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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2021
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission File Number: 001-33500
JAZZ PHARMACEUTICALS PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter) 
Ireland98-1032470
(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 classTrading Symbol(s)Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per shareJAZZThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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 
As of November 2, 2021, 61,469,645 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 SEPTEMBER 30, 2021

INDEX
 
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
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, Xywav® (calcium, magnesium, potassium, and sodium oxybates) oral solution, Epidiolex® (cannabidiol) oral solution, Epidyolex® (the trade name in Europe for Epidiolex), Sunosi® (solriamfetol), Defitelio® (defibrotide sodium), Defitelio® (defibrotide), CombiPlex®, Vyxeos® (daunorubicin and cytarabine) liposome for injection, Vyxeos® liposomal 44 mg/100 mg powder for concentrate for solution for infusion, Zepzelca® (lurbinectedin), Rylaze™ (recombinant Erwinia asparaginase) and Sativex® (nabiximols) oral solution. This report also includes trademarks, service marks and trade names of other companies. Trademarks, service marks and trade names appearing in this Quarterly Report on Form 10‑Q are the property of their respective owners.





2

Table of Contents
PART I – FINANCIAL INFORMATION
 
Item 1.Financial Statements

JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30,
2021
December 31,
2020
ASSETS
Current assets:
Cash and cash equivalents$671,780 $1,057,769 
Investments 1,075,000 
Accounts receivable, net of allowances499,023 396,490 
Inventories1,137,851 95,396 
Prepaid expenses94,474 62,422 
Other current assets225,098 152,491 
Total current assets2,628,226 2,839,568 
Property, plant and equipment, net255,006 127,935 
Operating lease assets89,628 129,169 
Intangible assets, net7,282,579 2,195,051 
Goodwill1,849,547 958,303 
Deferred tax assets, net314,666 254,916 
Deferred financing costs12,724 5,238 
Other non-current assets45,776 25,721 
Total assets$12,478,152 $6,535,901 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$63,815 $26,945 
Accrued liabilities603,715 352,732 
Current portion of long-term debt31,000 246,322 
Income taxes payable34,256 25,200 
Deferred revenue2,267 2,546 
Total current liabilities735,053 653,745 
Deferred revenue, non-current986 2,315 
Long-term debt, less current portion6,247,287 1,848,516 
Operating lease liabilities, less current portion89,359 140,035 
Deferred tax liabilities, net1,329,184 130,397 
Other non-current liabilities137,806 101,148 
Commitments and contingencies (Note 11)
Shareholders’ equity:
Ordinary shares6 6 
Non-voting euro deferred shares55 55 
Capital redemption reserve472 472 
Additional paid-in capital3,469,884 2,633,670 
Accumulated other comprehensive loss(397,517)(134,352)
Retained earnings865,577 1,159,894 
Total shareholders’ equity3,938,477 3,659,745 
Total liabilities and shareholders’ equity$12,478,152 $6,535,901 



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 (LOSS)
(In thousands, except per share amounts)
(Unaudited)
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
Revenues:
Product sales, net$834,247 $596,949 $2,186,118 $1,685,357 
Royalties and contract revenues3,868 3,939 11,389 12,693 
Total revenues838,115 600,888 2,197,507 1,698,050 
Operating expenses:
Cost of product sales (excluding amortization of acquired developed technologies)145,224 42,095 304,607 98,760 
Selling, general and administrative363,682 207,255 1,053,221 607,061 
Research and development141,036 78,647 350,305 243,676 
Intangible asset amortization159,804 66,684 368,476 192,505 
Acquired in-process research and development 10,000  215,250 
Impairment charge   136,139 
Total operating expenses809,746 404,681 2,076,609 1,493,391 
Income from operations28,369 196,207 120,898 204,659 
Interest expense, net(93,372)(27,428)(190,168)(72,134)
Foreign exchange gain (loss)(2,631)(639)1,262 (2,235)
Income (loss) before income tax provision (benefit) and equity in (gain) loss of investees(67,634)168,140 (68,008)130,290 
Income tax provision (benefit)(18,057)19,283 228,583 22,750 
Equity in (gain) loss of investees3,256 623 (2,274)2,338 
Net income (loss)$(52,833)$148,234 $(294,317)$105,202 
Net income (loss) per ordinary share:
Basic$(0.86)$2.67 $(4.98)$1.89 
Diluted$(0.86)$2.64 $(4.98)$1.87 
Weighted-average ordinary shares used in per share calculations - basic61,284 55,545 59,084 55,637 
Weighted-average ordinary shares used in per share calculations - diluted61,284 56,236 59,084 56,297 











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 (LOSS)
(In thousands)
(Unaudited)
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
Net income (loss)$(52,833)$148,234 $(294,317)$105,202 
Other comprehensive income (loss):
Foreign currency translation adjustments(206,819)47,139 (265,342)37,879 
Unrealized gain (loss) on cash flow hedging activities, net of income tax provision (benefit) of $22, $167, $353 and ($327), respectively
153 1,169 2,468 (2,287)
Unrealized gain (loss) on fair value hedging activities, net of income tax provision (benefit) of $28, $, ($97) and $, respectively
84  (291) 
Other comprehensive income (loss)(206,582)48,308 (263,165)35,592 
Total comprehensive income (loss)$(259,415)$196,542 $(557,482)$140,794 






















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 SharesNon-voting Euro DeferredCapital
Redemption
Reserve
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Equity
SharesAmountSharesAmount
Balance at December 31, 202056,171 $6 4,000 $55 $472 $2,633,670 $(134,352)$1,159,894 $3,659,745 
Issuance of ordinary shares in conjunction with exercise of share options408 — — — — 50,407 — — 50,407 
Issuance of ordinary shares in conjunction with vesting of restricted stock units294 — — — — — — — — 
Shares withheld for payment of employee's withholding tax liability— — — — — (23,784)— — (23,784)
Share-based compensation— — — — — 34,565 — — 34,565 
Other comprehensive loss— — — — — — (45,076)— (45,076)
Net income— — — — — — — 121,832 121,832 
Balance at March 31, 202156,873 $6 4,000 $55 $472 $2,694,858 $(179,428)$1,281,726 $3,797,689 
Issuance of ordinary shares in connection with the acquisition of GW Pharmaceuticals plc3,798 — — — — 608,456 — — 608,456 
Share-based payment - pre-combination service in connection with the acquisition of GW Pharmaceuticals plc— — — — — 3,555 — — 3,555 
Issuance of ordinary shares in conjunction with exercise of share options328 — — — — 43,600 — — 43,600 
Issuance of ordinary shares under employee stock purchase plan79 — — — — 8,282 — — 8,282 
Issuance of ordinary shares in conjunction with vesting of restricted stock units37 — — — — — — — — 
Shares withheld for payment of employee's withholding tax liability— — — — — (3,388)— — (3,388)
Share-based compensation— — — — — 48,119 — — 48,119 
Other comprehensive loss— — — — — — (11,507)— (11,507)
Net loss— — — — — — — (363,316)(363,316)
Balance at June 30, 202161,115 $6 4,000 $55 $472 $3,403,482 $(190,935)$918,410 $4,131,490 
Issuance of ordinary shares in conjunction with exercise of share options202 — — — — 14,822 — — 14,822 
Issuance of ordinary shares in conjunction with vesting of restricted stock units63 — — — — — — — — 
Shares withheld for payment of employee's withholding tax liability— — — — — (2,431)— — (2,431)
Share-based compensation— — — — — 54,011 — — 54,011 
Other comprehensive loss— — — — — — (206,582)— (206,582)
Net loss— — — — — — — (52,833)(52,833)
Balance at September 30, 202161,380 $6 4,000 $55 $472 $3,469,884 $(397,517)$865,577 $3,938,477 


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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 Ordinary SharesNon-voting Euro DeferredCapital
Redemption
Reserve
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Equity
SharesAmountSharesAmount
Balance at December 31, 201956,140 $6 4,000 $55 $472 $2,266,026 $(223,393)$1,067,815 $3,110,981 
Issuance of ordinary shares in conjunction with exercise of share options145 — — — — 13,264 — — 13,264 
Issuance of ordinary shares in conjunction with vesting of restricted stock units214 — — — — — — — — 
Shares withheld for payment of employee's withholding tax liability— — — — — (13,547)— — (13,547)
Share-based compensation— — — — — 28,731 — — 28,731 
Shares repurchased(1,131)— — — — — — (139,053)(139,053)
Other comprehensive loss— — — — — — (34,043)— (34,043)
Net loss— — — — — — — (157,833)(157,833)
Balance at March 31, 202055,368 $6 4,000 $55 $472 $2,294,474 $(257,436)$770,929 $2,808,500 
Issuance of Exchangeable Senior Notes, due 2026— — — — — 176,260 — — 176,260 
Partial repurchase of Exchangeable Senior Notes, due 2021— — — — — (12,069)— — (12,069)
Issuance of ordinary shares in conjunction with exercise of share options74 — — — — 4,440 — — 4,440 
Issuance of ordinary shares under employee stock purchase plan65 — — — — 6,547 — — 6,547 
Issuance of ordinary shares in conjunction with vesting of restricted stock units19 — — — — — — — — 
Shares withheld for payment of employee's withholding tax liability— — — — — (1,116)— — (1,116)
Share-based compensation— — — — — 30,599 — — 30,599 
Shares repurchased(70)— — — — — — (7,484)(7,484)
Other comprehensive income— — — — — — 21,327 — 21,327 
Net income— — — — — — — 114,801 114,801 
Balance at June 30, 202055,456 $6 4,000 $55 $472 $2,499,135 $(236,109)$878,246 $3,141,805 
Partial repurchase of Exchangeable Senior Notes, due 2021— — — — — (444)— — (444)
Issuance of ordinary shares in conjunction with exercise of share options96 — — — — 10,088 — — 10,088 
Issuance of ordinary shares in conjunction with vesting of restricted stock units40 — — — — — — — — 
Shares withheld for payment of employee's withholding tax liability— — — — — (1,097)— — (1,097)
Share-based compensation— — — — — 30,307 — — 30,307 
Other comprehensive income— — — — — — 48,308 — 48,308 
Net income— — — — — — — 148,234 148,234 
Balance at September 30, 202055,592 $6 4,000 $55 $472 $2,537,989 $(187,801)$1,026,480 $3,377,201 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 Nine Months Ended
September 30,
 20212020
Operating activities
Net income (loss)$(294,317)$105,202 
Adjustments to reconcile net loss to net cash provided by operating activities:
Intangible asset amortization368,476 192,505 
Acquisition accounting inventory fair value step-up adjustment148,637  
Share-based compensation 135,887 89,614 
Deferred tax provision (benefit)96,593 (120,909)
Non-cash interest expense66,055 45,702 
Depreciation19,387 14,076 
Provision for losses on accounts receivable and inventory13,444 9,148 
Impairment charge 136,139 
Acquired in-process research and development 215,250 
Other non-cash transactions9,622 12,672 
Changes in assets and liabilities:
Accounts receivable(27,956)(5,004)
Inventories(33,891)(21,861)
Prepaid expenses and other current assets(34,722)(64,902)
Operating lease assets12,054 9,730 
Other non-current assets(1,837)13,941 
Accounts payable19,167 20,645 
Accrued liabilities93,534 26,510 
Income taxes payable9,171 15,089 
Deferred revenue(1,608)(3,540)
Operating lease liabilities, less current portion(13,423)(9,884)
Other non-current liabilities16,479 33,254 
Net cash provided by operating activities600,752 713,377 
Investing activities
Proceeds from maturity of investments1,095,000 920,000 
Purchases of property, plant and equipment(17,674)(10,889)
Acquisition of intangible assets(17,891)(113,000)
Acquisition of investments(26,694)(1,661,750)
Acquisition of a business, net of cash acquired(6,234,792) 
Acquired in-process research and development (215,250)
Net cash used in investing activities(5,202,051)(1,080,889)
Financing activities
Net proceeds from issuance of borrowings under credit agreement3,719,930  
Net proceeds from issuance of Senior Secured Notes, due 20291,471,533  
Proceeds from employee equity incentive and purchase plans117,111 34,339 
Payment of employee withholding taxes related to share-based awards(29,603)(15,760)
Payments for repurchase of Exchangeable Senior Notes, due 2021(218,812)(356,188)
Repayments of long-term debt(843,028)(25,040)
Net proceeds from issuance of Exchangeable Senior Notes, due 2026 981,381 
Net proceeds from revolving credit facility 500,000 
Share repurchases (146,537)
Repayments under revolving credit facility (500,000)
Net cash provided by financing activities4,217,131 472,195 
Effect of exchange rates on cash and cash equivalents(1,821)(85)
Net increase (decrease) in cash and cash equivalents(385,989)104,598 
Cash and cash equivalents, at beginning of period1,057,769 637,344 
Cash and cash equivalents, at end of period$671,780 $741,942 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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JAZZ PHARMACEUTICALS PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. The Company and Summary of Significant Accounting Policies
Jazz Pharmaceuticals plc is a global biopharmaceutical company whose purpose is to innovate to transform the lives of patients and their families. We are dedicated to developing life-changing medicines for people with serious diseases - often with limited or no therapeutic options. We have a diverse portfolio of marketed medicines and novel product candidates, from early- to late-stage development, in neuroscience and oncology. Within these therapeutic areas, we are identifying new options for patients by actively exploring small molecules and biologics, and through innovative delivery technologies and cannabinoid science.
Our lead marketed products are:
Neuroscience
Xywav® (calcium, magnesium, potassium, and sodium oxybates) oral solution, a product that contains 92% less sodium than Xyrem, approved by FDA and launched in the U.S. in November 2020 for the treatment of cataplexy or EDS in narcolepsy patients seven years of age and older and approved by FDA in August 2021 for the treatment of adults with idiopathic hypersomnia and launched in the U.S. in November 2021;
Xyrem® (sodium oxybate) oral solution, a product approved by the U.S. Food and Drug Administration, or FDA, and marketed in the U.S. for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in narcolepsy patients seven years of age and older; Jazz also markets Xyrem in Canada for the treatment of cataplexy in patients with narcolepsy;
Epidiolex® (cannabidiol) oral solution, a product approved by FDA and launched in the U.S. in 2018 by GW Pharmaceuticals plc, or GW, for the treatments of seizures associated with Lennox-Gastaut syndrome, Dravet syndrome, or tuberous sclerosis complex in patients one year of age or older; in Europe (where it is marketed as Epidyolex®) and other markets, it is approved for adjunctive treatment of seizures associated with Lennox-Gastaut syndrome or Dravet syndrome, in conjunction with clobazam, in patients 2 years of age and older and for adjunctive treatment of seizures associated with tuberous sclerosis complex in patients 2 years of age and older (note that the clobazam restriction is limited to EU and UK);
Sunosi® (solriamfetol), a product approved by FDA and marketed in the U.S. and in Europe to improve wakefulness in adult patients with EDS associated with narcolepsy or obstructive sleep apnea; and
Sativex® (nabiximols) oral solution, a product marketed in Europe as treatment for symptom improvement in adult patients with moderate to severe spasticity due to multiple sclerosis, or MS, who have not responded adequately to other anti-spasticity medication and who demonstrate clinically significant improvement in spasticity-related symptoms during an initial trial of therapy.
Oncology
Zepzelca® (lurbinectedin), a product approved by FDA in June 2020 and launched in the U.S. in July 2020 for the treatment of adult patients with metastatic small cell lung cancer, or SCLC, with disease progression on or after platinum-based chemotherapy; in Canada, Zepzelca was approved in September 2021 for the treatment of adults with Stage III or metastatic SCLC, who have progressed on or after platinum-containing therapy;
Rylaze™ (recombinant Erwinia asparaginase), a product approved by FDA in June 2021 and launched in the U.S. in July 2021 for use as a component of a multi-agent chemotherapeutic regimen for the treatment of acute lymphoblastic leukemia, or ALL, or lymphoblastic lymphoma, or LBL, in adults and pediatric patients who have developed hypersensitivity or silent inactivation to E. coli-derived asparaginase;
Vyxeos® (daunorubicin and cytarabine) liposome for injection, a product approved in the U.S., Europe, U.K., and Canada (where it is marketed as Vyxeos® liposomal 44 mg/100 mg powder for concentrate for solution for infusion) for the treatment of adults with newly-diagnosed therapy-related acute myeloid leukemia, or AML, or AML with myelodysplasia-related changes; and
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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 Internationally (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children following HSCT therapy.
In May 2021, we acquired GW with the objectives of broadening our neuroscience portfolio, further diversifying our revenue and driving sustainable, long-term value creation opportunities. The total consideration paid by us for the entire issued share capital of GW was $7.2 billion. The acquisition, which we refer to as the GW Acquisition, closed on May 5, 2021. For further information regarding the GW Acquisition, please see Note 2.
Throughout this report, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the registrant,” "the Company", “we,” “us,” and “our” refer to Jazz Pharmaceuticals plc and its consolidated subsidiaries. Throughout this report, all references to “ordinary shares” refer to Jazz Pharmaceuticals plc’s ordinary shares.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared following the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by U.S. generally accepted accounting principles, or U.S. GAAP, can be condensed or omitted. The information included in this Quarterly Report on Form 10‑Q should be read in conjunction with our annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10‑K for the year ended December 31, 2020.
In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of our financial position and operating results. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021, for any other interim period or for any future period.
Our significant accounting policies have not changed substantially from those previously described in our Annual Report on Form 10‑K for the year ended December 31, 2020, other than as described below.
These condensed consolidated financial statements include the accounts of Jazz Pharmaceuticals plc and our subsidiaries, and intercompany transactions and balances have been eliminated.
The results of operations of the acquired GW business, along with the estimated fair values of the assets acquired and liabilities assumed in the GW Acquisition, have been included in our condensed consolidated financial statements since the closing of the GW Acquisition on May 5, 2021.
Our operating segment is reported in a manner consistent with the internal reporting provided to the chief operating decision maker, or CODM. Our CODM has been identified as our chief executive officer. We have determined that we operate in one business segment, which is the identification, development and commercialization of meaningful pharmaceutical products that address unmet medical needs.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.
Adoption of New Accounting Standards
In December 2019, the Financial Accounting Standards Board, or FASB, issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes by removing certain exceptions to the general principles in the existing guidance for income taxes and making other minor improvements. We adopted this standard on January 1, 2021 and adoption did not have a material impact on our consolidated financial statements.
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Performance-Based Restricted Stock Unit Awards
Performance-based restricted stock units, or PRSUs, awarded to employees vest upon the achievement of certain performance criteria at the end of a specified performance period, subject to a relative total shareholder return, or TSR, modifier. The estimated fair value of these PRSUs is based on a Monte Carlo simulation model. Compensation expense for PRSUs is recognized from the date the Company determines the performance criteria probable of being achieved to the date the award, or relevant portion of the award, is expected to vest. Cumulative adjustments are recorded on a quarterly basis to reflect subsequent changes to the estimated outcome of the performance criteria until the date results are determined.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand for a particular product. If our estimate of future demand changes, we consider the impact on the reserve for excess inventory and adjust the reserve as required. Increases in the reserve are recorded as charges in cost of product sales.
We capitalize inventory costs associated with our products prior to regulatory approval when, based on management's judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. The determination to capitalize inventory costs is based on various factors, including status and expectations of the regulatory approval process, any known safety or efficacy concerns, potential labeling restrictions, and any other impediments to obtaining regulatory approval. We had no pre-approval inventory on our condensed consolidated balance sheets as of September 30, 2021 or December 31, 2020.
Our inventory production process for our cannabinoid products includes the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of our inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.
Derivative Instruments and Hedging Activities
We record the fair value of derivative instruments as either assets or liabilities on the condensed consolidated balance sheets. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income (loss), depending on whether a derivative instrument is designated as part of a hedging transaction and, if it is, the type of hedging transaction. For a derivative to qualify as a hedge at inception and throughout the hedged period, we formally document the nature and relationships between the hedging instruments and hedged item.
For derivatives formally designated as hedges, we assess both at inception and quarterly thereafter, whether the hedging derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item.
Gains or losses on cash flow hedges are reclassified from other comprehensive income (loss) to earnings when the hedged transaction occurs. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting and any related unrealized gain or loss on the derivative instrument is recognized in current earnings.
We designate cross-currency interest rate swaps as fair value hedges to hedge foreign currency risks related to our borrowings denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in foreign exchange gain (loss) within the condensed consolidated statements of income (loss), along with the offsetting gains and losses of the related hedged item. We have elected to exclude the total forward points or currency basis from the assessment of hedge effectiveness and account for them as excluded components. The initial fair value of the excluded component is amortized to foreign exchange gain (loss) and the difference between changes in fair value of the excluded component and the amount recorded in earnings is recorded in other comprehensive income (loss).
Derivatives that are not designated and do not qualify as hedges are adjusted to fair value through current earnings.
Variable Interest Entity
In the nine months ended September 30, 2021, we invested in a cell of a protected cell company, or the protected cell, as part of our directors’ and officers’ liability risk financing strategy. Based on our control and the structure of the protected cell, we concluded that Jazz is the primary beneficiary of the protected cell and is required to consolidate the protected cell. The insurance premium payable to the protected cell for the three and nine months ended September 30, 2021 and the protected cell’s assets and liabilities as of September 30, 2021 were immaterial.
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Significant Risks and Uncertainties
We have implemented a comprehensive response strategy designed to manage the ongoing impact of the COVID-19 pandemic on our employees, patients and our business. The prolonged nature of the pandemic is negatively impacting our business in a limited and varied manner due to the emergence of the Delta variant and other variants with increased transmissibility, even in some cases in vaccinated people, limited access to health care provider offices and institutions and the willingness of patients or parents of patients to seek treatment. We expect that our business, financial condition, results of operations and growth prospects may continue to be negatively impacted by the pandemic on a limited basis that may vary depending on the context. With respect to our commercialization activities, while there continues to be some negative impact on demand, new patient starts and treatments for our products arising from the pandemic, primarily due to the inherent limitations of telemedicine and a reprioritization of healthcare resources toward COVID-19, we have seen improvements as healthcare systems have adapted to cope with the ongoing situation. However, for Epidiolex/Epidyolex, reports from the field indicate that COVID-19 and the lack of access to and limited availability of COVID-19 vaccines, especially for children under 12 years of age, have impacted the willingness of parents of pediatric patients to bring their children to a health care provider office, which can increase the risk of COVID exposure through contact with the healthcare system. We believe these dynamics have negatively impacted new patient starts in the U.S. and Europe. The extent of the impact on our ability to generate sales of approved products, execute on new product launches, our clinical development and regulatory efforts, our corporate development objectives and the value of and market for our ordinary shares, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time. Such developments include continued spread of the Delta variant in the U.S. and other countries and the potential emergence of other SARS-CoV-2 variants that may prove especially contagious or virulent, the ultimate duration and severity of the pandemic, governmental “stay-at-home” orders and travel restrictions, quarantines, social distancing and business closure requirements in the U.S., Ireland and other countries, and the effectiveness of vaccination programs and other actions taken globally to contain and treat the disease.
Our business has been substantially dependent on Xyrem and while we expect that our business will continue to be substantially dependent on oxybate product sales from both Xyrem and Xywav, there is no guarantee that we can maintain oxybate revenues at or near current levels, or that oxybate revenues will continue to grow. Our ability to maintain or increase oxybate revenues and realize the anticipated benefits from our investment in Xywav are subject to a number of risks and uncertainties including, without limitation, those related to the launch of Xywav for the treatment of idiopathic hypersomnia in adults and adoption in that indication; competition from the introduction of authorized generic and generic versions of sodium oxybate and new products for treatment of cataplexy and/or EDS in narcolepsy in the U.S. market and from other competitors; the current and potential impacts of the COVID-19 pandemic, including the current and expected future negative impact on demand for our products; increased pricing pressure from, changes in policies by, or restrictions on reimbursement imposed by, third party payors, including our ability to maintain adequate coverage and reimbursement for Xywav; increased rebates required to maintain access to our products; challenges to our intellectual property around Xyrem and/or Xywav, including pending antitrust and intellectual property litigation; and continued acceptance of Xyrem by physicians and patients and acceptance of Xywav by payors, physicians and patients.
In addition to risks related specifically to Xyrem and Xywav, we are subject to other challenges and risks related to successfully commercializing a portfolio of oncology products and other neuroscience products, including Epidiolex, Sunosi, Defitelio, Vyxeos, Rylaze and Zepzelca, and other risks specific to our business and our ability to execute on our strategy, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations, including, without limitation, risks and uncertainties associated with: ongoing clinical research activity and related outcomes, obtaining regulatory approval of our late-stage product candidates; effectively commercializing our recently approved or acquired products such as Xywav, Epidiolex, Zepzelca, Rylaze and Sunosi; obtaining and maintaining adequate coverage and reimbursement for our products; contracting and rebates to pharmacy benefit managers that reduces our net revenue; increasing scrutiny of pharmaceutical product pricing and resulting changes in healthcare laws and policy; market acceptance; regulatory concerns with controlled substances generally and the potential for abuse; future legislation, DEA action or FDA action authorizing the sale, distribution, use, and insurance reimbursement of non-FDA approved cannabinoid products; delays or problems in the supply of our products, loss of single source suppliers or failure to comply with manufacturing regulations; delays or problems with third parties that are part of our manufacturing and supply chain; identifying, acquiring or in-licensing additional products or product candidates; pharmaceutical product development and the inherent uncertainty of clinical success; the challenges of protecting and enhancing our intellectual property rights; complying with applicable regulatory requirements; and possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations. In addition, the success of the GW acquisition will depend, in part, on our ability to realize the anticipated benefits from successfully combining our and GW's historical businesses and the integration of our business practices and operations with GW's so that we can fully realize the anticipated benefits of the acquisition. The anticipated benefits to us of the GW Acquisition may not be realized fully within the expected timeframe or at all or may take longer to realize or cost more than expected, which could materially and adversely affect our business, financial condition, results of operations and growth prospects. Moreover, to the extent the COVID-19 pandemic continues to adversely affect our
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business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above.
Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, investments and derivative contracts. Our investment policy permits investments in U.S. federal government and federal agency securities, corporate bonds or commercial paper issued by U.S. corporations, money market instruments, certain qualifying money market mutual funds, certain repurchase agreements, and tax-exempt obligations of U.S. states, agencies and municipalities and places restrictions on credit ratings, maturities, and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and investments to the extent recorded on the balance sheet.
We manage our foreign currency transaction risk and interest rate risk within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes. As of September 30, 2021, we had foreign exchange forward contracts with notional amounts totaling $407.7 million. As of September 30, 2021, the outstanding foreign exchange forward contracts had a net liability fair value of $9.3 million. As of September 30, 2021, we had a cross-currency interest rate swap contract with a notional amount of $502.0 million. This outstanding cross-currency interest rate swap contract had a net liability fair value of $20.0 million as of September 30, 2021. The counterparties to these contracts are large multinational commercial banks, and we believe the risk of nonperformance is not significant.
We are also subject to credit risk from our accounts receivable related to our product sales. We monitor our exposure within accounts receivable and record a reserve against uncollectible accounts receivable as necessary. We extend credit to pharmaceutical wholesale distributors and specialty pharmaceutical distribution companies, primarily in the U.S., and to other international distributors and hospitals. Customer creditworthiness is monitored and collateral is not required. We monitor economic conditions in certain European countries which may result in variability of the timing of cash receipts and an increase in the average length of time that it takes to collect accounts receivable outstanding. Historically, we have not experienced significant credit losses on our accounts receivable and as of September 30, 2021 and December 31, 2020, allowances on receivables were not material. As of September 30, 2021, three customers accounted for 77% of gross accounts receivable, Express Scripts Specialty Distribution Services, Inc. and its affiliates, or ESSDS, which accounted for 57% of gross accounts receivable, McKesson Corporation and affiliates, or McKesson, which accounted for 11% of gross accounts receivable, and Cardinal Health, Inc., or Cardinal, which accounted for 9% of gross accounts receivable. As of December 31, 2020, three customers accounted for 84% of gross accounts receivable, ESSDS, which accounted for 68% of gross accounts receivable, McKesson, which accounted for 12% of gross accounts receivable, and Cardinal, which accounted for 4% of gross accounts receivable.
We depend on single source suppliers for most of our products, product candidates and their active pharmaceutical ingredients, or APIs. With respect to our oxybate products, the API is manufactured for us by a single source supplier and the finished products are manufactured both by us in our facility in Athlone, Ireland and by our