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Table of Contents


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

 
FORM 10-Q
 
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 D04 E5W7
011-353-1-634-7800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share
JAZZ
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No 
As of July 31, 2019, 56,621,139 ordinary shares of the registrant, nominal value $0.0001 per share, were outstanding.


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

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PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
637,739

 
$
309,622

Investments
245,000

 
515,000

Accounts receivable, net of allowances
311,249

 
263,838

Inventories
68,999

 
52,956

Prepaid expenses
31,712

 
25,017

Other current assets
75,367

 
67,572

Total current assets
1,370,066

 
1,234,005

Property, plant and equipment, net
127,183

 
200,358

Operating lease assets
144,746

 

Intangible assets, net
2,687,941

 
2,731,334

Goodwill
924,990

 
927,630

Deferred tax assets, net
184,383

 
57,879

Deferred financing costs
8,517

 
9,589

Other non-current assets
40,835

 
42,696

Total assets
$
5,488,661

 
$
5,203,491

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
82,222

 
$
40,602

Accrued liabilities
218,751

 
264,887

Current portion of long-term debt
33,387

 
33,387

Income taxes payable
30,413

 
1,197

Deferred revenue
4,720

 
5,414

Total current liabilities
369,493

 
345,487

Deferred revenue, non-current
7,221

 
9,581

Long-term debt, less current portion
1,567,842

 
1,563,025

Operating lease liabilities, less current portion
156,289

 

Deferred tax liabilities, net
283,669

 
309,097

Other non-current liabilities
120,713

 
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
2,171,458

 
2,113,630

Accumulated other comprehensive loss
(210,436
)
 
(197,791
)
Retained earnings
1,021,879

 
841,050

Total shareholders’ equity
2,983,434

 
2,757,422

Total liabilities and shareholders’ equity
$
5,488,661

 
$
5,203,491




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

3

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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Product sales, net
$
523,423

 
$
496,095

 
$
1,026,754

 
$
936,942

Royalties and contract revenues
10,710

 
4,384

 
15,565

 
8,150

Total revenues
534,133

 
500,479

 
1,042,319

 
945,092

Operating expenses:
 
 
 
 

 
 
Cost of product sales (excluding amortization of intangible assets)
27,676

 
34,714

 
61,182

 
68,633

Selling, general and administrative
176,014

 
158,579

 
343,961

 
365,792

Research and development
62,384

 
56,132

 
122,489

 
118,799

Intangible asset amortization
61,576

 
54,959

 
118,461

 
107,966

Impairment charges

 
42,896

 

 
42,896

Acquired in-process research and development
2,200

 

 
58,200

 

Total operating expenses
329,850

 
347,280

 
704,293

 
704,086

Income from operations
204,283

 
153,199

 
338,026

 
241,006

Interest expense, net
(18,234
)
 
(19,646
)
 
(36,156
)
 
(40,251
)
Foreign exchange loss
(1,933
)
 
(2,697
)
 
(2,544
)
 
(4,425
)
Loss on extinguishment and modification of debt

 
(1,425
)
 

 
(1,425
)
Income before income tax provision (benefit) and equity in loss of investees
184,116

 
129,431

 
299,326

 
194,905

Income tax provision (benefit)
(78,650
)
 
36,524

 
(49,534
)
 
55,670

Equity in loss of investees
868

 
586

 
1,761

 
923

Net income
$
261,898

 
$
92,321

 
$
347,099

 
$
138,312

 
 
 
 
 
 
 
 
Net income per ordinary share:
 
 
 
 
 
 
 
Basic
$
4.62

 
$
1.53

 
$
6.09

 
$
2.30

Diluted
$
4.56

 
$
1.50

 
$
6.01

 
$
2.26

Weighted-average ordinary shares used in per share calculations - basic
56,707

 
60,177

 
56,955

 
60,053

Weighted-average ordinary shares used in per share calculations - diluted
57,427

 
61,438

 
57,753

 
61,309










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

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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
261,898

 
$
92,321

 
$
347,099

 
$
138,312

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
13,319

 
(70,814
)
 
(7,823
)
 
(31,961
)
Unrealized gain (loss) on hedging activities, net of income tax (benefit) provision of ($440), $193, ($689) and $651, respectively
(3,081
)
 
1,354

 
(4,822
)
 
4,558

Other comprehensive income (loss)
10,238

 
(69,460
)
 
(12,645
)
 
(27,403
)
Total comprehensive income
$
272,136

 
$
22,861

 
$
334,454

 
$
110,909
























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

5

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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
Ordinary Shares
 
Non-voting Euro Deferred
 
Capital Redemption Reserve
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Equity
Shares
 
Amount
 
Shares
 
Amount
 
 
Balance at December 31, 2018
57,504

 
$
6

 
4,000

 
$
55

 
$
472

 
$
2,113,630

 
$
(197,791
)
 
$
841,050

 
$
2,757,422

Cumulative effect adjustment from adoption of new accounting standards

 

 

 

 

 

 

 
4,848

 
4,848

Issuance of ordinary shares in conjunction with exercise of share options
54

 

 

 

 

 
3,057

 

 

 
3,057

Issuance of ordinary shares in conjunction with vesting of restricted stock units
203

 

 

 

 

 

 

 

 

Shares withheld for payment of employee's withholding tax liability

 

 

 

 

 
(13,810
)
 

 

 
(13,810
)
Share-based compensation

 

 

 

 

 
27,861

 

 

 
27,861

Shares repurchased
(858
)
 

 

 

 

 

 

 
(111,249
)
 
(111,249
)
Other comprehensive loss

 

 

 

 

 

 
(22,883
)
 

 
(22,883
)
Net income

 

 

 

 

 

 

 
85,201

 
85,201

Balance at March 31, 2019
56,903

 
$
6

 
4,000

 
$
55

 
$
472

 
$
2,130,738

 
$
(220,674
)
 
$
819,850

 
$
2,730,447

Issuance of ordinary shares in conjunction with exercise of share options
98

 

 

 

 

 
7,033

 

 

 
7,033

Issuance of ordinary shares under employee stock purchase plan
57

 

 

 

 

 
6,032

 

 

 
6,032

Issuance of ordinary shares in conjunction with vesting of restricted stock units
15

 

 

 

 

 

 

 

 

Shares withheld for payment of employee's withholding tax liability

 

 

 

 

 
(1,003
)
 

 

 
(1,003
)
Share-based compensation

 

 

 

 

 
28,658

 

 

 
28,658

Shares repurchased
(447
)
 

 

 

 

 

 

 
(59,869
)
 
(59,869
)
Other comprehensive income

 

 

 

 

 

 
10,238

 

 
10,238

Net income

 

 

 

 

 

 

 
261,898

 
261,898

Balance at June 30, 2019
56,626

 
$
6

 
4,000

 
$
55

 
$
472

 
$
2,171,458

 
$
(210,436
)
 
$
1,021,879

 
$
2,983,434










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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(Continued)
(In thousands)
(Unaudited)
 
Ordinary Shares
 
Non-voting Euro Deferred
 
Capital Redemption Reserve
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Equity
Shares
 
Amount
 
Shares
 
Amount
 
 
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

Issuance of ordinary shares in conjunction with exercise of share options
457

 

 

 

 

 
51,023

 

 

 
51,023

Issuance of ordinary shares under employee stock purchase plan
59

 

 

 

 

 
5,447

 

 

 
5,447

Issuance of ordinary shares in conjunction with vesting of restricted stock units
16

 

 

 

 

 

 

 

 

Shares withheld for payment of employee's withholding tax liability

 

 

 

 

 
(1,429
)
 

 

 
(1,429
)
Share-based compensation

 

 

 

 

 
26,294

 

 

 
26,294

Shares repurchased
(135
)
 

 

 

 

 

 

 
(21,015
)
 
(21,015
)
Other comprehensive loss

 

 

 

 

 

 
(69,460
)
 

 
(69,460
)
Net income

 

 

 

 

 

 

 
92,321

 
92,321

Balance at June 30, 2018
60,386

 
$
6

 
4,000

 
$
55

 
$
472

 
$
2,037,091

 
$
(168,228
)
 
$
1,000,356

 
$
2,869,752
















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

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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Six Months Ended
June 30,
 
2019
 
2018
Operating activities
 
 
 
Net income
$
347,099

 
$
138,312

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Intangible asset amortization
118,461

 
107,966

Share-based compensation
55,841

 
50,615

Impairment charges

 
42,896

Depreciation
6,894

 
7,457

Acquired in-process research and development
58,200

 

Loss on disposal of assets
7

 
115

Deferred tax benefit
(151,347
)
 
(32,228
)
Provision for losses on accounts receivable and inventory
2,403

 
2,670

Loss on extinguishment and modification of debt

 
1,425

Amortization of debt discount and deferred financing costs
22,584

 
21,504

Other non-cash transactions
(2,547
)
 
10,996

Changes in assets and liabilities:

 

Accounts receivable
(47,574
)
 
(54,356
)
Inventories
(18,562
)
 
(8,938
)
Prepaid expenses and other current assets
(15,929
)
 
(5,268
)
Other non-current assets
694

 
1,767

Operating lease assets
7,399

 

Accounts payable
(14,096
)
 
7,371

Accrued liabilities
(59,031
)
 
60,108

Income taxes payable
29,050

 
(3,285
)
Deferred revenue
(3,054
)
 
(3,749
)
Other non-current liabilities
14,177

 
13,955

Operating lease liabilities, less current portion
431

 

Net cash provided by operating activities
351,100

 
359,333

Investing activities
 
 
 
Proceeds from maturity of investments
630,000

 
385,000

Acquired in-process research and development
(58,200
)
 

Purchases of property, plant and equipment
(21,911
)
 
(11,281
)
Acquisition of intangible assets
(25,500
)
 
(111,102
)
Acquisition of investments
(360,975
)
 
(505,350
)
Net cash provided by (used in) investing activities
163,414

 
(242,733
)
Financing activities
 
 
 
Proceeds from employee equity incentive and purchase plans
16,122

 
67,058

Payment of employee withholding taxes related to share-based awards
(14,813
)
 
(16,023
)
Repayments of long-term debt
(16,693
)
 
(9,023
)
Share repurchases
(171,118
)
 
(55,561
)
Proceeds from tenant improvement allowance on build-to-suit lease

 
1,253

Payment of debt modification costs

 
(6,406
)
Net cash used in financing activities
(186,502
)
 
(18,702
)
Effect of exchange rates on cash and cash equivalents
105

 
1,148

Net increase in cash and cash equivalents
328,117

 
99,046

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

 
386,035

Cash and cash equivalents, at end of period
$
637,739

 
$
485,081



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

8

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

1. The Company and Summary of Significant Accounting Policies
Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing 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:
Sunosi™ (solriamfetol), our newest lead marketed product launched in July 2019 and approved in the U.S. to improve wakefulness in adult patients with excessive daytime sleepiness, or EDS, associated with narcolepsy or obstructive sleep apnea. 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;
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 EDS in both adult and pediatric patients with narcolepsy;
Defitelio® (defibrotide sodium), a product approved in the U.S. for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome, with renal or pulmonary dysfunction following hematopoietic stem cell transplantation, or HSCT, and in Europe (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children undergoing HSCT therapy;
Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia who have developed hypersensitivity to E. coli-derived asparaginase; 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, 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 a new drug application, or 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 annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of our financial position and operating results. The results for the three and six months ended June 30, 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.

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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, including effectively launching and commercializing new products such as our recently-approved product Sunosi; 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.

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Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, investments and derivative contracts. Our investment policy permits investments in U.S. federal government and federal agency securities, corporate bonds or commercial paper issued by U.S. corporations, money market instruments, certain qualifying money market mutual funds, certain repurchase agreements, and tax-exempt obligations of U.S. states, agencies and municipalities and places restrictions on credit ratings, maturities, and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and investments to the extent recorded on the balance sheet.
We manage our foreign currency transaction risk and interest rate risk within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes. As of June 30, 2019, we had foreign exchange forward contracts with notional amounts totaling $288.9 million. As of June 30, 2019, the outstanding foreign exchange forward contracts had a net asset fair value of $1.6 million. As of June 30, 2019, we had interest rate swap contracts with notional amounts totaling $300.0 million. These outstanding interest rate swap contracts had a net liability fair value of $1.4 million as of June 30, 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 June 30, 2019 and December 31, 2018, allowances on receivables were not material. As of June 30, 2019, two customers accounted for 88% of gross accounts receivable, Express Scripts Specialty Distribution Services, Inc. and its affiliates, or Express Scripts, the central pharmacy for Xyrem, which accounted for 78% of gross accounts receivable, and McKesson Corporation and affiliates, or McKesson, which accounted for 10% 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

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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 six months ended June 30, 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 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): 
 
June 30, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
Cash
$
261,194

 
$

 
$

 
$
261,194

 
$
261,194

 
$

Time deposits
370,000

 

 

 
370,000

 
125,000

 
245,000

Money market funds
251,545

 

 

 
251,545

 
251,545

 

Totals
$
882,739

 
$

 
$

 
$
882,739

 
$
637,739

 
$
245,000


 
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.


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4. Fair Value Measurement
The following table summarizes, by major security type, our available-for-sale securities and derivative contracts as of June 30, 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): 
 
June 30, 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
$

 
$
370,000

 
$
370,000

 
$

 
$
515,000

 
$
515,000

Money market funds
251,545

 

 
251,545

 
94,016

 

 
94,016

Interest rate contracts

 
13

 
13

 

 
4,070

 
4,070

Foreign exchange forward contracts

 
1,732

 
1,732

 

 
1,194

 
1,194

Totals
$
251,545

 
$
371,745

 
$
623,290

 
$
94,016

 
$
520,264

 
$
614,280

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
1,445

 
$
1,445

 
$

 
$

 
$