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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, 2021
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.) |
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.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
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Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
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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. ☐
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 27, 2021, 61,148,558 ordinary shares of the registrant, nominal value $0.0001 per share, were outstanding.
JAZZ PHARMACEUTICALS PLC
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021
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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, Xywav™ (calcium, magnesium, potassium, and sodium oxybates) oral solution, Epidiolex® (cannabidiol) oral solution, Epidyolex® (the trade name in Europe for Epidiolex), Sunosi® (solriamfetol), Defitelio® (defibrotide sodium), Defitelio® (defibrotide), CombiPlex®, Vyxeos® (daunorubicin and cytarabine) liposome for injection, Vyxeos® liposomal 44 mg/100 mg powder for concentrate for solution for infusion, Zepzelca™ (lurbinectedin), Rylaze™ (recombinant Erwinia asparaginase) and Sativex® (delta-9-tetrahydrocannabinol/cannabidiol) 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.
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 891,400 | | | $ | 1,057,769 | |
Investments | — | | | 1,075,000 | |
Accounts receivable, net of allowances | 506,660 | | | 396,490 | |
Inventories | 1,251,259 | | | 95,396 | |
Prepaid expenses | 104,455 | | | 62,422 | |
Other current assets | 200,190 | | | 152,491 | |
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Total current assets | 2,953,964 | | | 2,839,568 | |
Property, plant and equipment, net | 277,066 | | | 127,935 | |
Operating lease assets | 149,254 | | | 129,169 | |
Intangible assets, net | 7,588,029 | | | 2,195,051 | |
Goodwill | 1,887,699 | | | 958,303 | |
Deferred tax assets, net | 296,493 | | | 254,916 | |
Deferred financing costs | 13,406 | | | 5,238 | |
Other non-current assets | 47,082 | | | 25,721 | |
Total assets | $ | 13,212,993 | | | $ | 6,535,901 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 64,826 | | | $ | 26,945 | |
Accrued liabilities | 561,091 | | | 352,732 | |
Current portion of long-term debt | 248,585 | | | 246,322 | |
Income taxes payable | 3,645 | | | 25,200 | |
Deferred revenue | 2,441 | | | 2,546 | |
Total current liabilities | 880,588 | | | 653,745 | |
Deferred revenue, non-current | 1,510 | | | 2,315 | |
Long-term debt, less current portion | 6,489,315 | | | 1,848,516 | |
Operating lease liabilities, less current portion | 156,556 | | | 140,035 | |
Deferred tax liabilities, net | 1,421,027 | | | 130,397 | |
Other non-current liabilities | 132,507 | | | 101,148 | |
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 | 3,403,482 | | | 2,633,670 | |
Accumulated other comprehensive loss | (190,935) | | | (134,352) | |
Retained earnings | 918,410 | | | 1,159,894 | |
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Total shareholders’ equity | 4,131,490 | | | 3,659,745 | |
Total liabilities and shareholders’ equity | $ | 13,212,993 | | | $ | 6,535,901 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenues: | | | | | | | |
Product sales, net | $ | 748,340 | | | $ | 558,203 | | | $ | 1,351,871 | | | $ | 1,088,408 | |
Royalties and contract revenues | 3,471 | | | 4,233 | | | 7,521 | | | 8,754 | |
Total revenues | 751,811 | | | 562,436 | | | 1,359,392 | | | 1,097,162 | |
Operating expenses: | | | | | | | |
Cost of product sales (excluding amortization of acquired developed technologies) | 119,194 | | | 28,008 | | | 159,383 | | | 56,665 | |
Selling, general and administrative | 429,031 | | | 191,406 | | | 689,539 | | | 399,806 | |
Research and development | 132,696 | | | 78,922 | | | 209,269 | | | 165,029 | |
Intangible asset amortization | 140,480 | | | 62,974 | | | 208,672 | | | 125,821 | |
Acquired in-process research and development | — | | | 3,000 | | | — | | | 205,250 | |
Impairment charge | — | | | — | | | — | | | 136,139 | |
Total operating expenses | 821,401 | | | 364,310 | | | 1,266,863 | | | 1,088,710 | |
Income (loss) from operations | (69,590) | | | 198,126 | | | 92,529 | | | 8,452 | |
Interest expense, net | (69,420) | | | (26,210) | | | (96,796) | | | (44,706) | |
Foreign exchange gain (loss) | 2,950 | | | (464) | | | 3,893 | | | (1,596) | |
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Income (loss) before income tax provision and equity in (gain) loss of investees | (136,060) | | | 171,452 | | | (374) | | | (37,850) | |
Income tax provision | 228,621 | | | 54,754 | | | 246,640 | | | 3,467 | |
Equity in (gain) loss of investees | (1,365) | | | 1,897 | | | (5,530) | | | 1,715 | |
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Net income (loss) | $ | (363,316) | | | $ | 114,801 | | | $ | (241,484) | | | $ | (43,032) | |
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Net income (loss) per ordinary share: | | | | | | | |
Basic | $ | (6.11) | | | $ | 2.07 | | | $ | (4.17) | | | $ | (0.77) | |
Diluted | $ | (6.11) | | | $ | 2.06 | | | $ | (4.17) | | | $ | (0.77) | |
Weighted-average ordinary shares used in per share calculations - basic | 59,448 | | | 55,413 | | | 57,966 | | | 55,684 | |
Weighted-average ordinary shares used in per share calculations - diluted | 59,448 | | | 55,864 | | | 57,966 | | | 55,684 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | $ | (363,316) | | | $ | 114,801 | | | $ | (241,484) | | | $ | (43,032) | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | (12,303) | | | 20,730 | | | (58,523) | | | (9,260) | |
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Unrealized gain (loss) on cash flow hedging activities, net of income tax provision (benefit) of $168, $85, $331 and ($494), respectively | 1,171 | | | 597 | | | 2,315 | | | (3,456) | |
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Unrealized loss on fair value hedging activities, net of income tax benefit of ($125), $—, ($125) and $—, respectively | (375) | | | — | | | (375) | | | — | |
Other comprehensive income (loss) | (11,507) | | | 21,327 | | | (56,583) | | | (12,716) | |
Total comprehensive income (loss) | $ | (374,823) | | | $ | 136,128 | | | $ | (298,067) | | | $ | (55,748) | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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| Ordinary Shares | | Non-voting Euro Deferred | | Capital Redemption Reserve | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | | | | | Total Equity |
Shares | | Amount | | Shares | | Amount | | |
Balance at December 31, 2020 | 56,171 | | | $ | 6 | | | 4,000 | | | $ | 55 | | | $ | 472 | | | $ | 2,633,670 | | | $ | (134,352) | | | $ | 1,159,894 | | | | | | | $ | 3,659,745 | |
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Issuance of ordinary shares in conjunction with exercise of share options | 408 | | | — | | | — | | | — | | | — | | | 50,407 | | | — | | | — | | | | | | | 50,407 | |
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Issuance of ordinary shares in conjunction with vesting of restricted stock units | 294 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | | — | |
Shares withheld for payment of employee's withholding tax liability | — | | | — | | | — | | | — | | | — | | | (23,784) | | | — | | | — | | | | | | | (23,784) | |
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Share-based compensation | — | | | — | | | — | | | — | | | — | | | 34,565 | | | — | | | — | | | | | | | 34,565 | |
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Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (45,076) | | | — | | | | | | | (45,076) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 121,832 | | | | | | | 121,832 | |
Balance at March 31, 2021 | 56,873 | | | $ | 6 | | | 4,000 | | | $ | 55 | | | $ | 472 | | | $ | 2,694,858 | | | $ | (179,428) | | | $ | 1,281,726 | | | | | | | $ | 3,797,689 | |
Issuance of ordinary shares in connection with the acquisition of GW Pharmaceuticals plc | 3,798 | | | — | | | — | | | — | | | — | | | 608,456 | | | — | | | — | | | | | | | 608,456 | |
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Share-based payment - pre-combination service in connection with the acquisition of GW Pharmaceuticals plc | — | | | — | | | — | | | — | | | — | | | 3,555 | | | — | | | — | | | | | | | 3,555 | |
Issuance of ordinary shares in conjunction with exercise of share options | 328 | | | — | | | — | | | — | | | — | | | 43,600 | | | — | | | — | | | | | | | 43,600 | |
Issuance of ordinary shares under employee stock purchase plan | 79 | | | — | | | — | | | — | | | — | | | 8,282 | | | — | | | — | | | | | | | 8,282 | |
Issuance of ordinary shares in conjunction with vesting of restricted stock units | 37 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | | — | |
Shares withheld for payment of employee's withholding tax liability | — | | | — | | | — | | | — | | | — | | | (3,388) | | | — | | | — | | | | | | | (3,388) | |
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Share-based compensation | — | | | — | | | — | | | — | | | — | | | 48,119 | | | — | | | — | | | | | | | 48,119 | |
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Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (11,507) | | | — | | | | | | | (11,507) | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (363,316) | | | | | | | (363,316) | |
Balance at June 30, 2021 | 61,115 | | | $ | 6 | | | 4,000 | | | $ | 55 | | | $ | 472 | | | $ | 3,403,482 | | | $ | (190,935) | | | $ | 918,410 | | | | | | | $ | 4,131,490 | |
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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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| Ordinary Shares | | Non-voting Euro Deferred | | Capital Redemption Reserve | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | | | | | Total Equity |
Shares | | Amount | | Shares | | Amount | | |
Balance at December 31, 2019 | 56,140 | | | $ | 6 | | | 4,000 | | | $ | 55 | | | $ | 472 | | | $ | 2,266,026 | | | $ | (223,393) | | | $ | 1,067,815 | | | | | | | $ | 3,110,981 | |
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Issuance of ordinary shares in conjunction with exercise of share options | 145 | | | — | | | — | | | — | | | — | | | 13,264 | | | — | | | — | | | | | | | 13,264 | |
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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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The accompanying notes are an integral part of these condensed consolidated financial statements.
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Operating activities | | | |
Net loss | $ | (241,484) | | | $ | (43,032) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Intangible asset amortization | 208,672 | | | 125,821 | |
Deferred tax provision (benefit) | 171,587 | | | (82,768) | |
Share-based compensation | 82,648 | | | 59,258 | |
Acquisition accounting inventory fair value step-up adjustment | 65,991 | | | — | |
Non-cash interest expense | 38,010 | | | 29,268 | |
Depreciation | 11,614 | | | 9,266 | |
Provision for losses on accounts receivable and inventory | 8,742 | | | 4,078 | |
Impairment charge | — | | | 136,139 | |
Acquired in-process research and development | — | | | 205,250 | |
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Other non-cash transactions | 2,983 | | | 3,496 | |
Changes in assets and liabilities: | | | |
Accounts receivable | (34,838) | | | 3,640 | |
Inventories | (29,402) | | | (18,826) | |
Prepaid expenses and other current assets | (21,351) | | | (44,853) | |
Operating lease assets | 7,893 | | | 6,422 | |
Other non-current assets | (173) | | | 1,982 | |
Accounts payable | 19,309 | | | 5,264 | |
Accrued liabilities | 56,688 | | | (6,972) | |
Income taxes payable | (21,839) | | | 45,481 | |
Deferred revenue | (911) | | | (2,360) | |
Operating lease liabilities, less current portion | (8,790) | | | (6,978) | |
Other non-current liabilities | 11,343 | | | 25,912 | |
Net cash provided by operating activities | 326,692 | | | 455,488 | |
Investing activities | | | |
Proceeds from maturity of investments | 1,095,000 | | | 565,000 | |
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Purchases of property, plant and equipment | (9,346) | | | (7,520) | |
Acquisition of a business, net of cash acquired | (6,234,792) | | | — | |
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Acquired in-process research and development | — | | | (205,250) | |
Acquisition of intangible assets | — | | | (113,000) | |
Acquisition of investments | (26,100) | | | (1,040,475) | |
Net cash used in investing activities | (5,175,238) | | | (801,245) | |
Financing activities | | | |
Net proceeds from issuance of borrowings under credit agreement | 3,719,930 | | | — | |
Net proceeds from issuance of Senior Secured Notes, due 2029 | 1,471,533 | | | — | |
Net proceeds from issuance of Exchangeable Senior Notes, due 2026 | — | | | 981,381 | |
Net proceeds from revolving credit facility | — | | | 500,000 | |
Proceeds from employee equity incentive and purchase plans | 102,289 | | | 24,251 | |
Payment of employee withholding taxes related to share-based awards | (27,172) | | | (14,663) | |
Repayments of long-term debt | (584,268) | | | (16,693) | |
Share repurchases | — | | | (146,537) | |
Payments for partial repurchase of Exchangeable Senior Notes, due 2021 | — | | | (332,888) | |
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Repayments under revolving credit facility | — | | | (500,000) | |
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Net cash provided by financing activities | 4,682,312 | | | 494,851 | |
Effect of exchange rates on cash and cash equivalents | (135) | | | (356) | |
Net increase (decrease) in cash and cash equivalents | (166,369) | | | 148,738 | |
Cash and cash equivalents, at beginning of period | 1,057,769 | | | 637,344 | |
Cash and cash equivalents, at end of period | $ | 891,400 | | | $ | 786,082 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 whose purpose is to innovate to transform the lives of patients and their families. We are dedicated to developing life-changing medicines for people with serious diseases - often with limited or no therapeutic options. We have a diverse portfolio of marketed medicines and novel product candidates, from early- to late-stage development, in neuroscience and oncology. Within these therapeutic areas, we are identifying new options for patients by actively exploring small molecules and biologics, and through innovative delivery technologies and cannabinoid science.
Our lead marketed products are:
•Xyrem® (sodium oxybate) oral solution, a 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 narcolepsy patients seven years of age and older;
•Xywav™ (calcium, magnesium, potassium, and sodium oxybates) oral solution, a product that contains 92% less sodium than Xyrem, approved by FDA and launched in the U.S. in November 2020 for the treatment of cataplexy or EDS in narcolepsy patients seven years of age and older;
•Epidiolex® (cannabidiol) oral solution, a product approved by FDA and launched in the U.S. in 2018 by GW Pharmaceuticals plc, or GW, and in Europe (where it is marketed as Epidyolex®), for the treatments of seizures associated with Lennox-Gastaut syndrome, Dravet syndrome, or tuberous sclerosis complex in patients one year of age or older, and certain forms of childhood-onset epilepsy;
•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;
•Zepzelca™ (lurbinectedin), a product approved by FDA in June 2020 and launched in the U.S. in July 2020 for the treatment of adult patients with metastatic small cell lung cancer, or SCLC, with disease progression on or after platinum-based chemotherapy;
•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;
•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 following HSCT therapy;
•Sativex® (delta-9-tetrahydrocannabinol/cannabidiol) oral solution, a product marketed in Europe as treatment for symptom improvement in adult patients with moderate to severe spasticity due to multiple sclerosis, or MS, who have not responded adequately to other anti-spasticity medication and who demonstrate clinically significant improvement in spasticity-related symptoms during an initial trial of therapy; and
•Rylaze™ (recombinant Erwinia asparaginase), a product approved by FDA and launched in the U.S. in July 2021 for use as a component of a multi-agent chemotherapeutic regimen for the treatment of acute lymphoblastic leukemia, or ALL, or lymphoblastic lymphoma, or LBL, in adults and pediatric patients who have developed hypersensitivity or silent inactivation to E. coli-derived asparaginase.
In May 2021, we acquired GW with the objectives of broadening our neuroscience portfolio, further diversifying our revenue and driving sustainable, long-term value creation opportunities. The total consideration paid by us for the entire issued share capital of GW was $7.2 billion. The acquisition, which we refer to as the GW Acquisition, closed on May 5, 2021. For further information regarding the GW Acquisition, please see Note 2.
Throughout this report, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the registrant,” "the Company", “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 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, 2020.
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, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021, 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, 2020, other than as described below.
These condensed consolidated financial statements include the accounts of Jazz Pharmaceuticals plc and our subsidiaries, and intercompany transactions and balances have been eliminated.
The results of operations of the acquired GW business, along with the estimated fair values of the assets acquired and liabilities assumed in the GW Acquisition, have been included in our condensed consolidated financial statements since the closing of the GW Acquisition on May 5, 2021.
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 December 2019, the Financial Accounting Standards Board, or 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. We adopted this standard on January 1, 2021 and adoption did not have a material impact on our consolidated financial statements.
Performance-Based Restricted Stock Unit Awards
Performance-based restricted stock units, or PRSUs, awarded to employees vest upon the achievement of certain performance criteria at the end of a specified performance period, subject to a relative total shareholder return, or TSR, modifier. The estimated fair value of these PRSUs is based on a Monte Carlo simulation model. Compensation expense for PRSUs is recognized from the date the Company determines the performance criteria probable of being achieved to the date the award, or relevant portion of the award, is expected to vest. Cumulative adjustments are recorded on a quarterly basis to reflect subsequent changes to the estimated outcome of the performance criteria until the date results are determined.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand for a particular product. If our estimate of future demand changes, we consider the impact on the reserve for excess inventory and adjust the reserve as required. Increases in the reserve are recorded as charges in cost of product sales.
We capitalize inventory costs associated with our products prior to regulatory approval when, based on management's judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. The determination to capitalize inventory costs is based on various factors, including status and expectations of the regulatory approval process, any known safety or efficacy concerns, potential labeling restrictions, and any other impediments to obtaining regulatory approval. We had no pre-approval inventory on our condensed consolidated balance sheets as of June 30, 2021 or December 31, 2020.
Our inventory production process for our cannabinoid products includes the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of our inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.
Derivative Instruments and Hedging Activities
We record the fair value of derivative instruments as either assets or liabilities on the condensed consolidated balance sheets. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income (loss), depending on whether a derivative instrument is designated as part of a hedging transaction and, if it is, the type of hedging transaction. For a derivative to qualify as a hedge at inception and throughout the hedged period, we formally document the nature and relationships between the hedging instruments and hedged item.
For derivatives formally designated as hedges, we assess both at inception and quarterly thereafter, whether the hedging derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item.
Gains or losses on cash flow hedges are reclassified from other comprehensive income (loss) to earnings when the hedged transaction occurs. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting and any related unrealized gain or loss on the derivative instrument is recognized in current earnings.
We designate cross-currency interest rate swaps as fair value hedges to hedge foreign currency risks related to our borrowings denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in foreign exchange gain (loss) within the condensed consolidated statements of income (loss), along with the offsetting gains and losses of the related hedged item. We have elected to exclude the total forward points or currency basis from the assessment of hedge effectiveness and account for them as excluded components. The initial fair value of the excluded component is amortized to foreign exchange gain (loss) and the difference between changes in fair value of the excluded component and the amount recorded in earnings is recorded in other comprehensive income (loss).
Derivatives that are not designated and do not qualify as hedges are adjusted to fair value through current earnings.
Variable Interest Entity
In the six months ended June 30, 2021, we invested in a cell of a protected cell company, or the protected cell, as part of our directors’ and officers’ liability risk financing strategy. Based on our control and the structure of the protected cell, we concluded that Jazz is the primary beneficiary of the protected cell and is required to consolidate the protected cell. The insurance premium payable to the protected cell for the three and six months ended June 30, 2021 and the protected cell’s assets and liabilities as of June 30, 2021 were immaterial.
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. We have experienced limited negative impacts to our business due to the pandemic. We expect that our business, financial condition, results of operations and growth prospects may continue to be impacted on a limited basis by the pandemic. With respect to our commercialization activities, while there continues to be some impact on demand arising from the pandemic, we have seen improvements as healthcare systems have adapted to cope with the ongoing situation. The COVID-19 pandemic has had 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 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 vaccination programs and other actions taken globally to contain and treat the disease.
Our business has been substantially dependent on Xyrem and while we expect that our business will continue to be substantially dependent on oxybate product sales from both Xyrem and Xywav, there is no guarantee that we can maintain
oxybate sales at or near historical levels, or that oxybate sales will continue to grow. Our ability to maintain or increase oxybate 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 new products for treatment of cataplexy and/or EDS in narcolepsy in the U.S. market, increased pricing pressure from, changes in policies by, or restrictions on reimbursement imposed by, third party payors, including our ability to maintain adequate coverage and reimbursement for Xywav, challenges to our intellectual property around Xyrem and Xywav, and continued acceptance of Xyrem by physicians and patients and acceptance of Xywav by payors, physicians and patients.
In addition to risks related specifically to Xyrem and Xywav, we are subject to other challenges and risks related to successfully commercializing a portfolio of oncology products and other neuroscience products, including Epidiolex, Sunosi, Defitelio, Vyxeos, Rylaze and Zepzelca, 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 Epidiolex, Sunosi, Zepzelca, Rylaze 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; regulatory concerns with cannabinoid products generally and the potential for abuse; future legislation or FDA action authorizing the sale, distribution, use, and insurance reimbursement of non-FDA approved cannabinoid products; 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, the anticipated benefits to us of the GW Acquisition may not be realized fully within the expected timeframe or at all or may take longer to realize or cost more than expected, which could materially and adversely affect our business, financial condition, results of operations and growth prospects. Moreover, 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, 2021, we had foreign exchange forward contracts with notional amounts totaling $427.3 million. As of June 30, 2021, the outstanding foreign exchange forward contracts had a net liability fair value of $5.2 million. As of June 30, 2021, 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 $0.2 million as of June 30, 2021. As of June 30, 2021, we had a cross-currency interest rate swap contract with a notional amount of $753.0 million. This outstanding cross-currency interest rate swap contract had a net liability fair value of $10.8 million as of June 30, 2021. The counterparties to these contracts are large multinational commercial banks, and we believe the risk of nonperformance is not significant.
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 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, 2021 and December 31, 2020, allowances on receivables were not material. As of June 30, 2021, three customers accounted for 74% of gross accounts receivable, Express Scripts Specialty Distribution Services, Inc. and its affiliates, or ESSDS, which accounted for 56% of gross accounts receivable, McKesson Corporation and affiliates, or McKesson, which accounted for 10% of gross accounts receivable, and Cardinal Health, Inc., or Cardinal, which accounted for 8% of gross accounts receivable. As of December 31, 2020, three customers
accounted for 84% of gross accounts receivable, ESSDS, which accounted for 68% of gross accounts receivable, McKesson, which accounted for 12% of gross accounts receivable, and Cardinal, which accounted for 4% 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 our oxybate products, the API is manufactured for us by a single source supplier and the finished products are manufactured both by us in our facility in Athlone, Ireland and by our U.S.-based supplier.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This new standard will be effective for us for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than the fiscal year beginning after December 15, 2020. We may elect to apply the amendments on a retrospective or modified retrospective basis. We are currently evaluating the timing, method of adoption and overall impact of this standard on our consolidated financial statements.
2. Business Combination
GW Acquisition
On May 5, 2021, or the Closing Date, we acquired the entire issued share capital of GW. As a result, GW became an indirect wholly owned subsidiary of the Company.
We acquired GW with the objective of broadening our neuroscience portfolio, further diversifying our revenue and driving sustainable, long-term value creation opportunities. GW was a global leader in discovering, developing, manufacturing and commercializing novel, regulatory approved therapeutics from its proprietary cannabinoid research platform to address a broad range of diseases.
The aggregate consideration for the GW Acquisition was $7.2 billion as follows (all amounts in thousands except American Depositary Shares, or ADS, and per GW ADS amounts):
| | | | | |
GW ADS outstanding May 5, 2021 | 31,556,200 | |
Cash consideration per GW ADS | $ | 200 | |
Total cash consideration to GW ADS holders | $ | 6,311,240 | |
Cash consideration to GW share option holders (inclusive of payroll taxes) | 267,450 | |
Total cash consideration | 6,578,690 | |
Equity consideration to GW ADS holders (1) | 608,456 | |
Consideration related to replacement share option pre-combination service | 3,555 | |
Total equity consideration | 612,011 | |
Total purchase consideration | $ | 7,190,701 | |
________________________
(1) 3.8 million ordinary shares were issued to GW ADS holders. The closing price of the ordinary shares on May 4, 2021 ($160.20) was used to determine the fair value of this equity consideration because the closing of the transaction on May 5, 2021 occurred prior to the opening of regular trading.
In April 2021, we closed an offering of $1.5 billion in aggregate principal amount of 4.375% senior secured notes, due 2029, or the Secured Notes. In May 2021, we entered into a credit agreement, or the Credit Agreement, that provides for (i) a seven-year $3.1 billion term loan B facility, or the Dollar Term Loan, (ii) a seven-year €625.0 million term loan B facility, or the Euro Term Loan and, together with the Dollar Term Loan, collectively known as the Term Loan and (iii) a five-year $500.0 million revolving credit facility, or the Revolving Credit Facility. We financed the cash portion of the GW Acquisition consideration through a combination of cash on hand and borrowings under the Term Loan and the Secured Notes. For further information on the Term Loan and the Secured Notes, please see Note 9.
The GW Acquisition was accounted for as a business combination using the acquisition method under which assets and liabilities of GW were recorded at their respective estimated fair values as of the Closing Date and added to the assets and liabilities of the Company, including an amount for goodwill representing the difference between the acquisition consideration and the estimated fair value of the identifiable net assets. The results of operations of GW and the estimated fair values of the assets acquired and liabilities assumed have been included in our condensed consolidated financial statements since the Closing Date.
In the three and six months ended June 30, 2021, we incurred $77.1 million and $84.0 million, respectively, in acquisition-related costs related to the GW Acquisition, which primarily consisted of banking, legal, accounting and valuation-related expenses. These expenses were recorded in selling, general and administrative expense in the accompanying condensed consolidated statements of income (loss).
During both the three and six months ended June 30, 2021, our condensed consolidated statements of income (loss) included revenues of $111.4 million and a net loss of $134.4 million from the acquired GW business, as measured from the Closing Date.
The fair values of assets acquired and liabilities assumed at the Closing Date are summarized below (in thousands):
| | | | | |
| Estimated fair values of assets acquired and liabilities assumed |
Cash and cash equivalents | $ | 343,898 | |
Accounts receivable | 76,355 | |
Inventory | 1,206,290 | |
Prepaid expenses and other current assets | 72,758 | |
Property, plant and equipment | 154,407 | |
Acquired developed technologies | 5,480,000 | |
In-process research and development | 160,000 | |
Total acquired identifiable intangible assets | 5,640,000 | |
Goodwill | 947,831 | |
Deferred tax liabilities, net | (1,083,673) | |
Accrued liabilities | (131,971) | |
Other assets/liabilities | (35,194) | |
Total purchase consideration | $ | 7,190,701 | |
The fair value estimates for the assets acquired and liabilities assumed were based upon preliminary calculations, and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the Closing Date).
Inventory
Inventories acquired included raw materials, work in progress and finished goods. Inventories were recorded at their estimated fair values. The inventory was valued at estimated selling price less the estimated costs to be incurred to complete (in the case of work in progress) and sell the inventory, the associated margins on these activities and holding costs. A step-up in value of inventory of $1,062.6 million was recorded in connection with the GW Acquisition. The step-up expense will be recorded in cost of product sales on our condensed consolidated statements of income (loss) as the inventory is sold to customers from the Closing Date.
Intangible assets
The fair value of acquired intangible assets was $5,640.0 million. The intangible assets include acquired developed technologies, primarily related to Epidiolex, and in-process research and development, or IPR&D.
The fair value of the Epidiolex acquired developed technology asset was determined by applying the income approach, which recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs, using a discount rate of 9.4% that reflects the return requirements of the market. This intangible asset is being amortized over an estimated useful life of 12 years.
Acquired IPR&D relates to nabiximols, which is currently in Phase 3 clinical trials for the treatment of spasticity associated with multiple sclerosis and spinal cord injury. The fair value of acquired IPR&D was determined using the income
approach, including the application of probability factors related to the likelihood of success of nabiximols reaching final development and commercialization. The fair value of acquired IPR&D was capitalized as of the Closing Date and is subsequently accounted for as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the Closing Date, this asset will not be amortized into earnings; instead, it will be subject to periodic impairment testing.
Some of the more significant assumptions inherent in the development of intangible asset fair values include: the amount and timing of projected future cash flows (including revenue, cost of sales, research and development cost and sales and marketing expenses); probability of success; the discount rate selected to measure inherent risk of future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, among other factors.
Deferred tax liabilities, net
The net deferred tax liability relates to the difference between the book basis and tax basis of acquired intangible assets and inventory, partially offset by acquired net operating losses and temporary differences.
Other tangible assets and liabilities
Other tangible assets and liabilities were valued at their respective carrying amounts as management believes that these amounts approximated their acquisition-date fair values.
Goodwill
Goodwill represents the excess of the total purchase consideration over the estimated fair value of net assets acquired and was recorded in the consolidated balance sheet as of the Closing Date. The goodwill was primarily attributable to the establishment of the deferred tax liability for the acquired intangible assets and inventory. We do not expect any portion of this goodwill to be deductible for tax purposes.
Pro Forma Financial Information (Unaudited)
The following unaudited supplemental pro forma information presents the combined historical results of income (loss) of the Company and GW for the three and six months ended June 30, 2021 and 2020, respectively, as if the GW Acquisition had been completed on January 1, 2020. The primary pro forma adjustments include:
•The exclusion of acquisition-related and integration expenses of $280.1 million and $299.9 million in the three and six months ended June 30, 2021 and related tax provision of $19.1 million and $18.0 million in each period, respectively. The inclusion of acquisition-related and integration expenses of $29.0 million and $