Document
Table of Contents


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

 
FORM 10-Q
 
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
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
011-353-1-634-7800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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  ý    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
ý
 
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No ý






Table of Contents



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
As of April 30, 2019, 56,660,701 ordinary shares of the registrant, nominal value $0.0001 per share, were outstanding.


Table of Contents


JAZZ PHARMACEUTICALS PLC
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

We own or have rights to various copyrights, trademarks, and trade names used in our business in the U.S. and/or other countries, including the following: Jazz Pharmaceuticals®, Xyrem® (sodium oxybate) oral solution, Erwinaze® (asparaginase Erwinia chrysanthemi), Erwinase®, Defitelio® (defibrotide sodium), Defitelio® (defibrotide), CombiPlex®, Vyxeos® (daunorubicin and cytarabine) liposome for injection, Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion, SunosiTM (solriamfetol) and FazaClo® (clozapine, USP). This report also includes trademarks, service marks and trade names of other companies. Trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.



2

Table of Contents


PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
547,466

 
$
309,622

Investments
285,000

 
515,000

Accounts receivable, net of allowances
320,485

 
263,838

Inventories
60,707

 
52,956

Prepaid expenses
28,974

 
25,017

Other current assets
62,985

 
67,572

Total current assets
1,305,617

 
1,234,005

Property, plant and equipment, net
113,006

 
200,358

Operating lease assets
147,365

 

Intangible assets, net
2,679,393

 
2,731,334

Goodwill
919,972

 
927,630

Deferred tax assets, net
65,090

 
57,879

Deferred financing costs
9,056

 
9,589

Other non-current assets
40,736

 
42,696

Total assets
$
5,280,235

 
$
5,203,491

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
42,669

 
$
40,602

Accrued liabilities
292,390

 
264,887

Current portion of long-term debt
33,387

 
33,387

Income taxes payable
40,833

 
1,197

Deferred revenue
4,720

 
5,414

Total current liabilities
413,999

 
345,487

Deferred revenue, non-current
8,401

 
9,581

Long-term debt, less current portion
1,565,277

 
1,563,025

Operating lease liabilities, less current portion
154,066

 

Deferred tax liabilities, net
296,148

 
309,097

Other non-current liabilities
111,897

 
218,879

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
2,130,738

 
2,113,630

Accumulated other comprehensive loss
(220,674
)
 
(197,791
)
Retained earnings
819,850

 
841,050

Total shareholders’ equity
2,730,447

 
2,757,422

Total liabilities and shareholders’ equity
$
5,280,235

 
$
5,203,491




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

3

Table of Contents



JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2019
 
2018
Revenues:
 
 
 
Product sales, net
$
503,331

 
$
440,847

Royalties and contract revenues
4,855

 
3,766

Total revenues
508,186

 
444,613

Operating expenses:
 
 
 
Cost of product sales (excluding amortization of intangible assets)
33,506

 
33,919

Selling, general and administrative
167,947

 
207,213

Research and development
60,105

 
62,667

Intangible asset amortization
56,885

 
53,007

Acquired in-process research and development
56,000

 

Total operating expenses
374,443

 
356,806

Income from operations
133,743

 
87,807

Interest expense, net
(17,922
)
 
(20,605
)
Foreign exchange loss
(611
)
 
(1,728
)
Income before income tax provision and equity in loss of investees
115,210

 
65,474

Income tax provision
29,116

 
19,146

Equity in loss of investees
893

 
337

Net income
$
85,201

 
$
45,991

 
 
 
 
Net income per ordinary share:
 
 
 
Basic
$
1.49

 
$
0.77

Diluted
$
1.47

 
$
0.75

Weighted-average ordinary shares used in per share calculations - basic
57,206

 
59,928

Weighted-average ordinary shares used in per share calculations - diluted
58,081

 
61,178










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

4

Table of Contents


JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2019
 
2018
Net income
$
85,201

 
$
45,991

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(21,142
)
 
38,853

Unrealized gain (loss) on hedging activities, net of income tax (benefit) provision of ($249) and $458, respectively
(1,741
)
 
3,204

Other comprehensive income (loss)
(22,883
)
 
42,057

Total comprehensive income
$
62,318

 
$
88,048
























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

5

Table of Contents


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
 
 
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


 
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
 
 
Balance at December 31, 2017
59,898

 
$
6

 
4,000

 
$
55

 
$
472

 
$
1,935,486

 
$
(140,878
)
 
$
917,956

 
$
2,713,097

Cumulative effect adjustment from adoption of new accounting standards

 

 

 

 

 

 
53

 
(351
)
 
(298
)
Issuance of ordinary shares in conjunction with exercise of share options
133

 

 

 

 

 
10,588

 

 

 
10,588

Issuance of ordinary shares in conjunction with vesting of restricted stock units
195

 

 

 

 

 

 

 

 

Shares withheld for payment of employee's withholding tax liability

 

 

 

 

 
(14,594
)
 

 

 
(14,594
)
Share-based compensation

 

 

 

 

 
24,276

 

 

 
24,276

Shares repurchased
(237
)
 

 

 

 

 

 

 
(34,546
)
 
(34,546
)
Other comprehensive income

 

 

 

 

 

 
42,057

 

 
42,057

Net income

 

 

 

 

 

 

 
45,991

 
45,991

Balance at March 31, 2018
59,989

 
$
6

 
4,000

 
$
55

 
$
472

 
$
1,955,756

 
$
(98,768
)
 
$
929,050

 
$
2,786,571








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

6

Table of Contents


JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Three Months Ended
March 31,
 
2019
 
2018
Operating activities
 
 
 
Net income
$
85,201

 
$
45,991

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Intangible asset amortization
56,885

 
53,007

Share-based compensation
27,552

 
24,303

Depreciation
3,539

 
3,722

Acquired in-process research and development
56,000

 

Loss on disposal of assets
3

 
256

Deferred tax benefit
(17,053
)
 
(15,307
)
Provision for losses on accounts receivable and inventory
528

 
590

Amortization of debt discount and deferred financing costs
11,133

 
10,617

Other non-cash transactions
1,181

 
16,026

Changes in assets and liabilities:

 

Accounts receivable
(56,960
)
 
(56,591
)
Inventories
(8,688
)
 
(3,312
)
Prepaid expenses and other current assets
(988
)
 
(3,534
)
Other non-current assets
426

 
1,012

Accounts payable
1,554

 
23,136

Accrued liabilities
(2,685
)
 
47,484

Income taxes payable
39,726

 
14,183

Deferred revenue
(1,874
)
 
(1,875
)
Other non-current liabilities
6,773

 
7,651

Net cash provided by operating activities
202,253

 
167,359

Investing activities
 
 
 
Proceeds from maturity of investments
345,000

 
195,000

Acquired in-process research and development
(56,000
)
 

Purchases of property, plant and equipment
(7,948
)
 
(7,149
)
Acquisition of investments
(115,000
)
 
(240,000
)
Net cash provided by (used in) investing activities
166,052

 
(52,149
)
Financing activities
 
 
 
Proceeds from employee equity incentive and purchase plans
3,057

 
10,588

Payment of employee withholding taxes related to share-based awards
(13,810
)
 
(14,594
)
Repayments of long-term debt
(8,347
)
 
(9,023
)
Share repurchases
(111,249
)
 
(34,546
)
Net cash used in financing activities
(130,349
)
 
(47,575
)
Effect of exchange rates on cash and cash equivalents
(112
)
 
(501
)
Net increase in cash and cash equivalents
237,844

 
67,134

Cash and cash equivalents, at beginning of period
309,622

 
386,035

Cash and cash equivalents, at end of period
$
547,466

 
$
453,169



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

7

Table of Contents


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

1. The Company and Summary of Significant Accounting Policies
Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing life-changing medicines for people with limited or no options. As a leader in sleep medicine and with a growing hematology/oncology portfolio, we have a diverse portfolio of products and product candidates in development.
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 adult and pediatric patients with narcolepsy;
Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia who have developed hypersensitivity to E. coli-derived asparaginase;
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; and
Vyxeos® (daunorubicin and cytarabine) liposome for injection, a product approved in the U.S. and in Europe (where it is marketed as Vyxeos® 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 acute myeloid leukemia with myelodysplasia-related changes.
In March 2019, the FDA approved our new drug application, or NDA, for Sunosi™ (solriamfetol) as a treatment to improve wakefulness in adult patients with EDS associated with narcolepsy or obstructive sleep apnea and recommended that Sunosi be scheduled by the U.S. Drug Enforcement Administration, or DEA. We expect to launch the product in the U.S. after the DEA completes its scheduling review. We are also seeking approval for solriamfetol in Europe and submitted a marketing authorization application to the European Medicines Agency in the fourth quarter of 2018.
In March 2019, we announced positive top-line results from our Phase 3 study evaluating the efficacy and safety of JZP-258, an oxybate product candidate that contains 92% less sodium than Xyrem, for the treatment of cataplexy and EDS in adult patients with narcolepsy, and we expect to submit an NDA for this product by as early as the end of 2019.
Our strategy to create shareholder value is focused on:
Strong financial execution through growth in sales of our current lead marketed products;
Building a diversified product portfolio and development pipeline through a combination of our internal research and development efforts and obtaining rights to clinically meaningful and differentiated on- or near-market products and early- to late-stage product candidates through acquisitions, collaborations, licensing arrangements, partnerships and venture investments; and
Maximizing the value of our products and product candidates by continuing to implement our comprehensive global development plans, including through generating additional clinical data and seeking regulatory approval for new indications.
Throughout this report, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the registrant,” “we,” “us,” and “our” refer to Jazz Pharmaceuticals plc and its consolidated subsidiaries. Throughout this report, all references to “ordinary shares” refer to Jazz Pharmaceuticals plc’s ordinary shares.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared following the requirements of the U.S. Securities and Exchange Commission 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

8

Table of Contents


annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.
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 months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, 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, 2018 with the exception of the accounting policy relating to operating leases and financing obligations which was updated as a result of adopting Accounting Standards Update No. 2016-02, “Leases”, or ASU No. 2016-02.
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.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease assets, other current liabilities, and operating lease liabilities on our condensed consolidated balance sheets. Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. In determining the net present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date. The operating lease asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For vehicle leases we account for the lease and non-lease components as a single lease component.
We have elected the short-term lease exemption and, therefore, do not recognize a right-of-use asset or corresponding liability for lease arrangements with an original term of 12 months or less.
Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-02. Under the new guidance, lessees are required to recognize a right-of-use asset, which represents the lessee’s right to use, or control the use of, a specified asset for the lease term, and a corresponding lease liability, which represents the lessee’s obligation to make lease payments under a lease, measured on a discounted basis. We adopted ASU No. 2016-02 on a modified retrospective basis applied to leases existing as of, or entered into after, January 1, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification of those leases in place as of January 1, 2019.
The adoption of ASU No. 2016-02 resulted in the recognition of right-of-use assets and lease liabilities of $149.4 million and $162.9 million, respectively, on the consolidated balance sheet as of January 1, 2019, and the de-recognition of the build-to-suit assets and related financing obligations on the consolidated balance sheet as of December 31, 2018 of $95.4 million and $109.8 million, respectively, with the balance impacting retained earnings, deferred rent and deferred tax liabilities. The right-of-use assets and lease liabilities primarily relate to real estate leases. Refer to Note 10 for lease-related disclosures.

9

Table of Contents


The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2019 for the adoption of the ASU No. 2016-02 was as follows (in thousands):
 
Balance at December 31,
2018
 
Transition Adjustments
 
Balance at January 1,
2019
Assets:
 
 
 
 
 
Property, plant and equipment, net
$
200,358

 
$
(95,397
)
 
$
104,961

Operating lease assets

 
149,442

 
149,442

Liabilities:
 
 
 
 
 
Accrued liabilities
264,887

 
8,165

 
273,052

Operating lease liabilities, less current portion

 
153,158

 
153,158

Deferred tax liabilities, net
309,097

 
1,489

 
310,586

Other non-current liabilities
218,879

 
(113,615
)
 
105,264

Shareholders' Equity:
 
 
 
 
 
Retained earnings
841,050

 
4,848

 
845,898

Significant Risks and Uncertainties
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, the introduction of new products in the U.S. market that compete with, or otherwise disrupt the market for, Xyrem in the treatment of cataplexy and/or EDS in narcolepsy, including our recently-approved product, Sunosi; the introduction of a generic version of Xyrem in the U.S. market before the entry dates specified in our settlements with the abbreviated new drug application, or ANDA, filers or on terms that are different from those contemplated by the settlement agreements; increased pricing pressure from, changes in policies by, or restrictions on reimbursement imposed by, third party payors, including pressure to agree to discounts, rebates or other restrictive pricing terms for Xyrem; changes in healthcare laws and policy, including changes in requirements for patient assistance programs, rebates, reimbursement and coverage by federal healthcare programs, and changes resulting from increased scrutiny on pharmaceutical pricing and risk evaluation and mitigation strategy, or REMS, programs by government entities; changes to or uncertainties around our Xyrem REMS, or any failure to comply with our REMS obligations to the satisfaction of the FDA; challenges to our intellectual property around Xyrem, including the possibility of new ANDA or NDA filers or new post-grant patent review proceedings; operational disruptions at the Xyrem central pharmacy; any supply or manufacturing problems, including any problems with our sole source Xyrem active pharmaceutical ingredient, or API, provider; continued acceptance of Xyrem by physicians and patients, including as a result of negative publicity that surfaces from time to time; and changes to our label, including new safety warnings or changes to our boxed warning, that further restrict how we market and sell Xyrem.
In addition to risks related specifically to Xyrem, we are subject to other challenges and risks specific to our business and our ability to execute on our strategy, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations, including, without limitation, risks and uncertainties associated with: effectively commercializing our other products; competition; 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; regulatory approval and successful launch of our late-stage product candidates; identifying, acquiring or in-licensing additional products or product candidates; pharmaceutical product development and the inherent uncertainty of clinical success; the regulatory approval process; 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.

10

Table of Contents


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 March 31, 2019, we had foreign exchange forward contracts with notional amounts totaling $217.2 million. As of March 31, 2019, the outstanding foreign exchange forward contracts had a net liability fair value of $1.5 million. As of March 31, 2019, we had interest rate swap contracts with notional amounts totaling $300.0 million. These outstanding interest rate swap contracts had a net asset fair value of $2.1 million as of March 31, 2019. 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 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 March 31, 2019 and December 31, 2018, allowances on receivables were not material. As of March 31, 2019, two customers accounted for 91% of gross accounts receivable, Express Scripts Specialty Distribution Services, Inc. and its affiliates, or Express Scripts, which accounted for 74% of gross accounts receivable, and McKesson Corporation and affiliates, or McKesson, which accounted for 17% of gross accounts receivable. As of December 31, 2018, two customers accounted for 89% of gross accounts receivable, Express Scripts, which accounted for 74% of gross accounts receivable, and McKesson, which accounted for 15% of gross accounts receivable.
We depend on single source suppliers for most of our products, product candidates and their 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 August 2018, the 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. The standard is effective for us beginning January 1, 2020 and early adoption is permitted. The new guidance is not expected to have a material impact on our results of operations and financial position.
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. The standard is effective for us beginning January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The new guidance is not expected to have a material impact on our results of operations and financial position.

2. Collaboration and License Agreement
On January 2, 2019, we entered into a strategic collaboration agreement with Codiak BioSciences, Inc., or Codiak, focused on the research, development and commercialization of exosome therapeutics to treat cancer. Codiak granted us an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize therapeutic candidates directed at five targets to be developed using Codiak's engEx™ precision engineering platform for exosome therapeutics.
Under the terms of the agreement, Codiak is responsible for the execution of preclinical and early clinical development of therapeutic candidates directed at all five targets through Phase 1/2 proof of concept studies. Following the conclusion of the applicable Phase 1/2 study, we will be responsible for future development, potential regulatory submissions and

11

Table of Contents


commercialization for each product.  Codiak has the option to participate in co-commercialization and cost/profit-sharing in the U.S. and Canada on up to two products.
As part of the agreement, we paid Codiak an upfront payment of $56.0 million in January 2019, which was recorded as acquired IPR&D expense in our condensed consolidated statements of income for the three months ended March 31, 2019. Codiak is eligible to receive up to $20 million in preclinical development milestone payments across all five programs.  Codiak is also eligible to receive milestone payments totaling up to $200 million per target based on investigational new drug application acceptance, clinical and regulatory milestones, including approvals in the U.S., the European Union, or EU, and Japan, and certain sales milestones. Codiak is also eligible to receive tiered royalties on net sales of each approved product.

3. Cash and Available-for-Sale Securities
Cash, cash equivalents and investments consisted of the following (in thousands): 
 
March 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
Cash
$
192,328

 
$

 
$

 
$
192,328

 
$
192,328

 
$

Time deposits
415,000

 

 

 
415,000

 
130,000

 
285,000

Money market funds
225,138

 

 

 
225,138

 
225,138

 

Totals
$
832,466

 
$

 
$

 
$
832,466

 
$
547,466

 
$
285,000

 
December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
Cash
$
215,606

 
$

 
$

 
$
215,606

 
$
215,606

 
$

Time deposits
515,000

 

 

 
515,000

 

 
515,000

Money market funds
94,016

 

 

 
94,016

 
94,016

 

Totals
$
824,622

 
$

 
$

 
$
824,622

 
$
309,622

 
$
515,000

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. Our investment balances represent time deposits with original maturities of greater than three months and less than one year.


12

Table of Contents


4. Fair Value Measurement
The following table summarizes, by major security type, our available-for-sale securities and derivative contracts as of March 31, 2019 and December 31, 2018 that were measured at fair value on a recurring basis and were categorized using the fair value hierarchy (in thousands): 
 
March 31, 2019
 
December 31, 2018
 
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
$

 
$
415,000

 
$
415,000

 
$

 
$
515,000

 
$
515,000

Money market funds
225,138

 

 
225,138

 
94,016

 

 
94,016

Interest rate contracts

 
2,090

 
2,090

 

 
4,070

 
4,070

Foreign exchange forward contracts

 
212

 
212

 

 
1,194

 
1,194

Totals
$
225,138

 
$
417,302

 
$
642,440

 
$
94,016

 
$
520,264

 
$
614,280

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$

 
$
1,713

 
$
1,713

 
$

 
$
1,460

 
$
1,460

Totals
$

 
$
1,713

 
$
1,713

 
$

 
$
1,460

 
$
1,460

As of March 31, 2019, our available-for-sale securities included time deposits and money market funds, and their carrying values were approximately equal to their fair values. Time deposits were measured at fair value using Level 2 inputs and money market funds were measured using quoted prices in active markets, which represent Level 1 inputs. Level 2 inputs, obtained from various third party data providers, represent quoted prices for similar assets in active markets, or these inputs were derived from observable market data, or if not directly observable, were derived from or corroborated by other observable market data.
Our derivative assets and liabilities include interest rate and foreign exchange derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates and our own credit risk, as well as an evaluation of our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the fair value hierarchy.
There were no transfers between the different levels of the fair value hierarchy in 2019 or in 2018.
As of March 31, 2019, the carrying amount of investments measured using the measurement alternative for equity investments without a readily determinable fair value was $4.5 million. The carrying amount, which is recorded within other non-current assets, represents the purchase price paid in December 2018.
As of March 31, 2019, the estimated fair values of our 1.875% exchangeable senior notes due 2021, or the 2021 Notes, and our 1.50% exchangeable senior notes due 2024, or the 2024 Notes, were approximately $585 million and $563 million, respectively. The fair values of the 2021 Notes and the 2024 Notes, which we refer to together as the Exchangeable Senior Notes, were estimated using quoted market prices obtained from brokers (Level 2). The estimated fair value of our borrowing under our term loan was approximately equal to its book value based on the borrowing rates currently available for variable rate loans (Level 2).

5. Derivative Instruments and Hedging Activities
We are exposed to certain risks arising from operating internationally, including fluctuations in interest rates on our outstanding term loan borrowings and fluctuations in foreign exchange rates primarily related to the translation of euro-denominated net monetary liabilities, including intercompany balances, held by subsidiaries with a U.S. dollar functional currency. We manage these exposures 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.
To achieve a desired mix of floating and fixed interest rates on our variable rate debt, we entered into interest rate swap agreements in March 2017 which are effective until July 2021. These agreements hedge contractual term loan interest rates. As of March 31, 2019 and December 31, 2018, the interest rate swap agreements had a notional amount of $300.0 million. As

13

Table of Contents


a result of these agreements, the interest rate on a portion of our term loan borrowings was fixed at 1.895%, plus the borrowing spread, until July 12, 2021.
The effective portion of changes in the fair value of derivatives designated as and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The impact on accumulated other comprehensive loss and earnings from derivative instruments that qualified as cash flow hedges for the three months ended March 31, 2019 and 2018 was as follows (in thousands):
 
Three Months Ended
March 31,
Interest Rate Contracts:
2019
 
2018
Gain (loss) recognized in accumulated other comprehensive loss, net of tax
$
(1,341
)
 
$
3,037

Loss (gain) reclassified from accumulated other comprehensive loss to interest expense, net of tax
(400
)
 
167

Assuming no change in LIBOR-based interest rates from market rates as of March 31, 2019, $1.3 million of gains, net of tax, recognized in accumulated other comprehensive loss will be reclassified to earnings over the next 12 months.
We enter into foreign exchange forward contracts, with durations of up to 12 months, designed to limit the exposure to fluctuations in foreign exchange rates related to the translation of certain non-U.S. dollar denominated liabilities, including intercompany balances. Hedge accounting is not applied to these derivative instruments as gains and losses on these hedge transactions are designed to offset gains and losses on underlying balance sheet exposures. As of March 31, 2019 and December 31, 2018, the notional amount of foreign exchange contracts where hedge accounting is not applied was $217.2 million and $271.5 million, respectively.
The foreign exchange loss in our condensed consolidated statements of income included the following gains and losses associated with foreign exchange contracts not designated as hedging instruments (in thousands):
 
Three Months Ended
March 31,
Foreign Exchange Forward Contracts:
2019
 
2018
Gain (loss) recognized in foreign exchange loss
$
(3,409
)
 
$
3,751

The cash flow effects of our derivative contracts for the three months ended March 31, 2019 and 2018 are included within net cash provided by operating activities in the condensed consolidated statements of cash flows.
The following tables summarize the fair value of outstanding derivatives (in thousands):
 
March 31, 2019
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
Other current assets
 
$
1,481

 
Accrued liabilities
 
$

 
Other non-current assets
 
609

 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
212

 
Accrued liabilities
 
1,713

Total fair value of derivative instruments
 
 
$
2,302

 
 
 
$
1,713


14

Table of Contents


 
December 31, 2018
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
Other current assets
 
$
1,929

 
Accrued liabilities
 
$

 
Other non-current assets
 
2,141

 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
1,194

 
Accrued liabilities
 
1,460

Total fair value of derivative instruments
 
 
$
5,264

 
 
 
$
1,460

Although we do not offset derivative assets and liabilities within our condensed consolidated balance sheets, our International Swap and Derivatives Association agreements provide for net settlement of transactions that are due to or from the same counterparty upon early termination of the agreement due to an event of default or other termination event. The following tables summarize the potential effect on our condensed consolidated balance sheets of offsetting our interest rate contracts and foreign exchange forward contracts subject to such provisions (in thousands):
 
March 31, 2019
 
Gross Amounts of Recognized Assets/ Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet
Description
 
 
 
Derivative Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
Derivative assets
$
2,302

 
$

 
$
2,302

 
$
(599
)
 
$

 
$
1,703

Derivative liabilities
(1,713
)
 

 
(1,713
)
 
599

 

 
(1,114
)
 
December 31, 2018
 
Gross Amounts of Recognized Assets/ Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet
Description
 
 
 
Derivative Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
Derivative assets
$
5,264

 
$

 
$
5,264

 
$
(935
)
 
$

 
$
4,329

Derivative liabilities
(1,460
)
 

 
(1,460
)
 
935

 

 
(525
)

6. Inventories
Inventories consisted of the following (in thousands): 
 
March 31,
2019
 
December 31,
2018
Raw materials
$
7,138

 
$
5,604

Work in process
31,254

 
26,034

Finished goods
22,315

 
21,318

Total inventories
$
60,707

 
$
52,956



15

Table of Contents


7. Goodwill and Intangible Assets
The gross carrying amount of goodwill was as follows (in thousands):
Balance at December 31, 2018
$
927,630

Foreign exchange
(7,658
)
Balance at March 31, 2019
$
919,972

The gross carrying amounts and net book values of our intangible assets were as follows (in thousands): 
 
March 31, 2019
 
December 31, 2018
 
Remaining
Weighted-
Average Useful
Life
(In years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Acquired developed technologies
13.8

 
$
3,109,876

 
$
(680,923
)
 
$
2,428,953

 
$
3,110,641

 
$
(632,413
)
 
$
2,478,228

Priority review voucher

 
111,101

 

 
111,101

 
111,101

 

 
111,101

Manufacturing contracts

 
12,026

 
(12,026
)
 

 
12,256

 
(12,256
)
 

Trademarks

 
2,890

 
(2,890
)
 

 
2,896

 
(2,896
)
 

Total finite-lived intangible assets
 
 
3,235,893

 
(695,839
)
 
2,540,054

 
3,236,894

 
(647,565
)
 
2,589,329

Acquired IPR&D assets
 
 
139,339

 

 
139,339

 
142,005

 

 
142,005

Total intangible assets
 
 
$
3,375,232

 
$
(695,839
)
 
$
2,679,393

 
$
3,378,899

 
$
(647,565
)
 
$
2,731,334

The assumptions and estimates used to determine future cash flows and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors, such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines. We reduced the estimated remaining useful life of the Erwinaze intangible asset due to the receipt of a contract termination notice from Porton Biopharma Limited in February 2019. The reduction in the estimated remaining useful life increased intangible asset amortization expense by $10.2 million, reduced net income by $6.9 million and reduced basic and diluted net income per ordinary share by $0.12 during the three months ended March 31, 2019.
Based on acquired developed technology intangible assets recorded as of March 31, 2019, and assuming the underlying assets will not be impaired and that we will not change the expected lives of the assets, future amortization expenses were estimated as follows (in thousands): 
Year Ending December 31,
Estimated
Amortization  
Expense
2019 (remainder)
$
184,982

2020
245,995

2021
198,981

2022
153,990

2023
153,990

Thereafter
1,491,015

Total
$
2,428,953



16

Table of Contents


8. Certain Balance Sheet Items
Property, plant and equipment consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Land and buildings
$
46,607

 
$
46,650

Leasehold improvements
33,328

 
33,273

Manufacturing equipment and machinery
25,999

 
25,837

Computer software
18,337

 
19,062

Construction-in-progress
16,973

 
51,243

Computer equipment
14,219

 
13,679

Furniture and fixtures
8,101

 
8,155

Build-to-suit facility

 
52,067

Subtotal
163,564

 
249,966

Less accumulated depreciation and amortization
(50,558
)
 
(49,608
)
Property, plant and equipment, net
$
113,006

 
$
200,358

The decrease in the carrying amount of construction-in-progress and build-to-suit facility assets as of March 31, 2019 compared to December 31, 2018 reflects the de-recognition of assets related to build-to-suit facility leases on adoption of ASU No. 2016-02.
Accrued liabilities consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Rebates and other sales deductions
$
87,980

 
$
86,495

Accrued loss contingency
58,546

 
58,154

Employee compensation and benefits
45,547

 
58,543

Accrued milestones
20,000



Clinical trial accruals
8,904

 
5,904

Current portion of operating lease liabilities
8,669

 

Royalties
7,676

 
2,679

Inventory-related accruals
7,656

 
8,753

Selling and marketing accruals
5,986

 
6,780

Accrued construction-in-progress
4,953

 
1,065

Professional fees
3,271

 
2,333

Accrued interest
2,579

 
7,407

Sales returns reserve
2,336

 
2,510

Derivative instrument liabilities
1,713

 
1,460

Other
26,574

 
22,804

Total accrued liabilities
$
292,390

 
$
264,887



17

Table of Contents


9. Debt
The following table summarizes the carrying amount of our indebtedness (in thousands):
 
March 31,
2019
 
December 31,
2018
2021 Notes
$
575,000

 
$
575,000

Unamortized discount and debt issuance costs on 2021 Notes
(55,631
)
 
(60,910
)
2021 Notes, net
519,369

 
514,090

 
 
 
 
2024 Notes
575,000

 
575,000

Unamortized discount and debt issuance costs on 2024 Notes
(133,875
)
 
(138,914
)
2024 Notes, net
441,125

 
436,086

 
 
 
 
Term loan
638,170

 
646,236

Total debt
1,598,664

 
1,596,412

Less current portion
33,387

 
33,387

Total long-term debt
$
1,565,277

 
$
1,563,025

Exchangeable Senior Notes
The Exchangeable Senior Notes were issued by Jazz Investments I Limited, or the Issuer, a 100%-owned finance subsidiary of Jazz Pharmaceuticals plc. The Exchangeable Senior Notes are senior unsecured obligations of the Issuer and are fully and unconditionally guaranteed on a senior unsecured basis by Jazz Pharmaceuticals plc. No subsidiary of Jazz Pharmaceuticals plc guaranteed the Exchangeable Senior Notes. Subject to certain local law restrictions on payment of dividends, among other things, and potential negative tax consequences, we are not aware of any significant restrictions on the ability of Jazz Pharmaceuticals plc to obtain funds from the Issuer or Jazz Pharmaceuticals plc’s other subsidiaries by dividend or loan, or any legal or economic restrictions on the ability of the Issuer or Jazz Pharmaceuticals plc’s other subsidiaries to transfer funds to Jazz Pharmaceuticals plc in the form of cash dividends, loans or advances. There is no assurance that in the future such restrictions will not be adopted.
As of March 31, 2019, the carrying values of the equity component of the 2021 Notes and the 2024 Notes, net of equity issuance costs, were $126.9 million and $149.8 million, respectively.
Maturities
Scheduled maturities with respect to our long-term debt principal balances outstanding as of March 31, 2019 were as follows (in thousands):
Year Ending December 31,
Scheduled Long-Term Debt Maturities
2019 (remainder)
$
25,040

2020
33,387

2021
608,387

2022
33,387

2023
517,493

Thereafter
575,000

Total
$
1,792,694



18

Table of Contents


10. Leases
The components of the lease expense for the three months ended March 31, 2019 were as follows (in thousands):
Lease Cost
Three Months Ended
March 31, 2019
Operating lease cost
$
5,870

Short-term lease cost
601

Variable lease cost
3

Sublease income
(162
)
Net lease cost
$
6,312

Supplemental balance sheet information related to operating leases was as follows (in thousands):
Leases
Classification
March 31,
2019
Assets

 
Operating lease assets
Operating lease assets
$
147,365



 
Liabilities

 
Current

 
  Operating lease liabilities
Accrued liabilities
8,669

Non-current

 
  Operating lease liabilities
Operating lease liabilities, less current portion
154,066

Total operating lease liabilities

$
162,735

Lease Term and Discount Rate
March 31,
2019
Weighted-average remaining lease term - operating leases (years)
10.3

Weighted-average discount rate - operating leases
5.3
%
Supplemental cash flow information related to operating leases was as follows (in thousands):

Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash outflows from operating leases
$
4,576

Non-cash operating activities:
 
Right-of-use assets obtained in exchange for new operating lease liabilities (1)
151,029

_____________________________
(1)
Includes the balances recognized on January 1, 2019 on adoption of ASU No. 2016-02.

19

Table of Contents



Maturities of operating lease liabilities were as follows (in thousands):
Year Ending December 31,
Operating leases
2019 (remainder)
$
7,658

2020
20,664

2021
20,591

2022
20,674

2023
20,961

Thereafter
128,164

Total lease payments
$
218,712

Less imputed interest
(55,977
)
Present value of lease liabilities
$
162,735



11. Commitments and Contingencies
Indemnification
In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification, including indemnification associated with product liability or infringement of intellectual property rights. Our exposure under these agreements is unknown because it involves future claims that may be made but have not yet been made against us. To date, we have not paid any claims or been required to defend any action related to these indemnification obligations.
We have agreed to indemnify our executive officers, directors and certain other employees for losses and costs incurred in connection with certain events or occurrences, including advancing money to cover certain costs, subject to certain limitations. The maximum potential amount of future payments we could be required to make under the indemnification obligations is unlimited; however, we maintain insurance policies that may limit our exposure and may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, we believe the fair value of these indemnification obligations is not significant. Accordingly, we did not recognize any liabilities relating to these obligations as of March 31, 2019 and December 31, 2018. No assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case we may incur substantial liabilities as a result of these indemnification obligations.
Lease and Other Commitments
Operating Leases. We have noncancelable operating leases for our office buildings and we are obligated to make payments under noncancelable operating leases for automobiles used by our sales force. Refer to Note 10 for details of the maturity of our operating lease liabilities.
Other Commitments. As of March 31, 2019, we had $70.3 million of noncancelable purchase commitments due within one year, primarily related to agreements with third party manufacturers.
Legal Proceedings
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.
Other Contingencies
In May and October 2016 and in February 2017, we received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of charitable organizations that provide financial assistance to Medicare patients. In April 2018, we reached an agreement in principle with the U.S. Department of Justice, or DOJ, on terms for a civil settlement of potential claims by the DOJ in the amount of $57.0 million plus interest to accrue at the statutory rate of 2.75%, subject to negotiation of a definitive settlement agreement and other contingencies. On April 4, 2019, we finalized the settlement agreement with the DOJ and the Office of Inspector General of the U.S. Department of Health and Human Services,

20

Table of Contents


or OIG, and we entered into a corporate integrity agreement requiring us to maintain our ongoing corporate compliance program and obligating us to implement or continue, as applicable, a set of defined corporate integrity activities for a period of five years from the effective date of the corporate integrity agreement. During 2018, we recorded $58.2 million related to this matter, including related interest, within accrued liabilities on our consolidated balance sheet with the related expense included in selling, general and administrative expenses on our consolidated statement of income. During the three months ended March 31, 2019, we recorded an additional $0.4 million of interest related to this matter. Under the settlement agreement, we are released from any civil or administrative monetary claim arising from allegations relating to our conduct between 2011 and May 2014 in supporting a charitable foundation that provided financial assistance to Medicare patients. The settlement agreement is not an admission of any wrongdoing or liability by us but a settlement of claims. In the event of a breach of the corporate integrity agreement, we could become liable for payment of certain stipulated penalties or could be excluded from participation in federal health programs.

12. Shareholders’ Equity
Share Repurchase Program
In November 2016, our board of directors authorized a share repurchase program pursuant to which we are authorized to repurchase a number of ordinary shares having an aggregate purchase price of up to $300.0 million, exclusive of any brokerage commissions. In November and December 2018, our board of directors increased the existing share repurchase program authorization by $320.0 million and $400.0 million, respectively, thereby increasing the total amount authorized to $1.02 billion. Under this program, which has no expiration date, we may repurchase ordinary shares from time to time on the open market. The timing and amount of repurchases will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, restrictions under the amended credit agreement, corporate and regulatory requirements and market conditions. The share repurchase program may be modified, suspended or discontinued at any time without prior notice. In the three months ended March 31, 2019, we spent a total of $111.2 million to purchase 0.9 million of our ordinary shares under the share repurchase program at an average total purchase price, including commissions, of $129.66 per share. All ordinary shares repurchased were canceled. As of March 31, 2019, the remaining amount authorized under the share repurchase program was $267.9 million.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss as of March 31, 2019 and December 31, 2018 were as follows (in thousands): 
 
Net Unrealized
Gain (Loss) From Hedging
Activities
 
Foreign
Currency
Translation
Adjustments
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2018
$
3,557

 
$
(201,348
)
 
$
(197,791
)
Other comprehensive loss before reclassifications
(1,341
)
 
(21,142
)
 
(22,483
)
Amounts reclassified from accumulated other comprehensive loss
(400
)
 

 
(400
)
Other comprehensive loss, net
(1,741
)
 
(21,142
)
 
(22,883
)
Balance at March 31, 2019
$
1,816

 
$
(222,490
)
 
$
(220,674
)
During the three months ended March 31, 2019, other comprehensive loss reflects foreign currency translation adjustments, primarily due to the weakening of the euro against the U.S. dollar, and the net unrealized loss on derivatives that qualify as cash flow hedges.


21

Table of Contents


13. Net Income per Ordinary Share
Basic net income per ordinary share is based on the weighted-average number of ordinary shares outstanding. Diluted net income per ordinary share is based on the weighted-average number of ordinary shares outstanding and potentially dilutive ordinary shares outstanding.
Basic and diluted net income per ordinary share were computed as follows (in thousands, except per share amounts): 
 
Three Months Ended
March 31,
 
2019
 
2018
Numerator:
 
 
 
Net income
$
85,201

 
$
45,991

Denominator:
 
 
 
Weighted-average ordinary shares used in per share calculations - basic
57,206

 
59,928

Dilutive effect of employee equity incentive and purchase plans
875

 
1,250

Weighted-average ordinary shares used in per share calculations - diluted
58,081

 
61,178

 
 
 
 
Net income per ordinary share:
 
 
 
Basic
$
1.49

 
$
0.77

Diluted
$
1.47

 
$
0.75

Potentially dilutive ordinary shares from our employee equity incentive and purchase plans and the Exchangeable Senior Notes are determined by applying the treasury stock method to the assumed exercise of share options, the assumed vesting of outstanding restricted stock units, or RSUs, the assumed issuance of ordinary shares under our employee stock purchase plan, or ESPP, and the assumed issuance of ordinary shares upon exchange of the Exchangeable Senior Notes. The potential issue of ordinary shares issuable upon exchange of the Exchangeable Senior Notes had no effect on diluted net income per ordinary share because the average price of our ordinary shares for the three months ended March 31, 2019 and 2018 did not exceed the effective exchange prices per ordinary share of the Exchangeable Senior Notes.
The following table represents the weighted-average ordinary shares that were excluded from the calculation of diluted net income per ordinary share for the periods presented because including them would have an anti-dilutive effect (in thousands): 
 
Three Months Ended
March 31,
 
2019
 
2018
Exchangeable Senior Notes
5,504

 
5,504

Options, RSUs and ESPP
4,988

 
3,305



22

Table of Contents


14. Revenues
The following table presents a summary of total revenues (in thousands): 
 
Three Months Ended
March 31,
 
2019
 
2018
Xyrem
$
368,317

 
$
316,777

Erwinaze/Erwinase
60,899

 
50,627

Defitelio/defibrotide
41,500

 
35,061

Vyxeos
28,943

 
26,228

Other
3,672

 
12,154

Product sales, net
503,331

 
440,847

Royalties and contract revenues
4,855

 
3,766

Total revenues
$
508,186

 
$
444,613

The following table presents a summary of total revenues attributed to geographic sources (in thousands): 
 
Three Months Ended
March 31,
 
2019
 
2018
United States
$
462,862

 
$
405,687

Europe
35,401

 
28,331

All other
9,923

 
10,595

Total revenues
$
508,186

 
$
444,613

The following table presents a summary of the percentage of total revenues from customers that represented more than 10% of our total revenues: 
 
Three Months Ended
March 31,
 
2019
 
2018
Express Scripts
72
%
 
71
%
McKesson
18
%
 
20
%
Financing and payment
Our payment terms vary by the type and location of our customer but payment is generally required in a term ranging from 30 to 45 days.
Contract Liabilities - Deferred Revenue
The deferred revenue balance as of March 31, 2019 primarily related to deferred upfront fees received from Nippon Shinyaku Co., Ltd., or Nippon Shinyaku, in connection with two license, development and commercialization agreements granting Nippon Shinyaku exclusive rights to develop and commercialize each of Defitelio and Vyxeos in Japan. We recognized contract revenues of $1.9 million during the three months ended March 31, 2019, relating to these upfront payments. The deferred revenue balances are being recognized over an average of four years representing the period we expect to perform our research and developments obligations under each agreement.
The following table presents a reconciliation of our beginning and ending balances in contract liabilities from contracts with customers for the three months ended March 31, 2019 (in thousands): 
 
Contract Liabilities
Balance as of December 31, 2018
$
14,995

Amount recognized within royalties and contract revenues
(1,874
)
Balance as of March 31, 2019
$
13,121




23

Table of Contents


15. Share-Based Compensation
Share-based compensation expense related to share options, RSUs and grants under our ESPP was as follows (in thousands): 
 
Three Months Ended
March 31,
 
2019
 
2018
Selling, general and administrative
$
20,370

 
$
18,234

Research and development
5,523

 
4,375

Cost of product sales
1,659

 
1,694

Total share-based compensation expense, pre-tax
27,552

 
24,303

Income tax benefit from share-based compensation expense
(3,667
)
 
(3,668
)
Total share-based compensation expense, net of tax
$
23,885

 
$
20,635

Share Options
The table below shows the number of shares underlying options granted to purchase our ordinary shares, the weighted-average assumptions used in the Black-Scholes option pricing model and the resulting weighted-average grant date fair value of share options granted: 
 
Three Months Ended
March 31,
 
2019
 
2018
Shares underlying options granted (in thousands)
1,297

 
1,152

Grant date fair value
$
42.84

 
$
46.08

Black-Scholes option pricing model assumption information:
 
 
 
Volatility
32
%
 
35
%
Expected term (years)
4.5

 
4.5

Range of risk-free rates
2.4-2.5%

 
2.2-2.5%

Expected dividend yield
%
 
%
Restricted Stock Units
The table below shows the number of RSUs granted covering an equal number of our ordinary shares and the weighted-average grant date fair value of RSUs granted:
 
Three Months Ended
March 31,
 
2019
 
2018
RSUs granted (in thousands)
519

 
461

Grant date fair value
$
139.38

 
$
140.60

The fair value of RSUs is determined on the date of grant based on the market price of our ordinary shares on that date. The fair value of RSUs is expensed ratably over the vesting period, generally over four years.
As of March 31, 2019, compensation cost not yet recognized related to unvested share options and RSUs was $109.1 million and $136.5 million, respectively, which is expected to be recognized over a weighted-average period of 3.0 years.


24

Table of Contents


16. Income Taxes
Our income tax provision was $29.1 million in the three months ended March 31, 2019 compared to $19.1 million for the same period in 2018. The effective tax rate was 25.3% in the three months ended March 31, 2019 compared to 29.2% for the same period in 2018. The decrease in the effective tax rate for the three months ended March 31, 2019 compared to the same period in 2018 was primarily due to the impact of the loss contingency expense in 2018. The effective tax rate for the three months ended March 31, 2019 was higher than the Irish statutory rate of 12.5% primarily due to income taxable at a higher rate than the Irish statutory rate and unrecognized tax benefits, partially offset by originating tax credits. We do not provide for Irish income taxes on undistributed earnings of our foreign operations that are intended to be indefinitely reinvested in our foreign subsidiaries.
Our net deferred tax liability primarily arose due to the acquisition of Celator Pharmaceuticals, Inc. The balance is net of deferred tax assets which are comprised primarily of U.S. federal and state tax credits, U.S. federal and state and foreign net operating loss carryforwards and other temporary differences. We maintain a valuation allowance against certain foreign and U.S. federal and state deferred tax assets. Each reporting period, we evaluate the need for a valuation allowance on our deferred tax assets by jurisdiction and adjust our estimates as more information becomes available.
We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. As a result, we have recorded an unrecognized tax benefit for certain tax benefits which we judge may not be sustained upon examination. Our most significant tax jurisdictions are Ireland and the U.S. (both at the federal level and in various state jurisdictions). In Ireland, we are no longer subject to income tax audits by taxing authorities for the years prior to 2013. The U.S. jurisdictions generally have statutes of limitations three to four years from the later of the return due date or the date when the return was filed. However, in the U.S. (at the federal level and in most states), carryforward tax attributes that were generated in 2014 and earlier may still be adjusted upon examination by the tax authorities. Certain of our subsidiaries are currently under examination by the French tax authorities for the years ended December 31, 2012, 2013, 2015, 2016 and 2017. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In December 2015, we received proposed tax assessment notices, and, in October 2018, we received revised tax assessment notices from the French tax authorities for 2012 and 2013, and in December 2018, we received a proposed tax assessment notice for 2015, relating to certain transfer pricing adjustments.  The notices provide for additional French tax of approximately $42 million for 2012 and 2013 and approximately $4 million for 2015, including interest and penalties through the respective dates of the proposed assessments, translated at the foreign exchange rate at March 31, 2019. We disagree with the assessments and are contesting them vigorously.

17. Subsequent Event
In April 2019, we finalized a settlement agreement with the DOJ and the OIG and entered into a corporate integrity agreement requiring us to maintain our ongoing corporate compliance program and obligating us to implement or continue, as applicable, a set of defined corporate integrity activities for a period of five years from the effective date of the corporate integrity agreement. For more information, see Note 11, Commitments and Contingencies—Other Contingencies.



25

Table of Contents


Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in Part II, Item 1A in this Quarterly Report on Form 10-Q. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the “Cautionary Note Regarding Forward-Looking Statements” that appears at the end of this discussion. These statements, like all statements in this report, speak only as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
Overview
Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing life-changing medicines for people with limited or no options. As a leader in sleep medicine and with a growing hematology/oncology portfolio, we have a diverse portfolio of products and product candidates in development.
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 adult and pediatric patients with narcolepsy;
Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia, or ALL, who have developed hypersensitivity to E. coli-derived asparaginase;
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; and
Vyxeos® (daunorubicin and cytarabine) liposome for injection, a product approved in the U.S. and in Europe (where it is marketed as Vyxeos® 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 t-AML, or acute myeloid leukemia, or AML, with myelodysplasia-related changes, or AML-MRC.
Our strategy to create shareholder value is focused on:
Strong financial execution through growth in sales of our current lead marketed products;
Building a diversified product portfolio and development pipeline through a combination of our internal research and development efforts and obtaining rights to clinically meaningful and differentiated on- or near-market products and early- to late-stage product candidates through acquisitions, collaborations, licensing arrangements, partnerships and venture investments; and
Maximizing the value of our products and product candidates by continuing to implement our comprehensive global development plans, including through generating additional clinical data and seeking regulatory approval for new indications.
In the three months ended March 31, 2019, our total net product sales increased by 14%, compared to the same period in 2018, primarily due to an increase in Xyrem net product sales. We expect total net product sales to increase in 2019 over 2018, primarily due to expected growth in sales of Xyrem, Vyxeos and Defitelio. Our ability to increase net product sales is subject to a number of risks and uncertainties as set forth below and under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. For additional information regarding our net product sales, see “—Results of Operations.”
Significant Developments Affecting Our Business
In January 2019, we entered into a strategic collaboration agreement with Codiak BioSciences, Inc., or Codiak, focused on the research, development and commercialization of exosome therapeutics to treat cancer.

26

Table of Contents


In February 2019, we received a contract termination notice from Porton Biopharma Limited, or PBL. As a result of our receipt of the contract termination notice, our license and supply agreement with PBL, which includes our license for Erwinaze, will expire on December 31, 2020. Unless we and PBL enter into a new agreement, we will lose our rights to Erwinaze effective December 31, 2020, other than our right to sell certain Erwinaze inventory for a post-termination sales period of 12 months.
In March 2019, we commenced the commercial launch of Xyrem for pediatric patients with narcolepsy, after completing the implementation of the related approved REMS modification. In May 2019, the FDA confirmed that as the first sponsor to obtain marketing approval for use of Xyrem to treat cataplexy and EDS in pediatric narcolepsy patients aged seven years and older, we are entitled to seven years of orphan drug exclusivity for the indication. 
In March 2019, the FDA approved our new drug application, or NDA, for Sunosi™ (solriamfetol) as a treatment to improve wakefulness in adult patients with EDS associated with narcolepsy or obstructive sleep apnea, or OSA, and recommended that Sunosi be scheduled by the U.S. Drug Enforcement Administration, or DEA. We expect to launch the product in the U.S. after the DEA completes its scheduling review. We are also seeking approval for solriamfetol in Europe and submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, in the fourth quarter of 2018.
In March 2019, we announced positive top-line results from our Phase 3 study evaluating the efficacy and safety of JZP-258, an oxybate product candidate that contains 92% less sodium than Xyrem, for the treatment of cataplexy and EDS in adult patients with narcolepsy, and we expect to submit an NDA for this product by as early as the end of 2019.
In April 2019, we finalized a settlement agreement with the U.S. Department of Justice, or DOJ, and the Office of Inspector General of the Department of Health and Human Services, or OIG, and we entered into a corporate integrity agreement requiring us to maintain our ongoing corporate compliance program and obligating us to implement or continue, as applicable, a set of defined corporate integrity activities for a period of five years from the effective date of the corporate integrity agreement. For more information, see Note 11, Commitments and Contingencies—Other Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Continued Emphasis on Research and Development
During the three months ended March 31, 2019, we continued our focus on research and development activities, all in our sleep and hematology/oncology therapeutic areas.
Below is a summary of ongoing and planned development projects related to our products and pipeline and their corresponding current stages of development:
Sleep
Product Candidates
Description
Submitted for Regulatory Approval
 
Solriamfetol in the European Union, or EU
EDS in OSA and EDS in narcolepsy
Phase 3
 
JZP-258 (oxybate; 92% sodium reduction)
Cataplexy and EDS in narcolepsy
JZP-258 (oxybate; 92% sodium reduction)
Idiopathic hypersomnia
Preclinical
 
Oxybate once-nightly formulation
Narcolepsy
Hematology/Oncology
Product Candidates
Description
Phase 3
 
Defitelio
Prevention of VOD in high-risk patients following HSCT
Vyxeos
AML or high-risk myelodysplastic syndrome, or MDS (AML19) (cooperative group study)
Vyxeos
AML or high-risk MDS (AML18) (cooperative group study)
Phase 2
 
Defitelio
Prevention of acute Graft versus Host Disease following allogeneic HSCT

27

Table of Contents


Product Candidates
Description
Defitelio
Treatment of transplant-associated thrombotic microangiopathy
(planned pivotal study)
Defitelio
Prevention of chimeric antigen receptor T-cell therapy-associated neurotoxicity (planned study)
Vyxeos + venetoclax
De novo or relapsed/refractory, or R/R, AML (MD Anderson Cancer Center, or MD Anderson, collaboration study)
Vyxeos
MDS (planned cooperative group study)
Vyxeos
R/R AML (cooperative group study)
Phase 1
 
Vyxeos + gemtuzumab
R/R AML or hypomethylating agent failure MDS (MD Anderson collaboration study)
Vyxeos + venetoclax
Low intensity dosing for unfit AML (planned phase 1/2 study)
Vyxeos
Low intensity dosing for higher risk MDS (planned MD Anderson collaboration study)
IMGN779
CD33+ AML (Jazz opt-in opportunity with ImmunoGen, Inc., or ImmunoGen)
IMGN632
CD123+ hematological malignancies (Jazz opt-in opportunity with ImmunoGen)
Preclinical
 
CombiPlex
Solid tumors candidate
CombiPlex
Hematology/oncology exploratory activities
Asparaginase
ALL and other hematological malignancies
Recombinant Pegaspargase
Hematological malignancies (Jazz opt-in opportunity with Pfenex, Inc.)
Defitelio
Exploratory activities
Exosome NRAS candidate
Hematological malignancies (collaboration with Codiak)
Exosome STAT3 candidate
Hematological malignancies (collaboration with Codiak)
Exosome-based candidates
Solid tumors/hematological malignancies (collaboration with Codiak)
In 2019 and beyond, we expect that our research and development expenses will continue to increase from historical levels, particularly as we prepare for anticipated regulatory submissions and trial data read-outs, initiate and undertake additional clinical trials and related development work and potentially acquire rights to additional product candidates. Our ability to continue to undertake our planned development activities, as well as the success of these activities, are subject to a number of risks and uncertainties, including the risk factors under the headings “Risks Related to Our Business” and “Risks Related to Our Industry” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Challenges, Risks and Trends Related to Our Business
Xyrem. Xyrem is our largest selling product, and our financial results are significantly influenced by sales of Xyrem, which were 73% of our net product sales for the three months ended March 31, 2019 and 75% of our net product sales for the year ended December 31, 2018. Our future plans assume that sales of Xyrem will increase, but there is no guarantee that we can maintain sales of Xyrem at or near current levels, or that Xyrem sales will continue to grow. We have periodically increased the price of Xyrem, most recently in January 2019, and there is no guarantee that price adjustments we have taken or may take in the future will not negatively affect Xyrem sales volumes and revenues from Xyrem.
Although Xyrem is protected by patents covering its manufacture, formulation, distribution system and method of use, nine companies have sent us notices that they had filed abbreviated new drug applications, or ANDAs, seeking approval to market a generic version of Xyrem, and we have filed and settled patent lawsuits with all nine companies. To date, the FDA has approved or tentatively approved three of these ANDAs, and we believe that it is likely that the FDA will approve or tentatively approve additional ANDAs. In connection with the ANDA settlement agreements, we granted four of the filers the right to sell an authorized generic version of Xyrem, or an AG Product, and we granted each of the nine filers a license to launch its own generic sodium oxybate product. The actual timing of the launch of an AG Product or generic sodium oxybate product is uncertain because the launch dates of the AG Products and generic sodium oxybate products under our settlement agreements are subject to acceleration under certain circumstances. In the absence of any circumstances triggering acceleration, the earliest launch of an AG Product would be January 1, 2023. For a further description of the settlement

28

Table of Contents


agreements, including a more complete description of potential dates of market entry for an AG Product(s) and generic sodium oxybate product(s) and circumstances that might trigger acceleration of such dates, see the risk factor under the heading “The introduction of a new product in the U.S. market that competes with, or otherwise disrupts the market for, Xyrem would adversely affect sales of Xyrem” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
In addition to generic and authorized generic versions of Xyrem, we and others may launch products as treatment options in cataplexy and/or EDS in patients with narcolepsy, including other branded sodium oxybate products and other new and existing branded market entrants. For example, Avadel Pharmaceuticals plc is conducting a Phase 3 clinical trial of a once-nightly formula of sodium oxybate which uses its proprietary technology for the treatment of EDS and cataplexy in patients with narcolepsy, and has indicated that it intends to seek approval of its product candidate in the U.S. under a Section 505(b)(2) NDA approval pathway. Other companies may also develop a sodium oxybate or similar product using, for example, an alternative formulation or a different delivery technology and pursue a similar regulatory approval strategy in the future.
Non-oxybate products intended for the treatment of EDS or cataplexy in narcolepsy, even if not directly competitive with Xyrem, could have the effect of changing treatment regimens and payor coverage of Xyrem, and indirectly materially and adversely affect sales of Xyrem. Prescribers often prescribe stimulants or wake-promoting agents for treatment of EDS, and anti-depressants for cataplexy, before prescribing or instead of prescribing Xyrem, and payors often require patients to try such medications before they will cover Xyrem. It is possible that additional branded or generic products that treat symptoms of narcolepsy will also be prescribed before or instead of Xyrem, or that payors will require patients to try such products before they will cover Xyrem. Our product, Sunosi (solriamfetol), is an example of a new market entrant recently approved by the FDA to improve wakefulness in adult patients with EDS associated with narcolepsy or OSA. Another example is pitolisant, a drug that has already been approved in Europe to treat adult patients with narcolepsy with or without cataplexy. Harmony Biosciences LLC, which has exclusive U.S. rights to seek approval of and commercialize pitolisant, announced in February 2019 that the FDA had accepted its pitolisant NDA for filing with priority review.
The receipt of marketing approval and commercialization of an alternative product approved in the U.S. for the treatment of narcolepsy patients could negatively impact our ability to maintain and grow sales of Xyrem, largely due to payor actions taken in response to the disruption of the narcolepsy market. This could have the additional impact of potentially triggering acceleration of market entry of the AG Products or other generic sodium oxybate products under our ANDA litigation settlement agreements. We expect that the approval and launch of any other sodium oxybate or alternative product that treats narcolepsy, or the launch of an AG Product or other generic version of Xyrem, could have a material adverse effect on our sales of and revenues from Xyrem and on our business, financial condition, results of operations and growth prospects.
Future Xyrem sales may also be impacted by changes to, or uncertainties around, regulatory restrictions, including changes to our current Xyrem risk evaluation and mitigation strategy, or REMS, which requires, among other things, that Xyrem be distributed through a single pharmacy. We cannot predict whether the FDA will request, seek to require or ultimately require modifications to, or impose additional requirements on, the Xyrem REMS, including in connection with the submission of applications for new oxybate products, new oxybate indications or the introduction of authorized generics, or whether the FDA will approve modifications to the Xyrem REMS that we consider warranted in connection with the submission of applications for new oxybate products. We may face pressure to further modify the Xyrem REMS or to license or share intellectual property pertinent to the Xyrem REMS, including proprietary data required for the safe distribution of sodium oxybate, in connection with the FDA’s approval of the generic sodium oxybate REMS or otherwise. Any such modifications to the Xyrem REMS approved, required or rejected by the FDA could make it more difficult or expensive for us to distribute Xyrem, make distribution easier for sodium oxybate competitors, disrupt continuity of care for Xyrem patients and/or negatively affect sales of Xyrem. We also cannot predict the impact of future implementation of a generic sodium oxybate REMS on the Xyrem REMS.
Erwinaze/Erwinase. Sales of our second largest product, Erwinaze/Erwinase (which we refer to in this report as Erwinaze unless otherwise indicated or the context otherwise requires), were 12% of our net product sales for the three months ended March 31, 2019 and 9% for the year ended December 31, 2018. Erwinaze is licensed from and manufactured by a single source, PBL, a company that is wholly owned by the UK Department of Health and Social Care. Our license and supply agreement with PBL, which includes our license for Erwinaze, expires on December 31, 2020. We and PBL had been engaged in discussions related to entry into a replacement agreement to extend the term of our commercial relationship past 2020, but we did not reach agreement. Unless we and PBL enter into a new agreement, we will lose our rights to Erwinaze effective December 31, 2020, other than our right to sell certain Erwinaze inventory for a post-termination sales period of 12 months. In such event, we may not be able to replace the product sales we would lose from Erwinaze, which in 2018 totaled $174.7 million, and our business, financial condition, results of operations and growth prospects would be materially adversely affected. In addition, we cannot predict whether and to what extent uncertainty related to our rights to, and availability of, Erwinaze after 2020 will negatively impact sales of and revenues from this product.
A continuing and significant challenge to maintaining sales of Erwinaze and a barrier to increasing sales is PBL’s inability to consistently supply product adequate to meet market demand. All Erwinaze that PBL has been able to supply is

29

Table of Contents


currently completely absorbed by demand for the product. In addition, PBL is subject to a January 2017 warning letter issued by the FDA citing significant violations of the FDA’s current Good Manufacturing Practices, or cGMP, as well as an inspection report from the UK Medicines and Healthcare Products Regulatory Agency listing several major findings, including major deficiencies and failures by PBL to comply with cGMP. PBL’s product quality and manufacturing issues have resulted, and continue to result, in disruptions in our ability to supply markets from time to time and have caused, and may in the future cause, us to implement batch-specific, modified product use instructions. We have been experiencing, and continue to experience, supply disruptions globally and expect further supply disruptions during 2019.  These supply disruptions will continue to adversely impact our ability to generate sales of and revenues from Erwinaze and our business, financial condition, results of operations and growth prospects could be materially adversely affected.
Defitelio/defibrotide. Sales of Defitelio/defibrotide were 8% of our net product sales for the three months ended March 31, 2019 and for the year ended December 31, 2018. Our ability to maintain and grow sales and to realize the anticipated benefits from our investment in Defitelio is subject to a number of risks and uncertainties, including continued acceptance by hospital pharmacy and therapeutics committees in the U.S., the continued availability of favorable pricing and adequate coverage and reimbursement, the limited experience of, and need to educate, physicians in recognizing, diagnosing and treating VOD, and the limited size of the population of VOD patients who are indicated for treatment with Defitelio. If sales of Defitelio do not reach the levels we expect, our anticipated revenue from the product will be negatively affected and our business, financial condition, results of operations and growth prospects could be materially adversely affected.
Vyxeos. Sales of Vyxeos were 6% of our net product sales for the three months ended March 31, 2019 and 5% of our net product sales for the year ended December 31, 2018. We began selling Vyxeos in the U.S. in August 2017 following NDA approval. In August 2018, the European Commission, or EC, granted marketing authorization for Vyxeos. We have commenced our rolling launch of Vyxeos in the EU, and we are in the process of making pricing and reimbursement submissions in EU member states.
Our ability to realize the anticipated benefits from our investment in Vyxeos is subject to a number of risks and uncertainties, including acceptance by hospital pharmacy and therapeutics committees in the U.S., the EU and other countries, the availability of adequate coverage, pricing and reimbursement approvals, competition from new and existing products and potential competition from products in development, and delays or problems in the supply or manufacture of Vyxeos. If sales of Vyxeos do not reach the levels we expect, our anticipated revenue from the product will be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Sunosi (solriamfetol). As described above, the FDA approved Sunosi in March 2019. In the fourth quarter of 2018, we submitted an MAA to the EMA for solriamfetol. We cannot predict whether our MAA will be approved in a timely manner, or at all. Our ability to realize the anticipated benefits from our investment in Sunosi is subject to a number of risks and uncertainties, including, among other things, any delays in U.S. launch timing due to longer than expected DEA scheduling review which needs to be completed in the U.S. before commercial launch; the availability of adequate formulary positions and pricing and adequate coverage and reimbursement by government programs and other third party payors, including the impact of any delays in coverage decisions by payors; restrictions on permitted promotional activities based on limitations on the approved labeling for the product required by the FDA or the EC; market acceptance of Sunosi; delays or problems in the supply or manufacture of Sunosi; and our ability to satisfy the FDA’s post-marketing requirements and other post-marketing requirements or commitments, if any, imposed by the EC in connection with its marketing authorization. If we are unable to successfully launch and commercialize Sunosi in the U.S., if we are unable to obtain approval of our solriamfetol MAA in a timely manner, or at all, if the EC requires product labeling that negatively impacts patient, physician or payor acceptance of the product, or if sales of Sunosi in the U.S. and in the EU (if approved) do not reach the levels we expect, our anticipated revenue from the product will be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
JZP-258. As described above, in March 2019, we announced positive top-line results from our Phase 3 study evaluating the efficacy and safety of JZP-258 for the treatment of cataplexy and EDS in adult patients with narcolepsy, and we expect to submit an NDA for this product by as early as the end of 2019. We cannot predict whether we will be able to submit our planned NDA in a timely manner or at all. Any failure or delay in successfully completing necessary clinical trials and conducting other activities, including CMC activities, that are required to complete our planned NDA submission and obtain regulatory approval, could materially and adversely affect our growth prospects. If we submit an NDA to the FDA for approval and the FDA determines that our safety or efficacy data do not warrant marketing approval, we may be required to conduct additional clinical trials, which could be costly and time-consuming, or we may not be able to commercialize JZP-258, in which event we would not receive any return on our investment.
Other Challenges and Risks. We anticipate that we will continue to face a number of other challenges and risks to our business and our ability to execute our strategy in 2019 and beyond. Some of these challenges and risks are specific to our business, and others are common to companies in the pharmaceutical industry with development and commercial operations. In this regard, a key aspect of our growth strategy is our continued and growing investment in research and development

30

Table of Contents


activities. Our ability to successfully develop product candidates for one or more indications as well as our ability to identify new indications for existing products are subject to a number of risks and uncertainties, such as the difficulty and uncertainty of pharmaceutical product development, including the timing thereof, and the uncertainty of clinical success, such as the risk that results from preclinical studies and/or early clinical trials may not be predictive of results obtained in later and larger clinical trials. In addition, obtaining regulatory approval for product candidates is subject to the inherent uncertainty associated with the regulatory approval process, especially as we continue to increase investment in our product pipeline development projects and undertake planned regulatory submissions for our product candidates.
We also seek to expand our business through corporate development activities. Our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business are subject to a number of risks and uncertainties, including the risks associated with business combination or product or product candidate acquisition transactions, such as the challenges inherent in the integration of acquired businesses with our historical business, the increase in geographic dispersion among our centers of operation and the risks that we may acquire unanticipated liabilities along with acquired businesses or otherwise fail to realize the anticipated benefits (commercial or otherwise) from such transactions.
We are increasingly experiencing pressure from third party payors to agree to discounts, rebates or other restrictive pricing terms for Xyrem.  As our business becomes more complex, we may decide to enter into rebate agreements in order to ensure that patients continue to have access to Xyrem, and to support the long-term success of our sleep franchise, which might result in lower net revenues for Xyrem. In addition to increasing pricing pressure from, and restrictions on reimbursement imposed by, governmental and private third party payors, due to the attention being paid globally to healthcare cost containment, drug pricing by pharmaceutical companies is currently, and is expected to continue to be, under close scrutiny by both federal and state governments, including with respect to companies that have increased the price of products after acquiring those products from other companies. In addition, REMS programs have increasingly drawn public scrutiny from the U.S. Congress, the Federal Trade Commission and the FDA, with allegations that such programs are used as a means of improperly blocking or delaying competition. If we become the subject of any future government investigation with respect to drug pricing or other business practices, including as they relate to the Xyrem REMS or otherwise, we could incur significant expense and could be distracted from operation of our business and execution of our strategy.
Any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and growth prospects. All of these risks are discussed in greater detail, along with other risks, in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Results of Operations
The following table presents our revenues and expenses (in thousands, except percentages): 
 
Three Months Ended
March 31,
 
Increase/
 
2019
 
2018
 
(Decrease)
Product sales, net
$
503,331

 
$
440,847

 
14
 %
Royalties and contract revenues
4,855

 
3,766

 
29
 %
Cost of product sales (excluding amortization of intangible assets)
33,506

 
33,919

 
(1
)%
Selling, general and administrative
167,947

 
207,213

 
(19
)%
Research and development
60,105

 
62,667

 
(4
)%
Intangible asset amortization
56,885

 
53,007

 
7
 %
Acquired in-process research and development
56,000

 

 
N/A(1)

Interest expense, net
17,922

 
20,605

 
(13
)%
Foreign exchange loss
611

 
1,728

 
(65
)%
Income tax provision
29,116

 
19,146

 
52
 %
Equity in loss of investees
893

 
337

 
165
 %
_____________________________
(1)
Comparison to prior period not meaningful.

31

Table of Contents


Revenues
The following table presents our product sales, royalties and contract revenues, and total revenues (in thousands, except percentages):
 
Three Months Ended
March 31,
 
Increase/
 
2019
 
2018
 
(Decrease)
Xyrem
$
368,317

 
$
316,777

 
16
 %
Erwinaze/Erwinase
60,899

 
50,627

 
20
 %
Defitelio/defibrotide
41,500

 
35,061

 
18
 %
Vyxeos
28,943

 
26,228

 
10
 %
Other
3,672

 
12,154

 
(70
)%
Product sales, net
503,331

 
440,847

 
14
 %
Royalties and contract revenues
4,855

 
3,766

 
29
 %
Total revenues
$
508,186

 
$
444,613

 
14
 %
Product Sales, Net
Xyrem product sales increased in the three months ended March 31, 2019 compared to the same period in 2018 due to a higher average net selling price and, to a lesser extent, an increase in sales volume. Price increases were instituted in January 2019 and January 2018. Xyrem product sales volume increased by 5% in the three months ended March 31, 2019 compared to the same period in 2018 primarily driven by an increase in the average number of patients on Xyrem. Erwinaze/Erwinase product sales increased in the three months ended March 31, 2019 compared to the same period in 2018 primarily due to an increase in product availability. Ongoing supply challenges at PBL continue to negatively impact our ability to supply the market. We are experiencing supply disruptions globally and expect further supply disruptions during 2019. Defitelio/defibrotide product sales increased in the three months ended March 31, 2019 compared to the same period in 2018 primarily due to higher volumes as a result of increased use by transplant centers that treat adult and pediatric patients. Vyxeos product sales increased in the three months ended March 31, 2019 compared to the same period in 2018 following the commercial launch in the EU in September 2018. Other product sales decreased in the three months ended March 31, 2019 compared to the same period in 2018 primarily due to the sale of our rights to Prialt to TerSera Therapeutics LLC, or TerSera, in September 2018. We expect total product sales will increase in 2019 over 2018, primarily due to expected growth in sales of Xyrem, Vyxeos and Defitelio.
Royalties and Contract Revenues
Royalties and contract revenues increased in the three months ended March 31, 2019 compared to the same period in 2018 primarily due to higher contract revenues from out-licensing agreements. We expect royalties and contract revenues to decrease in 2019 compared to 2018, primarily due to lower milestone revenues from out-licensing arrangements.
Cost of Product Sales
Cost of product sales decreased in the three months ended March 31, 2019 compared to the same period in 2018 primarily due to product mix. Gross margin as a percentage of net product sales was 93.3% in the three months ended March 31, 2019 compared to 92.3% for the same period in 2018. The increase in the gross margin percentage in the three months ended March 31, 2019 was primarily due to a change in product mix. We do not expect our gross margin as a percentage of net product sales to change materially in 2019 compared to 2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased in the three months ended March 31, 2019 compared to the same period in 2018 primarily due to the loss contingency of $57.0 million incurred in the three months ended March 31, 2018. In April 2018, we reached an agreement in principle with the DOJ on a proposal for a civil settlement of potential claims by the DOJ in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies. In April 2019, we finalized a settlement agreement with the DOJ and the OIG. For a further description of this matter, see Note 11, Commitments and Contingencies—Other Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Selling, general and administrative expenses for the three months ended March 31, 2019, compared to the same period in 2018, included higher expenses related to the planned launch of Sunosi in the U.S., an increase in other

32

Table of Contents


compensation-related expenses driven by higher headcount, and an increase in other expenses related to the expansion and support of our business. We expect selling, general and administrative expenses in 2019 to increase compared to 2018, primarily due to an increase in compensation-related expenses driven by higher headcount and other expenses related to the expansion and support of our business and an increase in expenses related to the preparation for the planned commercial launch of Sunosi in the U.S. and the continuation of the commercial launch of Vyxeos in the EU.
Research and Development Expenses
Research and development expenses consist primarily of costs related to clinical studies and outside services, personnel expenses, milestone payments and other research and development costs. Clinical study and outside services costs relate primarily to services performed by clinical research organizations, materials and supplies, and other third party fees. Personnel expenses relate primarily to salaries, benefits and share-based compensation. Other research and development expenses primarily include overhead allocations consisting of various support and facilities-related costs. We do not track fully-burdened research and development expenses on a project-by-project basis. We manage our research and development expenses by identifying the research and development activities that we anticipate will be performed during a given period and then prioritizing efforts based on our assessment of which development activities are important to our business and have a reasonable probability of success, and by dynamically allocating resources accordingly. We also continually review our development pipeline projects and the status of their development and, as necessary, reallocate resources among our development pipeline projects that we believe will best support the future growth of our business.
The following table provides a breakout of our research and development expenses by major categories of expense (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Clinical studies and outside services
$
30,231

 
$
28,189

Personnel expenses
21,310