Forward-Looking Statements” that appears at the end of this discussion. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
Throughout this report, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the registrant,” “we,” “us,” and “our” refer to Jazz Pharmaceuticals plc and its consolidated subsidiaries, including its predecessor Jazz Pharmaceuticals, Inc. All references to “Azur Pharma” are references to Jazz Pharmaceuticals plc (f/k/a Azur Pharma Public Limited Company) and its consolidated subsidiaries prior to the effective time of the Azur Merger on January 18, 2012. All references to “EUSA Pharma” are references to EUSA Pharma Inc. and its consolidated subsidiaries prior to the effective time of the EUSA Acquisition on June 12, 2012.
Overview
We are a specialty biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing innovative products that address unmet medical needs. Our strategy is to continue to create shareholder value by:
Growing sales of the existing products in our portfolio, including by identifying new growth opportunities;
Acquiring additional marketed specialty products or products close to regulatory approval to leverage our existing expertise and infrastructure; and
Pursuing targeted development of a pipeline of post-discovery specialty product candidates.
We have made substantial progress in the execution of our strategy in the first nine months of 2013. In the three and nine months ended September 30, 2013, our total net product sales increased by 32% and 58%, respectively, compared to the same periods in 2012. Sales of our lead product, Xyrem® (sodium oxybate) oral solution, increased 50% and 53% in the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. Sales of Erwinaze® (asparaginase Erwinia chrysanthemi), called Erwinase® in markets outside the United States, increased by 39% in the three months ended September 30, 2013 compared to the same period in 2012, and by 34%, on a pro forma basis, in the nine months ended September 30, 2013 compared to the same period in 2012. We expect total product sales will increase in 2013 over 2012 primarily due to growth in sales of Xyrem and Erwinaze.
In addition, in May 2013 we initiated purchases under a share repurchase program for up to $200 million of our ordinary shares. As of September 30, 2013, we had spent a total of $102.4 million to repurchase our ordinary shares under this program. For a more detailed discussion regarding our share repurchase program, see “Liquidity and Capital Resources” below.
Through the Azur Merger and the EUSA Acquisition, we significantly increased the number of products that we market and added products in therapeutic areas that were new to us, such as oncology and pain. We also enhanced our commercial platform, adding EUSA Pharma’s specialty commercial infrastructure in the United States and Europe and its international distribution network to our existing U.S. specialty product platform. Our marketed products address medical needs in the following therapeutic areas and include the following products:
Narcolepsy: Xyrem, the only product approved by the FDA for the treatment of both cataplexy and excessive daytime sleepiness in patients with narcolepsy;
Oncology: Erwinaze, a treatment for patients with ALL who have developed sensitivity to E. coli-derived asparaginase, and other products, including products for oncology supportive care;
Pain: Prialt® (ziconotide) intrathecal infusion, the only non-opioid intrathecal analgesic indicated for the management of severe chronic pain for patients who are intolerant of or refractory to other treatments; and
Psychiatry & Other: A portfolio of products, including FazaClo HD orally disintegrating clozapine tablets indicated for treatment-resistant schizophrenia. In addition, in February 2013 the FDA approved a new drug application for VersaclozTM (clozapine, USP) oral suspension for treatment-resistant schizophrenia, which we have exclusive rights to market in the United States. We plan to launch Versacloz in the first quarter of 2014.

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We also commercialize a portfolio of other products outside of the United States. These products are primarily in the oncology, critical care and oncology supportive care therapeutic areas and include Caphosol® (supersaturated calcium phosphate rinse), Collatamp (lyophilized collagen implant impregnated with the aminoglycoside antibiotic gentamicin), Fomepizole, Kidrolase (Escherichia coli L-asparaginase) and Xenazine® (tetrabenazine).
Our worldwide footprint includes headquarters in Dublin, Ireland and multiple offices in the United States, the United Kingdom and other countries in Europe, with approximately 700 employees in thirteen countries in October 2013. We intend that our operations will function as a platform for further growth, leveraging our commercial, medical and scientific experience to seek to maximize the potential of our existing products and expand our product portfolio through a combination of internal development, acquisition and in-licensing.
Our development pipeline projects currently include line extensions for existing products, the generation of additional clinical data for existing products and clinical development of new product candidates. These projects include:
Two clinical trials involving Erwinaze. The first is a clinical trial evaluating the intravenous administration of Erwinaze in North America, which has completed enrollment. Based on data collected in the study, which met the primary end point, we have recently submitted an amendment to the Erwinaze biological license application to the FDA to allow intravenous administration of Erwinaze. The second is a planned clinical trial to further evaluate the use of Erwinaze in adolescents and young adults with ALL who are hypersensitive to E. coli-derived asparaginase. We have identified a principal investigator for this study, are working with the investigator to finalize the study protocol and will begin the process of identifying and recruiting global study sites.
Development programs for two clinical product candidates. We are conducting a Phase 1 clinical trial in Europe of Asparec (mPEG-r-crisantaspase), a pegylated recombinant Erwinia asparaginase being developed for the treatment of patients with ALL with E. coli asparaginase hypersensitivity. In June 2013, the FDA granted Fast Track designation to the investigation of Asparec for ALL. The Fast Track program is designed to enable more frequent interactions with the FDA during drug development and to expedite the FDA’s review of a new drug candidate. We are working with investigators and will be reviewing our plans with the FDA for our first study of Asparec in children. We are also conducting our Phase 3 clinical trial in Europe of Leukotac (inolimomab), an anti-CD25 monoclonal antibody for the treatment of steroid-refractory acute graft vs. host disease.
Pre-clinical research and development work on JZP-386, a deuterium-modified analog of sodium oxybate, the active pharmaceutical ingredient in Xyrem. We licensed JZP-386 from Concert Pharmaceuticals, Inc. in February 2013, for potential use in patients with narcolepsy. We plan to make a regulatory filing by the end of 2013 that, if approved, would allow the first study of JZP-386 in humans.
Our research and development expenses will be higher in 2013 compared to 2012 due to an increase in development activities and due to the inclusion of a full year of expense from the acquired EUSA Pharma business.
During the remainder of 2013, we intend to continue to focus on executing our business strategy. We anticipate that we will continue to face a number of challenges and risks to our business and our ability to execute our strategy. For example, while we now have a more diversified product portfolio than in the past, our financial results remain significantly influenced by sales of Xyrem, which accounted for 67% and 64% of our net product sales in the three and nine months ended September 30, 2013, respectively, and 65% for the year ended December 31, 2012. As a result, we continue to place a high priority on seeking to maintain and increase sales of Xyrem in its approved indications, while remaining focused on ensuring the safe and effective use of the product. We are also focusing on the lifecycle management of Xyrem, including seeking to enhance and enforce our intellectual property rights.
Our ability to maintain or increase Xyrem product sales is subject to a number of risks and uncertainties, including those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. In particular, there are two ANDAs submitted to the FDA by third parties seeking to market generic versions of Xyrem. We have sued both third parties for infringement of our patents, and the litigation proceedings are ongoing. We cannot predict the timing or outcome of these proceedings. We expect that the approval of an ANDA that results in the launch of a generic version of Xyrem would have a material adverse effect on our business, financial condition, results of operations and growth prospects.
In addition, we are continuing our efforts on various regulatory matters, including working with the FDA on updated documents that we have submitted to the FDA on our Xyrem Risk Management Program, and potential modifications to this program. The updated documents are intended to conform to current formatting requirements for a REMS required by law, as well as to make other updates to the program and its documentation. We are engaged in ongoing communications with the FDA with respect to our REMS documents for Xyrem, but we have not reached agreement on certain significant terms. For example, we disagree with the FDA’s current position that, as part of the current REMS process, the Xyrem deemed REMS should be modified to enable the distribution of Xyrem through more than one pharmacy. We expect that final REMS documents for Xyrem will include modifications to, and/or requirements that are not currently implemented in, the Xyrem Risk Management Program. Any such modifications or additional requirements could potentially make it more difficult or

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expensive for us to distribute Xyrem, make it easier for future generic competitors to enter the market and/or negatively affect sales of Xyrem. We cannot predict whether, or on what terms, we will reach agreement with FDA on final REMS documents for Xyrem, whether we will initiate dispute resolution or other proceedings with FDA prior to finalizing the REMS documents, or, if any such proceedings are initiated, the outcome or timing thereof. In addition, the FDA is seeking to schedule an initial meeting with us and ANDA applicants to facilitate the development of a single shared system REMS for Xyrem (sodium oxybate). Also, we may face pressure to license or share our Xyrem Risk Management Program, which is the subject of multiple issued patents, or elements of it, with generic competitors. We cannot predict the outcome or impact on our business of any discussions with the FDA and/or any ANDA applicant with respect to the potential creation of a single shared system REMS for Xyrem, any future action that may be taken by a third party to seek to license or share our REMS, or the FDA’s response to a certification that a third party has been unable to obtain a license.
Our financial results are increasingly influenced by sales of our second largest product, Erwinaze, which have continued to grow. Sales of Erwinaze/Erwinase accounted for 19% and 21% of our net product sales in the three and nine months ended September 30, 2013, respectively. We seek to maintain and increase sales of Erwinaze, as well as to make Erwinaze more widely available through ongoing research and development activities. However, our ability to successfully and sustainably grow sales of Erwinaze is subject to a number of risks and uncertainties, including those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. In particular, a key challenge to our ability to maintain the current sales level and continue to increase sales is our need to assure sufficient supply of Erwinaze on a timely basis. We maintain very limited inventory of Erwinaze and, in 2013, our supply of Erwinaze was nearly completely absorbed by demand for the product. While we have been able to resolve potential supply shortages and meet product demand to date, if our continued efforts to avoid supply shortages are not successful, we could experience Erwinaze supply interruptions in the future, which could have a material adverse effect on our sales of and revenues from Erwinaze and limit our potential future maintenance and growth of the market for this product. In addition, while we continue to work with the manufacturer of Erwinaze to evaluate potential steps to increase the supply of Erwinaze over the longer term to address expected growing worldwide demand, our ability to increase sales of Erwinaze may be limited by our ability to obtain an increased supply of the product.
The implementation of our strategy is also subject to other challenges and risks specific to our business, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations. In addition to risks related to Xyrem and Erwinaze, other key challenges and risks that we face include risks and uncertainties related to:
the challenges of protecting our intellectual property rights;
delays or problems in the supply or manufacture of our products, particularly because we maintain limited inventories of certain products, including products for which our supply demands are growing, and we are dependent on single source suppliers to continue to meet our ongoing commercial needs;
the need to obtain appropriate pricing and reimbursement for our products in an increasingly challenging environment due to, among other things, the attention being paid to health care cost containment and other austerity measures in the United States and worldwide;
the ongoing regulation and oversight by the FDA, the DEA and non-U.S. regulatory agencies, including with respect to product labeling, requirements for distribution, obtaining sufficient DEA quotas where needed, marketing and promotional activities, adverse event reporting and product recalls or withdrawals;
the challenges of achieving and maintaining commercial success of our products, such as obtaining sustained acceptance of our products by patients, physicians and payors;
the difficulty and uncertainty of pharmaceutical product development and the uncertainty of clinical success and regulatory approval;
our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business; and
possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations.
All of these risks are discussed in greater detail, along with other risks, in Part II, Item 1A of this Quarterly Report on Form 10-Q.


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Results of Operations
The following discussions of our results of continuing operations exclude the results related to the women’s health business sold in 2012 (see “Loss from Discontinued Operations” below for more information). This business has been segregated from continuing operations and reflected as a discontinued operation for the 2012 periods. The following table presents revenues and expenses from continuing operations for the three and nine months ended September 30, 2013 and 2012, respectively (amounts in thousands): 
 
Three Months Ended
September 30,
 
Increase/
 
Nine Months Ended
September 30,
 
Increase/
 
2013
 
2012 (1)
 
(Decrease)
 
2013
 
2012 (1)
 
(Decrease)
Product sales, net
$
230,386

 
$
174,130

 
32
 %
 
$
631,602

 
$
398,585

 
58
%
Royalties and contract revenues
1,774

 
1,385

 
28
 %
 
5,047

 
3,691

 
37
%
Cost of product sales (excluding amortization of acquired developed technologies)
24,252

 
32,629

 
(26
)%
 
76,503

 
52,662

 
45
%
Selling, general and administrative
74,970

 
60,924

 
23
 %
 
223,004

 
162,505

 
37
%
Research and development
12,814

 
6,920

 
85
 %
 
32,811

 
13,200

 
149
%
Intangible asset amortization
19,564

 
19,742

 
(1
)%
 
58,518

 
43,444

 
35
%
Interest expense, net
6,202

 
7,750

 
(20
)%
 
20,743

 
9,199

 
125
%
Foreign currency loss
614

 
1,099

 
(44
)%
 
728

 
1,357

 
(46
)%
Loss on extinguishment and modification of debt

 

 
N/A(2)

 
3,749

 

 
N/A(2)

Income tax provision
18,335

 
12,856

 
43
 %
 
59,574

 
24,966

 
139
%
 _________________________
(1)
Our financial results include the financial results of the historic Azur Pharma and EUSA Pharma businesses since the completion of the Azur Merger on January 18, 2012 and the EUSA Acquisition on June 12, 2012.
(2)
Comparison to prior period is not meaningful.
Revenues
The following table presents product sales, royalties and contract revenues, and total revenues for the three and nine months ended September 30, 2013 and 2012, respectively (amounts in thousands):
 
Three Months Ended
September 30,
 
Increase/
 
Nine Months Ended
September 30,
 
Increase/
 
2013
 
2012
 
(Decrease)
 
2013
 
2012
 
(Decrease)
Xyrem
$
153,664

 
$
102,615

 
50
%
 
$
404,932

 
$
265,149

 
53
%
Erwinaze/Erwinase
44,078

 
31,652

 
39
%
 
130,754

 
37,660

 
247
%
Prialt
11,046

 
5,413

 
104
%
 
20,726

 
20,491

 
1
%
Psychiatry
10,679

 
21,032

 
(49
)%
 
40,093

 
58,518

 
(31
)%
Other
10,919

 
13,418

 
(19
)%
 
35,097

 
16,767

 
109
%
Product sales, net
230,386

 
174,130

 
32
%
 
631,602

 
398,585

 
58
%
Royalties and contract revenues
1,774

 
1,385

 
28
%
 
5,047

 
3,691

 
37
%
Total revenues
$
232,160

 
$
175,515

 
32
%
 
$
636,649

 
$
402,276

 
58
%
Product Sales, Net
Xyrem product sales increased in the three and nine months ended September 30, 2013 compared to the same periods in 2012, primarily due to a higher average net selling price in the 2013 periods and, to a lesser extent, increases in sales volume.  Price increases were instituted in 2012, February 2013 and July 2013 based on market analysis. Xyrem product sales volumes increased by 13% in both the three and nine months ended September 30, 2013 compared to the same periods in 2012. The sales volume increases were driven by an increase in the average number of patients on Xyrem and by a greater number of Xyrem patients who refilled their Xyrem prescriptions on schedule and who remained on therapy, which we believe resulted from our efforts to increase physician knowledge about Xyrem and to improve patient support services. In addition, we have seen higher growth in sales volume from new or previously infrequent physician prescribers who treat narcolepsy. We acquired

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Erwinaze/Erwinase in the EUSA Acquisition in June 2012. Erwinaze/Erwinase product sales increased by 39% in the three months ended September 30, 2013 compared to the same period in 2012, primarily due to an increase in sales volume. Erwinaze/Erwinase product sales increased in the nine months ended September 30, 2013 compared to the same period in 2012, primarily due to the inclusion of product sales for the full reporting period in 2013. On a pro forma basis, Erwinaze/Erwinase product sales increased by 34% in the nine months ended September 30, 2013 compared to the same period in 2012, primarily due to an increase in sales volume. The sales volume increases in both periods were driven primarily by a growth in new treatment sites prescribing Erwinaze as well as existing treatment sites identifying additional ALL patients with hypersensitivity to E. coli-derived asparaginase. Prialt product sales increased in the three months ended September 30, 2013 compared to the same period in 2012, primarily due to a $5.7 million sale to our European distributor in the three months ended September 30, 2013. During 2012, the sale to our European distributor occurred during the three months ended March 31, 2012. Psychiatry product sales decreased in the three and nine months ended September 30, 2013 compared to the same periods in 2012, primarily due to the launch of a generic version of Luvox CR in March 2013 and, to a lesser extent, the continued impact of the sale of the authorized generic product for FazaClo LD. Total product sales will be higher in 2013 than in 2012 primarily due to growth in sales of Xyrem and Erwinaze, partially offset by decreases in sales of some of our other products.
Royalties and Contract Revenues
Royalties and contract revenues increased in the nine months ended September 30, 2013 compared to the same period in 2012 due to royalties from the acquired EUSA Pharma business. We expect royalty and contract revenue to increase slightly in 2013 as compared to 2012 primarily due to the inclusion of a full year of royalties from the acquired EUSA Pharma business.

Cost of Product Sales
Cost of product sales decreased in the three months ended September 30, 2013 compared to the same period in 2012 due to a decrease in acquisition accounting inventory fair value step-up adjustments of $9.8 million. Cost of product sales increased in the nine months ended September 30, 2013 compared to the same period in 2012, primarily due to increased sales, partially offset by a decrease in acquisition accounting inventory fair value step-up adjustments of $11.5 million. Gross margin as a percentage of net product sales was 89.5% and 87.9% in the three and nine months ended September 30, 2013, respectively, compared to 81.3% and 86.8% for the same periods in 2012, respectively. The increase in our gross margin percentages was primarily due to a decrease in acquisition accounting inventory fair value step-up adjustments of $9.8 million and $11.5 million in the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. We expect our gross margin percentage to increase slightly in 2013 compared to 2012 primarily driven by a decrease in the amount of acquisition accounting inventory fair value step-up adjustments and also the different product mix in 2013.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were higher in the three and nine months ended September 30, 2013 compared to the same periods in 2012, primarily due to increases in salary and benefit related expenses (including share-based compensation expense) of $6.9 million and $37.1 million, respectively, driven primarily by the expansion of our business; increases in the change in fair value of the contingent consideration payable of $4.1 million and $11.8 million, respectively; increases in sales and promotional expenses of $1.8 million and $9.5 million, respectively; and increases in facility and maintenance expenses of $1.5 million and $6.0 million, respectively; partially offset by decreases in transaction, integration and restructuring expenses of $3.0 million and $16.6 million, respectively. Selling, general and administrative expenses will be higher in 2013 than in 2012 due to the inclusion of a full year of expense with respect to the acquired EUSA Pharma business, increased headcount to support our larger, global organization and an increase in direct marketing spend on key products.
Research and Development Expenses
Research and development expenses consist primarily of personnel expenses, costs related to clinical studies and outside services and other research and development costs. Personnel expenses relate primarily to salaries, benefits and share-based compensation. Clinical study and outside services costs relate primarily to clinical studies performed by clinical research organizations, materials and supplies and other third-party fees. Other research and development expenses primarily include overhead allocations consisting of various support and facilities-related costs. We do not track fully-burdened research and development expenses on a project-by-project basis. We manage our research and development expenses by identifying the research and development activities that we anticipate will be performed during a given period and then prioritizing efforts based on our assessment of what development activities are important to our business and have a reasonable probability of success, and by dynamically allocating resources accordingly. We also continually review our development pipeline projects and the status of their development and, as necessary, reallocate resources among our development pipeline projects in a manner that we believe will best support the future growth of our business.

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The following table provides a breakout of our research and development expenses by major categories of expense (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Personnel expenses
$
5,989

 
$
3,083

 
$
15,328

 
$
6,567

Clinical studies and outside services
5,908

 
3,394

 
15,142

 
5,741

Other
917

 
443

 
2,341

 
892

Total
$
12,814

 
$
6,920

 
$
32,811

 
$
13,200

Research and development expenses increased in the three and nine months ended September 30, 2013 compared to the same periods in 2012 by $5.9 million and $19.6 million, respectively, primarily due to increased clinical studies and outside services costs of $2.5 million and $9.4 million, respectively, and increased personnel expenses of $2.9 million and $8.8 million, respectively. Clinical studies and outside services expenses in the three and nine months ended September 30, 2013 included upfront license fees of $1.0 million and $5.0 million, respectively, with no similar expense in the same periods in 2012. Clinical studies and outside services costs increased in the three and nine months ended September 30, 2013 compared to the same periods in 2012, primarily due to an increase in costs incurred to develop new product candidates that we acquired in the EUSA Acquisition.
A discussion of the risks and uncertainties with respect to our research and development activities, including completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part II, Item 1A of this report.
Intangible Asset Amortization
We acquired finite-lived intangible assets in connection with the Azur Merger and the EUSA Acquisition that are expected to be amortized over their useful economic lives of two to 15 years. Amortization expense for the three months ended September 30, 2013 was consistent with that in the same period in 2012. The increase in amortization expense in the nine months ended September 30, 2013 compared to the same period in 2012 was primarily due to amortization relating to the intangible assets acquired in the EUSA Acquisition. Amortization expense will be higher in 2013 than in 2012 due to the inclusion of a full year of amortization expense related to the intangible assets we acquired in the EUSA Acquisition.
Interest Expense, Net
Interest expense, net was lower in the three months ended September 30, 2013 compared to the same period in 2012 due to a decrease in interest rates associated with our long-term debt, partially offset by an increase in the principal balance outstanding. Interest expense, net was higher in the nine months ended September 30, 2013 compared to the same period in 2012 due to the inclusion of interest expense in 2013 on the original term loans we obtained under the original credit agreement in June 2012. We amended the credit agreement and refinanced the original term loans in June 2013. As of September 30, 2013, $555.8 million principal amount was outstanding on our new term loans under the amended credit agreement and the interest rate on the new term loans was 3.5%. Interest expense will be higher in 2013 than in 2012 due to a higher average debt balance.
Foreign Currency Loss
Foreign currency loss in the three and nine months ended September 30, 2013 related to the translation of foreign currency net monetary assets, including intercompany balances.
Loss on Extinguishment and Modification of Debt
We recorded a loss of $3.7 million in the nine months ended September 30, 2013 in connection with the refinancing of the original term loans, which was comprised of $2.7 million related to the expensing of unamortized deferred financing costs and unamortized original issue discount associated with extinguished debt and $1.0 million related to new third party fees associated with modified debt.

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Income Tax Provision
Our income tax provision was $18.3 million and $59.6 million for the three and nine months ended September 30, 2013, respectively, compared to $12.9 million and $25.0 million for the same periods in 2012. Our effective tax rate from continuing operations was 19.6% and 27.0% for the three and nine months ended September 30, 2013 compared to 27.7% and 20.8% for the same periods in 2012. The decrease in the effective tax rate for the three months ended September 30, 2013 compared to the same period in 2012 was primarily due to estimated changes in the profit mix among the various tax jurisdictions in which we operate as well as higher taxes in 2012 related to acquisition restructuring. The increase in the effective tax rate for the nine months ended September 30, 2013 compared to the same period in 2012 was primarily due to a higher level of profits subject to U.S. federal and state income taxes in 2013, the release of a valuation allowance against substantially all of our U.S federal and state deferred tax assets in the fourth quarter of 2012 and a provision for income taxes on operations we acquired as part of the EUSA Acquisition. The effective tax rates for the 2013 periods were higher than the Irish statutory rate of 12.5% primarily due to income taxable at a rate higher than the Irish statutory rate, certain uncertain tax positions, current year losses in some jurisdictions for which no tax benefit is available, and various expenses not deductible for tax purposes, partially offset by benefits from certain originating income tax credits. Our income tax provision reflects our estimate of the effective tax rate expected to be applicable for the full year and we re-evaluate this estimate each quarter based on our forecasted tax expense for the full year. No provision for income tax in Ireland has been recognized on undistributed earnings of our foreign subsidiaries because we consider such earnings to be indefinitely reinvested.
Loss from Discontinued Operations
In 2012, we sold our women’s health business. Net revenue and loss from discontinued operations were as follows (in thousands):
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Product sales, net
$
8,086

 
$
19,277

 
 
 
 
Loss from discontinued operations (1)
$
(386
)
 
$
(6,908
)
_________________________
(1)
There was no income tax on the loss from discontinued operations.

Non-GAAP Financial Measures
To supplement our financial results presented on a GAAP basis, we use certain non-GAAP, also referred to as adjusted or non-GAAP adjusted, financial measures as shown in the table and footnotes below. We believe that each of these non-GAAP financial measures is helpful in understanding our past financial performance and potential future results, particularly in light of the effect of various acquisition and divestiture transactions effected by us during 2012. They are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses these supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. Compensation of our executives is based in part on the performance of our business based on certain of these non-GAAP financial measures. In addition, we believe that the presentation of these non-GAAP financial measures is useful to investors because it enhances the ability of investors to compare our results from period to period and allows for greater transparency with respect to key financial metrics we use in making operating decisions, and also because our investors and analysts regularly use them to model and track our financial performance. Investors should note that these non-GAAP financial measures are not prepared under any comprehensive set of accounting rules or principles and do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Investors should also note that these non-GAAP financial measures have no standardized meaning prescribed by GAAP and, therefore, have limits in their usefulness to investors. In addition, from time to time in the future there may be other items that we may exclude for the purposes of our non-GAAP financial measures; likewise, we may in the future cease to exclude items that we have historically excluded for the purpose of our non-GAAP financial measures. Because of the non-standardized definitions, the non-GAAP financial measures used in this report may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by our competitors and other companies. Adjusted net income measures exclude from GAAP income from continuing operations, as applicable, intangible asset amortization, share-based compensation expense, acquisition accounting inventory fair value step-up adjustments, transaction and integration costs, restructuring charges, change in fair value of contingent consideration, upfront license fees, depreciation expense, loss on extinguishment and modification of debt and other non-cash expense, and adjust the income tax provision to the estimated amount of taxes payable in cash.

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Reconciliations of GAAP reported income from continuing operations to non-GAAP adjusted net income and related per share amounts are as follows (in thousands, except per share amounts): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
GAAP reported income from continuing operations
$
75,409

 
$
33,595

 
$
161,019

 
$
94,943

Intangible asset amortization
19,564

 
19,742

 
58,518

 
43,444

Share-based compensation expense
11,876

 
6,355

 
32,139

 
14,684

Acquisition accounting inventory fair value step-up
512

 
10,336

 
3,143

 
14,676

Transaction and integration costs
113

 
1,503

 
1,846

 
17,692

Restructuring charges

 
1,633

 
1,457

 
2,180

Change in fair value of contingent consideration
5,000

 
900

 
12,900

 
1,100

Upfront license fees
988

 

 
4,988

 

Depreciation
895

 

 
2,065

 

Loss on extinguishment and modification of debt

 

 
3,749

 

Other non-cash expense
1,083

 
1,261

 
3,505

 
1,569

Income tax adjustments (1)
(6,043
)
 
3,263

 
(3,198
)
 
6,160

Non-GAAP adjusted net income (2)
$
109,397

 
$
78,588

 
$
282,131

 
$
196,448

 
 
 
 
 
 
 
 
GAAP reported income from continuing operations per diluted share
$
1.23

 
$
0.56

 
$
2.62