Document
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 June 30, 2016
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)
 

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 August 2, 2016, 60,532,109 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 JUNE 30, 2016

INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
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, Erwinaze® (asparaginase Erwinia chrysanthemi), Erwinase®, Defitelio® (defibrotide sodium), Defitelio® (defibrotide), Prialt® (ziconotide) intrathecal infusion, CombiPlex® and VyxeosTM. This report also includes trademarks, service marks and trade names of other companies. Trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.



2

Table of Contents


PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
867,966

 
$
988,785

Investments
48,409

 

Accounts receivable, net of allowances
231,837

 
209,685

Inventories
33,291

 
19,451

Prepaid expenses
23,143

 
20,699

Other current assets
26,244

 
19,047

Total current assets
1,230,890

 
1,257,667

Property and equipment, net
93,476

 
85,572

Intangible assets, net
1,300,761

 
1,185,606

Goodwill
661,845

 
657,139

Deferred tax assets, net, non-current
117,507

 
122,863

Deferred financing costs
6,610

 
7,209

Other non-current assets
37,005

 
27,548

Total assets
$
3,448,094

 
$
3,343,604

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
28,406

 
$
21,807

Accrued liabilities
157,622

 
164,070

Current portion of long-term debt
37,500

 
37,587

Income taxes payable
1,761

 
1,808

Deferred revenue
1,432

 
1,370

Total current liabilities
226,721

 
226,642

Deferred revenue, non-current
3,161

 
3,721

Long-term debt, less current portion
1,141,652

 
1,150,857

Deferred tax liability, net, non-current
289,906

 
294,485

Other non-current liabilities
94,196

 
69,253

Commitments and contingencies (Note 8)

 


Shareholders’ equity:
 
 
 
Ordinary shares
6

 
6

Non-voting euro deferred shares
55

 
55

Capital redemption reserve
472

 
471

Additional paid-in capital
1,617,069

 
1,562,900

Accumulated other comprehensive loss
(249,988
)
 
(267,472
)
Retained earnings
324,844

 
302,686

Total shareholders’ equity
1,692,458

 
1,598,646

Total liabilities and shareholders’ equity
$
3,448,094

 
$
3,343,604





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

3

Table of Contents


JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Product sales, net
$
379,110

 
$
332,106

 
$
713,026

 
$
639,141

Royalties and contract revenues
2,051

 
1,641

 
4,145

 
3,909

Total revenues
381,161

 
333,747

 
717,171

 
643,050

Operating expenses:
 
 
 
 

 
 
Cost of product sales (excluding amortization of intangible assets)
23,980

 
21,813

 
47,419

 
50,111

Selling, general and administrative
122,618

 
107,132

 
251,383

 
219,520

Research and development
39,091

 
27,833

 
70,343

 
55,014

Acquired in-process research and development

 

 
8,750

 

Intangible asset amortization
26,737

 
23,668

 
49,379

 
48,345

Total operating expenses
212,426

 
180,446

 
427,274

 
372,990

Income from operations
168,735

 
153,301

 
289,897

 
270,060

Interest expense, net
(12,121
)
 
(15,812
)
 
(24,313
)
 
(32,057
)
Foreign currency gain (loss)

 
(1,914
)
 
(819
)
 
331

Loss on extinguishment and modification of debt

 
(16,815
)
 

 
(16,815
)
Income before income tax provision
156,614

 
118,760

 
264,765

 
221,519

Income tax provision
45,332

 
30,647

 
79,362

 
62,706

Net income
111,282

 
88,113

 
185,403

 
158,813

Net loss attributable to noncontrolling interests, net of tax

 
(1
)
 

 
(1
)
Net income attributable to Jazz Pharmaceuticals plc
$
111,282

 
$
88,114

 
$
185,403

 
$
158,814

 
 
 
 
 
 
 
 
Net income attributable to Jazz Pharmaceuticals plc per ordinary share:
 
 
 
 
 
 
 
Basic
$
1.84

 
$
1.44

 
$
3.05

 
$
2.60

Diluted
$
1.80

 
$
1.40

 
$
2.98

 
$
2.52

Weighted-average ordinary shares used in per share calculations - basic
60,499

 
61,190

 
60,821

 
60,998

Weighted-average ordinary shares used in per share calculations - diluted
61,833

 
63,090

 
62,154

 
63,028









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

4

Table of Contents


JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
111,282

 
$
88,113

 
$
185,403

 
$
158,813

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(27,704
)
 
30,544

 
17,484

 
(125,953
)
Other comprehensive income (loss)
(27,704
)
 
30,544

 
17,484

 
(125,953
)
Total comprehensive income
83,578

 
118,657

 
202,887

 
32,860

Comprehensive income (loss) attributable to noncontrolling interests, net of tax

 
1

 

 
(9
)
Comprehensive income attributable to Jazz Pharmaceuticals plc
$
83,578

 
$
118,656

 
$
202,887

 
$
32,869























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

5

Table of Contents


JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Six Months Ended
June 30,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
185,403

 
$
158,813

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Intangible asset amortization
49,379

 
48,345

Share-based compensation
49,616

 
44,119

Depreciation
5,044

 
4,595

Acquired in-process research and development
8,750

 

Loss on disposal of property and equipment
37

 
46

Excess tax benefit from share-based compensation
(3,503
)
 

Deferred income taxes
(1,052
)
 
(16,873
)
Provision for losses on accounts receivable and inventory
1,688

 
610

Loss on extinguishment and modification of debt

 
16,815

Amortization of debt discount and deferred financing costs
10,776

 
12,048

Other non-cash transactions
967

 
(4,110
)
Changes in assets and liabilities:

 

Accounts receivable
(22,158
)
 
(8,479
)
Inventories
(15,050
)
 
(1,849
)
Prepaid expenses and other current assets
(10,335
)
 
(13,676
)
Other long-term assets
(4,396
)
 
(6,658
)
Accounts payable
6,224

 
2,129

Accrued liabilities
(5,589
)
 
(18,135
)
Income taxes payable
3,398

 
6,497

Deferred revenue
(476
)
 
(382
)
Other non-current liabilities
14,587

 
13,271

Net cash provided by operating activities
273,310

 
237,126

Investing activities
 
 
 
Purchases of property and equipment
(4,173
)
 
(27,432
)
Acquisition of in-process research and development
(8,750
)
 

Acquisition of investments
(53,484
)
 

Acquisition of intangible assets
(150,000
)
 

Net proceeds from sale of business

 
33,703

Net cash provided by (used in) investing activities
(216,407
)
 
6,271

Financing activities
 
 
 
Net proceeds from issuance of debt

 
901,003

Proceeds from employee equity incentive and purchase plans
14,611

 
26,730

Repayments of long-term debt
(19,282
)
 
(895,402
)
Payment of employee withholding taxes related to share-based awards
(14,278
)
 
(16,679
)
Share repurchases
(163,244
)
 
(11,690
)
Excess tax benefit from share-based compensation
3,503

 

Net cash provided by (used in) financing activities
(178,690
)
 
3,962

Effect of exchange rates on cash and cash equivalents
968

 
(9,758
)
Net increase (decrease) in cash and cash equivalents
(120,819
)
 
237,601

Cash and cash equivalents, at beginning of period
988,785

 
684,042

Cash and cash equivalents, at end of period
$
867,966

 
$
921,643






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

6

Table of Contents


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

1. The Company and Summary of Significant Accounting Policies
Jazz Pharmaceuticals plc is an international biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing meaningful products that address unmet medical needs.
We have a diverse portfolio of products and product candidates, with a focus in the areas of sleep and hematology/oncology. Our lead marketed products are:
Xyrem® (sodium oxybate) oral solution, the only product approved by the U.S. Food and Drug Administration, or FDA, for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in patients with narcolepsy;
Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia, or ALL, who have developed hypersensitivity to E. coli-derived asparaginase; and
Defitelio® (defibrotide sodium), a product approved in the U.S. for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome, or SOS, with renal or pulmonary dysfunction following hematopoietic stem cell transplantation, or HSCT, and in Europe (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children undergoing HSCT therapy.
Our strategy is to create shareholder value by:
Growing sales of the existing products in our portfolio, including by identifying and investing in growth opportunities such as new treatment indications;
Acquiring clinically meaningful and differentiated products that are on the market or product candidates that are in late-stage development; and
Pursuing targeted development of post-discovery differentiated product candidates.
We apply a disciplined approach to allocating our resources between investments in our current commercial and development portfolio and acquisitions or in-licensing of new assets.
On July 12, 2016, we completed the acquisition of Celator Pharmaceuticals, Inc., or Celator, which acquisition we refer to in this report as the Celator Acquisition. The aggregate consideration for the Celator Acquisition was approximately $1.5 billion. The Celator Acquisition broadened our hematology/oncology portfolio with the acquisition of worldwide development and commercialization rights to VyxeosTM, an investigational product in development as a treatment for acute myeloid leukemia, or AML. In addition, the Celator Acquisition provides us with Celator’s proprietary technology platform, CombiPlex®, which enables the rational design and rapid evaluation of optimized combinations of anti-cancer drugs. Please see Note 14 for additional information regarding the Celator Acquisition.
On July 12, 2016, we entered into an amendment to our existing 2015 credit agreement, which we refer to in this report as our amended credit agreement, that provides for a revolving credit facility of $1.25 billion, which replaced our prior revolving credit facility of $750.0 million, and a $750.0 million term loan facility. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. The maturity date of both our revolving credit facility and term loan facility was extended from June 2020 to July 2021.
In June 2016, we received FDA approval of our manufacturing and development facility in Ireland. We plan to use this facility for the manufacture of Xyrem and development-stage products.
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. Throughout this report, all references to “ordinary shares” refer to Jazz Pharmaceuticals plc’s ordinary shares.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared following the requirements of the U.S. 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 U.S. GAAP, can be condensed or omitted. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

7

Table of Contents


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 six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016, for any other interim period or for any future period.
These condensed consolidated financial statements include the accounts of Jazz Pharmaceuticals plc and our subsidiaries, and intercompany transactions and balances have been eliminated.
Adoption of New Accounting Standard
Effective January 1, 2016, we adopted Accounting Standards Update, or ASU, No. 2015-03 “Interest - Imputation of Interest”, or ASU No. 2015-03. ASU No. 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability instead of as an asset. The standard requires retrospective application. The adoption of ASU No. 2015-03 resulted in a $16.1 million reduction of both deferred financing costs and long-term debt, less current portion in our condensed consolidated balance sheet as of December 31, 2015.
Significant Risks and Uncertainties
Our financial results remain significantly influenced by sales of Xyrem. In the three and six months ended June 30, 2016, net product sales of Xyrem were $281.0 million and $530.5 million, respectively, which represented 74% of total net product sales in both periods. Our ability to maintain or increase sales of Xyrem in its approved indications is subject to a number of risks and uncertainties, including the potential introduction of generic competition or an alternative sodium oxybate or other product that competes with Xyrem; changed or increased regulatory restrictions or regulatory actions by the FDA; our suppliers’ ability to obtain sufficient quotas from the U.S. Drug Enforcement Administration, or DEA; any supply, manufacturing or distribution problems arising with any of our suppliers or distributors, all of whom are sole source providers for us; any increase in pricing pressure from or restrictions on reimbursement imposed by third party payors; changes in healthcare laws and policy; continued acceptance of Xyrem by physicians and patients; changes to our label, including new safety warnings or changes to our boxed warning, that further restrict how we market and sell Xyrem; and operational disruptions at the central pharmacy or any failure to comply with our risk evaluation and mitigation strategy, or REMS, obligations to the satisfaction of the FDA.
Seven companies have sent us notices that they have filed abbreviated new drug applications, or ANDAs, with the FDA seeking approval to market a generic version of Xyrem. We have filed lawsuits against each of these companies seeking to prevent the introduction of a generic version of Xyrem that would infringe our patents. In the second quarter of 2016, we settled two of these lawsuits, granting the settling ANDA applicants a license to manufacture, market and sell their generic versions of Xyrem on or after December 31, 2025, or earlier depending on the occurrence of certain events. The court in which our ANDA litigation is ongoing has determined that all of our pending patent litigation against the first ANDA filer, Roxane Laboratories, Inc., or Roxane, will be consolidated for trial and set trial in this consolidated case for the second quarter of 2017.  We cannot predict the timing or outcome of this or the other ANDA litigation proceedings. Certain ANDA filers have also filed petitions for inter partes review, or IPR, by the Patent Trial and Appeal Board, or the PTAB, of the U.S. Patent and Trademark Office, or USPTO, with respect to the validity of certain distribution, method of use and formulation patents covering Xyrem. The PTAB instituted IPR trials with respect to patents and patent claims that are the subject of certain of these petitions. In July 2016, the PTAB issued final decisions that the claims of six distribution system patents that were the subject of certain IPR trials are unpatentable; as a result, if the Court of Appeals for the Federal Circuit upholds those decisions or if the time for appeal expires, these claims will be canceled. For a description of these matters, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q. We cannot predict whether additional post-grant patent review challenges will be filed by any of the ANDA filers or any other entity, the outcome of any pending IPR or other proceeding, the outcome of any appeal of the July 2016 IPR decisions with respect to six patents covering the distribution system for Xyrem, whether the PTAB will institute any petitioned IPR proceeding that has not yet been instituted, or the impact any IPR or other proceeding might have on ongoing ANDA litigation proceedings or other aspects of our Xyrem business. We expect that the approval of an ANDA that results in the launch of a generic version of Xyrem, or the approval and launch of other sodium oxybate products that compete with Xyrem, would have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Approval of an ANDA with respect to a generic version of Xyrem will require a REMS, which may be either a single shared REMS with Xyrem or a separate REMS with differing but comparable aspects of elements to assure safe use, or ETASU, in the approved Xyrem REMS. We and the ANDA applicants had interactions with respect to developing a single shared REMS for several years. The ANDA applicants are not currently engaging in single shared REMS discussions with us, but we are seeking to continue the interactions with the goal of developing a single shared REMS. However, we cannot predict whether, or to what extent, our interactions with the ANDA applicants will resume or whether we will develop a single shared

8

Table of Contents


REMS with the ANDA applicants. We are aware that, separate from the discussions with us, the FDA and ANDA applicants have exchanged communications regarding a REMS for sodium oxybate. If we and the ANDA applicants do not develop a single shared REMS, or we do not license or share intellectual property pertinent to our Xyrem REMS with generic competitors within a time frame or on terms that the FDA considers acceptable, the FDA may assert that its waiver authority permits it to approve the ANDA of one or more generic competitors with a separate REMS that differs in some aspects from our approved Xyrem REMS. We also may face pressure to develop a single shared REMS with potential generic competitors for Xyrem that is different from the approved Xyrem REMS or to license or share intellectual property pertinent to the Xyrem REMS, or elements of the Xyrem REMS, including proprietary data required for safe distribution of sodium oxybate, with generic competitors. We cannot predict the outcome or impact on our business of any future action that we may take with respect to the development of a single shared REMS for sodium oxybate, licensing or sharing intellectual property pertinent to our Xyrem REMS or elements of the Xyrem REMS, or the FDA’s response to a request by one or more ANDA applicants for a waiver of the requirement for a single shared REMS, including in connection with a certification that the applicant had been unable to obtain a license. The FDA’s response to any such request could include approval of one or more ANDAs. In addition, the Federal Trade Commission, or FTC, other governmental authorities or others could claim or determine that we are using the Xyrem REMS in an anticompetitive manner (including in light of the FDA’s statement in the Xyrem REMS approval letter that the Xyrem REMS could be used in an anticompetitive manner inconsistent with applicable provisions of the Federal Food, Drug and Cosmetic Act, or FDCA) or have engaged in other anticompetitive practices.
In August 2015, we implemented the final Xyrem REMS, which was approved by the FDA in February 2015, and we have submitted and expect to continue to submit ongoing assessments as set forth in the FDA’s Xyrem REMS approval letter. The process under which enrolled patients receive Xyrem is complex, and we have transitioned most prescribers and patients to the final Xyrem REMS process and documentation requirements. We have notified the FDA regarding our anticipated timing for completing the transition of the remaining prescribers and patients and that we will continue to work with the remaining prescribers and patients to complete the transition. However, we cannot guarantee that we will be able to transition the remaining prescribers and patients to the final Xyrem REMS, that our notification and ongoing assessments will be satisfactory to the FDA or that the Xyrem REMS will satisfy the FDA’s expectations in its evaluation of the Xyrem REMS on an ongoing basis. Any failure to comply with the REMS obligations could result in enforcement action by the FDA; lead to changes in our Xyrem REMS obligations; negatively affect sales of Xyrem; result in additional costs and expenses for us; and/or take a significant amount of time, any of which could materially and adversely affect our business, financial condition, results of operations and growth prospects.
Obtaining and maintaining appropriate reimbursement for Xyrem in the U.S. is increasingly challenging due to, among other things, the attention being paid to healthcare cost containment and prescription drug pricing, pricing pressure from third party payors and increasingly restrictive reimbursement conditions being imposed by third party payors. In this regard, we have experienced and expect to continue to experience increasing pressure from third party payors to agree to discounts, rebates or other pricing terms for Xyrem. Any such restrictive pricing terms or additional reimbursement conditions could have a material adverse effect on our Xyrem revenues. In addition, drug pricing by pharmaceutical companies has recently come under close scrutiny, particularly with respect to companies that have increased the price of products after acquiring those products from other companies. We expect that healthcare policies and reforms intended to curb healthcare costs will continue to be proposed, which could limit the prices that we charge for our products, including Xyrem, limit our commercial opportunity and/or negatively impact revenues from sales of our products. Also, price increases on Xyrem and our other products, and negative publicity regarding pricing and price increases generally, whether with respect to our products or products distributed by other pharmaceutical companies, could negatively affect market acceptance of Xyrem and our other products.
In the three and six months ended June 30, 2016, sales of our second largest product, Erwinaze/Erwinase (which we refer to in this report as Erwinaze unless otherwise indicated or the context otherwise requires), were $49.7 million and $100.9 million, respectively, which represented 13% and 14% of total net product sales, respectively. We seek to maintain and increase sales of Erwinaze, as well as to make Erwinaze more widely available, through ongoing sales and marketing and research and development activities. However, a significant challenge to our ability to maintain current sales levels and to increase sales is our extremely limited inventory of Erwinaze and our need to avoid supply disruptions due to capacity constraints, production delays, quality or regulatory challenges or other manufacturing difficulties. Erwinaze is licensed from and manufactured by a single source, Porton Biopharma Limited, or PBL. The current manufacturing capacity for Erwinaze is completely absorbed by demand for the product. We are working with PBL to evaluate potential expansion of its production capacity to increase the supply of Erwinaze over the longer term. As a consequence of constrained manufacturing capacity, we have had an extremely limited or no ability to build product inventory levels that can be used to absorb disruptions to supply resulting from quality, regulatory or other issues, and we have experienced product quality, manufacturing and inventory challenges that have resulted in disruptions in our ability to supply certain markets and caused us to implement batch-specific, modified product use instructions. We expect that we will continue to experience inventory and supply challenges, which may result in temporary disruptions in our ability to supply certain markets, including the U.S., from time to time. If capacity

9

Table of Contents


constraints or supply disruptions continue, whether as a result of continued quality or other manufacturing issues, regulatory issues or otherwise, we may be unable to build a desired excess level of product inventory, our ability to supply the market may continue to be compromised, physicians’ decisions to use Erwinaze in the future may be negatively impacted and our sales of and revenues from Erwinaze, our potential future maintenance and growth of the market for this product, and/or our business, financial condition, results of operations and growth prospects could be materially adversely affected. Our ability to successfully and sustainably maintain or grow sales of Erwinaze is also subject to a number of other risks and uncertainties, including the limited population of patients with ALL and the incidence of hypersensitivity reactions to E. coli-derived asparaginase within that population, our need to apply for and receive marketing authorizations, through the European Union’s, or EU’s, mutual recognition procedure or otherwise, in certain additional countries so we can launch promotional efforts in those countries, as well as those other risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
In the three and six months ended June 30, 2016, sales of Defitelio/defibrotide represented 9% and 7% of our net product sales, respectively. We acquired this product in January 2014 in connection with our acquisition of Gentium S.r.l., or Gentium, which we refer to as the Gentium Acquisition, and secured worldwide rights to the product by acquiring rights to defibrotide in the Americas in August 2014. We launched Defitelio in certain European countries in 2014 and continue to launch in additional European countries on a rolling basis. On March 30, 2016, the FDA approved our new drug application, or NDA, for Defitelio for the treatment of adult and pediatric patients with VOD, also known as SOS, with renal or pulmonary dysfunction following HSCT. We launched Defitelio in the U.S. shortly after FDA approval.
Our ability to realize the anticipated benefits from our investment in Defitelio is subject to risks and uncertainties, including:
the acceptance of Defitelio in the U.S. by hospital pharmacy and therapeutics committees and the availability of adequate coverage and reimbursement by government programs and third party payors;
U.S. market acceptance of Defitelio at its commercial price now that it is no longer available to new patients under an expanded access treatment protocol;
the lack of experience of U.S. physicians in diagnosing and treating VOD, particularly in adults, and the possibility that physicians may delay initiation of treatment or terminate treatment before the end of the recommended dosing schedule;
our ability to successfully maintain or grow sales of Defitelio in Europe;
delays or problems in the supply or manufacture of the product;
the limited size of the population of VOD patients who are indicated for treatment with Defitelio (particularly if changes in HSCT treatment protocols reduce the incidence of VOD);
our ability to meet the post-marketing commitments and requirements imposed by the FDA in connection with its approval of our NDA for Defitelio; and
our ability to obtain marketing approval in other countries and to develop the product for additional indications.
If sales of Defitelio do not reach the levels we expect, our anticipated revenue from the product will be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
In furtherance of our growth strategy, we have made a significant investment in Vyxeos through the Celator Acquisition. Vyxeos is currently not approved as a marketed product in any jurisdiction. We expect to initiate a rolling submission of an NDA for Vyxeos to the FDA by the end of the third quarter of 2016 and to complete the submission in late 2016 or early 2017. FDA Breakthrough Therapy designation has been granted for Vyxeos for the treatment of adults with therapy-related AML or AML with myelodysplasia-related changes. Breakthrough Therapy designation is a process designed to expedite the development and review of a drug that is intended to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on one or more clinically significant endpoints. We are also currently evaluating the timing of filing for regulatory approval of Vyxeos in Europe.
Our ability to realize the anticipated benefits from this investment is subject to a number of risks and uncertainties, including:
our ability to successfully obtain marketing approval for Vyxeos in the United States and Europe;
risks associated with developing products based on the CombiPlex technology platform that we acquired in the Celator Acquisition, such as Vyxeos, the first injectable fixed ratio, drug delivery combination oncology product that the FDA would potentially be considering for approval;

10

Table of Contents


the need to establish pricing and reimbursement support for Vyxeos in the event we are able to obtain marketing approval for Vyxeos in the United States or in other countries;
the acceptance of Vyxeos in the United States and other countries by hospital pharmacy and therapeutics committees and the availability of adequate coverage and reimbursement by government programs and third party payors;
delays or problems in the supply or manufacture of the product, including with respect to the requirement of the third parties upon which we rely to manufacture Vyxeos and its active pharmaceutical ingredients, or APIs, to obtain the approval of the FDA and/or other regulatory authorities to manufacture Vyxeos; and
the limited size of the population of AML patients who may potentially be indicated for treatment with Vyxeos.
If we are unable to obtain regulatory approval for Vyxeos in the United States or in Europe in a timely manner, or at all, or if sales of an approved Vyxeos product do not reach the levels we expect, our anticipated revenue from Vyxeos would be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
For more information on risks and uncertainties relating to Erwinaze, Defitelio and Vyxeos, see the risk factor under the heading “While Xyrem remains our largest product, our success also depends on our ability to effectively commercialize our other products and, in the case of our newly acquired product candidate, Vyxeos, our ability to obtain regulatory approval in the United States and Europe and, if approved, to successfully launch and commercialize Vyxeos. Our inability to do so could have a material adverse effect on our business, financial condition, results of operations and growth prospects” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
In addition to risks specifically related to Xyrem, Erwinaze, Defitelio/defibrotide and Vyxeos, we are subject to other challenges and risks specific to our business and our ability to execute on our strategy, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations. These risks and uncertainties include:
the challenges of protecting and enhancing our intellectual property rights;
the challenges of achieving and maintaining commercial success of our products;
delays or problems in the supply or manufacture of our products, particularly with respect to certain products as to which we maintain limited inventories, and our dependence on single source suppliers to continue to meet our ongoing commercial demand or our requirements for clinical trial supplies;
the need to obtain and maintain appropriate pricing and reimbursement for our products in an increasingly challenging environment due to, among other things, the attention being paid to healthcare cost containment and other austerity measures in the U.S. and worldwide, including the need to obtain and maintain reimbursement for Xyrem in the U.S. in an environment in which we are subject to increasingly restrictive conditions for reimbursement required by third party payors;
our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business;
the challenges of compliance with the requirements of 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, patient assistance programs, adverse event reporting and product recalls or withdrawals;
the difficulty and uncertainty of pharmaceutical product development, including the timing thereof, and the uncertainty of clinical success, such as the risk that results from preclinical studies and/or early clinical trials may not be predictive of results obtained in later and larger clinical trials planned or anticipated to be conducted for our product candidates;
the inherent uncertainty associated with the regulatory approval process, especially as we continue to undertake increased activities and make growing investment in our product pipeline development projects;
the risks associated with business combination or product or product candidate acquisition transactions, including risks associated with the Celator Acquisition, such as the challenges inherent in the integration of acquired businesses with our historic business, the increase in geographic dispersion among our centers of operation and the risks that we may acquire unanticipated liabilities along with acquired businesses or otherwise fail to realize the anticipated benefits (commercial or otherwise) from such transactions; and
possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations, which have increased as a result of, among other things, the Celator Acquisition.

11

Table of Contents


Any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and growth prospects. All of these risks and uncertainties are discussed in greater detail, along with other risks and uncertainties, in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, investments and marketable securities. Our investment policy permits investments in U.S. federal government and federal agency securities, 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 pharmaceutical wholesale distributors and specialty pharmaceutical distribution companies, primarily in the United States, and to other international distributors and hospitals. 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 June 30, 2016, five customers accounted for 92% of gross accounts receivable, including Express Scripts Specialty Distribution Services, Inc. and its affiliates, or Express Scripts, which accounted for 69% of gross accounts receivable, IDIS Limited, or IDIS, which accounted for 11% of gross accounts receivable and McKesson Corporation and its affiliates, or McKesson, which accounted for 10% of gross accounts receivable. As of December 31, 2015, five customers accounted for 90% of gross accounts receivable, including Express Scripts, which accounted for 69% of gross accounts receivable, and IDIS, which accounted for 11% of gross accounts receivable. 
We depend on single source suppliers 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 Attributable to Jazz Pharmaceuticals plc per Ordinary Share
Basic net income attributable to Jazz Pharmaceuticals plc per ordinary share is based on the weighted-average number of ordinary shares outstanding. Diluted net income attributable to Jazz Pharmaceuticals plc per ordinary share is based on the weighted-average number of ordinary shares outstanding and potentially dilutive ordinary shares outstanding.

12

Table of Contents


Basic and diluted net income per ordinary share were computed as follows (in thousands, except per share amounts): 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income attributable to Jazz Pharmaceuticals plc
$
111,282

 
$
88,114

 
$
185,403

 
$
158,814

Denominator:
 
 
 
 
 
 
 
Weighted-average ordinary shares used in per share calculation - basic
60,499

 
61,190

 
60,821

 
60,998

Dilutive effect of employee equity incentive and purchase plans
1,334

 
1,900

 
1,333

 
2,030

Weighted-average ordinary shares used in per share calculation - diluted
61,833

 
63,090

 
62,154

 
63,028

 
 
 
 
 
 
 
 
Net income attributable to Jazz Pharmaceuticals plc per ordinary share:
 
 
 
 
 
 
 
Basic
$
1.84

 
$
1.44

 
$
3.05

 
$
2.60

Diluted
$
1.80

 
$
1.40

 
$
2.98

 
$
2.52

Potentially dilutive ordinary shares from our employee equity incentive and purchase plans and our 1.875% exchangeable senior notes due 2021, or the 2021 Notes, are determined by applying the treasury stock method to the assumed exercise of share options, the assumed vesting of outstanding restricted stock units, or RSUs, the assumed issuance of ordinary shares under our employee stock purchase plan, or ESPP, and the assumed issuance of ordinary shares upon exchange of the 2021 Notes. The potential issue of approximately 2.9 million ordinary shares issuable upon exchange of the 2021 Notes had no effect on diluted net income per ordinary share because the average price of our ordinary shares for the three and six months ended June 30, 2016 and 2015 did not exceed the effective exchange price of $199.77 per ordinary share.
The following table represents the weighted-average ordinary shares that were excluded from the calculation 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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
1.875% exchangeable senior notes due 2021
2,878

 
2,878

 
2,878

 
2,878

Options to purchase ordinary shares and RSUs
2,907

 
1,586

 
2,606

 
1,453

Ordinary shares under ESPP
66

 

 
85

 

Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board, or the FASB, issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, statutory tax withholding requirements, accounting for forfeitures and classification on the statement of cash flows. ASU No. 2016-09 is effective for us beginning January 1, 2017. We are currently assessing our approach to the adoption of this standard and the impact on our results of operations and financial position.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. Under the new guidance, lessees will be required to recognize a right-of-use asset, which represents the lessee’s right to use, or control the use of, a specified asset for the lease term, and a corresponding lease liability, which represents the lessee’s obligation to make lease payments under a lease, measured on a discounted basis. ASU No. 2016-02 is effective beginning January 1, 2019 and early application is permitted. ASU No. 2016-02 must be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.  We are currently assessing our approach to the adoption of this standard and the potential impact on our results of operations and financial position.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. The standard states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this, an entity will

13

Table of Contents


need to identify the contract with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize revenue when (or as) the entity satisfies each performance obligation. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date”, which deferred the effective date of ASU No. 2014-09. ASU No. 2014-09 will now be effective for us beginning January 1, 2018 and can be adopted on a full retrospective basis or on a modified retrospective basis. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. We are currently assessing our approach to the adoption of these standards and the potential impact on our results of operations and financial position.

2. Asset Acquisition
In March 2016, we acquired all of the outstanding shares of Alizé Pharma II S.A.S., a privately held biotechnology company, for an upfront payment of $8.8 million.  In connection with the acquisition, we obtained intellectual property and know-how related to recombinant crisantaspase.  The transaction includes contingent regulatory milestone payments of up to €10 million.  The transaction was accounted for as an asset acquisition and the upfront payment was charged to acquired in-process research and development, or IPR&D, expense upon closing of the transaction.

3. Fair Value Measurement
Cash, cash equivalents and investments consisted of the following (in thousands): 
 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and Cash Equivalents
 
Investments
Cash
$
265,798

 
$

 
$

 
$
265,798

 
$
265,798

 
$

Time deposits
650,577

 

 

 
650,577

 
602,168

 
48,409

Totals
$
916,375

 
$

 
$

 
$
916,375

 
$
867,966

 
$
48,409

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
Cash
$
274,945

 
$

 
$

 
$
274,945

 
$
274,945

 
$

Time deposits
713,840

 

 

 
713,840

 
713,840

 

Totals
$
988,785

 
$

 
$

 
$
988,785

 
$
988,785

 
$

Cash equivalents and investments are considered available-for-sale securities. 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. Our investment balance represents time deposits with original maturities of greater than three months.
The following table summarizes, by major security type, our available-for-sale securities as of June 30, 2016 and December 31, 2015 that were measured at fair value on a recurring basis and were categorized using the fair value hierarchy (in thousands): 
 
June 30, 2016
 
December 31, 2015
 
Significant Other
Observable
Inputs
(Level 2)
 
Total
Estimated
Fair Value    
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Estimated
Fair Value    
Time deposits
$
650,577

 
$
650,577

 
$
713,840

 
$
713,840


14

Table of Contents


As of June 30, 2016, our available-for-sale securities included time deposits which were measured at fair value using Level 2 inputs and their carrying values were approximately equal to their fair values. Level 2 inputs, obtained from various third party data providers, represent quoted prices for similar assets in active markets, or these inputs were derived from observable market data, or if not directly observable, were derived from or corroborated by other observable market data.
There were no transfers between the different levels of the fair value hierarchy in 2016 or in 2015.
As of June 30, 2016, the estimated fair value of our 2021 Notes was approximately $618 million. The fair value of the 2021 Notes was estimated using quoted market prices obtained from brokers (Level 2). The estimated fair value of our borrowings under our term loan were approximately equal to their respective book values based on the borrowing rates currently available for variable rate loans (Level 2).

4. Inventories
Inventories consisted of the following (in thousands): 
 
June 30,
2016
 
December 31,
2015
Raw materials
$
2,735

 
$
2,608

Work in process
19,341

 
11,836

Finished goods
11,215

 
5,007

Total inventories
$
33,291

 
$
19,451


5. Goodwill and Intangible Assets
The gross carrying amount of goodwill was as follows (in thousands):
Balance at December 31, 2015
$
657,139

Foreign exchange
4,706

Balance at June 30, 2016
$
661,845

The gross carrying amounts and net book values of our intangible assets were as follows (in thousands): 
 
June 30, 2016
 
December 31, 2015
 
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
11.8
 
$
1,530,546

 
$
(371,876
)
 
$
1,158,670

 
$
1,321,324

 
$
(324,044
)
 
$
997,280

Manufacturing contracts
1.6
 
11,865

 
(7,240
)
 
4,625

 
11,697

 
(5,676
)
 
6,021

Trademarks
 
2,886

 
(2,886
)
 

 
2,882

 
(2,882
)
 

Total finite-lived intangible assets
 
 
1,545,297

 
(382,002
)
 
1,163,295

 
1,335,903

 
(332,602
)
 
1,003,301

Acquired IPR&D assets
 
 
137,466

 

 
137,466

 
182,305

 

 
182,305

Total intangible assets
 
 
$
1,682,763

 
$
(382,002
)
 
$
1,300,761

 
$
1,518,208

 
$
(332,602
)
 
$
1,185,606

The increase in the gross carrying amount of intangible assets as of June 30, 2016 compared to December 31, 2015 is primarily due to the capitalization of a $150.0 million milestone payment to Sigma-Tau Pharmaceuticals Inc., or Sigma-Tau, that was triggered by the FDA approval of Defitelio on March 30, 2016. Additionally, after receiving FDA approval of Defitelio, we reclassified $48.4 million of acquired IPR&D from an indefinite-lived intangible asset to an acquired developed technology finite-lived intangible asset. The Defitelio acquired developed technology asset will be amortized over its estimated useful life of 14 years. The increase in the gross carrying amount was also due to the positive impact of foreign currency translation adjustments due to the strengthening of the euro against the U.S. dollar.
The assumptions and estimates used to determine future cash flows and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors, such as

15

Table of Contents


industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines.
Based on finite-lived intangible assets recorded as of June 30, 2016, and assuming the underlying assets will not be impaired and that we will not change the expected lives of the assets, future amortization expenses were estimated as follows (in thousands): 
Year Ending December 31,
Estimated
Amortization  
Expense
2016 (remaining)
$
52,909

2017
105,818

2018
102,972

2019
102,752

2020
101,565

Thereafter
697,279

Total
$
1,163,295


6. Certain Balance Sheet Items
Property and equipment consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Land and buildings
$
42,275

 
$
1,775

Manufacturing equipment and machinery
21,045

 
5,828

Construction-in-progress
18,972

 
63,008

Computer software
16,007

 
15,797

Computer equipment
10,033

 
10,963

Leasehold improvements
9,184

 
9,301

Furniture and fixtures
2,638

 
2,580

Subtotal
120,154

 
109,252

Less accumulated depreciation and amortization
(26,678
)
 
(23,680
)
Property and equipment, net
$
93,476

 
$
85,572


The decrease in construction-in-progress, or CIP, from December 31, 2015 to June 30, 2016 is primarily due to the reclassification of building and equipment costs related to the Ireland manufacturing and development facility from CIP to the appropriate property and equipment category on the balance sheet following FDA approval of the facility in June 2016.

16

Table of Contents


Accrued liabilities consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Rebates and other sales deductions
$
70,264

 
$
67,454

Employee compensation and benefits
32,873

 
35,595

Sales returns reserve
5,706

 
6,110

Royalties
5,396

 
4,211

Inventory-related accruals
5,236

 
1,017

Clinical trial accruals
4,449

 
1,601

Professional fees
3,655

 
3,038

Accrued interest
3,475

 
4,043

Accrued construction-in-progress
1,116

 
1,637

Contract claim settlement

 
18,000

Other
25,452

 
21,364

Total accrued liabilities
$
157,622

 
$
164,070


7. Debt
The following table summarizes the carrying amount of our indebtedness (in thousands):
 
June 30,
2016
 
December 31,
2015
1.875% exchangeable senior notes due 2021
$
575,000

 
$
575,000

Unamortized discount on 1.875% exchangeable senior notes due 2021
(110,504
)
 
(119,467
)
1.875% exchangeable senior notes due 2021, net
464,496

 
455,533

Term loan
714,656

 
732,398

Other borrowings

 
513

Total debt
1,179,152

 
1,188,444

Less current portion
37,500

 
37,587

Total long-term debt
$
1,141,652

 
$
1,150,857

Amendment of Credit Facility
On June 18, 2015, Jazz Pharmaceuticals plc, as guarantor, and certain of our wholly owned subsidiaries, as borrowers, entered into a credit agreement, which we refer to in this report as the 2015 credit agreement, that provided for a $750.0 million principal amount term loan, which was drawn in full at closing, and a $750.0 million revolving credit facility, of which $160.0 million was drawn at closing and subsequently repaid. We used the proceeds from initial borrowings under the 2015 credit agreement to repay in full the $893.1 million principal amount of term loans outstanding under the credit agreement that we entered into in June 2012, as subsequently amended, which we refer to as the previous credit agreement, and to pay related fees and expenses. The previous credit agreement was terminated upon repayment of the term loans outstanding thereunder.
On July 12, 2016, Jazz Pharmaceuticals plc, as guarantor, and certain of our wholly owned subsidiaries, as borrowers, entered into Amendment No. 1 to the 2015 credit agreement. We refer to the 2015 credit agreement, as amended, in this report as the amended credit agreement. The amended credit agreement provides for a revolving credit facility of $1.25 billion, which replaces the revolving credit facility of $750.0 million provided for under the 2015 credit agreement, and a $750.0 million term loan facility, of which $721.9 million principal amount was outstanding as of July 12, 2016. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition and expect to use the proceeds from future loans under the revolving credit facility, if any, for general corporate purposes, including corporate development activities. Please see Note 14 for additional information regarding the Celator Acquisition.
Under the amended credit agreement, the term loan matures on July 12, 2021 and the revolving credit facility terminates, and any loans outstanding thereunder become due and payable, on July 12, 2021.
Borrowings under the amended credit agreement bear interest, at our option, at a rate equal to either (a) the LIBOR rate, plus an applicable margin ranging from 1.50% to 2.25% per annum, based upon our secured leverage ratio, or (b) the prime lending rate, plus an applicable margin ranging from 0.50% to 1.25% per annum, based upon our secured leverage ratio. The

17

Table of Contents


revolving credit facility has a commitment fee payable on the undrawn amount ranging from 0.25% to 0.35% per annum based upon our secured leverage ratio.
Jazz Pharmaceuticals plc and certain of our wholly owned subsidiaries are borrowers under the amended credit agreement. The borrowers’ obligations under the amended credit agreement and any hedging or cash management obligations entered into with a lender are guaranteed on a senior secured basis by Jazz Pharmaceuticals plc and certain of our subsidiaries (including the issuer of the 2021 Notes as described below) and are secured by substantially all of Jazz Pharmaceuticals plc’s, the borrowers’ and the guarantor subsidiaries’ assets.
We may make voluntary prepayments of principal at any time without payment of a premium. We are required to make mandatory prepayments of the term loan (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), and (3) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions).
Principal repayments of the term loan, which are due quarterly, are equal to 5.0% per annum of the principal amount outstanding on July 12, 2016 of $721.9 million during the first two years, 7.5% per annum during the third year, 10.0% per annum during the fourth year and 12.5% per annum during the fifth year, with any remaining balance payable on the maturity date.
The amended credit agreement contains financial covenants that require Jazz Pharmaceuticals plc and our restricted subsidiaries to not (a) exceed a maximum secured net leverage ratio or (b) fall below a cash interest coverage ratio. We were, as of June 30, 2016, and are currently, in compliance with these financial covenants.
Exchangeable Senior Notes
The 2021 Notes were issued by Jazz Investments I Limited, or the Issuer, a 100%-owned finance subsidiary of Jazz Pharmaceuticals plc. The Issuer’s obligations under the 2021 Notes are fully and unconditionally guaranteed on a senior unsecured basis by Jazz Pharmaceuticals plc. No subsidiary of Jazz Pharmaceuticals plc guaranteed the 2021 Notes. Subject to certain local law restrictions on payment of dividends, among other things, and potential negative tax consequences, we are not aware of any significant restrictions on the ability of Jazz Pharmaceuticals plc to obtain funds from the Issuer or Jazz Pharmaceuticals plc’s other subsidiaries by dividend or loan, or any legal or economic restrictions on the ability of the Issuer or Jazz Pharmaceuticals plc’s other subsidiaries to transfer funds to Jazz Pharmaceuticals plc in the form of cash dividends, loans or advances. There is no assurance that in the future such restrictions will not be adopted.
As of June 30, 2016, the carrying value of the equity component of the 2021 Notes, net of equity issuance costs, was $126.9 million.
Maturities
Scheduled maturities with respect to our long-term debt principal balances outstanding as of June 30, 2016 were as follows (in thousands):
Year Ending December 31,
Scheduled Long-Term Debt Maturities
2016 (remainder)
$
18,750

2017
42,188

2018
60,937

2019
79,687

2020
520,313

Thereafter
575,000

Total
$
1,296,875


8. 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

18

Table of Contents


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 June 30, 2016 and December 31, 2015. 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 and facility leases as of June 30, 2016 were as follows (in thousands): 
Year Ending December 31,
Lease
  Payments  
2016 (remainder)
$
6,358

2017
13,437

2018
8,613

2019
7,250

2020
6,682

Thereafter
66,579

Total
$
108,919

In January 2015, we entered into an agreement to lease office space located in Palo Alto, California in a building to be constructed by the landlord. We expect to occupy this office space by the end of 2017. In connection with this lease, the landlord is providing a tenant improvement allowance for the costs associated with the design, development and construction of tenant improvements for the leased facility. We are obligated to fund all costs incurred in excess of the tenant improvement allowance. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, we have concluded we are the deemed owner of the building during the construction period. As of June 30, 2016, we recorded project construction costs of $12.8 million incurred by the landlord as construction-in-progress in property and equipment, net and a corresponding financing obligation in other non-current liabilities in our condensed consolidated balance sheets. We will increase the asset and financing obligation as additional building costs are incurred by the landlord during the construction period. In the three and six months ended June 30, 2016, we recorded rent expense associated with the ground lease of $0.5 million and $0.9 million, respectively, in our condensed consolidated statements of income.
As of June 30, 2016, we had $27.0 million of noncancelable purchase commitments due within one year, primarily related to agreements with third party manufacturers.
Legal Proceedings
We are involved in legal proceedings, including the following matters:
Xyrem ANDA Matters. On October 18, 2010, we received a notice of Paragraph IV Patent Certification, or Paragraph IV Certification, from Roxane that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. Roxane’s initial notice 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 the notice 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 initial notice in the U.S. District Court for the District of New Jersey, or the District Court, seeking a permanent injunction to prevent Roxane from introducing a generic version of Xyrem that would infringe our patents. In accordance with the Drug Price Competition and Patent Term Restoration Act of 1984, or Hatch-Waxman Act, as a result of our having filed a timely lawsuit against Roxane, FDA approval of Roxane’s ANDA was stayed for 30 months, or until April 2013. That stay has expired. Additional patents covering Xyrem have been issued since December 2010, and after receiving Paragraph IV Certification notices from Roxane with respect to those patents, we have filed additional lawsuits against Roxane to include

19

Table of Contents


these additional patents in the litigation. All of the lawsuits filed against Roxane between 2010 and 2012 were consolidated by the District Court into a single case, which we refer to as the first Roxane consolidated case. In the first Roxane consolidated case, we allege that 10 of our patents covering Xyrem are or will be infringed by Roxane’s ANDA and seek a permanent injunction to prevent Roxane from launching a generic version of Xyrem that would infringe these patents.
After receiving additional Paragraph IV Certification notices from Roxane, we filed three actions against Roxane in the District Court on February 20, 2015, June 1, 2015 and January 27, 2016 that were consolidated by the District Court into a second case, which we refer to as the second Roxane consolidated case. In the second Roxane consolidated case, we allege that five of our patents covering Xyrem are or will be infringed by Roxane’s ANDA and seek a permanent injunction to prevent Roxane from introducing a generic version of Xyrem that would infringe those patents.
In December 2013, the District Court permitted Roxane to amend its answer in the first Roxane consolidated case to allege certain equitable defenses, and the parties were given additional time for discovery on those new defenses. In addition, in March 2014, the District Court granted our motion to bifurcate and stay the portion of the first Roxane consolidated case regarding patents related to the distribution system for Xyrem.
In April 2015, Roxane moved in the second Roxane consolidated case to dismiss claims involving our patent covering a part of the Xyrem label that instructs prescribers on adjusting the dose of Xyrem when it is being co-administered with divalproex sodium (also known as valproate or valproic acid) on the grounds that this patent does not cover patentable subject matter. In October 2015, the District Court administratively terminated this motion to dismiss (without prejudice) pending the outcome of IPR proceedings before the PTAB, relating to the patent that was the subject of Roxane’s motion. Such IPR proceedings were filed by Par, Ranbaxy and Amneal and are discussed below.
In July 2016, the District Court determined that it would try all of the patents at issue in the first and second Roxane consolidated cases together, including patents that were previously bifurcated and stayed, and set trial in this consolidated case for the second quarter of 2017.
The actual timing of events in our litigation with Roxane may be earlier or later than we currently anticipate. We cannot predict the specific timing or outcome of events in these matters or the impact of these matters on other ongoing proceedings with any ANDA filer.
On December 10, 2012, we received notice of 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. On January 18, 2013, we filed a lawsuit against Amneal in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Amneal’s ANDA and seeking a permanent injunction to prevent Amneal from introducing a generic version of Xyrem that would infringe these patents. On November 21, 2013, we received notice of Paragraph IV Certification from Par Pharmaceutical, Inc., or Par, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On December 27, 2013, we filed a lawsuit against Par in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Par’s ANDA and seeking a permanent injunction to prevent Par from introducing a generic version of Xyrem that would infringe these patents.
In April 2014, Amneal asked the District Court to consolidate its case with the Par case, stating that both cases would proceed on the schedule for the Par case. The District Court granted this request in May 2014. The order consolidating the cases provides that Amneal’s 30-month stay period will be extended to coincide with the date of Par’s 30-month stay period. The stay expired on May 20, 2016.
Additional patents covering Xyrem have issued since April 2014 and have been listed in the Orange Book for Xyrem. Amneal and Par have given us additional notices of Paragraph IV Certifications regarding such patents, and we have filed additional lawsuits against Amneal and Par in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Amneal’s and Par’s ANDAs and seeking a permanent injunction to prevent Amneal and Par from introducing a generic version of Xyrem that will infringe these patents. In March 2016, Par moved to dismiss claims involving our patents covering a part of the Xyrem label that instructs prescribers on adjusting the dose of Xyrem when it is being co-administered with divalproex sodium (also known as valproate or valproic acid).
On June 4, 2014, we received a notice of Paragraph IV Certification from Ranbaxy Laboratories Limited, or Ranbaxy, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On July 15, 2014, we filed a lawsuit against Ranbaxy in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Ranbaxy’s ANDA and seeking a permanent injunction to prevent Ranbaxy from introducing a generic version of Xyrem that will infringe these patents. Since June 2014, we have received additional notices of Paragraph IV Certification from Ranbaxy regarding newly issued patents for Xyrem listed in the Orange Book, and we have filed additional lawsuits against Ranbaxy in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Ranbaxy’s ANDA and seeking a permanent injunction to prevent Ranbaxy from introducing a generic version of Xyrem that will infringe these patents. In May 2016, the Ranbaxy litigation was settled as described below.

20

Table of Contents


On October 30, 2014, we received a notice of Paragraph IV Certification from Watson Laboratories, Inc., or Watson, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On December 11, 2014, we filed a lawsuit against Watson in the District Court alleging that our patents covering Xyrem are or will be infringed by Watson’s ANDA and seeking a permanent injunction to prevent Watson from introducing a generic version of Xyrem that would infringe these patents. In March 2015, Watson moved to dismiss the portion of the case based on our Orange Book-listed patents covering the distribution system for Xyrem on the grounds that these patents do not cover patentable subject matter. In November 2015, the District Court administratively terminated this motion to dismiss (without prejudice) pending the outcome of IPR proceedings before the PTAB relating to the patents that were the subject of Watson’s motion. Since March 2015, we have received an additional notice of Paragraph IV Certification from Watson regarding newly issued patents for Xyrem listed in the Orange Book, and we have filed an additional lawsuit against Watson in the District Court alleging that our patents covering Xyrem are or will be infringed by Watson’s ANDA and seeking a permanent injunction to prevent Watson from introducing a generic version of Xyrem that would infringe these patents.
In April 2015, the District Court issued an order that consolidated all then-pending lawsuits against Amneal, Par, Ranbaxy and Watson into one case.
On June 8, 2015, we received a Paragraph IV Certification from Wockhardt Bio AG, or Wockhardt, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem.  On July 17, 2015, we filed a lawsuit in the District Court alleging that our patents covering Xyrem were or would be infringed by Wockhardt’s ANDA and seeking a permanent injunction to prevent Wockhardt from introducing a generic version of Xyrem that would infringe our patents.  On November 26, 2015, we received an additional notice of Paragraph IV Certification from Wockhardt regarding newly issued patents listed in the Orange Book, and we filed an additional lawsuit against Wockhardt in the District Court alleging that our patents covering Xyrem were or would be infringed by Wockhardt’s ANDA and seeking a permanent injunction to prevent Wockhardt from introducing a generic version of Xyrem that would infringe these patents. In April 2016, the Wockhardt litigation was settled as set forth below.
On July 23, 2015, we received a Paragraph IV Certification from Lupin Inc., or Lupin, that it has submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On September 2, 2015, we filed a lawsuit in the District Court alleging that our patents covering Xyrem are or will be infringed by Lupin’s ANDA and seeking a permanent injunction to prevent Lupin from introducing a generic version of Xyrem that would infringe our patents.
In January 2016, the District Court issued an order consolidating all of the cases then pending against Amneal, Par, Ranbaxy, Watson, Wockhardt and Lupin into a single case for all purposes. In April 2016, the District Court issued orders consolidating two cases against Amneal and Ranbaxy relating to later-issued patents with the previously consolidated case against Amneal, Par, Ranbaxy, Watson and Lupin. In June 2016, the District Court issued an order consolidating a case against Watson relating to a later-issued patent with the previously consolidated case against Amneal, Par, Watson and Lupin.
We entered into settlement agreements with Wockhardt and Ranbaxy on April 18, 2016 and May 9, 2016, respectively, that resolved our patent litigation against Wockhardt and Ranbaxy. Under the settlement agreements, we granted each of Wockhardt and Ranbaxy a license to manufacture, market, and sell its generic version of Xyrem on or after December 31, 2025, or earlier depending on the occurrence of certain events. The specific terms of the settlement agreements are confidential.
The settlements with Wockhardt and Ranbaxy do not resolve the litigation against Amneal, Par, Watson and Lupin, which is ongoing. We cannot predict the specific timing or outcome of events in this matter with respect to the remaining defendants or the impact of developments involving any specific parties or patents on other ongoing proceedings with any ANDA filer.
Xyrem Post-Grant Patent Review Matters. In January 2015, certain of the ANDA filers filed petitions for IPR with respect to the validity of six patents covering the distribution system for Xyrem. In July 2015, the PTAB issued decisions instituting IPR trials with respect to these petitions. In July 2016, the PTAB issued final decisions that the claims of these six patents are unpatentable; if the United States Court of Appeals for the Federal Circuit upholds those decisions or if the time for appeal expires, these claims will be canceled.  We expect to appeal these decisions to the United States Court of Appeals for the Federal Circuit. In September 2015, certain of the ANDA filers filed a petition for IPR with respect to the validity of an additional patent covering the distribution system for Xyrem. In March 2016, the PTAB issued a decision instituting an IPR trial with respect to three claims of the patent subject to this petition, and we expect the PTAB to issue a final decision on the validity of these claims in March 2017. The PTAB denied the petition with respect to the other 25 claims of the patent.
In October 2015, Ranbaxy and Par filed petitions for IPR with respect to the validity of one of our patents covering a method for prescribing Xyrem when it is being co-administered with divalproex sodium, and Amneal filed an IPR petition on the same patent in February 2016. In April 2016, the PTAB denied Par’s petition in its entirety and issued a decision on Ranbaxy’s petition, instituting an IPR trial with respect to 16 of the claims under the patent subject to this petition and denying the petition with respect to the other 18 claims. In July 2016, the PTAB denied Amneal’s petition in its entirety. In March 2016, Ranbaxy filed a petition for IPR with respect to the validity of the second of our patents covering a method for

21

Table of Contents


prescribing Xyrem when it is being co-administered with divalproex sodium. In connection with settlement of our litigation with Ranbaxy, both of the IPR petitions filed by Ranbaxy were terminated.
In December 2015, Wockhardt filed a petition for IPR with respect to the validity of one of our patents covering the formulation of Xyrem. In connection with settlement of our patent litigation with Wockhardt, this IPR petition was terminated.
We cannot predict whether additional post-grant patent review challenges will be filed by any of the ANDA filers or any other entity, the outcome of any pending IPR or other proceeding, the outcome of any appeal of the July 2016 IPR decisions with respect to six patents covering the distribution system for Xyrem, whether the PTAB will institute any petitioned IPR proceeding that has not yet been instituted, or the impact any IPR or other proceeding might have on ongoing ANDA litigation proceedings or other aspects of our Xyrem business.
Shareholder Litigation Matters Relating to Celator Acquisition. On June 21, 2016, a putative class-action lawsuit challenging the Celator Acquisition, captioned Dunbar v. Celator Pharmaceuticals, Inc., or the Dunbar action, was filed in the Superior Court of New Jersey. The complaint was filed against Celator, each member of the Celator board of directors, Jazz Pharmaceuticals plc and our wholly owned subsidiary Plex Merger Sub, Inc., or Plex. The complaint generally alleges that the Celator directors breached their fiduciary duties in connection with the Celator Acquisition, and that Jazz Pharmaceuticals plc and Plex aided and abetted these alleged breaches of fiduciary duty. The complaint also generally asserts that the Celator directors breached their fiduciary duties to Celator’s public stockholders by, among other things, (i) agreeing to sell Celator to us at an inadequate price, (ii) implementing an unfair process, (iii) agreeing to certain provisions of the merger agreement for the Celator Acquisition that allegedly favored us and deterred alternative bids, and (iv) failing to disclose purportedly material information in Celator’s Schedule 14D-9 filing with the SEC. The plaintiff sought, among other things, an injunction against the consummation of the Celator Acquisition and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees.
Between June 27, 2016 and June 29, 2016, two putative class-action lawsuits challenging the Celator Acquisition, captioned Palmisciano v. Celator Pharmaceuticals, Inc., or the Palmisciano action, and Barreto v. Celator Pharmaceuticals, Inc., or the Barreto action, were filed in the District Court. The complaints were filed against Celator and each member of the Celator board of directors. The complaints assert causes of action under sections 14 and 20 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, predicated on Celator’s and the Celator directors’ alleged failure to disclose purportedly material information in Celator’s Schedule 14D-9 filing with the SEC. The plaintiffs sought, among other things, an injunction against the consummation of the Celator Acquisition and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees. Neither Jazz Pharmaceuticals plc nor Plex were named defendants in these actions.
On July 6, 2016, the defendants to the Dunbar action, the Palmisciano action and the Barreto action entered into a memorandum of understanding regarding settlement of these actions. The memorandum of understanding outlines the terms of the parties’ agreement in principle to settle and release all claims which were or could have been asserted in these actions. In consideration for such settlement and release, the parties to these actions agreed, among other things, that Celator would amend its Schedule 14D-9 to include certain supplemental disclosures. The Schedule 14D-9 was amended by Celator on July 6, 2016, and the Celator Acquisition was completed on July 12, 2016. The settlement remains subject to, among other items, the execution of a stipulation of settlement by the parties, final approval of the settlement by the District Court in the Barreto action and dismissal with prejudice of the Dunbar action and the Palmisciano action.
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.
Other Contingencies
We have not previously submitted pricing data for two radiopharmaceutical products, Quadramet® (samarium sm 153 lexidronam injection) and ProstaScint® (capromab pendetide), for Medicaid and the Public Health Service’s 340B drug pricing discount program, or 340B program.  We engaged in interactions with the Centers for Medicare and Medicaid Services, or CMS, and a trade group, the Council on Radionuclides and Radiopharmaceuticals, or CORAR, regarding the reporting of Medicaid pricing data and paying Medicaid rebates for radiopharmaceutical products. In addition to the discussions with CMS as part of CORAR, we have had separate discussions with CMS directly regarding Quadramet. We sold Quadramet to a third party in December 2013, but we retained any liabilities related to sales of the product during prior periods. Similarly, we sold ProstaScint to a third party in May 2015, but we retained any liabilities related to sales of the product during prior periods. We are currently unable to predict whether price reporting and rebates will be required for Quadramet and ProstaScint for some or all of the period during which we were responsible for sales of these products.  The initiation of any reporting of Medicaid pricing data for Quadramet or ProstaScint could result in retroactive 340B ceiling price liability for these two products. We are currently unable to reasonably estimate an amount or range of a potential contingent loss. Any material liability resulting from radiopharmaceutical price reporting would negatively impact our financial results.

22

Table of Contents


In May 2016, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of 501(c)(3) organizations that provide financial assistance to Medicare patients, and, for Xyrem, documents concerning our provision of financial assistance to Medicare patients. Other companies have disclosed similar inquiries. We are cooperating with this subpoena. We are unable to predict how long this investigation will continue or its outcome, but we expect that we will incur significant costs in connection with the investigation, regardless of the outcome.

9. Shareholders’ Equity
The following tables present a reconciliation of our beginning and ending balances in shareholders’ equity for the six months ended June 30, 2016 and 2015, respectively (in thousands): 
 
Total Shareholders' Equity
Shareholders' equity at January 1, 2016
$
1,598,646

Issuance of ordinary shares in conjunction with employee equity incentive and purchase plans
14,611

Employee withholding taxes related to share-based awards
(14,278
)
Share-based compensation
50,333

Tax benefit from employee share options
3,503

Shares repurchased
(163,244
)
Other comprehensive income
17,484

Net income
185,403

Shareholders' equity at June 30, 2016
$
1,692,458

 
Attributable to:
 
Jazz Pharmaceuticals plc
 
Noncontrolling interests
 
Total Shareholders' Equity
Shareholders' equity at January 1, 2015
$
1,371,144

 
$
64

 
$
1,371,208

Issuance of ordinary shares in conjunction with employee equity incentive and purchase plans
26,730

 

 
26,730

Employee withholding taxes related to share-based awards
(16,679
)
 

 
(16,679
)
Share-based compensation
44,394

 

 
44,394

Shares repurchased
(11,690
)
 

 
(11,690
)
Other comprehensive loss
(125,945
)
 
(8
)
 
(125,953
)
Net income
158,814

 
(1
)
 
158,813

Shareholders' equity at June 30, 2015
$
1,446,768

 
$
55

 
$
1,446,823

Share Repurchase Program
In November 2015, our board of directors authorized a share repurchase program pursuant to which we are authorized to repurchase a number of ordinary shares having an aggregate purchase price of up to $300 million, exclusive of any brokerage commissions. Under this share repurchase program, which has no expiration date, we may repurchase ordinary shares from time to time on the open market. 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 our credit agreement, corporate and regulatory requirements and market conditions. In the six months ended June 30, 2016, we spent a total of $163.2 million to purchase 1.3 million of our ordinary shares under the share repurchase program at an average total purchase price, including commissions, of $126.74 per share. All ordinary shares repurchased by us were canceled. In June 2016, we temporarily suspended our share repurchase program in connection with the Celator Acquisition. The share repurchase program may be modified, suspended, otherwise discontinued or resumed at any time without prior notice. As of June 30, 2016, the remaining amount authorized under the share repurchase program was approximately $96.6 million.

23

Table of Contents


Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss as of June 30, 2016 and December 31, 2015 were as follows (in thousands): 
 
Foreign
Currency
Translation
Adjustments
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2015
$
(267,472
)
 
$
(267,472
)
Other comprehensive income
17,484

 
17,484

Balance at June 30, 2016
$
(249,988
)
 
$
(249,988
)
During the six months ended June 30, 2016, other comprehensive income reflects foreign currency translation adjustments, primarily due to the strengthening of the euro against the U.S. dollar.

10. 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 identification, development and commercialization of meaningful pharmaceutical products that address unmet medical needs. The following table presents a summary of total revenues (in thousands): 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Xyrem
$
280,968

 
$
247,846

 
$
530,505

 
$
460,536

Erwinaze/Erwinase
49,748

 
46,151

 
100,921

 
96,504

Defitelio/defibrotide
33,246

 
15,257

 
51,143

 
32,620

Prialt® (ziconotide) intrathecal infusion
8,073

 
7,138

 
14,282

 
13,902

Psychiatry
3,867

 
9,372

 
10,869

 
18,465

Other
3,208

 
6,342

 
5,306

 
17,114

Product sales, net
379,110

 
332,106

 
713,026

 
639,141

Royalties and contract revenues
2,051

 
1,641

 
4,145

 
3,909

Total revenues
$
381,161

 
$
333,747

 
$
717,171

 
$
643,050

The following table presents a summary of total revenues attributed to geographic sources (in thousands): 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
United States
$
345,853

 
$
302,564

 
$
651,732

 
$
571,811

Europe
28,749

 
24,125

 
53,769

 
56,760

All other
6,559

 
7,058

 
11,670

 
14,479

Total revenues
$
381,161

 
$
333,747

 
$
717,171

 
$
643,050

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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Express Scripts
74
%
 
74
%
 
74
%
 
71
%
McKesson
15
%
 
%
 
14
%
 
%
Accredo Health Group, Inc.
%
 
11
%
 
%
 
12
%

At the end of the second quarter of 2015, we transitioned the U.S. distribution of Erwinaze from Accredo Health Group, Inc. to McKesson.


24

Table of Contents


The following table presents total long-lived assets, consisting of property and equipment, by location (in thousands): 
 
June 30,
2016
 
December 31,
2015
Ireland
$
63,943

 
$
62,795

United States
20,342

 
12,794

Italy
7,529

 
7,928

Other
1,662

 
2,055

Total long-lived assets
$
93,476

 
$
85,572



11. 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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Selling, general and administrative
$
20,949

 
$
18,662

 
$
41,153

 
$
35,301

Research and development
3,521

 
3,866

 
6,811

 
7,351

Cost of product sales
963

 
772

 
1,652

 
1,467

Total share-based compensation expense, pre-tax
25,433

 
23,300

 
49,616

 
44,119

Tax benefit from share-based compensation expense
(7,195
)
 
(6,910
)
 
(14,158
)
 
(13,064
)
Total share-based compensation expense, net of tax
$
18,238

 
$
16,390

 
$
35,458

 
$
31,055

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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Shares underlying options granted (in thousands)
90

 
70

 
1,099

 
950

Grant date fair value
$
45.10

 
$
58.57

 
$
40.58

 
$
57.57

Black-Scholes option pricing model assumption information:
 
 
 
 
 
 
 
Volatility
37
%
 
39
%
 
39
%
 
39
%
Expected term (years)
4.2

 
4.2

 
4.2

 
4.2

Range of risk-free rates
1.0-1.1%

 
1.1-1.4%

 
1.0-1.5%

 
1.1-1.4%

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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
RSUs granted (in thousands)
35

 
27

 
436

 
365

Grant date fair value
$
145.07

 
$
177.71

 
$
125.22

 
$
174.79

The fair value of RSUs is determined on the date of grant based on the market price of our ordinary shares on that date. The fair value of RSUs is expensed ratably over the vesting period of four years.

25

Table of Contents


As of June 30, 2016, compensation cost not yet recognized related to unvested share options and RSUs was $85.4 million and $99.1 million, respectively, which is expected to be recognized over a weighted-average period of 2.7 years and 2.5 years, respectively.

12. Restructuring
In the six months ended June 30, 2016, we recorded severance costs of $1.5 million for terminated employees in connection with the reorganization of our operations primarily in France and Italy. These 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 and included within cost of product sales and selling, general and administrative expenses in our condensed consolidated statements of income. As of June 30, 2016, we had incurred total termination benefit costs of $2.6 million in connection with this reorganization. We do not expect to incur any additional material one-time termination benefit costs relating to these restructuring activities in 2016.
The following table summarizes the amounts related to restructuring through June 30, 2016 (in thousands):
 
Termination Benefits
Balance at December 31, 2015
$
1,105

Expense
1,520

Payments
(1,823
)
Balance at June 30, 2016
$
802

The balances as of June 30, 2016 and December 31, 2015 were included within accrued liabilities in our condensed consolidated balance sheets.

13. Income Taxes
Our income tax provision was $45.3 million and $79.4 million in the three and six months ended June 30, 2016, respectively, compared to $30.6 million and $62.7 million for the same periods in 2015. The effective tax rates were 28.9% and 30.0% in the three and six months ended June 30, 2016, respectively, compared to 25.8% and 28.3% for the same periods in 2015. The increase in the effective tax rates for the three and six months ended June 30, 2016 compared to the same periods in 2015 was primarily due to a decrease in originating tax credits and the impact of changes in tax rates in certain jurisdictions in which we operate, partially offset by changes in income mix among the various jurisdictions in which we operate. The effective tax rates for the three and six months ended June 30, 2016 were higher than the Irish statutory rate of 12.5% primarily due to income taxable at a rate higher than the Irish statutory rate, uncertain tax positions, and various expenses not deductible for tax purposes, partially offset by originating tax credits and deductions available in relation to subsidiary equity. We do not provide for Irish income taxes on undistributed earnings of our foreign operations that are intended to be indefinitely reinvested in our foreign subsidiaries.
Our deferred tax assets are comprised 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 and adjust our estimates as more information becomes available.
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. Our most significant tax jurisdictions are Ireland, the United States (both at the federal level and in various state jurisdictions), Italy and France. 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 French tax authorities for fiscal years 2012 and 2013 and by the Italian tax authorities for fiscal year 2014. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In December 2015, we received proposed tax assessment notices from the French tax authorities for 2012 and 2013 relating to certain transfer pricing adjustments. The notices propose additional French tax of approximately $42.4 million, including interest and penalties through the date of the assessment, translated at the foreign exchange rate at June 30, 2016. We disagree with the proposed assessment and intend to contest it vigorously.


26

Table of Contents


14. Subsequent Events
On May 31, 2016, we entered into a definitive merger agreement with Celator pursuant to which we made a cash tender offer of $30.25 per share for all of the outstanding shares of Celator’s common stock. As of the expiration of the offer period on July 12, 2016, 36,516,173 shares, which represented approximately 81% of Celator’s then outstanding common stock, were properly tendered and not withdrawn in the tender offer. In addition, notices of guaranteed delivery were delivered with respect to 2,016,237 additional shares representing approximately 4% of Celator’s outstanding common stock as of the expiration of the tender offer. The condition to the tender offer that more than 50% of Celator’s outstanding common stock be validly tendered and not withdrawn prior to the expiration of the tender offer was satisfied. On July 12, 2016, we completed the Celator Acquisition under the terms of the merger agreement, pursuant to which Celator became an indirect wholly owned subsidiary of Jazz Pharmaceuticals plc and each share of Celator common stock then outstanding (other than shares owned by us or Celator) was converted into the right to receive $30.25, the same price per share offered in the tender offer. The aggregate consideration for the Celator Acquisition was approximately $1.5 billion.
On July 12, 2016, we entered into an amendment to the 2015 credit agreement that provides for a revolving credit facility of $1.25 billion, which replaced our prior revolving credit facility of $750.0 million, and a $750.0 million term loan facility, of which $721.9 million remained outstanding as of July 12, 2016. Please see Note 7 for further information regarding the 2015 credit agreement and the July 2016 amendments thereto. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. As of July 12, 2016, the interest rate on the outstanding term loan was 2.63% and on revolving loan borrowings was 2.48%.
Celator is an oncology-focused biopharmaceutical company that is transforming the science of combination therapy and developing products to improve patient outcomes in cancer. The Celator Acquisition broadened our hematology/oncology portfolio with the acquisition of worldwide development and commercialization rights to Vyxeos, an investigational product in development as a treatment for AML. In addition, the Celator Acquisition provides us with Celator’s proprietary technology platform, CombiPlex, which enables the rational design and rapid evaluation of optimized combinations of anti-cancer drugs.
The acquisition of Celator will be accounted for as a business combination using the acquisition method. We are in the process of determining fair values of the assets acquired and liabilities assumed in the business combination, and completing the required supplemental pro forma revenue and earnings information for this acquisition. We expect to include a preliminary determination of the acquisition consideration and detail of the assets acquired and liabilities assumed in our condensed consolidated financial statements for the quarter ending September 30, 2016.


27

Table of Contents


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 Quarterly Report on Form 10-Q. 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 the date of this Quarterly Report on Form 10-Q (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
Overview
Jazz Pharmaceuticals plc is an international biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing meaningful products that address unmet medical needs.
We have a diverse portfolio of products and product candidates, with a focus in the areas of sleep and hematology/oncology. Our lead marketed products are:
Xyrem® (sodium oxybate) oral solution, the only product approved by the U.S. Food and Drug Administration, or FDA, for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in patients with narcolepsy;
Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia, or ALL, who have developed hypersensitivity to E. coli-derived asparaginase; and
Defitelio® (defibrotide sodium), a product approved in the U.S. for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome, or SOS, with renal or pulmonary dysfunction following hematopoietic stem cell transplantation, or HSCT, and in Europe (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children undergoing HSCT therapy.
Our strategy is to create shareholder value by:
Growing sales of the existing products in our portfolio, including by identifying and investing in growth opportunities such as new treatment indications;
Acquiring clinically meaningful and differentiated products that are on the market or product candidates that are in late-stage development; and
Pursuing targeted development of post-discovery differentiated product candidates.
We apply a disciplined approach to allocating our resources between investments in our current commercial and development portfolio and acquisitions or in-licensing of new assets.
In the three and six months ended June 30, 2016, our total net product sales increased by 14% and 12%, respectively, compared to the same period in 2015, primarily due to an increase in Xyrem product sales. We expect total net product sales to increase in 2016 over 2015, primarily due to anticipated growth in sales of Xyrem and Defitelio. For additional information regarding our net product sales, see “—Results of Operations.”
On March 30, 2016, the FDA granted marketing approval for Defitelio for the treatment of adult and pediatric patients with VOD, also known as SOS, with renal or pulmonary dysfunction following HSCT. We launched Defitelio in the U.S. shortly after FDA approval.
On July 12, 2016, we completed the acquisition of Celator Pharmaceuticals, Inc., or Celator, which acquisition we refer to in this report as the Celator Acquisition. The aggregate consideration for the Celator Acquisition was approximately $1.5 billion. The Celator Acquisition broadened our hematology/oncology portfolio with the acquisition of worldwide development and commercialization rights to VyxeosTM, an investigational product in development as a treatment for acute myeloid leukemia, or AML. In addition, the Celator Acquisition provides us with Celator’s proprietary technology platform, CombiPlex®, which is designed to enable the rational design and rapid evaluation of optimized combinations of anti-cancer drugs.
On July 12, 2016, we entered into an amendment to our existing 2015 credit agreement, or the amended credit agreement, that provides for a revolving credit facility of approximately $1.25 billion, which replaced our prior revolving credit facility of

28

Table of Contents


$750.0 million, and a $750.0 million term loan facility, of which $721.9 million remained outstanding as of the effective date of the amended credit agreement. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. The maturity date of both our revolving credit facility and term loan facility was extended from June 2020 to July 2021.
In June 2016, we received FDA approval of our manufacturing and development facility in Ireland. We plan to use this facility for the manufacture of Xyrem and development-stage products.
During the six months ended June 30, 2016, we continued our focus on research and development activities, which currently include clinical development of new product candidates, activities related to line extensions and new indications for existing products and the generation of additional clinical data for existing products, all in our sleep and hematology/oncology therapeutic areas.
A summary of our ongoing development activities is provided below:
Project
Disease Area
Status
Sleep
 
 
JZP-110
Excessive sleepiness in narcolepsy
Phase 3 clinical trial initiated in second quarter of 2015; expect preliminary data in mid-2017
 
Excessive sleepiness in obstructive sleep apnea, or OSA
Two Phase 3 clinical trials initiated in second quarter of 2015; expect preliminary data in the first quarter of 2017
JZP-386
EDS in narcolepsy
Phase 1 clinical trials completed; further evaluation ongoing
Xyrem
Cataplexy with narcolepsy in children and adolescents
Phase 3 clinical trial ongoing; enrollment completion expected by the end of the fourth quarter of 2016
Hematology/Oncology
 
Defibrotide
Prevention of VOD in high-risk patients
Preparing to initiate Phase 3 clinical trial; initiation of patient enrollment expected in the fourth quarter of 2016
Vyxeos
High-risk (secondary) AML
Phase 3 clinical trial completed; expect to initiate a rolling submission of a new drug application, or NDA, to the FDA by the end of the third quarter of 2016 and to complete the submission in late 2016 or early 2017
In the sleep area, we have ongoing and planned development programs for Xyrem and certain other product candidates.
JZP-110.
Phase 3 Clinical Trials. JZP-110 is a late-stage investigational compound being developed for potential treatment of excessive sleepiness in patients with narcolepsy and excessive sleepiness in patients with OSA. We acquired worldwide development, manufacturing and commercial rights to JZP-110 from Aerial BioPharma LLC, or Aerial, in January 2014, other than in certain jurisdictions in Asia where SK Biopharmaceuticals Co., Ltd, or SK, retains rights. We initiated patient enrollment in our Phase 3 clinical program in the second quarter of 2015. We are conducting one Phase 3 clinical trial in patients with excessive sleepiness associated with narcolepsy and two Phase 3 clinical trials in patients with excessive sleepiness associated with OSA. Approximately 800 patients are expected to be enrolled in these three trials in the aggregate. We are expecting preliminary data from the trials in patients with excessive sleepiness associated with OSA in the first quarter of 2017 and from the trial in patients with excessive sleepiness associated with narcolepsy in mid-2017. Subject to the results of these trials, we anticipate submitting an NDA to the FDA in late 2017. In addition, we expect to enroll up to 600 patients from certain of our Phase 2 and Phase 3 clinical trials in an open label extension trial evaluating the long-term safety and maintenance of efficacy of JZP-110.
Other Activities. We are also exploring additional potential indications for JZP-110.
Xyrem.
Phase 3 Clinical Trial of Xyrem in Children and Adolescents. While in many patients narcolepsy can begin during childhood and adolescence, there is limited information on the treatment of pediatric narcolepsy patients with Xyrem. We have worked with the FDA and several leading specialists to design a clinical trial to generate additional data on the treatment of pediatric narcolepsy patients with Xyrem. In the fourth quarter of 2014, we initiated a Phase 3 clinical trial to assess the safety and efficacy of Xyrem in children and adolescents aged seven to 17 who have narcolepsy with cataplexy. We expect to complete enrollment in this trial by the end of the fourth quarter of 2016.

29

Table of Contents


Other Activities. We are also pursuing other activities related to the potential development of options for narcolepsy patients that would provide clinically meaningful improvements compared to Xyrem, including once-nightly dosing. Although results from our Phase 1 trial of JZP-386, a deuterium-modified analog of sodium oxybate, which we licensed from Concert Pharmaceuticals, Inc., or Concert, in February 2013, did not support advancing JZP-386 into a later-stage clinical trial, the clinical data demonstrated that JZP-386 provided favorable deuterium-related effects, including higher serum concentrations and correspondingly increased pharmacodynamics effects at clinically relevant time points compared to Xyrem, and a safety profile similar to that observed with Xyrem. We are exploring formulation options designed to leverage the positive effects observed in the studies.
In the hematology and oncology area, we also have ongoing and planned development activities.
Defibrotide.
Planned Phase 3 Clinical Trial. We are preparing to commence a Phase 3 clinical trial to evaluate the safety and efficacy of defibrotide for the prevention of VOD in high-risk patients. We expect to initiate patient enrollment in the fourth quarter of 2016.
Other Activities. We are also exploring additional potential indications for defibrotide and assessing the potential to pursue regulatory approval of defibrotide in additional countries.
Erwinaze. We are pursuing activities related to the potential development of an effective and well-tolerated long-acting recombinant crisantaspase that would offer benefits compared to Erwinaze. We are also assessing the potential to pursue regulatory approval of Erwinaze in additional countries.
Vyxeos. Celator completed a Phase 3 clinical trial in high-risk (secondary) AML. Vyxeos is currently not approved as a marketed product in any jurisdiction. We expect to initiate a rolling submission of an NDA for Vyxeos to the FDA by the end of the third quarter of 2016 and to complete the submission in late 2016 or early 2017. FDA Breakthrough Therapy designation has been granted for Vyxeos for the treatment of adults with therapy-related AML or AML with myelodysplasia-related changes. Breakthrough Therapy designation is a process designed to expedite the development and review of a drug that is intended to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on one or more clinically significant endpoints. In addition, we are currently evaluating the timing of filing for regulatory approval of Vyxeos in Europe. We are also assessing the potential for approval of Vyxeos in other countries and for development of Vyxeos in indications in addition to the treatment of high risk (secondary) AML.
For 2016 and beyond, we expect that our research and development expenses will increase from historical levels, particularly as we initiate and undertake additional clinical trials and related development work and potentially acquire rights to additional product candidates. 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 the remainder of 2016 and beyond. Some of these challenges and risks are specific to our business, and others are common to companies in the pharmaceutical industry with development and commercial operations.
Xyrem. Our financial results remain significantly influenced by sales of Xyrem, which accounted for 74% of our net product sales in the three and six months ended June 30, 2016 and 73% of our net product sales in the year ended December 31, 2015. 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 and to develop product, service and safety improvements for patients.
Our ability to maintain or increase Xyrem product sales is subject to risks and uncertainties, including those discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. In particular, seven companies have sent us notices that they have filed abbreviated new drug applications, or ANDAs, with the FDA seeking approval to market a generic version of Xyrem. We have filed lawsuits against each of these companies seeking to prevent the introduction of a generic version of Xyrem that would infringe our patents. In the second quarter of 2016, we settled two of these lawsuits, granting the settling ANDA applicants a license to manufacture, market and sell their generic versions of Xyrem on or after December 31, 2025, or earlier depending on the occurrence of certain events. The court in which our ANDA litigation is ongoing has determined that all of our pending patent litigation against the first ANDA filer, Roxane Laboratories, Inc., or Roxane, will be consolidated for trial and set trial in this consolidated case for the second quarter of 2017.  We cannot predict the timing or outcome of this or the other ANDA litigation proceedings. Certain ANDA filers have also filed petitions for inter partes review, or IPR, by the Patent Trial and Appeal Board, or the PTAB, of the U.S. Patent and Trademark Office, or USPTO, with respect to the validity of certain distribution, method of use and formulation patents covering Xyrem. The PTAB instituted IPR trials with respect to patents and patent claims that are the subject of certain of these petitions. In July 2016, the PTAB issued final decisions that the claims of six distribution system patents that were the subject of certain IPR trials are unpatentable; as a result, if the Court of Appeals for the Federal Circuit upholds those decisions or if the time for appeal expires, these claims will be canceled. For a description of these matters, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q. We cannot predict whether additional post-grant patent review challenges will be filed by any of the ANDA filers or any other entity, the

30

Table of Contents


outcome of any pending IPR or other proceeding, the outcome of any appeal of the July 2016 IPR decisions with respect to six patents covering the distribution system for Xyrem, whether the PTAB will institute any petitioned IPR proceeding that has not yet been instituted, or the impact any IPR or other proceeding might have on ongoing ANDA litigation proceedings or other aspects of our Xyrem business. We expect that the approval of an ANDA that results in the launch of a generic version of Xyrem, or the approval and launch of other sodium oxybate products that compete with Xyrem, would have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Approval of an ANDA with respect to a generic version of Xyrem will require a risk evaluation and mitigation strategy, or REMS, which may be either a single shared REMS with Xyrem or a separate REMS with differing but comparable aspects of elements to assure safe use, or ETASU, in the approved Xyrem REMS. We and the ANDA applicants had interactions with respect to developing a single shared REMS for several years. The ANDA applicants are not currently engaging in single shared REMS discussions with us, but we are seeking to continue the interactions with the goal of developing a single shared REMS. However, we cannot predict whether, or to what extent, our interactions with the ANDA applicants will resume or whether we will develop a single shared REMS with the ANDA applicants. We are aware that, separate from the discussions with us, the FDA and ANDA applicants have exchanged communications regarding a REMS for sodium oxybate. If we and the ANDA applicants do not develop a single shared REMS, or we do not license or share intellectual property pertinent to our Xyrem REMS with generic competitors within a time frame or on terms that the FDA considers acceptable, the FDA may assert that its waiver authority permits it to approve the ANDA of one or more generic competitors with a separate REMS that differs in some aspects from our approved Xyrem REMS. We also may face pressure to develop a single shared REMS with potential generic competitors for Xyrem that is different from the approved Xyrem REMS or to license or share intellectual property pertinent to the Xyrem REMS, or elements of the Xyrem REMS, including proprietary data required for safe distribution of sodium oxybate, with generic competitors. We cannot predict the outcome or impact on our business of any future action that we may take with respect to the development of a single shared REMS for sodium oxybate, licensing or sharing intellectual property pertinent to our Xyrem REMS or elements of the Xyrem REMS, or the FDA’s response to a request by one or more ANDA applicants for a waiver of the requirement for a single shared REMS, including in connection with a certification that the applicant had been unable to obtain a license. The FDA’s response to any such request could include approval of one or more ANDAs. In addition, the Federal Trade Commission, or FTC, other governmental authorities or others could claim or determine that we are using the Xyrem REMS in an anticompetitive manner (including in light of the FDA’s statement in the Xyrem REMS approval letter that the Xyrem REMS could be used in an anticompetitive manner inconsistent with applicable provisions of the Federal Food, Drug and Cosmetic Act, or FDCA) or have engaged in other anticompetitive practices.
In August 2015, we implemented the final Xyrem REMS, which was approved by the FDA in February 2015, and we have submitted and expect to continue to submit ongoing assessments as set forth in the FDA’s Xyrem REMS approval letter. The process under which enrolled patients receive Xyrem is complex, and we have transitioned most prescribers and patients to the final Xyrem REMS process and documentation requirements. We have notified the FDA regarding our anticipated timing for completing the transition of the remaining prescribers and patients and that we will continue to work with the remaining prescribers and patients to complete the transition. However, we cannot guarantee that we will be able to transition the remaining prescribers and patients to the final Xyrem REMS, that our notification and ongoing assessments will be satisfactory to the FDA or that the Xyrem REMS will satisfy the FDA’s expectations in its evaluation of the Xyrem REMS on an ongoing basis. Any failure to comply with the REMS obligations could result in enforcement action by the FDA; lead to changes in our Xyrem REMS obligations; negatively affect sales of Xyrem; result in additional costs and expenses for us; and/or take a significant amount of time, any of which could materially and adversely affect our business, financial condition, results of operations and growth prospects. Further, we cannot predict whether the FDA will seek to require or ultimately require modifications to the Xyrem REMS, including with respect to the distribution system, or seek to otherwise impose or ultimately impose additional requirements to the Xyrem REMS, or the potential timing, terms or propriety thereof. Any such modifications or additional requirements could potentially make it easier for ANDA applicants to obtain FDA approval of their ANDAs, make it more difficult or expensive for us to distribute Xyrem, make distribution easier for future generic competitors, impair the safety profile of Xyrem and/or negatively affect sales of Xyrem.
Obtaining and maintaining appropriate reimbursement for Xyrem in the U.S. is increasingly challenging due to, among other things, the attention being paid to healthcare cost containment and prescription drug pricing, pricing pressure from third party payors and increasingly restrictive reimbursement conditions being imposed by third party payors. In this regard, we have experienced and expect to continue to experience increasing pressure from third party payors to agree to discounts, rebates or other pricing terms for Xyrem. Any such restrictive pricing terms or additional reimbursement conditions could have a material adverse effect on our Xyrem revenues. In addition, drug pricing by pharmaceutical companies has recently come under close scrutiny, particularly with respect to companies that have increased the price of products after acquiring those products from other companies. We expect that healthcare policies and reforms intended to curb healthcare costs will continue to be proposed, which could limit the prices that we charge for our products, including Xyrem, limit our commercial opportunity and/or negatively impact revenues from sales of our products. Also, price increases on Xyrem and our other products, and negative publicity regarding pricing and price increases generally, whether with respect to our products or

31

Table of Contents


products distributed by other pharmaceutical companies, could negatively affect market acceptance of Xyrem and our other products.
Erwinaze/Erwinase. Sales of our second largest product, Erwinaze/Erwinase (which we refer to in this report as Erwinaze unless otherwise indicated or the context otherwise requires), accounted for 13% and 14%, respectively, of our net product sales in the three and six months ended June 30, 2016 and 15% in the year ended December 31, 2015. We seek to maintain and increase sales of Erwinaze, as well as to make Erwinaze more widely available, through ongoing sales and marketing and research and development activities. However, a significant challenge to our ability to maintain current sales levels and to increase sales is our extremely limited inventory of Erwinaze and our need to avoid supply interruptions of Erwinaze due to capacity constraints, production delays, quality or regulatory challenges or other manufacturing difficulties. Erwinaze is licensed from and manufactured by a single source, Porton Biopharma Limited, or PBL. The current manufacturing capacity for Erwinaze is completely absorbed by demand for the product. We are working with PBL to evaluate potential expansion of its production capacity to increase the supply of Erwinaze over the longer term. As a consequence of constrained manufacturing capacity, we have had an extremely limited or no ability to build product inventory levels that can be used to absorb disruptions to supply resulting from quality, regulatory or other issues, and we have experienced product quality, manufacturing and inventory challenges that have resulted in disruptions in our ability to supply certain markets and caused us to implement batch-specific, modified product use instructions. We expect that we will continue to experience inventory and supply challenges, which may result in temporary disruptions in our ability to supply certain markets, including the U.S., from time to time. If capacity constraints or supply disruptions continue, whether as a result of continued quality or other manufacturing issues, regulatory issues or otherwise, we may be unable to build a desired excess level of product inventory, our ability to supply the market may continue to be compromised, physicians’ decisions to use Erwinaze in the future may be negatively impacted and our sales of and revenues from Erwinaze, our potential future maintenance and growth of the market for this product, and/or our business, financial condition, results of operations and growth prospects could be materially adversely affected. Our ability to successfully and sustainably maintain or grow sales of Erwinaze is also subject to a number of other risks and uncertainties, including 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, our need to apply for and receive marketing authorizations, through the European Union’s, or EU’s, mutual recognition procedure or otherwise, in certain additional countries so we can launch promotional efforts in those countries, as well as those other risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Defitelio. Sales of Defitelio accounted for 9% and 7%, respectively, of our net product sales in the three and six months ended June 30, 2016 and 5% in the year ended December 31, 2015. We acquired this product in January 2014 in connection with our acquisition of Gentium S.r.l., or Gentium, which we refer to as the Gentium Acquisition, and secured worldwide rights to the product by acquiring rights to defibrotide in the Americas in August 2014. We launched Defitelio in certain European countries in 2014 and continue to launch in additional European countries on a rolling basis. On March 30, 2016, the FDA approved our NDA for Defitelio for the treatment of adult and pediatric patients with VOD, also known as SOS, with renal or pulmonary dysfunction following HSCT. We launched Defitelio in the U.S. shortly after FDA approval.
Our ability to realize the anticipated benefits from our investment in Defitelio is subject to risks and uncertainties, including:
the acceptance of Defitelio in the U.S. by hospital pharmacy and therapeutics committees and the availability of adequate coverage and reimbursement by government programs and third party payors;
U.S. market acceptance of Defitelio at its commercial price now that it is no longer available to new patients under an expanded access treatment protocol;
the lack of experience of U.S. physicians in diagnosing and treating VOD, particularly in adults, and the possibility that physicians may delay initiation of treatment or terminate treatment before the end of the recommended dosing schedule;
our ability to successfully maintain or grow sales of Defitelio in Europe;
delays or problems in the supply or manufacture of the product;
the limited size of the population of VOD patients who are indicated for treatment with Defitelio (particularly if changes in HSCT treatment protocols reduce the incidence of VOD);
our ability to meet the post-marketing commitments and requirements imposed by the FDA in connection with its approval of our NDA for Defitelio; and
our ability to obtain marketing approval in other countries and to develop the product for additional indications.
If sales of Defitelio do not reach the levels we expect, our anticipated revenue from the product will be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

32

Table of Contents


Vyxeos. In furtherance of our growth strategy, we have made a significant investment in Vyxeos through the Celator Acquisition. Our ability to realize the anticipated benefits from this investment is subject to a number of risks and uncertainties, including:
our ability to successfully obtain marketing approval for Vyxeos in the United States and Europe;
risks associated with developing products based on the CombiPlex technology platform that we acquired in the Celator Acquisition, such as Vyxeos, the first injectable fixed ratio, drug delivery combination oncology product that the FDA would potentially be considering for approval;
the need to establish pricing and reimbursement support for Vyxeos in the event we are able to obtain marketing approval for Vyxeos in the United States or in other countries;
the acceptance of Vyxeos in the United States and other countries by hospital pharmacy and therapeutics committees and the availability of adequate coverage and reimbursement by government programs and third party payors;
delays or problems in the supply or manufacture of the product, including with respect to the requirement of the third parties upon which we rely to manufacture Vyxeos and its active pharmaceutical ingredients, or APIs, to obtain the approval of the FDA and/or other regulatory authorities to manufacture Vyxeos; and
the limited size of the population of AML patients who may potentially be indicated for treatment with Vyxeos.
If we are unable to obtain regulatory approval for Vyxeos in the United States or in Europe in a timely manner, or at all, or if sales of an approved Vyxeos product do not reach the levels we expect, our anticipated revenue from Vyxeos would be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
For more information on risks and uncertainties relating to Erwinaze, Defitelio and Vyxeos, see the risk factor under the heading “While Xyrem remains our largest product, our success also depends on our ability to effectively commercialize our other products and, in the case of our newly acquired product candidate, Vyxeos, our ability to obtain regulatory approval in the United States and Europe and, if approved, to successfully launch and commercialize Vyxeos. Our inability to do so could have a material adverse effect on our business, financial condition, results of operations and growth prospects” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
In addition to risks specifically related to Xyrem, Erwinaze, Defitelio and Vyxeos, other key challenges and risks that we face include risks and uncertainties related to:
the challenges of protecting and enhancing our intellectual property rights;
the challenges of achieving and maintaining commercial success of our products;
delays or problems in the supply or manufacture of our products, particularly with respect to certain products as to which we maintain limited inventories, and our dependence on single source suppliers to continue to meet our ongoing commercial demand or our requirements for clinical trial supplies;
the need to obtain and maintain appropriate pricing and reimbursement for our products in an increasingly challenging environment due to, among other things, the attention being paid to healthcare cost containment and other austerity measures in the U.S. and worldwide, including the need to obtain and maintain reimbursement for Xyrem in the U.S. in an environment in which we are subject to increasingly restrictive conditions for reimbursement required by third party payors;
our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business;
the challenges of compliance with the requirements of 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, patient assistance programs, adverse event reporting and product recalls or withdrawals;
the difficulty and uncertainty of pharmaceutical product development, including the timing thereof, and the uncertainty of clinical success, such as the risk that results from preclinical studies and/or early clinical trials may not be predictive of results obtained in later and larger clinical trials planned or anticipated to be conducted for our product candidates;
the inherent uncertainty associated with the regulatory approval process, especially as we continue to undertake increased activities and make growing investment in our product pipeline development projects;
the risks associated with business combination or product or product candidate acquisition transactions, including risks associated with the Celator Acquisition, such as the challenges inherent in the integration of acquired businesses with our historic business, the increase in geographic dispersion among our centers of operation and the risks that we

33

Table of Contents


may acquire unanticipated liabilities along with acquired businesses or otherwise fail to realize the anticipated benefits (commercial or otherwise) from such transactions; and
possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations, as a result of, among other things, the Celator Acquisition.
Any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and growth prospects. All of these risks and uncertainties are discussed in greater detail, along with other risks and uncertainties, in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Results of Operations
The following table presents our revenues and expenses (in thousands, except percentages): 
 
Three Months Ended
June 30,
 
Increase/
 
Six Months Ended
June 30,
 
Increase/
 
2016
 
2015
 
(Decrease)
 
2016
 
2015
 
(Decrease)
Product sales, net
$
379,110

 
$
332,106

 
14
%
 
$
713,026

 
$
639,141

 
12
%
Royalties and contract revenues
2,051

 
1,641

 
25
%
 
4,145

 
3,909

 
6
%
Cost of product sales (excluding amortization of intangible assets)
23,980

 
21,813

 
10
%
 
47,419

 
50,111

 
(5
)%
Selling, general and administrative
122,618

 
107,132

 
14
%
 
251,383

 
219,520

 
15
%
Research and development
39,091

 
27,833

 
40
%
 
70,343

 
55,014

 
28
%
Acquired in-process research and development

 

 
N/A(1)

 
8,750

 

 
N/A(1)

Intangible asset amortization
26,737

 
23,668

 
13
%
 
49,379

 
48,345

 
2
%
Interest expense, net
12,121

 
15,812

 
(23
)%
 
24,313

 
32,057

 
(24
)%
Foreign currency (gain) loss

 
1,914

 
N/A(1)

 
819

 
(331
)
 
(347
)%
Loss on extinguishment and modification of debt

 
16,815

 
N/A(1)

 

 
16,815

 
N/A(1)

Income tax provision
45,332

 
30,647

 
48
%
 
79,362

 
62,706

 
27
%
Net loss attributable to noncontrolling interests, net of tax

 
1

 
N/A(1)

 

 
1

 
N/A(1)

_____________________________
(1)
Comparison to prior period not meaningful.
Revenues
The following table presents our product sales, royalties and contract revenues, and total revenues (in thousands, except percentages):
 
Three Months Ended
June 30,
 
Increase/
 
Six Months Ended
June 30,
 
Increase/
 
2016
 
2015
 
(Decrease)
 
2016
 
2015
 
(Decrease)
Xyrem
$
280,968

 
$
247,846

 
13
%
 
$
530,505

 
$
460,536

 
15
%
Erwinaze/Erwinase
49,748

 
46,151

 
8
%
 
100,921

 
96,504

 
5
%
Defitelio/defibrotide
33,246

 
15,257

 
118
%
 
51,143

 
32,620

 
57
%
Prialt® (ziconotide) intrathecal infusion
8,073

 
7,138

 
13
%
 
14,282

 
13,902

 
3
%
Psychiatry
3,867

 
9,372

 
(59
)%
 
10,869

 
18,465

 
(41
)%
Other
3,208

 
6,342

 
(49
)%
 
5,306

 
17,114

 
(69
)%
Product sales, net
379,110

 
332,106

 
14
%
 
713,026

 
639,141

 
12
%
Royalties and contract revenues
2,051

 
1,641

 
25
%
 
4,145

 
3,909

 
6
%
Total revenues
$
381,161

 
$
333,747

 
14
%
 
$
717,171

 
$
643,050

 
12
%

34

Table of Contents


Product Sales, Net
Xyrem product sales increased in the three and six months ended June 30, 2016 compared to the same periods in 2015, primarily due to a higher average net selling price and, to a lesser extent, an increase in sales volume.  A price increase was instituted in February 2016. Xyrem product sales volume increased by 4% in each of the three and six months ended June 30, 2016 compared to the same periods in 2015. The sales volume increase was driven by an increase in the average number of patients on Xyrem, which includes new patients, patients who have restarted Xyrem therapy and active patients who remained on Xyrem therapy. Erwinaze product sales increased in the three and six months ended June 30, 2016 compared to the same periods in 2015, primarily due to price increases instituted in January 2016 and July 2015 and, to a lesser extent, an increase in sales volume, partially offset by higher chargebacks and rebates resulting from increased utilization under the 340B drug pricing discount and Medicaid programs. The Erwinaze sales volume increase was primarily driven by demand in existing treatment sites and, to a lesser extent, new treatment sites prescribing Erwinaze. In the three and six months ended June 30, 2016, Erwinaze sales volume was negatively impacted by supply challenges that temporarily disrupted our ability to supply certain markets. Defitelio/defibrotide product sales increased in the three and six months ended June 30, 2016 compared to the same periods in 2015, primarily due to the launch of Defitelio in the U.S. in April 2016 and higher net sales outside the U.S. Prialt product sales increased in the three and six months ended June 30, 2016 compared to the same periods in 2015, primarily due to an increase in sales volume. Psychiatry product sales decreased in the three and six months ended June 30, 2016 compared to the same periods in 2015, primarily due to generic competition. Other sales decreased in the six months ended June 30, 2016 compared to the same period in 2015, primarily due to our sale in March 2015 of certain products and the related business that we acquired as part of our acquisition of EUSA Pharma Inc., or EUSA Pharma, which we refer to as the EUSA Acquisition. We expect total product sales will increase in 2016 over 2015, primarily due to anticipated growth in sales of our lead marketed products, partially offset by decreases in sales of certain other products.
Royalties and Contract Revenues
Royalties and contract revenues increased in the three and six months ended June 30, 2016 compared to the same periods in 2015. We expect royalties and contract revenues in 2016 to increase slightly compared to 2015, primarily due to higher royalties on our out-licensed products.

Cost of Product Sales
Cost of product sales increased in the three months ended June 30, 2016 compared to the same period in 2015, primarily due to a change in product mix. Cost of product sales decreased in the six months ended June 30, 2016 compared to the same period in 2015, primarily due to a change in product mix, partially offset by an increase in net product sales. Gross margin as a percentage of net product sales was 93.7% and 93.3% in the three and six months ended June 30, 2016, respectively, compared to 93.4% and 92.2% for the same periods in 2015. The increase in our gross margin percentage in the three and six months ended June 30, 2016 was primarily due to a change in product mix. Cost of product sales is not expected to change materially in 2016 compared to 2015.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased in the three months ended June 30, 2016 compared to the same period in 2015, primarily due to an increase in compensation-related expenses of $7.1 million driven by higher headcount and an increase in other expenses related to the expansion and support of our business. Selling, general and administrative expenses increased in the six months ended June 30, 2016 compared to the same periods in 2015, primarily due to an increase in compensation-related expenses of $15.2 million driven by higher headcount, an increase in legal fees and expenses, expenses related to the launch of Defitelio in the U.S., and an increase in other expenses related to the expansion and support of our business. We expect selling, general and administrative expenses in 2016 to increase compared to 2015, primarily due to an increase in compensation-related expenses driven by higher headcount, expenses related to the launch of Defitelio in the U.S., the preparation for the potential commercial launch of Vyxeos, increase in expenses related to Xyrem REMS and pharmacy services and other expenses related to the expansion and support of our business.
Research and Development Expenses
Research and development expenses consist primarily of costs related to clinical studies and outside services, personnel expenses, milestone payments and other research and development costs. Clinical study and outside services costs relate primarily to services performed by clinical research organizations, materials and supplies, and other third party fees. Personnel expenses relate primarily to salaries, benefits and share-based compensation. 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

35

Table of Contents


prioritizing efforts based on our assessment of which 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 that we believe will best support the future growth of our business.
The following table provides a breakout of our research and development expenses by major categories of expense (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Clinical studies and outside services
$
25,302

 
$
16,010

 
$
43,858

 
$
31,313

Personnel expenses
10,999

 
9,746

 
21,227

 
19,854

Other
2,790

 
2,077

 
5,258

 
3,847

Total
$
39,091

 
$
27,833

 
$
70,343

 
$
55,014

Research and development expenses increased by $11.3 million and $15.3 million in the three and six months ended June 30, 2016, respectively, compared to the same periods in 2015, primarily due to increased clinical studies and outside services costs driven primarily by costs related to three Phase 3 clinical trials for JZP-110.
For 2016 and beyond, we expect that our research and development expenses will continue to increase from historical levels particularly as we initiate additional clinical trials and related development work and potentially acquire rights to additional product candidates. 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 Quarterly Report on Form 10‑Q.
Acquired In-Process Research and Development
Acquired in-process research and development expense in the six months ended June 30, 2016 related to an upfront payment of $8.8 million we made in connection with the acquisition of intellectual property and know-how related to recombinant crisantaspase.
Intangible Asset Amortization
Intangible asset amortization increased in the three and six months ended June 30, 2016 compared to the same periods in 2015 primarily due to the commencement of amortization of the Defitelio U.S. intangible asset upon FDA approval in March 2016, partially offset by the cessation of amortization of certain intangible assets that were fully amortized in 2015 and the impact of foreign exchange rates on euro-denominated assets. Intangible asset amortization is not expected to change materially in 2016 compared to 2015.
Interest Expense, Net
In June 2015, we terminated the credit agreement that we entered into in June 2012, as subsequently amended, or the previous credit agreement, and entered into a new credit agreement, or the 2015 credit agreement. Interest expense, net decreased by $3.7 million and $7.7 million in the three and six months ended June 30, 2016 compared to the same period in 2015, primarily due to a reduction in interest rates on borrowings under the 2015 credit agreement as compared to the previous credit agreement and a lower average debt balance. On July 12, 2016, we entered into an amendment to our 2015 credit agreement that provides for a revolving credit facility of $1.25 billion, which replaced our prior revolving credit facility of $750.0 million, and a $750.0 million term loan facility, of which $721.9 million remained outstanding as of July 12, 2016. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. We expect interest expense will be higher in 2016 compared to 2015 due to the increase in our average debt balance.
Foreign Currency Gain (Loss)
The foreign currency loss in the six months ended June 30, 2016 primarily related to the translation of euro-denominated net monetary liabilities, including intercompany balances, held by subsidiaries with a U.S. dollar functional currency.


36

Table of Contents


Loss on Extinguishment and Modification of Debt
In the three and six months ended June 30, 2015, we recorded a loss of $16.8 million in connection with a refinancing of our term loan and revolving credit facilities in June 2015, which was comprised of $16.0 million related to the expensing of unamortized deferred financing costs and unamortized original issue discount associated with extinguished debt and $0.8 million related to new third party fees associated with the modification of existing debt.
Income Tax Provision
Our income tax provision was $45.3 million and $79.4 million in the three and six months ended June 30, 2016, respectively, compared to $30.6 million and $62.7 million for the same periods in 2015. The effective tax rates were 28.9% and 30.0% for the three and six months ended June 30, 2016, respectively, compared to 25.8% and 28.3% in the same periods in 2015. The increase in the effective tax rates for the three and six months ended June 30, 2016, compared to the same periods in 2015, was primarily due to a decrease in originating tax credits and the impact of changes in tax rates in certain jurisdictions in which we operate, partially offset by changes in income mix among the various jurisdictions in which we operate. The effective tax rates for the three and six months ended June 30, 2016 were higher than the Irish statutory rate of 12.5% primarily due to income taxable at a rate higher than the Irish statutory rate, unrecognized tax benefits, and various expenses not deductible for tax purposes, partially offset by originating tax credits and deductions available in relation to subsidiary equity.

Liquidity and Capital Resources
As of June 30, 2016, we had cash, cash equivalents and investments of $916.4 million, borrowing availability under our revolving credit facility of $749.5 million and long-term debt of $1.3 billion. Our long-term debt included our $721.9 million aggregate principal amount term loan and $575.0 million principal amount of the 2021 Notes. We generated cash flows from operations of $273.3 million during the six months ended June 30, 2016 and we expect to continue to generate positive cash flows from operations during 2016.
On July 12, 2016, we completed the Celator Acquisition. The aggregate cost to us of the Celator Acquisition was approximately $1.5 billion. On July 12, 2016, we entered into an amendment to our 2015 credit agreement that provides for a revolving credit facility of $1.25 billion, which replaced our prior revolving credit facility of $750.0 million, and a $750.0 million term loan facility, of which $721.9 million remained outstanding at close. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition and expect to use the proceeds from future loans under the revolving credit facility, if any, for general corporate purposes, including corporate development activities.
We believe that our existing cash balances, cash we expect to generate from operations and funds available under our revolving credit facility will be sufficient to fund our operations and to meet our existing obligations for the foreseeable future. The adequacy of our cash resources depends on many assumptions, including primarily our assumptions with respect to product sales and expenses, as well as the other factors set forth in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q under the headings “Xyrem is our largest selling product, and our inability to maintain or increase sales of Xyrem would have a material adverse effect on our business, financial condition, results of operations and growth prospects,” “If generic versions of Xyrem or other sodium oxybate products that compete with Xyrem are approved and launched, sales of Xyrem would be adversely affected,” “The manufacture, distribution and sale of Xyrem are subject to significant regulatory oversight and restrictions and the requirements of a risk evaluation and mitigation strategy, and these restrictions and requirements, as well as the potential impact of changes to these restrictions and requirements, subject us to increased risks and uncertainties, any of which could negatively impact sales of Xyrem,” and “To continue to grow our business, we will need to commit substantial resources, which could result in future losses or otherwise limit our opportunities or affect our ability to operate our business.” Our assumptions may prove to be wrong or other factors may adversely affect our business, and as a result we could exhaust or significantly decrease our available cash resources and we may not be able to generate sufficient cash to service our debt obligations which could, among other things, force us to raise additional funds and/or force us to reduce our expenses, either of which could have a material adverse effect on our business.
To continue to grow our business over the longer term, we plan to commit substantial resources to product acquisition and in-licensing, product development, clinical trials of product candidates and expansion of our commercial, manufacturing and other operations. In this regard, we have evaluated and expect to continue to evaluate a wide array of strategic transactions as part of our strategy to acquire or in-license and develop additional products and product candidates. Acquisition opportunities that we pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition, we may pursue new operations or continue the expansion of our existing operations. Accordingly, we expect to continue to opportunistically seek access to additional capital to license or acquire additional products, product candidates or companies to expand our operations or for general corporate purposes. Raising

37

Table of Contents


additional capital could be accomplished through one or more public or private debt or equity financings, collaborations or partnering arrangements. Any equity financing would be dilutive to our shareholders, and the consent of the lenders under the amended credit agreement could be required for certain financings.
In November 2015, our board of directors authorized a share repurchase program pursuant to which we are authorized to repurchase a number of ordinary shares having an aggregate purchase price of up to $300 million, exclusive of any brokerage commissions. Under this share repurchase program, which has no expiration date, we may repurchase ordinary shares from time to time on the open market. 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 our credit agreement, corporate and regulatory requirements and market conditions. In the six months ended June 30, 2016, we spent a total of $163.2 million to purchase 1.3 million of our ordinary shares under the share repurchase program at an average total purchase price, including commissions, of $126.74 per share. All ordinary shares repurchased by us were canceled. We temporarily suspended our share repurchase program in June 2016 in connection with the Celator Acquisition. The share repurchase program may be modified, suspended, otherwise discontinued or resumed at any time without prior notice. As of June 30, 2016, the remaining amount authorized under the share repurchase program was approximately $96.6 million.
The following table presents a summary of our cash flows for the periods indicated (in thousands):
 
Six Months Ended
June 30,
 
2016
 
2015
Net cash provided by operating activities
$
273,310

 
$
237,126

Net cash provided by (used in) investing activities
(216,407
)
 
6,271

Net cash provided by (used in) financing activities
(178,690
)
 
3,962

Effect of exchange rates on cash and cash equivalents
968

 
(9,758
)
Net increase (decrease) in cash and cash equivalents
$
(120,819
)
 
$
237,601

Net cash provided by operating activities of $273.3 million for the six months ended June 30, 2016 related to net income of $185.4 million, adjusted for non-cash items of $121.7 million primarily related to intangible asset amortization and share-based compensation expense. This was partially offset by $33.8 million of net cash outflow related to changes in operating assets and liabilities. Net cash provided by operating activities of $237.1 million for the six months ended June 30, 2015 related to net income of $158.8 million, adjusted for non-cash items of $105.6 million primarily related to intangible asset amortization and share-based compensation expense. This was partially offset by $27.3 million of net cash outflow related to changes in operating assets and liabilities which included an increase of $13.3 million in our other non-current liabilities primarily relating to reserves for uncertain tax positions, $13.7 million in our prepaid expenses primarily due to upfront payments to a clinical research organization and a decrease in accrued liabilities of $18.1 million primarily driven by employee-related expenses, partially offset by an increase in income taxes payable.
Net cash used in investing activities for the six months ended June 30, 2016 primarily related to a $150.0 million milestone payment to Sigma-Tau that was triggered by the FDA approval of Defitelio on March 30, 2016, purchase of investments of $53.5 million, an upfront payment of $8.8 million we made in connection with the acquisition of intellectual property and know-how related to recombinant crisantaspase and purchases of property and equipment of $4.2 million. Net cas