SEC Filing | Jazz Pharmaceuticals plc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2020



☐	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.)

Fifth Floor, Waterloo Exchange,

Waterloo Road, Dublin 4, Ireland D04 E5W7

011-353-1-634-7800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share	JAZZ	The Nasdaq Stock Market LLC

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 28, 2020, 55,458,631 ordinary shares of the registrant, nominal value $0.0001 per share, were outstanding.

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JAZZ PHARMACEUTICALS PLC

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2020

INDEX



		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets – June 30, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Income (Loss) – Three and Six Months Ended June 30, 2020 and 2019	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2020 and 2019	5
	Condensed Consolidated Statements of Shareholders’ Equity - Three and Six Months Ended June 30, 2020 and 2019	6
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2020 and 2019	8
	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72

Item 5.	Other Information	73

Item 6.	Exhibits	74

SIGNATURES		76

We own or have rights to various copyrights, trademarks, and trade names used in our business in the U.S. and/or other countries, including the following: Jazz Pharmaceuticals^®, Xyrem^® (sodium oxybate) oral solution, Sunosi^® (solriamfetol), Defitelio^® (defibrotide sodium), Defitelio^® (defibrotide), Erwinaze^® (asparaginase Erwinia chrysanthemi), Erwinase^®, CombiPlex^®, Vyxeos^®(daunorubicin and cytarabine) liposome for injection, Vyxeos^® liposomal 44 mg/100 mg powder for concentrate for solution for infusion, Zepzelca™ (lurbinectedin), and Xywav™ (calcium, magnesium, potassium, and sodium oxybates) oral solution. 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.

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PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements

JAZZ PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



	June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	786,082		$	637,344
Investments	910,000			440,000
Accounts receivable, net of allowances	351,920			355,987
Inventories	92,534			78,608
Prepaid expenses	49,109			39,434
Other current assets	112,701			78,895
Total current assets	2,302,346			1,630,268
Property, plant and equipment, net	128,259			131,506
Operating lease assets	133,179			139,385
Intangible assets, net	2,286,126			2,440,977
Goodwill	918,021			920,018
Deferred tax assets, net	243,395			221,403
Deferred financing costs	6,347			7,426
Other non-current assets	48,828			47,914
Total assets	$	6,066,501		$	5,538,897
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	50,043		$	45,732
Accrued liabilities	266,918			269,686
Current portion of long-term debt	33,387			33,387
Income taxes payable	55,979			10,965
Deferred revenue	3,633			4,720
Total current liabilities	409,960			364,490
Deferred revenue, non-current	3,588			4,861
Long-term debt, less current portion	2,069,669			1,573,870
Operating lease liabilities, less current portion	144,264			151,226
Deferred tax liabilities, net	162,376			224,095
Other non-current liabilities	134,839			109,374
Commitments and contingencies (Note 11)
Shareholders’ equity:
Ordinary shares	6			6
Non-voting euro deferred shares	55			55
Capital redemption reserve	472			472
Additional paid-in capital	2,499,135			2,266,026
Accumulated other comprehensive loss	(236,109		)	(223,393		)
Retained earnings	878,246			1,067,815
Total shareholders’ equity	3,141,805			3,110,981
Total liabilities and shareholders’ equity	$	6,066,501		$	5,538,897

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

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JAZZ PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenues:
Product sales, net	$	558,203		$	523,423		$	1,088,408		$	1,026,754
Royalties and contract revenues	4,233			10,710			8,754			15,565
Total revenues	562,436			534,133			1,097,162			1,042,319
Operating expenses:
Cost of product sales (excluding amortization of acquired developed technologies)	28,008			27,676			56,665			61,182
Selling, general and administrative	191,406			176,014			399,806			343,961
Research and development	78,922			62,384			165,029			122,489
Intangible asset amortization	62,974			61,576			125,821			118,461
Acquired in-process research and development	3,000			2,200			205,250			58,200
Impairment charge	—			—			136,139			—
Total operating expenses	364,310			329,850			1,088,710			704,293
Income from operations	198,126			204,283			8,452			338,026
Interest expense, net	(26,210		)	(18,234		)	(44,706		)	(36,156		)
Foreign exchange loss	(464		)	(1,933		)	(1,596		)	(2,544		)
Income (loss) before income tax provision (benefit) and equity in loss of investees	171,452			184,116			(37,850		)	299,326
Income tax provision (benefit)	54,754			(78,650		)	3,467			(49,534		)
Equity in loss of investees	1,897			868			1,715			1,761
Net income (loss)	$	114,801		$	261,898		$	(43,032	)	$	347,099

Net income (loss) per ordinary share:
Basic	$	2.07		$	4.62		$	(0.77	)	$	6.09
Diluted	$	2.06		$	4.56		$	(0.77	)	$	6.01
Weighted-average ordinary shares used in per share calculations - basic	55,413			56,707			55,684			56,955
Weighted-average ordinary shares used in per share calculations - diluted	55,864			57,427			55,684			57,753

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

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JAZZ PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020			2019
Net income (loss)	$	114,801	$	261,898		$	(43,032	)	$	347,099
Other comprehensive income (loss):
Foreign currency translation adjustments	20,730		13,319			(9,260		)	(7,823		)
Unrealized gain (loss) on hedging activities, net of income tax provision (benefit) of $85, ($440), ($494) and ($689), respectively	597		(3,081		)	(3,456		)	(4,822		)
Other comprehensive income (loss)	21,327		10,238			(12,716		)	(12,645		)
Total comprehensive income (loss)	$	136,128	$	272,136		$	(55,748	)	$	334,454

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

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JAZZ PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Ordinary Shares				Non-voting Euro Deferred			Capital Redemption Reserve		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Equity
	Shares		Amount		Shares	Amount		Capital Redemption Reserve		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Equity
Balance at December 31, 2019	56,140		$	6	4,000	$	55	$	472	$	2,266,026		$	(223,393	)	$	1,067,815		$	3,110,981
Issuance of ordinary shares in conjunction with exercise of share options	145		—		—	—		—		13,264			—			—			13,264
Issuance of ordinary shares in conjunction with vesting of restricted stock units	214		—		—	—		—		—			—			—			—
Shares withheld for payment of employee's withholding tax liability	—		—		—	—		—		(13,547		)	—			—			(13,547		)
Share-based compensation	—		—		—	—		—		28,731			—			—			28,731
Shares repurchased	(1,131	)	—		—	—		—		—			—			(139,053		)	(139,053		)
Other comprehensive loss	—		—		—	—		—		—			(34,043		)	—			(34,043		)
Net loss	—		—		—	—		—		—			—			(157,833		)	(157,833		)
Balance at March 31, 2020	55,368		$	6	4,000	$	55	$	472	$	2,294,474		$	(257,436	)	$	770,929		$	2,808,500
Issuance of Exchangeable Senior Notes, due 2026	—		—		—	—		—		176,260			—			—			176,260
Partial repurchase of Exchangeable Senior Notes, due 2021	—		—		—	—		—		(12,069		)	—			—			(12,069		)
Issuance of ordinary shares in conjunction with exercise of share options	74		—		—	—		—		4,440			—			—			4,440
Issuance of ordinary shares under employee stock purchase plan	65		—		—	—		—		6,547			—			—			6,547
Issuance of ordinary shares in conjunction with vesting of restricted stock units	19		—		—	—		—		—			—			—			—
Shares withheld for payment of employee's withholding tax liability	—		—		—	—		—		(1,116		)	—			—			(1,116		)
Share-based compensation	—		—		—	—		—		30,599			—			—			30,599
Shares repurchased	(70	)	—		—	—		—		—			—			(7,484		)	(7,484		)
Other comprehensive income	—		—		—	—		—		—			21,327			—			21,327
Net income	—		—		—	—		—		—			—			114,801			114,801
Balance at June 30, 2020	55,456		$	6	4,000	$	55	$	472	$	2,499,135		$	(236,109	)	$	878,246		$	3,141,805

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JAZZ PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(Continued)

(In thousands)

(Unaudited)



	Ordinary Shares				Non-voting Euro Deferred			Capital Redemption Reserve		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Equity
	Shares		Amount		Shares	Amount		Capital Redemption Reserve		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Equity
Balance at December 31, 2018	57,504		$	6	4,000	$	55	$	472	$	2,113,630		$	(197,791	)	$	841,050		$	2,757,422
Cumulative effect adjustment from adoption of new accounting standards	—		—		—	—		—		—			—			4,848			4,848
Issuance of ordinary shares in conjunction with exercise of share options	54		—		—	—		—		3,057			—			—			3,057
Issuance of ordinary shares in conjunction with vesting of restricted stock units	203		—		—	—		—		—			—			—			—
Shares withheld for payment of employee's withholding tax liability	—		—		—	—		—		(13,810		)	—			—			(13,810		)
Share-based compensation	—		—		—	—		—		27,861			—			—			27,861
Shares repurchased	(858	)	—		—	—		—		—			—			(111,249		)	(111,249		)
Other comprehensive loss	—		—		—	—		—		—			(22,883		)	—			(22,883		)
Net income	—		—		—	—		—		—			—			85,201			85,201
Balance at March 31, 2019	56,903		$	6	4,000	$	55	$	472	$	2,130,738		$	(220,674	)	$	819,850		$	2,730,447
Issuance of ordinary shares in conjunction with exercise of share options	98		—		—	—		—		7,033			—			—			7,033
Issuance of ordinary shares under employee stock purchase plan	57		—		—	—		—		6,032			—			—			6,032
Issuance of ordinary shares in conjunction with vesting of restricted stock units	15		—		—	—		—		—			—			—			—
Shares withheld for payment of employee's withholding tax liability	—		—		—	—		—		(1,003		)	—			—			(1,003		)
Share-based compensation	—		—		—	—		—		28,658			—			—			28,658
Shares repurchased	(447	)	—		—	—		—		—			—			(59,869		)	(59,869		)
Other comprehensive income	—		—		—	—		—		—			10,238			—			10,238
Net income	—		—		—	—		—		—			—			261,898			261,898
Balance at June 30, 2019	56,626		$	6	4,000	$	55	$	472	$	2,171,458		$	(210,436	)	$	1,021,879		$	2,983,434

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JAZZ PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2020			2019
Operating activities
Net income (loss)	$	(43,032	)	$	347,099
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Intangible asset amortization	125,821			118,461
Share-based compensation	59,258			55,841
Impairment charge	136,139			—
Depreciation	9,266			6,894
Acquired in-process research and development	205,250			58,200
Deferred tax benefit	(82,768		)	(151,347		)
Provision for losses on accounts receivable and inventory	4,078			2,403
Loss on extinguishment of debt	4,475			—
Amortization of debt discount and deferred financing costs	24,793			22,584
Other non-cash transactions	3,496			(779		)
Changes in assets and liabilities:
Accounts receivable	3,640			(47,574		)
Inventories	(18,826		)	(18,562		)
Prepaid expenses and other current assets	(44,853		)	(15,929		)
Other non-current assets	1,982			(1,067		)
Operating lease assets	6,422			7,399
Accounts payable	5,264			(14,096		)
Accrued liabilities	(6,972		)	(59,031		)
Income taxes payable	45,481			29,050
Deferred revenue	(2,360		)	(3,054		)
Other non-current liabilities	25,912			14,177
Operating lease liabilities, less current portion	(6,978		)	431
Net cash provided by operating activities	455,488			351,100
Investing activities
Proceeds from maturity of investments	565,000			630,000
Purchases of property, plant and equipment	(7,520		)	(21,911		)
Acquired in-process research and development	(205,250		)	(58,200		)
Acquisition of intangible assets	(113,000		)	(25,500		)
Acquisition of investments	(1,040,475		)	(360,975		)
Net cash provided by (used in) investing activities	(801,245		)	163,414
Financing activities
Net proceeds from issuance of Exchangeable Senior Notes, due 2026	981,381			—
Proceeds from revolving credit facility	500,000			—
Proceeds from employee equity incentive and purchase plans	24,251			16,122
Payment of employee withholding taxes related to share-based awards	(14,663		)	(14,813		)
Repayments of long-term debt	(16,693		)	(16,693		)
Share repurchases	(146,537		)	(171,118		)
Payments for partial repurchase of Exchangeable Senior Notes, due 2021	(332,888		)	—
Repayments under revolving credit facility	(500,000		)	—
Net cash provided by (used in) financing activities	494,851			(186,502		)
Effect of exchange rates on cash and cash equivalents	(356		)	105
Net increase in cash and cash equivalents	148,738			328,117
Cash and cash equivalents, at beginning of period	637,344			309,622
Cash and cash equivalents, at end of period	$	786,082		$	637,739

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

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JAZZ PHARMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. The Company and Summary of Significant Accounting Policies

Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing and commercializing life-changing medicines that transform the lives of patients with serious diseases – often with limited or no options. We have a diverse portfolio of marketed medicines and novel product candidates, from early- to late-stage development, in key therapeutic areas. Our focus is in neuroscience, including sleep medicine and movement disorders, and in oncology, including hematologic malignancies and solid tumors. We actively explore new options for patients including novel compounds, small molecule advancements, biologics and innovative delivery technologies.

Our lead marketed products are:


•	Xyrem^® (sodium oxybate) oral solution, the only product approved by the U.S. Food and Drug Administration, or FDA, and marketed in the U.S. for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in both adult and pediatric patients with narcolepsy;


•	Sunosi^® (solriamfetol), a product approved by FDA and marketed in the U.S. and in Europe to improve wakefulness in adult patients with EDS associated with narcolepsy or obstructive sleep apnea;

•

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, 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;


•	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;


•	Vyxeos^®(daunorubicin and cytarabine) liposome for injection, a product approved in the U.S. and in Europe (where it is marketed as Vyxeos^® liposomal 44 mg/100 mg powder for concentrate for solution for infusion) for the treatment of adults with newly-diagnosed therapy-related acute myeloid leukemia, or AML, or AML with myelodysplasia-related changes; and


•	Zepzelca™ (lurbinectedin), a product approved by FDA in June 2020 and recently launched in the U.S. for the treatment of adult patients with metastatic small cell lung cancer, or SCLC, with disease progression on or after platinum-based chemotherapy.

On July 21, 2020, Xywav™ (formerly JZP-258) was approved in the U.S. for the treatment of cataplexy or EDS in narcolepsy patients seven years of age and older; we expect to launch Xywav in the fourth quarter of 2020. This approval follows multiple significant regulatory approvals and product launches over the last five years. In 2020, we also obtained our European approval of Sunosi, which was launched in Germany in May 2020, and the U.S. approval of Zepzelca, which was launched in July 2020.

Our strategy to create shareholder value is focused on:


•	Strong execution driving sales growth in our core therapy areas through leveraging our leading market position and expertise in sleep and new high growth products in oncology that address significant unmet needs;


•	Expanding our pipeline with external patient-centric innovation to achieve a balanced portfolio of highly differentiated programs;


•	Continuing to build a flexible, efficient, and productive development engine for targeted therapeutic conditions to identify and progress early- and mid-stage assets; and


•	Investing in a scalable operating model and differentiated capabilities to enable successful partnerships and unlock further value through indication expansion and global markets.

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.

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Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared following the requirements of the U.S. Securities and Exchange Commission 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, 2019.

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, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020, for any other interim period or for any future period.

Our significant accounting policies have not changed substantially from those previously described in our Annual Report on Form 10-K for the year ended December 31, 2019.

These condensed consolidated financial statements include the accounts of Jazz Pharmaceuticals plc and our subsidiaries, and intercompany transactions and balances have been eliminated.

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.

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.

Adoption of New Accounting Standards

In August 2018, the Financial Accounting Standards Board, or FASB, issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard on January 1, 2020 and adoption did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. We adopted this standard on January 1, 2020 and adoption did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires that credit losses on financial assets measured at amortized cost be determined using an expected loss model, instead of the current incurred loss model, and requires that credit losses related to available-for-sale debt securities be recorded through an allowance for credit losses and limited to the amount by which carrying value exceeds fair value. We adopted this standard on January 1, 2020 and adoption did not have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. ASC 848 allows for different elections to be made at different points in time, and the timing of those elections will be documented as applicable. For the avoidance of doubt, we intend to reassess the elections of optional expedients and exceptions included within ASC 848 related to our hedging activities and will document the election of these items on a quarterly basis. ASC 848 is effective for us as of January 1, 2020 and will no longer be available to apply after December 31, 2022. In June 2020, we elected the expedient in

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ASC 848-50-25-2, which allows us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform.

Significant Risks and Uncertainties

With the global impact of the COVID-19 pandemic, we have developed a comprehensive response strategy, including establishing cross-functional response teams and implementing business continuity plans to manage the impact of the COVID-19 pandemic on our employees, patients and our business. Given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, we expect that our business, financial condition, results of operations and growth prospects will continue to be adversely affected in future quarters. With respect to our commercialization activities, the evolving effects of the COVID-19 pandemic are having a negative impact on demand, new patient starts and treatments for our products, primarily due to the inherent limitations of telemedicine and a reprioritization of healthcare resources toward COVID-19. The extent of the impact on our ability to generate sales of and revenues from our approved products, execute on new product launches, our clinical development and regulatory efforts, our corporate development objectives and the value of and market for our ordinary shares, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration and severity of the pandemic, governmental “stay-at-home” orders and travel restrictions, quarantines, social distancing and business closure requirements in the U.S., Ireland and other countries, and the effectiveness of actions taken globally to contain and treat the disease.

Our financial results are significantly influenced by sales of Xyrem. Our ability to maintain or increase Xyrem product sales is subject to a number of risks and uncertainties including, without limitation, those related to the introduction of authorized generic and generic versions of sodium oxybate and/or new products for treatment of cataplexy and/or EDS in narcolepsy in the U.S. market, the current and potential impacts of the ongoing COVID-19 pandemic, including the current and expected future negative impact on demand for our products and the uncertainty with respect to our ability to meet commercial demand in the future, increased pricing pressure from, changes in policies by, or restrictions on reimbursement imposed by, third party payors, challenges to our intellectual property around Xyrem, and continued acceptance of Xyrem by physicians and patients.

In addition to risks related specifically to Xyrem, we are subject to other challenges and risks related to successfully commercializing a portfolio of oncology products and other neuroscience products, including Sunosi, Defitelio, Erwinaze, Vyxeos, Zepzelca and Xywav, and other 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, including, without limitation, risks and uncertainties associated with: obtaining regulatory approval of our late-stage product candidates; effectively commercializing our recently approved products such as Sunosi, Zepzelca and Xywav; obtaining and maintaining adequate coverage and reimbursement for our products; increasing scrutiny of pharmaceutical product pricing and resulting changes in healthcare laws and policy; market acceptance; delays or problems in the supply of our products, loss of single source suppliers or failure to comply with manufacturing regulations; identifying, acquiring or in-licensing additional products or product candidates; pharmaceutical product development and the inherent uncertainty of clinical success; the challenges of protecting and enhancing our intellectual property rights; complying with applicable regulatory requirements; and possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations. In addition, to the extent the COVID-19 pandemic continues to adversely affect our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above.

Concentrations of Risk

Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, investments and derivative contracts. 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 investments to the extent recorded on the balance sheet.

We manage our foreign currency transaction risk and interest rate risk within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes. As of June 30, 2020, we had foreign exchange forward contracts with notional amounts totaling $283.7 million. As of June 30, 2020, the outstanding foreign exchange forward contracts had a net liability fair value of $0.3 million. As of June 30, 2020, we had interest rate swap contracts with notional amounts totaling $300.0 million. These outstanding interest rate swap contracts had a net liability fair value of $5.5 million as of June 30, 2020. The counterparties to these contracts are large multinational commercial banks, and we believe the risk of nonperformance is not significant.

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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 U.S., 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 as of June 30, 2020 and December 31, 2019, allowances on receivables were not material. As of June 30, 2020, two customers accounted for 87% of gross accounts receivable, Express Scripts Specialty Distribution Services, Inc. and its affiliates, or ESSDS, which accounted for 73% of gross accounts receivable, and McKesson Corporation and affiliates, or McKesson, which accounted for 14% of gross accounts receivable. As of December 31, 2019, two customers accounted for 89% of gross accounts receivable, ESSDS, which accounted for 77% of gross accounts receivable, and McKesson, which accounted for 12% of gross accounts receivable.

We depend on single source suppliers for most of our products, product candidates and their active pharmaceutical ingredients, or APIs. With respect to Xyrem, the API is manufactured for us by a single source supplier and the finished product is manufactured both by us in our facility in Athlone, Ireland and by our U.S.-based Xyrem supplier.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes by removing certain exceptions to the general principles in the existing guidance for income taxes and making other minor improvements. The amendments are effective for annual reporting periods beginning after December 15, 2020 with early adoption permitted. We are currently evaluating the impact of adopting this new accounting guidance.

2. License Agreement

On December 19, 2019, we entered into an exclusive license agreement with Pharma Mar, S.A., or PharmaMar, for development and U.S. commercialization of Zepzelca. Zepzelca was granted orphan drug designation for relapsed SCLC by FDA in August 2018. In December 2019, PharmaMar submitted a new drug application, or NDA, to FDA for accelerated approval of Zepzelca for relapsed SCLC based on data from a Phase 2 trial, and in February 2020, FDA accepted the NDA for filing with priority review. In June 2020, FDA approved the NDA for Zepzelca for the treatment of adult patients with metastatic SCLC with disease progression on or after platinum-based chemotherapy.

Under the terms of this agreement, which became effective in January 2020 upon expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, we paid PharmaMar an upfront payment of $200.0 million, which was recorded as in-process research and development, or IPR&D expense in our condensed consolidated statements of income (loss) for the six months ended June 30, 2020. In June 2020, we made a milestone payment of $100.0 million to PharmaMar following FDA approval of Zepzelca, which was capitalized as an intangible asset on our condensed consolidated balance sheet.

PharmaMar is eligible to receive potential future regulatory milestone payments of up to $150.0 million upon the achievement of full regulatory approval of Zepzelca within certain timelines. PharmaMar is also eligible to receive up to $550.0 million in potential commercial milestone payments, as well as incremental tiered royalties on future net sales of Zepzelca ranging from the high teens up to 30 percent. PharmaMar may receive additional payments on approval of other indications, with any such payments creditable against commercial milestone payment obligations. PharmaMar retains production rights for Zepzelca and will supply the product to us.

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3. Cash and Available-for-Sale Securities

Cash, cash equivalents and investments consisted of the following (in thousands):



	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cash and Cash Equivalents		Investments
Cash	$	470,560	$	—	$	—	$	470,560	$	470,560	$	—
Time deposits	1,100,000		—		—		1,100,000		190,000		910,000
Money market funds	125,522		—		—		125,522		125,522		—
Totals	$	1,696,082	$	—	$	—	$	1,696,082	$	786,082	$	910,000



	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cash and Cash Equivalents		Investments
Cash	$	333,172	$	—	$	—	$	333,172	$	333,172	$	—
Time deposits	460,000		—		—		460,000		20,000		440,000
Money market funds	284,172		—		—		284,172		284,172		—
Totals	$	1,077,344	$	—	$	—	$	1,077,344	$	637,344	$	440,000

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 (loss). Our investment balances represent time deposits with original maturities of greater than three months and less than one year. Interest income from available-for-sale securities was $3.1 million and $7.6 million in three and six months ended June 30, 2020, respectively, and $5.0 million and $9.8 million in the three and six months ended June 30, 2019, respectively.

4. Fair Value Measurement

The following table summarizes, by major security type, our available-for-sale securities and derivative contracts as of June 30, 2020 and December 31, 2019 that were measured at fair value on a recurring basis and were categorized using the fair value hierarchy (in thousands):



	June 30, 2020						December 31, 2019
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Total Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Total Estimated Fair Value
Assets:
Available-for-sale securities:
Time deposits	$	—	$	1,100,000	$	1,100,000	$	—	$	460,000	$	460,000
Money market funds	125,522		—		125,522		284,172		—		284,172
Foreign exchange forward contracts	—		1,454		1,454		—		2,508		2,508
Totals	$	125,522	$	1,101,454	$	1,226,976	$	284,172	$	462,508	$	746,680
Liabilities:
Interest rate contracts	$	—	$	5,479	$	5,479	$	—	$	1,515	$	1,515
Foreign exchange forward contracts	—