Jazz Pharmaceuticals plc - FORM 10-Q - May 9, 2017

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EX-32.1 - CERTIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350 - Jazz Pharmaceuticals plcjazzq12017ex321.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - Jazz Pharmaceuticals plcjazzq12017ex312.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - Jazz Pharmaceuticals plcjazzq12017ex311.htm

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, 2017
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
¨
(Do not check if a smaller reporting company)
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
As of May 2, 2017, 60,028,816 ordinary shares of the registrant, nominal value $0.0001 per share, were outstanding.


JAZZ PHARMACEUTICALS PLC
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017

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, Erwinaze® (asparaginase Erwinia chrysanthemi), Erwinase®, Defitelio® (defibrotide sodium), Defitelio® (defibrotide), Prialt® (ziconotide) intrathecal infusion, CombiPlex® and VyxeosTM. 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

PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
346,995

 
$
365,963

Investments
60,000

 
60,000

Accounts receivable, net of allowances
243,035

 
234,244

Inventories
37,653

 
34,051

Prepaid expenses
38,118

 
24,501

Other current assets
27,052

 
29,310

Total current assets
752,853

 
748,069

Property and equipment, net
119,913

 
107,490

Intangible assets, net
2,998,780

 
3,012,001

Goodwill
899,290

 
893,810

Deferred tax assets, net, non-current
18,038

 
15,060

Deferred financing costs
9,325

 
9,737

Other non-current assets
17,625

 
14,060

Total assets
$
4,815,824

 
$
4,800,227

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
29,144

 
$
22,415

Accrued liabilities
183,645

 
193,268

Current portion of long-term debt
136,094

 
36,094

Income taxes payable
35,300

 
4,506

Deferred revenue
8,590

 
1,123

Total current liabilities
392,773

 
257,406

Deferred revenue, non-current
22,624

 
2,601

Long-term debt, less current portion
1,739,594

 
1,993,531

Deferred tax liability, net, non-current
548,038

 
556,733

Other non-current liabilities
128,809

 
112,617

Commitments and contingencies (Note 9)

 


Shareholders’ equity:
 
 
 
Ordinary shares
6

 
6

Non-voting euro deferred shares
55

 
55

Capital redemption reserve
472

 
472

Additional paid-in capital
1,681,774

 
1,665,232

Accumulated other comprehensive loss
(299,843
)
 
(317,333
)
Retained earnings
601,522

 
528,907

Total shareholders’ equity
1,983,986

 
1,877,339

Total liabilities and shareholders’ equity
$
4,815,824

 
$
4,800,227





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

3

JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2017
 
2016
Revenues:
 
 
 
Product sales, net
$
373,678

 
$
333,916

Royalties and contract revenues
2,375

 
2,094

Total revenues
376,053

 
336,010

Operating expenses:
 
 
 
Cost of product sales (excluding amortization of intangible assets)
25,065

 
23,439

Selling, general and administrative
144,255

 
128,765

Research and development
44,928

 
31,252

Acquired in-process research and development
—

 
8,750

Intangible asset amortization
25,665

 
22,642

Total operating expenses
239,913

 
214,848

Income from operations
136,140

 
121,162

Interest expense, net
(18,844
)
 
(12,192
)
Foreign exchange loss
(1,464
)
 
(819
)
Income before income tax provision and equity in loss of investee
115,832

 
108,151

Income tax provision
29,160

 
32,339

Equity in loss of investee
161

 
—

Net income
$
86,511

 
$
75,812

 
 
 
 
Net income per ordinary share:
 
 
 
Basic
$
1.44

 
$
1.24

Diluted
$
1.41

 
$
1.21

Weighted-average ordinary shares used in per share calculations - basic
59,880

 
61,142

Weighted-average ordinary shares used in per share calculations - diluted
61,178

 
62,616








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

4

JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2017
 
2016
Net income
$
86,511

 
$
75,812

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
18,112

 
45,188

Unrealized loss on hedging activities, net of tax benefit of $89
(622
)
 
—

Other comprehensive income
17,490

 
45,188

Total comprehensive income
$
104,001

 
$
121,000























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

5

JAZZ PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Three Months Ended
March 31,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
86,511

 
$
75,812

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Intangible asset amortization
25,665

 
22,642

Share-based compensation
25,193

 
24,183

Depreciation
3,130

 
2,527

Acquired in-process research and development
—

 
8,750

Loss on disposal of property and equipment
82

 
37

Deferred income taxes
(15,000
)
 
(5,742
)
Provision for losses on accounts receivable and inventory
948

 
898

Amortization of debt discount and deferred financing costs
5,615

 
5,362

Other non-cash transactions
1,405

 
1,579

Changes in assets and liabilities:

 

Accounts receivable
(8,483
)
 
(13,802
)
Inventories
(4,258
)
 
(6,307
)
Prepaid expenses and other current assets
(10,637
)
 
(1,231
)
Other long-term assets
(2,170
)
 
104

Accounts payable
5,865

 
10,664

Accrued liabilities
(15,743
)
 
(6,706
)
Income taxes payable
30,753

 
25,758

Deferred revenue
27,490

 
(266
)
Other non-current liabilities
8,174

 
7,392

Net cash provided by operating activities
164,540

 
151,654

Investing activities
 
 
 
Purchases of property and equipment
(3,574
)
 
(2,472
)
Acquisition of in-process research and development
—

 
(8,750
)
Acquisition of investments
—

 
(773
)
Net cash used in investing activities
(3,574
)
 
(11,995
)
Financing activities
 
 
 
Proceeds from employee equity incentive and purchase plans and exercise of warrants
5,676

 
3,780

Repayments of long-term debt
(9,023
)
 
(9,397
)
Payment of employee withholding taxes related to share-based awards
(14,431
)
 
(12,476
)
Share repurchases
(13,896
)
 
(134,365
)
Repayments under revolving credit facility
(150,000
)
 
—

Net cash used in financing activities
(181,674
)
 
(152,458
)
Effect of exchange rates on cash and cash equivalents
1,740

 
3,794

Net decrease in cash and cash equivalents
(18,968
)
 
(9,005
)
Cash and cash equivalents, at beginning of period
365,963

 
988,785

Cash and cash equivalents, at end of period
$
346,995

 
$
979,780



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

6

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

1. The Company and Summary of Significant Accounting Policies
Jazz Pharmaceuticals plc is an international biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing meaningful products that address unmet medical needs.
We have a diverse portfolio of products and product candidates, with a focus in the areas of sleep and hematology/oncology. 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 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; and
•
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, or SOS, 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.
Our strategy is to create shareholder value by:
•
Growing sales of the existing products in our portfolio, including by identifying and investing in growth opportunities such as new treatment indications and new geographic markets;
•
Acquiring or licensing rights to clinically meaningful and differentiated products that are on the market or product candidates that are in late-stage development; and
•
Pursuing targeted development of post-discovery differentiated product candidates.
We apply a disciplined approach to allocating our resources between investments in our current commercial and development portfolio and acquisitions or in-licensing of new assets.
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, or SEC, 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, 2016.
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, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017, for any other interim period or for any future period.
These condensed consolidated financial statements include the accounts of Jazz Pharmaceuticals plc and our subsidiaries, and intercompany transactions and balances have been eliminated.
Significant Risks and Uncertainties
Our financial results remain significantly influenced by sales of Xyrem. In the three months ended March 31, 2017, net product sales of Xyrem were $272.3 million, which represented 73% of total net product sales. Our ability to maintain or

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increase product sales of Xyrem is subject to risks and uncertainties, including the potential U.S. introduction of a generic version of Xyrem before the entry dates specified in our settlements with certain companies that had filed abbreviated new drug applications, or ANDAs with the FDA seeking approval to market a generic version of Xyrem or on terms that are different from those contemplated by the settlements; the potential U.S. introduction of an alternative product to Xyrem for treating cataplexy and/or EDS, in narcolepsy; changes to, increases in or uncertainties around regulatory restrictions, including changes to our Xyrem risk evaluation and mitigation strategy, or REMS, particularly in light of the FDA’s waiver of the single shared REMS requirement for sodium oxybate and approval of a separate generic sodium oxybate REMS; any increase in pricing pressure from, or restrictions on reimbursement imposed by, third party payors; 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 by government entities; operational disruptions at the Xyrem central pharmacy or any failure to comply with our REMS obligations to the satisfaction of the FDA; any supply or manufacturing problems, including any problems with our sole source sodium oxybate provider; continued acceptance of Xyrem by physicians and patients, even in the face of negative publicity that surfaces from time to time; changes to our label, including new safety warnings or changes to our boxed warning, that further restrict how we market and sell Xyrem; and our U.S.-based sodium oxybate and Xyrem suppliers’ ability to obtain sufficient quotas from the U.S. Drug Enforcement Administration, or DEA, to satisfy our needs for Xyrem.
Although Xyrem is protected by patents covering its manufacture, formulation, distribution system and method of use, seven companies have filed ANDAs with the FDA seeking approval to market a generic version of Xyrem. In addition, we are aware of a third party that has stated that it intends to file a new drug application, or NDA, to market a once nightly formulation of sodium oxybate for treatment of cataplexy and/or EDS in narcolepsy. We filed patent lawsuits against each of the ANDA filers in the U.S. District Court for the District of New Jersey, or the District Court. On April 5, 2017, we settled all lawsuits against the first ANDA filer, West-Ward Pharmaceuticals Corp. (a wholly owned subsidiary of Hikma Pharmaceuticals PLC), which acquired Roxane Laboratories, Inc., or West-Ward, granting West-Ward the right to sell an authorized generic version of Xyrem, or the West-Ward AG Product, commencing on January 1, 2023, or earlier under certain circumstances, and granting West-Ward a license to launch its generic sodium oxybate product as early as six months thereafter. In the second quarter of 2016, we had settled lawsuits with two of the other ANDA filers, granting those filers a license to manufacture, market and sell their generic versions of Xyrem on or after December 31, 2025, or earlier depending on the occurrence of certain events. For a description of our settlements with West-Ward and two of the other ANDA filers, see “Overview—Significant Developments Affecting Our Business” in Part I, Item 2 of this Quarterly Report on Form 10-Q. Lawsuits with the four remaining companies that have filed ANDAs with the FDA seeking approval to market a generic version of Xyrem remain pending in the District Court. Although no trial date has been set, the trial in this case could occur as early as the first quarter of 2018. For a description of these legal proceedings, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q. We cannot predict the timing or outcome of the ANDA litigation proceedings against the remaining non-settling ANDA filers, which have been consolidated as one case in the District Court. In July 2016, the Patent Trial and Appeal Board, or PTAB, of the U.S. Patent and Trademark Office issued final decisions that the claims of six patents listed in the Orange Book as covering the Xyrem REMS are unpatentable. We filed a notice of appeal of these decisions on February 22, 2017. If the United States Court of Appeals for the Federal Circuit upholds those decisions on appeal, these claims will be canceled, and we will not be able to enforce these patents. In March 2016, the PTAB partially instituted an inter partes review, or IPR, on three claims of a seventh REMS patent, declining to review 25 of 28 claims. The PTAB issued a final decision in March 2017 that the three claims they reviewed were unpatentable. We have not yet decided whether to appeal that ruling. For a description of these legal proceedings, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q.
On January 17, 2017, the FDA announced approval of the West-Ward ANDA, and on January 19, 2017, the FDA tentatively approved two additional ANDAs for generic versions of Xyrem, one for Amneal Pharmaceuticals, or Amneal, and one for Ohm Laboratories Inc., formerly known as Ranbaxy, Inc., or Ohm. West-Ward’s ANDA approval includes a waiver that permits West-Ward to use a separate REMS program from the Xyrem REMS, or the generic sodium oxybate REMS, on the condition that the generic sodium oxybate REMS be open to all future sponsors of ANDAs or NDAs for sodium oxybate products. We were not involved in the development of the generic sodium oxybate REMS. We continue to evaluate whether the FDA’s waiver of the requirement for a single, shared system REMS in connection with approval of the ANDAs meets the conditions for such a waiver under applicable law and, to the extent that we determine that the waiver was not permissible under applicable law, will evaluate potential challenges to the FDA’s waiver decision. We cannot predict whether or when we may pursue any such challenges or whether any such challenges would be successful.
The actual timing of any commercial launch of an authorized generic or generic version of Xyrem is uncertain. We do not believe a launch by an ANDA filer is likely to occur prior to either a date agreed in a settlement agreement between us and such ANDA filer or a District Court, or potentially an appellate court, decision in our ongoing patent litigation. However, notwithstanding our patents, and settlement agreements licensing those patents as of future dates, it is possible that West-Ward or any other company that receives FDA approval of an ANDA for a generic version of Xyrem or an NDA for another sodium oxybate product could introduce a generic version of Xyrem or other sodium oxybate product before the entry dates specified

8

in our settlement agreements or before our patents expire, including if it is determined that the introduction of the competing product does not infringe our patents, or that our patents are invalid or unenforceable, or if a non-settling ANDA filer that has received approval for its product decides, before applicable ongoing patent litigation is concluded, to launch a sodium oxybate product at risk of being held liable for damages for patent infringement. In addition, even if we prevail in our ongoing litigation at trial or on appeal, we cannot guarantee that the court will grant an injunction that prevents the ANDA filers from marketing their generic versions of Xyrem. Instead the court may order an ANDA filer that is found to infringe to pay damages in the form of lost profits or a reasonable royalty, which could be significant. We expect that the launch of any generic version of Xyrem, including the West-Ward AG Product or other authorized generic version of Xyrem, or the approval and launch of other products that compete with Xyrem, could have a material adverse effect on our sales of Xyrem and on our business, financial condition, results of operations and growth prospects. For further discussion regarding the risks associated with the West-Ward settlement agreement, the tentative approval of the Amneal and Ohm ANDAs, potential approval or tentative approval of additional ANDAs, the potential launch of a generic version of Xyrem, or the approval and launch of other sodium oxybate products that compete with Xyrem, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q and the risk factors under the headings “Risks Related to Xyrem and the Significant Impact of Xyrem Sales,” “We face substantial competition from other companies, including companies with greater resources, including larger sales organizations and more experience working with large and diverse product portfolios, than we have,” and “Risks Related to Our Intellectual Property” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
In August 2015, we implemented the current Xyrem REMS, and we have submitted and expect to continue to submit ongoing assessments as set forth in the FDA’s Xyrem REMS approval letter. However, we cannot guarantee that our implementation and ongoing assessments will be satisfactory to the FDA or that the Xyrem REMS will satisfy the FDA’s expectations in its evaluation of the Xyrem REMS on an ongoing basis. Any failure to comply with the REMS obligations could result in enforcement action by the FDA; lead to changes in our Xyrem REMS obligations; negatively affect sales of Xyrem; result in additional costs and expenses for us; and/or take a significant amount of time, any of which could materially and adversely affect our business, financial condition, results of operations and growth prospects. Further, we cannot predict whether the FDA will request, seek to require or ultimately require modifications to, or impose additional requirements on, the Xyrem REMS in connection with the anticipated distribution of the West-Ward AG Product, the approval of the generic sodium oxybate or otherwise or the potential timing, terms or propriety thereof. Any such modifications or additional requirements could make it more difficult or expensive for us to distribute Xyrem, make distribution easier for sodium oxybate competitors, impair the safety profile of Xyrem and/or negatively affect sales of Xyrem.
We may face pressure to modify the Xyrem REMS, or to license or share intellectual property pertinent to the Xyrem REMS, including proprietary data required for safe distribution of sodium oxybate, in connection with the FDA’s approval of the generic sodium oxybate REMS. We cannot predict the outcome or impact on our business of any future action that we may take with respect to the approval of the generic sodium oxybate REMS, or licensing or sharing intellectual property pertinent to our Xyrem REMS or elements of the Xyrem REMS. For more information, see the risk factors under the headings “The launch of a generic version of Xyrem or other sodium oxybate products that compete with Xyrem would adversely affect sales of Xyrem” and “We have incurred and expect to continue to incur substantial costs as a result of litigation or other proceedings relating to patents, other intellectual property rights and related matters, and we may be unable to protect our rights to, or commercialize, our products” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
In September 2016, Jazz Pharmaceuticals, Inc., our wholly owned subsidiary, submitted a Citizen Petition to the FDA requesting that, for safety reasons, the FDA refuse to approve any sodium oxybate ANDA with a proposed package insert or REMS that omits the portions of the Xyrem package insert and the Xyrem REMS that instruct prescribers on adjusting the dose of the product when it is co-administered with divalproex sodium (also known as valproate or valproic acid). On January 17, 2017, the FDA granted the Citizen Petition with respect to the Xyrem package insert. The FDA concluded that it will not approve any sodium oxybate ANDA referencing Xyrem that does not include in its package insert the portions of the currently approved Xyrem package insert related to the drug-drug interaction with divalproex sodium. The FDA stated that it did not need to reach the question of whether the drug-drug interaction, or DDI, information could have been excluded from the generic sodium oxybate REMS materials because it was approving a REMS in connection with a sodium oxybate ANDA including that information. Our Xyrem patents include three DDI patents covering these instructions on the Xyrem package insert and Xyrem REMS. We cannot predict whether or when one or more of the ANDA filers may pursue a challenge to the FDA’s response to the Citizen Petition or whether any such challenges would be successful. Likewise, we cannot predict whether we will be able to maintain the validity of, or will otherwise obtain a judicial determination that the generic sodium oxybate package insert or the generic sodium oxybate REMS will infringe, any of our patents or, if we prevail in proving infringement, whether a court will grant an injunction that prevents any non-settling ANDA filers or other company introducing a different sodium oxybate product from marketing its product. For a description of these matters, including risks and uncertainties related to our REMS, our REMS patents and our DDI patents, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q, and the risk factors under the headings “Risks Related to Xyrem and the Significant Impact of Xyrem Sales” and “Risks Related to Our Intellectual Property” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

9

Obtaining and maintaining appropriate reimbursement for Xyrem in the U.S. is increasingly challenging due to, among other things, the attention being paid to healthcare cost containment and prescription drug pricing, pricing pressure from third party payors and increasingly restrictive reimbursement conditions being imposed by third party payors. In this regard, we have experienced and expect to continue to experience increasing pressure from third party payors to agree to discounts, rebates or other pricing terms for Xyrem. Any such restrictive pricing terms or additional reimbursement conditions could have a material adverse effect on our Xyrem revenues. In addition, drug pricing by pharmaceutical companies has recently come under close scrutiny, particularly with respect to companies that have increased the price of products after acquiring those products from other companies. We expect that healthcare policies and reforms intended to curb healthcare costs will continue to be proposed, which could limit the prices that we charge for our products, including Xyrem, limit our commercial opportunity and/or negatively impact revenues from sales of our products. Also, price increases on Xyrem and our other products, and negative publicity regarding pricing and price increases generally, whether with respect to our products or products distributed by other pharmaceutical companies, could negatively affect market acceptance of Xyrem and our other products.
In the three months ended March 31, 2017, net product 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 $51.4 million, which represented 14% of total net product sales. We seek to maintain and increase sales of Erwinaze, as well as to make Erwinaze more widely available, through ongoing sales and marketing and research and development activities. However, our ability to successfully and sustainably maintain or grow sales of Erwinaze is subject to a number of risks and uncertainties, including the limited population of patients with ALL and the incidence of hypersensitivity reactions to E. coli-derived asparaginase within that population, our need to apply for and receive marketing authorizations, through the European Union’s mutual recognition procedure or otherwise, in certain additional countries so we can launch promotional efforts in those countries, as well as those other risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Erwinaze is licensed from and manufactured by a single source, Porton Biopharma Limited, or PBL. Our agreement with PBL, including our license, expires in December 2020, subject to five-year extensions unless terminated by either party in writing by December 2018. We cannot predict whether the term of the agreement will be extended or, if extended, the terms of any such extension.
Erwinaze was approved by the FDA under a biologics license application, or BLA, and was launched in the U.S. in November 2011. The Erwinaze BLA includes a number of post-marketing commitments related to the manufacture of Erwinaze by PBL. We cannot predict if or when PBL will comply with its manufacturing-related post-marketing commitments that are part of the BLA approval. In March 2016, the FDA conducted an inspection of the PBL manufacturing facility and issued an FDA Form 483 to PBL that included observations related to a range of operational systems and processes. In April 2016 and September 2016, PBL responded to the FDA Form 483 with its plan, including required remediation activities, to address the observations, and subsequently provided additional information in response to another FDA request. In January 2017, the FDA issued a warning letter to PBL indicating that it was not satisfied with PBL’s response to the FDA Form 483, citing significant violations of current Good Manufacturing Practices, or cGMP for finished pharmaceuticals and significant deviations from cGMP for active pharmaceutical ingredients, or APIs. In March 2017, PBL responded to the warning letter issued by the FDA. We cannot predict if or when PBL will correct the violations and deviations to the satisfaction of the FDA or whether the FDA will be satisfied with PBL’s response to the warning letter. Any failure to do so to the satisfaction of the FDA could result in the FDA refusing admission of Erwinaze into the U.S., as well as additional enforcement actions by the FDA and other regulatory entities.
In addition, a significant challenge to our ability to maintain current sales levels and to increase sales is our need to avoid supply disruptions of Erwinaze due to capacity constraints, production delays, quality or regulatory challenges or other manufacturing difficulties. The current manufacturing capacity for Erwinaze is completely absorbed by demand for the product. We are working with PBL to evaluate potential expansion of its production capacity to increase the supply of Erwinaze over the longer term and to address the production delays, quality challenges and related regulatory scrutiny. As a consequence of constrained manufacturing capacity, we have had an extremely limited or no ability to build product inventory levels that can be used to absorb disruptions to supply resulting from quality, regulatory or other issues. We have experienced product quality, manufacturing and inventory challenges that have resulted, and may continue to result, in disruptions in our ability to supply certain markets, including the U.S., from time to time and have caused, and may in the future cause, us to implement batch-specific, modified product use instructions. Most recently, we experienced supply disruptions in the first quarter of 2017 in most of the countries outside the U.S. where we market Erwinaze, and we expect additional supply disruptions of Erwinaze in the U.S. and other countries in 2017. As capacity constraints and supply disruptions continue, whether as a result of continued quality or other manufacturing issues, regulatory issues or otherwise, we will be unable to build a desired excess level of product inventory, our ability to supply the market may continue to be compromised and physicians’ decisions to use Erwinaze have been, and in the future may continue to be, negatively impacted. Additional Erwinaze supply disruptions and/or our inability to expand production capacity could materially adversely affect our sales of and revenues from Erwinaze and our potential future maintenance and growth of the market for this product.

10

In the three months ended March 31, 2017, net product sales of Defitelio/defibrotide represented 10% of total net product sales. We acquired this product in January 2014 in connection with our acquisition of Gentium S.r.l., or Gentium, which we refer to as the Gentium Acquisition, and secured worldwide rights to the product by acquiring rights to defibrotide in the Americas in August 2014. We launched Defitelio in certain European countries in 2014 and continued to launch in additional European countries on a rolling basis through 2016. We are in the process of making pricing and reimbursement submissions with respect to Defitelio in those European countries where Defitelio is not yet launched, including in countries where pricing and reimbursement approvals are required for launch. Our ability to realize the anticipated benefits from our investment in Defitelio/defibrotide is subject to risks and uncertainties, including those discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. In particular, we may not be able to successfully maintain or grow sales of Defitelio in Europe, or obtain marketing approval in other countries, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. A key challenge to our success in maintaining or growing sales of Defitelio in Europe is our ability to obtain appropriate pricing and reimbursement approvals in those European countries where Defitelio is not yet launched. If we experience delays or unforeseen difficulties in obtaining favorable pricing and reimbursement approvals, planned launches in the affected countries would be delayed, or, if we are unable to ultimately obtain favorable pricing and reimbursement approvals in countries that represent significant markets, especially where a country’s reimbursed price influences other countries, our growth prospects in Europe could be negatively affected.
In March 2016, the FDA approved our NDA for Defitelio for the treatment of adult and pediatric patients with VOD with renal or pulmonary dysfunction following HSCT. We promote Defitelio along with Erwinase to many hematology and oncology specialists who operate in the same hospitals, and we believe that we benefit from operational synergies from this overlap. We launched Defitelio in the U.S. shortly after FDA approval, and our U.S. commercial launch is still at an early stage. Our ability to realize the anticipated benefits from our investment in Defitelio is subject to risks and uncertainties, including the continued acceptance of Defitelio in the U.S. by hospital pharmacy and therapeutics committees and the continued availability of adequate coverage and reimbursement by government programs and third party payors; the lack of experience of U.S. physicians in diagnosing and treating VOD, particularly in adults, and the possibility that physicians may delay initiation of treatment or terminate treatment before the end of the recommended dosing schedule; our ability to successfully maintain or grow sales of Defitelio in Europe; delays or problems in the supply or manufacture of the product; the limited size of the population of VOD patients who are indicated for treatment with Defitelio (particularly if changes in HSCT treatment protocols reduce the incidence of VOD diagnosis); our ability to meet the post-marketing commitments and requirements imposed by the FDA in connection with its approval of our NDA for Defitelio; and our ability to obtain marketing approval in other countries and to develop the product for additional indications, as well as those other risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. If sales of Defitelio 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.
In addition, in 2016, we made a significant investment in VyxeosTM, an investigational product in development as a treatment for high-risk acute myeloid leukemia, through the acquisition of Celator Pharmaceuticals Inc., or Celator, in July 2016, or the Celator Acquisition. Our ability to realize the anticipated benefits from this investment is subject to a number of risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. If we are unable to obtain regulatory approval for Vyxeos in the U.S. or in Europe in a timely manner, or at all, or if sales of an approved Vyxeos product do not reach the levels we expect, our anticipated revenue from Vyxeos would be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
In addition to risks specifically related to Xyrem, Erwinaze, Defitelio/defibrotide and Vyxeos, 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. These risks and uncertainties include:
•
the challenges of protecting and enhancing our intellectual property rights;
•
the challenges of achieving and maintaining commercial success of our products;
•
delays or problems in the supply or manufacture of our products and product candidates, particularly with respect to certain products as to which we maintain limited inventories, our dependence on single source suppliers for most of our products, product candidates and APIs, and the requirement that we and our product suppliers be qualified by the FDA to manufacture product and comply with applicable manufacturing regulations;
•
the need to obtain and maintain appropriate pricing and reimbursement for our products in an increasingly challenging environment due to, among other things, the attention being paid to healthcare cost containment and other austerity measures and pharmaceutical pricing in the U.S. and worldwide, including the need to obtain and maintain reimbursement for Xyrem in the U.S. in an environment in which we are subject to increasingly restrictive conditions for reimbursement required by government programs and third party payors;

11

•
our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business;
•
the challenges of compliance with the requirements of the FDA, the DEA, and comparable non-U.S. regulatory agencies, including with respect to product labeling, requirements for distribution, obtaining sufficient DEA quotas where needed, marketing and promotional activities, patient assistance programs, adverse event reporting and product recalls or withdrawals;
•
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 planned or anticipated to be conducted for our product candidates;
•
the inherent uncertainty associated with the regulatory approval process, especially as we continue to increase investment in our product pipeline development projects and undertake multiple planned NDA submissions for our product candidates;
•
the risks associated with business combination or product or product candidate acquisition transactions, including risks associated with the Celator Acquisition, 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; and
•
possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations.
Derivative Instruments and Hedging Activities
We record the fair value of derivative instruments as either assets or liabilities on the balance sheet. 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. We assess, both at inception and on an on-going basis, whether the derivative instruments that are used in cash flow hedging transactions are highly effective in offsetting the changes in cash flows of hedged items. We assess hedge ineffectiveness on a quarterly basis and record the gain or loss related to the ineffective portion of derivative instruments, if any, to current earnings. 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.
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, 2017, we had foreign exchange forward contracts with notional amounts totaling $148.9 million. As of March 31, 2017, the net fair value of outstanding foreign exchange forward contracts was not significant. As of March 31, 2017, we had interest rate swap contracts with notional amounts totaling $300.0 million. These outstanding interest rate swap contracts had a net liability fair value of $0.8 million, of which $1.2 million was included in other non-current assets and $2.0 million was included in accrued liabilities as of March 31, 2017. The counterparties to these contracts are large multinational commercial banks, and we believe the risk of nonperformance is not material.
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

12

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 we do not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on our financial position, liquidity or results of operations. As of March 31, 2017, five customers accounted for 88% of gross accounts receivable, including Express Scripts Specialty Distribution Services, Inc. and its affiliates, or Express Scripts, which accounted for 69% of gross accounts receivable, and McKesson Corporation and affiliates, which accounted for 15% of gross accounts receivable. As of December 31, 2016, five customers accounted for 90% of gross accounts receivable, including Express Scripts, which accounted for 73% of gross accounts receivable, and McKesson Corporation and affiliates, which accounted for 13% of gross accounts receivable. 
We depend on single source suppliers for most of our products, product candidates and their APIs. We commenced manufacturing of Xyrem in our Ireland facility in the third quarter of 2016.
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.
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,
 
2017
 
2016
Numerator:
 
 
 
Net income
$
86,511

 
$
75,812

Denominator:
 
 
 
Weighted-average ordinary shares used in per share calculation - basic
59,880

 
61,142

Dilutive effect of employee equity incentive and purchase plans
1,298

 
1,474

Weighted-average ordinary shares used in per share calculation - diluted
61,178

 
62,616

 
 
 
 
Net income per ordinary share:
 
 
 
Basic
$
1.44

 
$
1.24

Diluted
$
1.41

 
$
1.21

Potentially dilutive ordinary shares from our employee equity incentive and purchase plans and our 1.875% exchangeable senior notes due 2021, or the 2021 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 2021 Notes. The potential issue of approximately 2.9 million ordinary shares issuable upon exchange of the 2021 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, 2017 and 2016 did not exceed the effective exchange price of $199.77 per ordinary share.

13

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,
 
2017
 
2016
1.875% exchangeable senior notes due 2021
2,878

 
2,878

Options to purchase ordinary shares and RSUs
3,406

 
2,305

Ordinary shares under ESPP
—

 
104

Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board, or 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.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” which provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for us beginning January 1, 2018. Early adoption is permitted. The future impact of ASU No. 2017-01 will be dependent upon the nature of our future acquisition or disposition transactions, if any.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” which requires an entity to recognize the income tax consequences of an intra-entity asset transfer, other than an intra-entity asset transfer of inventory, when the transfer occurs. The standard is effective for us beginning January 1, 2018. Early adoption is permitted. We are currently assessing our approach to the adoption of this standard and the impact on our results of operations and financial position.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for us beginning January 1, 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. Under the new guidance, lessees will be 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. ASU No. 2016-02 is effective beginning January 1, 2019 and early application is permitted. ASU No. 2016-02 must be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. The adoption of ASU No. 2016-02 will result in a significant increase in our consolidated balance sheet for right-of-use assets and lease liabilities.  While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for the lease agreement we entered into in January 2015 to lease office space located in Palo Alto, California in a building to be constructed by the landlord, which is accounted for as a build-to-suit arrangement under existing accounting standards, and the lease agreement we entered into in August 2016 for office space in Dublin, Ireland.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. The standard states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this, an entity will need to identify the contract with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize revenue when (or as) the entity satisfies each performance obligation. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date”, which deferred the effective date of ASU No. 2014-09. ASU No. 2014-09 will now be effective for us beginning January 1, 2018 and can be adopted on a full retrospective basis or on a modified retrospective basis. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606):

14

Identifying Performance Obligations and Licensing”, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. Presently, we plan to adopt ASU No. 2014-09 at its effective date, however we have not yet determined which transition method we will choose. We have substantially completed our review of existing revenue contracts and currently do not anticipate that the implementation of ASU No. 2014-09 will have a material impact on our results of operations and financial position. We are continuing to review the impact that the new standard will have on our financial statement disclosures.

2. Cash and Available-for-Sale Securities
Cash, cash equivalents and investments consisted of the following (in thousands): 
 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
Cash
$
136,990

 
$
—

 
$
—

 
$
136,990

 
$
136,990

 
$
—

Time deposits
185,000

 
—

 
—

 
185,000

 
125,000

 
60,000

Money market funds
85,005

 
—

 
—

 
85,005

 
85,005

 
—

Totals
$
406,995

 
$
—

 
$
—

 
$
406,995

 
$
346,995

 
$
60,000

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
Cash
$
215,963

 
$
—

 
$
—

 
$
215,963

 
$
215,963

 
$
—

Time deposits
210,000

 
—

 
—

 
210,000

 
150,000

 
60,000

Totals
$
425,963

 
$
—

 
$
—

 
$
425,963

 
$
365,963

 
$
60,000

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 investments balance represents time deposits with original maturities of greater than three months.


15

3. Fair Value Measurement
The following table summarizes, by major security type, our available-for-sale securities and derivative contracts as of March 31, 2017 and December 31, 2016 that were measured at fair value on a recurring basis and were categorized using the fair value hierarchy (in thousands): 
 
March 31, 2017
 
December 31, 2016
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Estimated
Fair Value    
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Estimated
Fair Value    
Assets:
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Time deposits
$
—

 
$
185,000

 
$
185,000

 
$
210,000

 
$
210,000

Money market funds
85,005

 
—

 
85,005

 
—

 
—

Interest rate contracts
—

 
1,181

 
1,181

 
—

 
—

Foreign exchange forward contracts
—

 
490

 
490

 
—

 
—

Totals
$
85,005

 
$
186,671

 
$
271,676

 
$
210,000

 
$
210,000

Liabilities:
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
1,989

 
$
1,989

 
$
—

 
$
—

Foreign exchange forward contracts
—

 
482

 
482

 
—

 
—

Totals
$
—

 
$
2,471

 
$
2,471

 
$
—

 
$
—

As of March 31, 2017, 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, 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 2017 or in 2016.
As of March 31, 2017, the estimated fair value of our 2021 Notes was approximately $615 million. The fair value of the 2021 Notes was estimated using quoted market prices obtained from brokers (Level 2). The estimated fair value of our borrowings under our term loan and revolving credit facilities were approximately equal to their respective book values based on the borrowing rates currently available for variable rate loans (Level 2).

4. Derivative and Hedging Activities
We are exposed to certain risks arising from operating internationally, including fluctuations in interest rates on our outstanding revolving credit facility and 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 from March 3, 2017 until July 12, 2021. These agreements hedge contractual term loan interest rates. As of March 31, 2017, the interest rate swap agreements had a notional amount of $300.0 million. As 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.

16

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 ineffective portion of the change in fair value is recognized directly in 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, 2017 was as follows (in thousands):

Interest Rate Contracts:
Three Months Ended
March 31, 2017
Loss recognized in accumulated other comprehensive loss, net of tax
$
855

Loss reclassified from accumulated other comprehensive loss to interest expense, net of tax
$
(233
)
Assuming no change in LIBOR-based interest rates from market rates as of March 31, 2017, $2.0 million of losses recognized in accumulated other comprehensive loss will be reclassified to earnings over the next 12 months. The ineffective portion from derivative instruments that qualified as cash flow hedges for the three months ended March 31, 2017 was $0.1 million.
We enter into foreign exchange forward contracts, with durations of up to 365 days, designed to limit the exposure to fluctuations in foreign exchange rates related to the translation of certain euro-denominated intercompany loans. 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, 2017, the notional amount of foreign exchange contracts where hedge accounting is not applied was $148.9 million. We recognized a minimal gain in other income and expense for the three months ended March 31, 2017 associated with the foreign exchange contracts not designated as hedging instruments.
The cash flow effects of our derivative contracts for the three months ended March 31, 2017 are included within net cash provided by operating activities in the condensed consolidated statements of cash flows.
The following table summarizes the fair value of outstanding derivatives as of March 31, 2017 (in thousands):

 
March 31, 2017
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
Other non-current assets
 
$
1,181

 
Accrued liabilities
 
$
1,989

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
490

 
Accrued liabilities
 
482

Total fair value of derivative instruments
 
 
$
1,671

 
 
 
$
2,471

There were no outstanding derivatives as of December 31, 2016.

5. Inventories
Inventories consisted of the following (in thousands): 
 
March 31,
2017
 
December 31,
2016
Raw materials
$
2,798

 
$
1,547

Work in process
17,437

 
18,689

Finished goods
17,418

 
13,815

Total inventories
$
37,653

 
$
34,051



17

6. Goodwill and Intangible Assets
The gross carrying amount of goodwill was as follows (in thousands):
Balance at December 31, 2016
$
893,810

Foreign exchange
5,480

Balance at March 31, 2017
$
899,290

The gross carrying amounts and net book values of our intangible assets were as follows (in thousands): 
 
March 31, 2017
 
December 31, 2016
 
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
11.1

 
$
1,491,720

 
$
(438,983
)
 
$
1,052,737

 
$
1,477,618

 
$
(410,523
)
 
$
1,067,095

Manufacturing contracts
0.8

 
11,434

 
(9,121
)
 
2,313

 
11,278

 
(8,292
)
 
2,986

Trademarks
—

 
2,876

 
(2,876
)
 
—

 
2,872

 
(2,872
)
 
—

Total finite-lived intangible assets
 
 
1,506,030

 
(450,980
)
 
1,055,050

 
1,491,768

 
(421,687
)
 
1,070,081

Acquired in-process research and development assets
 
 
1,943,730

 
—

 
1,943,730

 
1,941,920

 
—

 
1,941,920

Total intangible assets
 
 
$
3,449,760

 
$
(450,980
)
 
$
2,998,780

 
$
3,433,688

 
$
(421,687
)
 
$
3,012,001

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.
Based on finite-lived intangible assets recorded as of March 31, 2017, 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
2017 (remainder)
$
77,309

2018
100,336

2019
100,123

2020
98,980

2021
98,044

Thereafter
580,258

Total
$
1,055,050



18

7. Certain Balance Sheet Items
Property and equipment consisted of the following (in thousands):
 
March 31,
2017
 
December 31,
2016
Land and buildings
$
46,067

 
$
46,033

Construction-in-progress
42,653

 
33,427

Manufacturing equipment and machinery
19,722

 
19,596

Computer software
18,548

 
17,832

Leasehold improvements
13,126

 
9,328

Computer equipment
11,234

 
10,980

Furniture and fixtures
3,385

 
2,436

Subtotal
154,735

 
139,632

Less accumulated depreciation and amortization
(34,822
)
 
(32,142
)
Property and equipment, net
$
119,913

 
$
107,490


Accrued liabilities consisted of the following (in thousands):
 
March 31,
2017
 
December 31,
2016
Rebates and other sales deductions
$
73,949

 
$
72,344

Employee compensation and benefits
35,914

 
43,363

Clinical trial accruals
10,897

 
10,139

Royalties
7,486

 
11,643

Professional fees
6,192

 
4,596

Selling and marketing accruals
4,467

 
3,924

Sales returns reserve
4,145

 
4,366

Inventory-related accruals
4,003

 
3,350

Accrued construction-in-progress
3,484

 
1,597

Accrued interest
2,356

 
5,179

Accrued contract termination fees
—

 
11,612

Other
30,752

 
21,155

Total accrued liabilities
$
183,645

 
$
193,268


8. Debt
The following table summarizes the carrying amount of our indebtedness (in thousands):
 
March 31,
2017
 
December 31,
2016
1.875% exchangeable senior notes due 2021
$
575,000

 
$
575,000

Unamortized discount on 1.875% exchangeable senior notes due 2021
(96,436
)
 
(101,094
)
1.875% exchangeable senior notes due 2021, net
478,564

 
473,906

Borrowings under revolving credit facility
700,000

 
850,000

Term loan
697,124

 
705,719

Total debt
1,875,688

 
2,029,625

Less current portion
136,094

 
36,094

Total long-term debt
$
1,739,594

 
$
1,993,531

Exchangeable Senior Notes
The 2021 Notes were issued by Jazz Investments I Limited, or the Issuer, a 100%-owned finance subsidiary of Jazz Pharmaceuticals plc. The Issuer’s obligations under the 2021 Notes are fully and unconditionally guaranteed on a senior unsecured basis by Jazz Pharmaceuticals plc. No subsidiary of Jazz Pharmaceuticals plc guaranteed the 2021 Notes. Subject to

19

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, 2017, the carrying value of the equity component of the 2021 Notes, net of equity issuance costs, was $126.9 million.
Maturities
Scheduled maturities with respect to our long-term debt principal balances outstanding as of March 31, 2017 were as follows (in thousands):
Year Ending December 31,
Scheduled Long-Term Debt Maturities
2017 (remainder)
$
27,070

2018
40,605

2019
58,652

2020
76,700

2021
1,775,801

Total
$
1,978,828

As of March 31, 2017, we recorded $100.0 million of outstanding borrowings under our revolving credit facility in current liabilities based on our intent to repay this amount. The repayment was made in April 2017.

9. 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 and 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, 2017 and December 31, 2016. 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.

20

Lease and Other Commitments
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. Future minimum lease payments under our noncancelable operating and facility leases as of March 31, 2017 were as follows (in thousands): 
Year Ending December 31,
Lease
  Payments  
2017 (remainder)
$
11,973

2018
12,243

2019
10,825

2020
9,556

2021
9,464

Thereafter
68,028

Total
$
122,089

In January 2015, we entered into an agreement to lease office space located in Palo Alto, California in a building to be constructed by the landlord. We expect to occupy this office space by the end of 2017. In connection with this lease, the landlord is providing a tenant improvement allowance for the costs associated with the design, development and construction of tenant improvements for the leased facility. We are obligated to fund all costs incurred in excess of the tenant improvement allowance. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, we have concluded we are the deemed owner of the building during the construction period. As of March 31, 2017, we recorded project construction costs of $34.6 million incurred by the landlord as construction-in-progress in property and equipment, net and a corresponding financing obligation in other non-current liabilities in our condensed consolidated balance sheets. We will increase the asset and financing obligation as additional building costs are incurred by the landlord during the construction period. In the three months ended March 31, 2017, we recorded rent expense associated with the ground lease of $0.5 million in our condensed consolidated statement of income.
As of March 31, 2017, we had $31.9 million of noncancelable purchase commitments due within one year, primarily related to agreements with third party manufacturers.
Legal Proceedings
We are involved in legal proceedings, including the following matters:
Xyrem ANDA Matters Relating to the First ANDA Filer. On October 18, 2010, we received a notice of Paragraph IV Patent Certification, or Paragraph IV Certification, from West-Ward that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. West-Ward’s initial notice alleged that three patents then listed for Xyrem in the Orange Book on the date of the notice are invalid, unenforceable or not infringed by West-Ward’s proposed generic product. On November 22, 2010, we filed a lawsuit against West-Ward in response to West-Ward’s initial notice in the District Court, in which we sought a permanent injunction to prevent West-Ward from introducing a generic version of Xyrem that would infringe our patents. Additional patents covering Xyrem have been issued both before and since December 2010, and after receiving Paragraph IV Certification notices from West-Ward with respect to those patents, we filed additional lawsuits against West-Ward to include these additional patents in the litigation. All of the lawsuits filed against West-Ward between 2010 and 2012 were consolidated by the District Court into a single case, which we refer to as the first West-Ward consolidated case. In the first West-Ward consolidated case, we alleged that 10 of our patents covering Xyrem are or will be infringed by West-Ward’s ANDA and sought a permanent injunction to prevent West-Ward from launching a generic version of Xyrem that would infringe these patents.
After receiving additional Paragraph IV Certification notices from West-Ward, we filed three actions against West-Ward in the District Court on February 20, 2015, June 1, 2015 and January 27, 2016 that were consolidated by the District Court into a second case, which we refer to as the second West-Ward consolidated case. In the second West-Ward consolidated case, we alleged that five of our patents covering Xyrem are or will be infringed by West-Ward’s ANDA and sought a permanent injunction to prevent West-Ward from introducing a generic version of Xyrem that would infringe those patents.
In December 2013, the District Court permitted West-Ward to amend its answer in the first West-Ward consolidated case to allege certain equitable defenses, and the parties were given additional time for discovery on those new defenses. In addition, in March 2014, the District Court granted our motion to bifurcate and stay the portion of the first West-Ward consolidated case regarding REMS patents.

21

In July 2016, the District Court determined that it would try all of the patents at issue in the first and second West-Ward consolidated cases together, including the REMS patents that were previously bifurcated and stayed, and set trial in this combined consolidated case for the second quarter of 2017. In the first quarter of 2017, the District Court bifurcated and stayed the part of the combined consolidated case involving the REMS patents. Also in the first quarter of 2017, the FDA approved West-Ward’s ANDA with a REMS that is separate from the Xyrem REMS.
On August 12, 2016, we filed a lawsuit against West-Ward in the District Court in which we alleged that an additional later-issued REMS patent is or will be infringed by West-Ward’s ANDA and sought a permanent injunction to prevent West-Ward from introducing a generic version of Xyrem that would infringe that patent. In September 2016, West-Ward moved to dismiss the lawsuit.
On April 5, 2017, we entered into a settlement agreement and related agreements resolving our patent infringement litigation against West-Ward in the District Court. On April 10, 2017, the District Court approved an order dismissing the litigation. We have released West-Ward from all claims asserting that patents covering Xyrem are or would be infringed by the West-Ward ANDA, and West-Ward has released us from all claims asserting that the patents covering Xyrem are unenforceable, unpatentable, invalid or not infringed by the generic version of Xyrem covered by West-Ward’s ANDA. In accordance with legal requirements, we and West-Ward have submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review. For more information regarding the settlement agreement with West-Ward, see “Overview—Significant Developments Affecting Our Business” in Part I, Item 2 of this Quarterly Report on Form 10-Q.
Xyrem ANDA Matters Relating to Second Filers. On December 10, 2012, we received notice of Paragraph IV Certification from Amneal that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On January 18, 2013, we filed a lawsuit against Amneal in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Amneal’s ANDA and seeking a permanent injunction to prevent Amneal from introducing a generic version of Xyrem that would infringe these patents. On November 21, 2013, we received notice of Paragraph IV Certification from Par Pharmaceutical, Inc., or Par, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On December 27, 2013, we filed a lawsuit against Par in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Par’s ANDA and seeking a permanent injunction to prevent Par from introducing a generic version of Xyrem that would infringe these patents.
In April 2014, Amneal asked the District Court to consolidate its case with the Par case, stating that both cases would proceed on the schedule for the Par case. The District Court granted this request in May 2014. The order consolidating the cases extended Amneal’s 30-month stay period to coincide with the date of Par’s 30-month stay period. The stay expired on May 20, 2016.
Additional patents covering Xyrem have been issued since April 2014 and have been listed in the Orange Book for Xyrem. Amneal and Par have given us additional notices of Paragraph IV Certifications regarding such patents, and we have filed additional lawsuits against Amneal and Par in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Amneal’s and Par’s ANDAs and seeking a permanent injunction to prevent Amneal and Par from introducing a generic version of Xyrem that will infringe these patents. In March 2016, Par moved to dismiss claims involving our patents covering a part of the Xyrem label that instructs prescribers on adjusting the dose of Xyrem when it is being co-administered with divalproex sodium (also known as valproate or valproic acid), or our DDI patents. In August 2016, we and Par stipulated to dismiss claims relating to our patents covering the formulation of Xyrem on the grounds that Par had notified FDA that it had converted its Paragraph IV Certifications to a Paragraph III Certification.
On June 4, 2014, we received a notice of Paragraph IV Certification from Ohm that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On July 15, 2014, we filed a lawsuit against Ohm in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Ohm’s ANDA and seeking a permanent injunction to prevent Ohm from introducing a generic version of Xyrem that will infringe these patents. Since June 2014, we have received additional notices of Paragraph IV Certification from Ohm regarding newly issued patents for Xyrem listed in the Orange Book, and we have filed additional lawsuits against Ohm in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Ohm’s ANDA and seeking a permanent injunction to prevent Ohm from introducing a generic version of Xyrem that will infringe these patents. In May 2016, the Ohm litigation was settled as described below. In the first quarter of 2017, the FDA tentatively approved the ANDAs of Amneal and Ohm.
On October 30, 2014, we received a notice of Paragraph IV Certification from Teva Pharmaceutical Industries Ltd., formerly known as Watson Laboratories, Inc., or Teva, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On December 11, 2014, we filed a lawsuit against Teva in the District Court alleging that our patents covering Xyrem are or will be infringed by Teva’s ANDA and seeking a permanent injunction to prevent Teva from introducing a generic version of Xyrem that would infringe these patents. In March 2015, Teva moved to dismiss the portion of the case based on our Orange Book-listed REMS patents on the grounds that these patents do not cover patentable subject matter. In November 2015, the District Court administratively terminated this motion to dismiss (without prejudice) pending

22

the outcome of IPR proceedings before the PTAB relating to the patents that were the subject of Teva’s motion. Since March 2015, we have received an additional notice of Paragraph IV Certification from Teva regarding newly issued patents for Xyrem listed in the Orange Book, and we have filed an additional lawsuit against Teva in the District Court alleging that our patents covering Xyrem are or will be infringed by Teva’s ANDA and seeking a permanent injunction to prevent Teva from introducing a generic version of Xyrem that would infringe these patents.
In April 2015, the District Court issued an order that consolidated all then-pending lawsuits against Amneal, Par, Ohm and Teva into one case.
On June 8, 2015, we received a Paragraph IV Certification from Wockhardt Bio AG, or Wockhardt, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On July 17, 2015, we filed a lawsuit in the District Court alleging that our patents covering Xyrem were or would be infringed by Wockhardt’s ANDA and seeking a permanent injunction to prevent Wockhardt from introducing a generic version of Xyrem that would infringe our patents. On November 26, 2015, we received an additional notice of Paragraph IV Certification from Wockhardt regarding newly issued patents listed in the Orange Book, and we filed an additional lawsuit against Wockhardt in the District Court alleging that our patents covering Xyrem were or would be infringed by Wockhardt’s ANDA and seeking a permanent injunction to prevent Wockhardt from introducing a generic version of Xyrem that would infringe these patents. In April 2016, the Wockhardt litigation was settled as set forth below.
On July 23, 2015, we received a Paragraph IV Certification from Lupin Inc., or Lupin, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On September 2, 2015, we filed a lawsuit in the District Court alleging that our patents covering Xyrem are or will be infringed by Lupin’s ANDA and seeking a permanent injunction to prevent Lupin from introducing a generic version of Xyrem that would infringe our patents.
In January, April and June 2016, the District Court issued orders consolidating all of the cases then pending against Amneal, Par, Ohm, Teva, Wockhardt and Lupin into a single case for all purposes. No trial date has been set in that consolidated case.
Additional patents covering Xyrem have been issued since June 2016 and have been listed in the Orange Book for Xyrem. We have received additional Paragraph IV notices from Amneal regarding such patents and have filed new lawsuits in the District Court, alleging that our additional patents covering Xyrem are or will be infringed by Amneal’s ANDA and seeking a permanent injunction to prevent Amneal from introducing a generic version of Xyrem that would infringe our patents.
We entered into settlement agreements with Wockhardt and Ohm on April 18, 2016 and May 9, 2016, respectively, that resolved our patent litigation against Wockhardt and Ohm. Under the settlement agreements, we granted each of Wockhardt and Ohm a license to manufacture, market, and sell its generic version of Xyrem on or after December 31, 2025, or earlier depending on the occurrence of certain events. The specific terms of the settlement agreements are confidential.
The settlements with Wockhardt and Ohm do not resolve the litigation against Amneal, Par, Teva and Lupin, which is ongoing. We cannot predict the specific timing or outcome of events in this matter with respect to the remaining defendants or the impact of developments involving any specific parties or patents on other ongoing proceedings with any ANDA filer.
Xyrem Post-Grant Patent Review Matters. In January 2015, certain of the ANDA filers filed petitions for IPR with respect to the validity of the six REMS patents. In July 2016, the PTAB issued final decisions that the claims of these six patents are unpatentable; as a result, if the United States Court of Appeals for the Federal Circuit upholds those decisions on appeal, these claims will be canceled. We have filed notices of appeal with respect to these IPR decisions to the United States Court of Appeals for the Federal Circuit. In September 2015, certain of the ANDA filers filed a petition for IPR with respect to the validity of an additional REMS patent. In March 2016, the PTAB partially instituted an IPR on three claims of a seventh REMS patent, declining to review 25 of 28 claims. In March 2017, the PTAB issued a final decision that the three claims that were reviewed by the PTAB are unpatentable. We have not yet decided whether to appeal that ruling.
In October 2015, Ohm and Par filed petitions for IPR with respect to the validity of one of our DDI patents, and Amneal filed an IPR petition on the same patent in February 2016. In April 2016, the PTAB denied Par’s petition in its entirety and issued a decision on Ohm’s petition, instituting an IPR trial with respect to 16 of the claims under the patent subject to this petition and denying the petition with respect to the other 18 claims. In July 2016, the PTAB denied Amneal’s petition in its entirety. In March 2016, Ohm filed a petition for IPR with respect to the validity of the second of our DDI patents. In connection with settlement of our litigation with Ohm, both of the IPR petitions filed by Ohm were terminated.
In December 2015, Wockhardt filed a petition for IPR with respect to the validity of one of our patents covering the formulation of Xyrem. In connection with settlement of our patent litigation with Wockhardt, this IPR petition was terminated.
We cannot predict whether additional post-grant patent review challenges will be filed by any of the ANDA filers or any other entity, the outcome of any pending IPR or other proceeding, the outcome of any appeal of the July 2016 IPR decisions

23

with respect to the six REMS patents or the impact any IPR or other proceeding might have on ongoing ANDA litigation proceedings or other aspects of our Xyrem business.
Shareholder Litigation Matters Relating to Celator Acquisition. On June 21, 2016, a putative class-action lawsuit challenging our Celator Acquisition, captioned Dunbar v. Celator Pharmaceuticals, Inc., or the Dunbar action, was filed in the Superior Court of New Jersey. We refer to our acquisition of Celator in this report as the Celator Acquisition. The complaint was filed against Celator, each member of the Celator board of directors, Jazz Pharmaceuticals plc and our wholly owned subsidiary Plex Merger Sub, Inc., or Plex. The complaint generally alleges that the Celator directors breached their fiduciary duties in connection with the Celator Acquisition, and that Jazz Pharmaceuticals plc and Plex aided and abetted these alleged breaches of fiduciary duty. The complaint also generally asserts that the Celator directors breached their fiduciary duties to Celator’s public stockholders by, among other things, (i) agreeing to sell Celator to us at an inadequate price, (ii) implementing an unfair process, (iii) agreeing to certain provisions of the merger agreement for the Celator Acquisition that allegedly favored us and deterred alternative bids, and (iv) failing to disclose purportedly material information in Celator’s Schedule 14D-9 filing with the U.S. Securities and Exchange Commission, or SEC. The plaintiff sought, among other things, an injunction against the consummation of the Celator Acquisition and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees.
Between June 27, 2016 and June 29, 2016, two putative class-action lawsuits challenging the Celator Acquisition, captioned Palmisciano v. Celator Pharmaceuticals, Inc., or the Palmisciano action, and Barreto v. Celator Pharmaceuticals, Inc., or the Barreto action, were filed in the District Court. The complaints were filed against Celator and each member of the Celator board of directors. The complaints assert causes of action under sections 14 and 20 of the Securities Exchange Act of 1934, as amended, predicated on Celator’s and the Celator directors’ alleged failure to disclose purportedly material information in Celator’s Schedule 14D-9 filing with the SEC. The plaintiffs sought, among other things, an injunction against the consummation of the Celator Acquisition and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees. Neither Jazz Pharmaceuticals plc nor Plex were named defendants in these actions.
On July 6, 2016, the defendants to the Dunbar action, the Palmisciano action and the Barreto action entered into a memorandum of understanding, or MOU, regarding settlement of these actions with the plaintiffs. The MOU outlines the terms of the parties’ agreement in principle to settle and release all claims which were or could have been asserted in these actions. In consideration for such settlement and release, the parties to these actions agreed, among other things, that Celator would amend its Schedule 14D-9 to include certain supplemental disclosures. The Schedule 14D-9 was amended by Celator on July 6, 2016, and the Celator Acquisition was completed on July 12, 2016. The settlement remains subject to, among other items, confirmatory discovery, the execution of a stipulation of settlement by the parties, final approval of the settlement by the District Court in the Barreto action and dismissal with prejudice of the Dunbar action and the Palmisciano action.
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other 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 2016, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of 501(c)(3) organizations that provide financial assistance to Medicare patients, and, for Xyrem, documents concerning the provision of financial assistance to Medicare patients. In October 2016, we received a second subpoena updating and further specifying document requests regarding support to 501(c)(3) organizations that provide financial assistance to Medicare patients and the provision of financial assistance for Medicare patients taking drugs sold by us. In February 2017, we received a third subpoena requesting documents regarding our support to a specific 501(c)(3) organization that established a fund for narcolepsy patients in January 2017.  Other companies have disclosed similar subpoenas and continuing inquiries. We are cooperating with this investigation. We are unable to predict how long this investigation will continue, whether we will receive additional subpoenas in connection with this investigation, or its outcome, but we expect that we will continue to incur significant costs in connection with the investigation, regardless of the outcome. For more information, see the risk factor under the heading “We are subject to significant ongoing regulatory obligations and oversight, which may result in significant additional expense and limit our ability to commercialize our products” in Part II, Item 1A of this Quarterly Report on Form 10-Q.


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10. Shareholders’ Equity
The following tables present a reconciliation of our beginning and ending balances in shareholders’ equity for the three months ended March 31, 2017 and 2016, respectively (in thousands): 
 
Total Shareholders' Equity
Shareholders' equity at January 1, 2017
$
1,877,339

Issuance of ordinary shares in conjunction with employee equity incentive and purchase plans
5,676

Employee withholding taxes related to share-based awards
(14,431
)
Share-based compensation
25,297

Shares repurchased
(13,896
)
Other comprehensive income
17,490

Net income
86,511

Shareholders' equity at March 31, 2017
$
1,983,986

 
Total Shareholders' Equity
Shareholders' equity at January 1, 2016
$
1,706,333

Issuance of ordinary shares in conjunction with employee equity incentive and purchase plans
3,780

Employee withholding taxes related to share-based awards
(12,476
)
Share-based compensation
24,608

Shares repurchased
(134,365
)
Other comprehensive income
45,188

Net income
75,812

Shareholders' equity at March 31, 2016
$
1,708,880

Share Repurchase Program
In November 2016, our board of directors authorized a new 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 the three months ended March 31, 2017, we spent a total of $13.9 million to purchase 0.1 million of our ordinary shares under the share repurchase program at an average total purchase price, including commissions, of $117.65 per share. As of March 31, 2017, the remaining amount authorized under the share repurchase program was $267.6 million.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss as of March 31, 2017 and December 31, 2016 were as follows (in thousands): 
 
Net Unrealized
Losses
From Hedging Activities
 
Foreign
Currency
Translation
Adjustments
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2016
$
—

 
$
(317,333
)
 
$
(317,333
)
Other comprehensive income (loss)
(622
)
 
18,112

 
17,490

Balance at March 31, 2017
$
(622
)
 
$
(299,221
)
 
$
(299,843
)
During the three months ended March 31, 2017, other comprehensive income (loss) reflects foreign currency translation adjustments, primarily due to the strengthening of the euro against the U.S. dollar, and the net unrealized losses on derivatives that qualify as cash flow hedges.


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11. Segment and Other Information
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. The following table presents a summary of total revenues (in thousands): 
 
Three Months Ended
March 31,
 
2017
 
2016
Xyrem
$
272,326

 
$
249,537

Erwinaze/Erwinase
51,388

 
51,173

Defitelio/defibrotide
35,900

 
17,897

Prialt® (ziconotide) intrathecal infusion
7,717

 
6,209

Other
6,347

 
9,100

Product sales, net
373,678

 
333,916

Royalties and contract revenues
2,375

 
2,094

Total revenues
$
376,053

 
$
336,010

The following table presents a summary of total revenues attributed to geographic sources (in thousands): 
 
Three Months Ended
March 31,
 
2017
 
2016
United States
$
339,183

 
$
305,879

Europe
31,352

 
25,020

All other
5,518

 
5,111

Total revenues
$
376,053

 
$
336,010

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,
 
2017
 
2016
Express Scripts
72
%
 
74
%
McKesson Corporation and affiliates
17
%
 
13
%

The following table presents total long-lived assets, consisting of property and equipment, by location (in thousands): 
 
March 31,
2017
 
December 31,
2016
Ireland
$
64,862

 
$
62,453

United States
45,943

 
35,791

Italy
7,107

 
7,000

Other
2,001

 
2,246

Total long-lived assets
$
119,913

 
$
107,490



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12. 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,
 
2017
 
2016
Selling, general and administrative
$
19,805

 
$
20,204

Research and development
4,142

 
3,290

Cost of product sales
1,246

 
689

Total share-based compensation expense, pre-tax
25,193

 
24,183

Income tax benefit from share-based compensation expense
(7,624
)
 
(6,933
)
Total share-based compensation expense, net of tax
$
17,569

 
$
17,250

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,
 
2017
 
2016
Shares underlying options granted (in thousands)
1,171

 
1,009

Grant date fair value
$
42.19

 
$
40.17

Black-Scholes option pricing model assumption information:
 
 
 
Volatility
35
%
 
39
%
Expected term (years)
4.3

 
4.2

Range of risk-free rates
1.7-1.8%

 
1.0-1.5%

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,
 
2017
 
2016
RSUs granted (in thousands)
468

 
400

Grant date fair value
$
135.46

 
$
123.46

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, 2017, compensation cost not yet recognized related to unvested share options and RSUs was $117.5 million and $147.4 million, respectively, which is expected to be recognized over a weighted-average period of 3.0 years.


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13. Income Taxes
Our income tax provision was $29.2 million in the three months ended March 31, 2017 compared to $32.3 million for the same period in 2016. The effective tax rate was 25.2% in the three months ended March 31, 2017 compared to 29.9% for the same period in 2016. The decrease in the effective tax rate for the three months ended March 31, 2017 compared to the same period in 2016 was primarily due to changes in income mix among the various jurisdictions in which we operate. The effective tax rate for the three months ended March 31, 2017 was higher than the Irish statutory rate of 12.5% primarily due to income taxable at a rate higher than the Irish statutory rate, uncertain tax positions, and various expenses not deductible for tax purposes, partially offset by originating tax credits and deductions available in relation to subsidiary equity. 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 Celator Acquisition. The balance is net of deferred tax assets which are comprised primarily of U.S. federal and state net operating loss carryforwards, 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 established a liability for certain tax benefits which we judge may not be sustained upon examination. Our most significant tax jurisdictions are Ireland, the U.S. (both at the federal level and in various state jurisdictions), Italy and France. Because of our net operating loss carryforwards and tax credit carryforwards, substantially all of our tax years remain open to federal, state, and foreign tax examination. Certain of our subsidiaries are currently under examination by the French tax authorities for the years ended December 31, 2012 and 2013. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In December 2015, we received proposed tax assessment notices from the French tax authorities for 2012 and 2013 relating to certain transfer pricing adjustments. The notices propose additional French tax of approximately $40.9 million, including interest and penalties through the date of the assessment, translated at the foreign exchange rate at March 31, 2017. We disagree with the proposed assessment and intend to contest it vigorously.




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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 an international biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing meaningful products that address unmet medical needs.
We have a diverse portfolio of products and product candidates, with a focus in the areas of sleep and hematology/oncology. 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 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; and
•
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, or SOS, 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.
Our strategy is to create shareholder value by:
•
Growing sales of the existing products in our portfolio, including by identifying and investing in growth opportunities such as new treatment indications and new geographic markets;
•
Acquiring or licensing rights to clinically meaningful and differentiated products that are on the market or product candidates that are in late-stage development; and
•
Pursuing targeted development of post-discovery differentiated product candidates.
We apply a disciplined approach to allocating our resources between investments in our current commercial and development portfolio and acquisitions or in-licensing of new assets.
In the three months ended March 31, 2017, our total net product sales increased by 12% compared to the same period in 2016, primarily due to an increase in Xyrem and Defitelio product sales. We expect total net product sales to increase in 2017 over 2016, primarily due to expected growth in sales of Xyrem and Defitelio, as well as sales from the anticipated U.S. commercial launch of VyxeosTM, an investigational product in development as a treatment for high-risk acute myeloid leukemia, or AML. 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
Settlement with West-Ward. On April 5, 2017, we entered into a settlement agreement and related agreements resolving our patent infringement litigation against West-Ward Pharmaceuticals Corp. (a wholly owned subsidiary of Hikma Pharmaceuticals PLC), which acquired Roxane Laboratories, Inc., or West-Ward, in the U.S. District Court for the District of New Jersey, or the District Court. In connection with the settlement agreement, we granted West-Ward the right to sell an authorized generic version of Xyrem, or the West-Ward AG Product, in the U.S. for an initial term of six months commencing on January 1, 2023, or earlier under certain circumstances. Such circumstances include events related to the market entry of other generic versions of Xyrem, a final decision that all unexpired claims of the Xyrem patents are invalid and/or unenforceable, and a substantial reduction in Xyrem net sales over specified periods of time. West-Ward has the right to extend

29

the initial six month term for the West-Ward AG Product, or the Initial Term, and continue to sell the West-Ward AG Product for up to a total of five years (the Initial Term, as it may be extended by West-Ward, is referred to as the AG Sales Period). We will receive a meaningful royalty from West-Ward on net sales of the West-Ward AG Product, with the royalty rate increasing during the Initial Term based on increased net sales of the West-Ward AG Product. There will also be a substantial increase in the royalty rate should the AG Sales Period be extended beyond one year. We will also be paid for supply of the West-Ward AG Product and will be reimbursed by West-Ward for a portion of the services costs associated with the operation of the Xyrem risk evaluation and mitigation strategy, or REMS, and distribution of the West-Ward AG Product.
We also granted West-Ward a non-exclusive license under the Xyrem patents to make, have made and market its generic sodium oxybate product under the West-Ward abbreviated new drug application, or ANDA, in the U.S., effective at the end of the AG Sales Period. West-Ward has agreed that, other than in accordance with the terms and conditions of the settlement agreement and the foregoing arrangements, West-Ward will not make, use or sell a generic version of Xyrem for so long as any Xyrem patents remain in effect.
The West-Ward AG Product will be distributed through the FDA-approved Xyrem REMS. The FDA’s approval of West-Ward’s ANDA in January 2017 includes a waiver that permits West-Ward’s ANDA product to use a separate REMS program, or the generic sodium oxybate REMS, from the Xyrem REMS. The settlement agreement permits West-Ward to develop and implement the separate REMS approved with its ANDA, and permits us to challenge the FDA’s waiver decision and the separate REMS approved in connection with West-Ward’s ANDA, and to raise any other safety issues pertaining to Xyrem.
For further discussion, see “—Challenges, Risks and Trends Related to Our Lead Marketed Products” below.
Other Significant Developments
Key recent developments in our research and development activities include the following:
On March 20, 2017, we announced positive top-line efficacy results from our two Phase 3 clinical trials evaluating JZP-110 in adult patients with excessive sleepiness, or ES, associated with obstructive sleep apnea, or OSA. On April 26, 2017, we announced positive top-line efficacy results from our Phase 3 clinical trial evaluating JZP-110 in adult patients with ES associated with narcolepsy.
On March 30, 2017, we announced the execution of license agreements granting Nippon Shinyaku Co., Ltd., or Nippon, exclusive rights to develop and commercialize Defitelio and Vyxeos in Japan.
On March 31, 2017, we completed the rolling submission of a new drug application, or NDA, for Vyxeos with the FDA.
On April 24, 2017, we announced positive top-line efficacy results from our Phase 3 clinical trial evaluating Xyrem in pediatric narcolepsy patients with cataplexy.
Continued Emphasis on Research and Development
During the three months ended March 31, 2017, we continued our focus on research and development activities, which currently include clinical development of new product candidates, activities related to line extensions and new indications for existing products and the generation of additional clinical data for existing products, all in our sleep and hematology/oncology therapeutic areas.

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A summary of our ongoing development activities is provided below:
Project
Disease Area
Status
Sleep
 
 
JZP-110
ES in OSA
Top-line data from two Phase 3 trials received in first quarter of 2017; plan to submit an NDA to the FDA in late 2017
JZP-110
ES in narcolepsy

Top-line data from Phase 3 trial received in second quarter of 2017; plan to submit an NDA to the FDA in late 2017
JZP-110
ES in Parkinson’s disease
First patient enrolled in Phase 2 trial in first quarter of 2017
Xyrem
EDS and cataplexy in pediatric narcolepsy patients with cataplexy
Top-line data from Phase 3 trial received in second quarter of 2017; expect to submit a supplemental NDA, or sNDA, and pediatric written request report to the FDA in fourth quarter of 2017
JZP-507
EDS and cataplexy in narcolepsy
Expect to submit an NDA to the FDA by first quarter of 2018
JZP-258
EDS and cataplexy in narcolepsy
First patient enrolled in Phase 3 trial being conducted in the European Union, or EU, and U.S. in first quarter of 2017; subject to results of trial, expect to submit an NDA to the FDA in 2019
Oxybate once-nightly dosing
Narcolepsy
Program progressing; evaluation of deuterated oxybate and other formulation options continues as part of once-nightly development
process
Hematology/Oncology
 
Vyxeos
(CPX-351)
High-risk AML
Rolling submission of an NDA to the FDA completed in first quarter of 2017; expect to submit a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, in second half of 2017
Defibrotide
Prevention of VOD in high-risk patients following HSCT
First patient enrolled in Phase 3 trial in first quarter of 2017

Defibrotide

Prevention of acute Graft versus Host Disease, or aGvHD, following HSCT
Expect to initiate Phase 2 trial in fourth quarter of 2017
Asparaginase
ALL and other hematologic disorders
Evaluation of early-stage product candidates

In the sleep therapeutic area, we have the following ongoing and planned development activities:
•
JZP-110.
Phase 3 Clinical Trials.  JZP-110 is a late-stage investigational compound being developed for potential treatment of ES in patients with narcolepsy and ES in patients with OSA. We acquired worldwide development, manufacturing and commercial rights to JZP-110 from Aerial BioPharma LLC, or Aerial, in January 2014, other than in certain jurisdictions in Asia where SK Biopharmaceuticals Co., Ltd, or SK, retains rights. We conducted two Phase 3 clinical trials in patients with ES associated with OSA and one Phase 3 clinical trial in patients with ES associated with narcolepsy. In the first quarter of 2017, we received positive top-line efficacy results from the two Phase 3 clinical trials in patients with ES associated with OSA, and based on a preliminary safety analysis, the most commonly reported adverse events in these trials were consistent with those previously observed in the Phase 2 clinical trials evaluating JZP-110 in narcolepsy. In the second quarter of 2017, we received positive top-line efficacy results from the Phase 3 clinical trial in patients with ES associated with narcolepsy, and based on a preliminary safety analysis, the most commonly reported adverse events in this trial were generally consistent with those previously observed in the Phase 2 clinical trials evaluating JZP-110 in narcolepsy. We are planning to submit an NDA to the FDA in late 2017 to seek approval for JZP-110 in the treatment of ES associated with OSA and ES associated with narcolepsy. In addition, we have enrolled approximately 635 patients from our Phase 2 and Phase 3 clinical trials in an ongoing open label extension trial evaluating the long-term safety and maintenance of efficacy of JZP-110.
Phase 2 Clinical Trial.  We commenced patient enrollment in a Phase 2 clinical trial of JZP-110 in patients with ES associated with Parkinson’s disease in the first quarter of 2017. We expect to enroll approximately 50 adult patients in this trial. There are no FDA-approved therapies for ES in Parkinson’s disease in the U.S.
Other Activities.  We are also evaluating future pipeline expansion opportunities for JZP-110 in other disorders and conditions, as well as opportunities for geographic expansion.

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•
Xyrem.
Phase 3 Clinical Trial of Xyrem in Children and Adolescents. While in many patients narcolepsy can begin during childhood and adolescence, there is limited information on the treatment of pediatric narcolepsy patients with Xyrem. We worked with the FDA and several leading specialists to design a clinical trial to generate additional data on the treatment of pediatric narcolepsy patients with Xyrem. In the fourth quarter of 2014, we initiated a Phase 3 clinical trial to assess the safety and efficacy of Xyrem in children and adolescents aged seven to 17 who have narcolepsy with cataplexy. In the second quarter of 2017, we received positive top-line efficacy results from this trial, with preliminary safety results that were consistent with the results previously observed in Xyrem studies in adults and our post-marketing experience. We anticipate submitting an sNDA and pediatric written request report to the FDA in the fourth quarter of 2017.
•
JZP-507.
JZP-507 is an investigational new drug candidate with a 50% reduction in sodium content compared to Xyrem that in a pilot study has demonstrated bioequivalence to Xyrem. We are investigating JZP-507 for the potential treatment of both narcolepsy with cataplexy and EDS in narcolepsy. We anticipate submitting an NDA to the FDA by the first quarter of 2018. We believe that JZP-507 would offer a clinically meaningful benefit to patients compared to Xyrem.
•
JZP-258.
JZP-258 is an investigational new drug candidate that contains 90% less sodium than Xyrem and is being developed for the potential treatment of both narcolepsy with cataplexy and EDS in narcolepsy. We believe that JZP-258 would offer a clinically meaningful benefit to patients compared to Xyrem. We enrolled the first patient in a Phase 3 clinical trial of JZP-258 in the EU and U.S. in the first quarter of 2017, and, subject to the results of this trial, we anticipate submitting an NDA to the FDA in 2019.
We are also pursuing activities related to the potential development of once-nightly dosing options for narcolepsy patients that we believe would provide clinically meaningful improvements to patients compared to Xyrem. We are exploring formulation options, including an evaluation of deuterated oxybate.
In the hematology and oncology therapeutic area, we have the following ongoing and planned development activities:
•
Vyxeos (CPX-351). Through the acquisition of Celator Pharmaceuticals, Inc., or Celator, in July 2016, or the Celator Acquisition, we acquired worldwide development and commercialization rights to Vyxeos. Vyxeos is currently not approved as a marketed product in any jurisdiction. We completed the rolling submission of an NDA to the FDA for Vyxeos in the first quarter of 2017. We have requested priority review for the NDA, which, if granted, would reduce the expected duration of the FDA’s review of the NDA. We are conducting additional post-submission activities, including with respect to chemistry, manufacturing and controls, or CMC, in support of our NDA submission for Vyxeos. We expect to submit an MAA for Vyxeos to the EMA in the second half of 2017.
FDA Breakthrough Therapy designation has been granted for Vyxeos for the treatment of adults with therapy-related AML or AML with myelodysplasia-related changes. Breakthrough Therapy designation is a process designed to expedite the development and review of a drug that is intended to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapies on one or more clinically significant endpoints. In addition, the FDA has granted Fast Track designation to Vyxeos for the treatment of elderly patients with secondary AML. Fast Track is a designation by the FDA of an investigational drug for expedited review to facilitate development of drugs which treat a serious or life-threatening condition and fulfill an unmet medical need. Vyxeos has also received Orphan Drug Designation by the FDA and the European Commission, or EC, for the treatment of AML.
We are also assessing the potential for approval of Vyxeos in other countries and for development of Vyxeos in indications in addition to the treatment of adults with therapy-related AML or AML with myelodysplasia-related changes.
•
Defibrotide.
Phase 3 Clinical Trial. In the first quarter of 2017, we enrolled the first patient in a Phase 3 clinical trial of defibrotide to evaluate the safety and efficacy of defibrotide for the prevention of VOD in high-risk and very high-risk patients following HSCT. We expect to enroll approximately 400 patients in this global trial and, depending on the results from the interim analysis, the enrollment could increase to up to approximately 600 patients.
Planned Phase 2 Clinical Trial. We expect to initiate a Phase 2 trial to evaluate defibrotide for the prevention of aGvHD following HSCT in the fourth quarter of 2017.

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Other Activities.  We are pursuing regulatory approval of defibrotide in Canada. We are also evaluating the potential of defibrotide in additional post-HSCT complications, as well as investigating defibrotide’s potential utility in other serious, life-threatening conditions.
For 2017 and beyond, we expect that our research and development expenses will continue to increase from historical levels, particularly as we prepare for a number of anticipated regulatory submissions, 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 Lead Marketed Products
Xyrem. Xyrem is our largest selling product, and our financial results are significantly influenced by sales of Xyrem, which accounted for 73% of our net product sales for the three months ended March 31, 2017 and 75% of our net product sales for the year ended December 31, 2016. As a result, we continue to place a high priority on seeking to maintain and increase sales of Xyrem in its approved indications, while remaining focused on ensuring the safe and effective use of the product. We are also focusing on product development efforts relating to Xyrem, including seeking to enhance and enforce our intellectual property rights and to develop product, service and safety improvements for patients.
Our future plans assume that sales of Xyrem will increase, although our plans assume a slower rate of increase than in recent years. While Xyrem product sales grew from 2015 to 2016 and from 2014 to 2015, we cannot assure you 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 2017, and we cannot assure you that price adjustments we have taken or may take in the future will not negatively affect Xyrem sales volumes.
Our ability to maintain or increase Xyrem product sales is subject to risks and uncertainties, including those discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, including those related to:
•
the potential U.S. introduction of a generic version of Xyrem before the entry dates specified in our settlements with certain companies that had filed ANDAs with the FDA seeking approval to market a generic version of Xyrem or on terms that are different from those contemplated by the settlements, as further described below;
•
the potential U.S. introduction of an alternative product to Xyrem for treating cataplexy and/or EDS in narcolepsy;
•
changes to, increases in or uncertainties around regulatory restrictions, including changes to our Xyrem REMS, particularly in light of the FDA’s waiver of the single shared systems REMS requirement for sodium oxybate and approval of the generic sodium oxybate REMS, as further described below;
•
any increase in pricing pressure from, or restrictions on reimbursement imposed by, third party payors;
•
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 by government entities;
•
operational disruptions at the Xyrem central pharmacy or any failure to comply with our REMS obligations to the satisfaction of the FDA;
•
any supply or manufacturing problems, including any problems with our sole source provider of the active pharmaceutical ingredient, or API, for Xyrem;
•
continued acceptance of Xyrem by physicians and patients, even in the face of negative publicity that surfaces from time to time;
•
changes to our label, including new safety warnings or changes to our boxed warning, that further restrict how we market and sell Xyrem; and
•
our U.S.-based sodium oxybate and Xyrem suppliers’ ability to obtain sufficient quotas from the U.S. Drug Enforcement Administration, or DEA, to satisfy our needs for Xyrem.
Although Xyrem is protected by patents covering its manufacture, formulation, distribution system and method of use, seven companies have filed ANDAs with the FDA seeking approval to market a generic version of Xyrem. We filed patent lawsuits against each of these companies in the District Court. As described above, on April 5, 2017, we settled all lawsuits against the first ANDA filer, West-Ward, granting West-Ward the right to sell the West-Ward AG Product commencing on January 1, 2023, or earlier under certain circumstances, and granting West-Ward a license to launch its generic sodium oxybate product as early as six months thereafter. In the second quarter of 2016, we had settled lawsuits with two of the other ANDA filers, granting those filers a license to manufacture, market and sell their generic versions of Xyrem on or after

33

December 31, 2025, or earlier depending on the occurrence of certain events. For a description of our settlement with West-Ward, see “Overview—Significant Developments Affecting Our Business” in this Part I, Item 2. Lawsuits with the four remaining companies that have filed ANDAs with the FDA seeking approval to market a generic version of Xyrem remain pending in the District Court. Although no trial date has been set, the trial in this case could occur as early as the first quarter of 2018. For a description of these legal proceedings, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q. We cannot predict the timing or outcome of the ANDA litigation proceedings against the remaining non-settling ANDA filers, which have been consolidated as one case in the District Court.
In July 2016, the Patent Trial and Appeal Board, or PTAB, of the U.S. Patent and Trademark Office issued final decisions that the claims of six patents listed in the Orange Book as covering the Xyrem REMS are unpatentable. We filed a notice of appeal of these decisions on February 22, 2017. If the United States Court of Appeals for the Federal Circuit upholds those decisions on appeal, these claims will be canceled, and we will not be able to enforce these patents. In March 2016, the PTAB partially instituted an inter partes review, or IPR, on three claims of a seventh REMS patent, declining to review 25 of 28 claims. The PTAB issued a final decision in March 2017 that the three claims they reviewed were unpatentable. We have not yet decided whether to appeal that ruling. For a description of these legal proceedings, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q. We cannot predict whether additional post-grant patent review challenges will be filed by any of the ANDA filers or any other entity, the outcome of any proceeding, including any appeal, or the impact any IPR or other proceeding might have on ongoing ANDA litigation proceedings or other aspects of our Xyrem business.
In September 2016, Jazz Pharmaceuticals, Inc., our wholly owned subsidiary, submitted a Citizen Petition to the FDA requesting that, for safety reasons, the FDA refuse to approve any sodium oxybate ANDA with a proposed package insert or REMS that omits the portions of the Xyrem package insert and the Xyrem REMS that instruct prescribers on adjusting the dose of the product when it is co-administered with divalproex sodium (also known as valproate or valproic acid). On January 17, 2017, the FDA granted the Citizen Petition with respect to the Xyrem package insert. The FDA concluded that it will not approve any sodium oxybate ANDA referencing Xyrem that does not include in its package insert the portions of the currently approved Xyrem package insert related to the drug-drug interaction with divalproex sodium. The FDA stated that it did not need to reach the question of whether the drug-drug interaction information could have been excluded from the generic sodium oxybate REMS materials because it was approving a REMS in connection with a sodium oxybate ANDA including that information. Our Xyrem patents include three method of administration patents relating to a drug-drug interaction, or DDI patents, covering these instructions on the Xyrem package insert and Xyrem REMS. We cannot predict whether or when one or more of the ANDA filers may pursue a challenge to the FDA’s response to the Citizen Petition or whether any such challenges would be successful. Likewise, we cannot predict whether we will be able to maintain the validity of, or will otherwise obtain a judicial determination that the generic sodium oxybate package insert or the generic sodium oxybate REMS will infringe, any of our patents or, if we prevail in proving infringement, whether a court will grant an injunction that prevents any non-settling ANDA filer or other company introducing a different sodium oxybate product from marketing its product. For a description of these matters, including risks and uncertainties related to our REMS, our REMS patents and our DDI patents, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q, and the risk factors under the headings “Risks Related to Xyrem and the Significant Impact of Xyrem Sales” and “Risks Related to Our Intellectual Property” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
On January 17, 2017, the FDA announced approval of the West-Ward ANDA, and on January 19, 2017, the FDA tentatively approved two additional ANDAs for generic versions of Xyrem, one for Amneal Pharmaceuticals, LLC, or Amneal, and one for Ohm Laboratories Inc., formerly known as Ranbaxy, Inc., or Ohm. West-Ward’s ANDA approval includes a waiver that permits West-Ward to use the generic sodium oxybate REMS, on the condition that the generic sodium oxybate REMS be open to all future sponsors of ANDAs or NDAs for sodium oxybate products. We were not involved in the development of the generic sodium oxybate REMS. We continue to evaluate whether the FDA’s waiver of the requirement for a single, shared system REMS in connection with approval of the ANDAs meets the conditions for such a waiver under applicable law and, to the extent that we determine that the waiver was not permissible under applicable law, will evaluate potential challenges to the FDA’s waiver decision. We cannot predict whether or when we may pursue any such challenges or whether any such challenges would be successful.
In connection with FDA approval of the current Xyrem REMS in February 2015, the FDA indicated that it intends to evaluate the Xyrem REMS on an ongoing basis and will require modifications as may be appropriate. We cannot predict whether the FDA will request, seek to require or ultimately require modifications to, or impose additional requirements on, the Xyrem REMS in connection with the anticipated distribution of the West-Ward AG Product, the approval of the generic sodium oxybate REMS or otherwise, or the potential timing, terms or propriety thereof. Any such modifications or additional requirements could make it more difficult or expensive for us to distribute Xyrem, make distribution easier for sodium oxybate competitors, impair the safety profile of Xyrem and/or negatively affect sales of Xyrem. We also may face pressure to license or share intellectual property pertinent to the Xyrem REMS, including proprietary data required for safe distribution of sodium oxybate, in connection with the FDA’s approval of the generic sodium oxybate REMS. We cannot predict the outcome or

34

impact on our business of any future action that we may take with respect to the approval of the generic sodium oxybate REMS, or licensing or sharing intellectual property pertinent to our Xyrem REMS or elements of the Xyrem REMS.
The actual timing of any commercial launch of an authorized generic or generic version of Xyrem is uncertain. We do not believe a launch by an ANDA filer is likely to occur prior to either a date agreed in a settlement agreement between us and such ANDA filer or a District Court, or potentially an appellate court, decision in our ongoing patent litigation. However, notwithstanding our patents, and settlement agreements licensing those patents as of future dates, it is possible that West-Ward or any other company that receives FDA approval of an ANDA for a generic version of Xyrem or an NDA for another sodium oxybate product could introduce a generic version of Xyrem or other sodium oxybate product before the entry dates specified in our settlement agreements or before our patents expire, including if it is determined that the introduction of the competing product does not infringe our patents, or that our patents are invalid or unenforceable, or if a non-settling ANDA filer that has received approval for its product decides, before applicable ongoing patent litigation is concluded, to launch a sodium oxybate product at risk of being held liable for damages for patent infringement. In addition, even if we prevail in our ongoing litigation at trial or on appeal, we cannot guarantee that the court will grant an injunction that prevents the ANDA filers from marketing their generic versions of Xyrem. Instead the court may order an ANDA filer that is found to infringe to pay damages in the form of lost profits or a reasonable royalty, which could be significant. We expect that the launch of any generic version of Xyrem, including the West-Ward AG Product or other authorized generic version of Xyrem, or the approval and launch of other products that compete with Xyrem, could have a material adverse effect on our sales of Xyrem and on our business, financial condition, results of operations and growth prospects. For further discussion regarding the risks associated with the West-Ward settlement agreement, the tentative approval of the Amneal and Ohm ANDAs, potential approval or tentative approval of additional ANDAs, the potential launch of a generic version of Xyrem, or the approval and launch of other sodium oxybate products that compete with Xyrem, see “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q and the risk factors under the headings “Risks Related to Xyrem and the Significant Impact of Xyrem Sales,” “We face substantial competition from other companies, including companies with greater resources, including larger sales organizations and more experience working with large and diverse product portfolios, than we have,” and “Risks Related to Our Intellectual Property” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
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), accounted for 14% of our net product sales for the three months ended March 31, 2017 and for the year ended December 31, 2016. We seek to maintain and increase sales of Erwinaze, as well as to make Erwinaze more widely available, through ongoing sales and marketing and research and development activities.
However, a significant challenge to our ability to maintain current sales levels and to increase sales is our extremely limited inventory of Erwinaze, past and continuing supply disruptions and our need to minimize or avoid additional supply disruptions due to capacity constraints, production delays, quality or regulatory challenges and other manufacturing difficulties. Erwinaze is licensed from and manufactured by a single source, Porton Biopharma Limited, or PBL.
In January 2017, the FDA issued a warning letter to PBL indicating that it was not satisfied with PBL’s responses to the FDA Form 483 issued to PBL in March 2016, citing significant violations of the FDA’s current Good Manufacturing Practices, or cGMP, for finished pharmaceuticals and significant deviations from cGMP for APIs. In March 2017, PBL filed a response to the warning letter with the FDA. We cannot predict whether the FDA’s required remediation activities will further strain manufacturing capacity and adversely affect Erwinaze supply, particularly in light of our extremely limited product inventory. We also cannot predict if or when PBL will correct the violations and deviations to the satisfaction of the FDA or whether the FDA will be satisfied with PBL’s response to the warning letter. Any failure to do so could result in the FDA refusing admission of Erwinaze in the U.S., as well as additional enforcement actions by the FDA and other regulatory entities. Any of these actions could have a material adverse effect on our sales of, and revenues from, Erwinaze and limit our potential future maintenance and growth of the market for this product.
Moreover, the current manufacturing capacity for Erwinaze is completely absorbed by demand for the product. We are working with PBL to evaluate potential expansion of its production capacity to increase the supply of Erwinaze over the longer term and to address the production delays, quality challenges and related regulatory scrutiny. As a consequence of constrained manufacturing capacity, we have had an extremely limited or no ability to build product inventory levels that can be used to absorb disruptions to supply resulting from quality, regulatory or other issues. We have experienced product quality, manufacturing and inventory challenges that have resulted, and may continue to result, in disruptions in our ability to supply certain markets, including the U.S., from time to time and have caused, and may in the future cause, us to implement batch-specific, modified product use instructions. Most recently, we experienced supply disruptions in the first quarter of 2017 in most of the countries outside the U.S. where we market Erwinaze, and we expect additional supply disruptions of Erwinaze in the U.S. and other countries in 2017. As capacity constraints and supply disruptions continue, whether as a result of continued quality or other manufacturing issues, regulatory issues or otherwise, we will be unable to build a desired excess level of product inventory, our ability to supply the market may continue to be compromised and physicians’ decisions to use Erwinaze have been, and in the future may continue to be, negatively impacted. Additional Erwinaze supply disruptions and/or our

35

inability to expand production capacity could materially adversely affect our sales of and revenues from Erwinaze and our potential future maintenance and growth of the market for this product, as further discussed in “Risk Factors” in Part I, Item 1A of this Quarterly Report on Form 10-Q.
Defitelio/defibrotide. Sales of Defitelio/defibrotide were 10% of our net product sales for the three months ended March 31, 2017 and 7% of our net product sales for the year ended December 31, 2016. We launched Defitelio in certain European countries beginning in 2014 and continue to launch the product in additional European countries on a rolling basis. On March 30, 2016, the FDA approved our NDA for Defitelio for the treatment of adult and pediatric patients with VOD with renal or pulmonary dysfunction following HSCT. We launched Defitelio in the U.S. shortly after FDA approval, and our U.S. commercial launch is still at an early stage.
Our ability to realize the anticipated benefits from our investment in Defitelio is subject to risks and uncertainties, including the risk factors set forth under the heading “Risks Related to Our Business” in Item II, Part 1A of this Quarterly Report on Form 10-Q. If sales of Defitelio 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.
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 2017 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 2016, we made a significant investment in Vyxeos through the Celator Acquisition. Our ability to realize the anticipated benefits from this investment is subject to a number of risks and uncertainties, including the risk factors set forth under “Risks Relating to Our Business” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
In addition, drug pricing by pharmaceutical companies is currently, and is expected to continue to be, under close scrutiny, including with respect to companies that have increased the price of products after acquiring those products from other companies. Both the U.S. House of Representatives and the U.S. Senate have conducted several hearings with respect to pharmaceutical drug pricing practices, including in connection with the investigation of specific price increases by several pharmaceutical companies. If we become the subject of any government investigation with respect to our drug pricing or other business practices, we could incur significant expense and could be distracted from operation of our business and execution of our strategy.
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 501(c)(3) organizations that provide financial assistance to Medicare patients and documents concerning the provision of financial assistance to Medicare patients taking drugs sold by us. The Office of the Inspector General has established guidelines that permit pharmaceutical manufacturers to make donations to charitable organizations who provide co-pay assistance to Medicare patients, provided that such organizations, among other things, are bona fide charities, are entirely independent of and not controlled by the manufacturer, provide aid to applicants on a first-come basis according to consistent financial criteria, and do not link aid to use of a donor’s product. If we or our vendors or donation recipients are deemed to fail to comply with relevant laws, regulations or evolving government guidance in the operation of these programs, we could be subject to damages, fines, penalties or other criminal, civil or administrative sanctions or enforcement actions. For more information, see the risk factors under the headings “Changes in healthcare law and implementing regulations, including those based on recently enacted legislation, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict, and these changes could have a material adverse effect on our business and financial condition” and “We are subject to significant ongoing regulatory obligations and oversight, which may result in significant additional expense and limit our ability to commercialize our products” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Other key challenges and risks that we face include risks and uncertainties related to:
•
the challenges of protecting and enhancing our intellectual property rights;
•
the challenges of achieving and maintaining commercial success of our products;
•
delays or problems in the supply or manufacture of our products and product candidates, particularly with respect to certain products as to which we maintain limited inventories, our dependence on single source suppliers for most of our products, product candidates and APIs, and the requirement that we and our product suppliers be qualified by the FDA to manufacture product and comply with applicable manufacturing regulations;
•
the need to obtain and maintain appropriate pricing and reimbursement for our products in an increasingly challenging environment due to, among other things, the attention being paid to healthcare cost containment and other austerity measures and pharmaceutical pricing in the U.S. and worldwide, including the need to obtain and

36

maintain reimbursement for Xyrem in the U.S. in an environment in which we are subject to increasingly restrictive conditions for reimbursement required by government programs and third party payors;
•
our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business;
•
the challenges of compliance with the requirements of the FDA, the DEA and comparable non-U.S. regulatory agencies, including with respect to product labeling, requirements for distribution, obtaining sufficient DEA quotas where needed, marketing and promotional activities, patient assistance programs, adverse event reporting and product recalls or withdrawals;
•
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 planned or anticipated to be conducted for our product candidates;
•
the inherent uncertainty associated with the regulatory approval process, especially as we continue to increase investment in our product pipeline development projects and undertake multiple planned NDA submissions for our product candidates;
•
the risks associated with business combination or product or product candidate acquisition transactions, including risks associated with the Celator Acquisition, 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; and
•
possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations.
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/
 
2017
 
2016
 
(Decrease)
Product sales, net
$
373,678

 
$
333,916

 
12
%
Royalties and contract revenues
2,375

 
2,094

 
13
%
Cost of product sales (excluding amortization of intangible assets)
25,065

 
23,439

 
7
%
Selling, general and administrative
144,255

 
128,765

 
12
%
Research and development
44,928

 
31,252

 
44
%
Acquired in-process research and development
—

 
8,750

 
N/A(1)

Intangible asset amortization
25,665

 
22,642

 
13
%
Interest expense, net
18,844

 
12,192

 
55
%
Foreign exchange loss
1,464

 
819

 
79
%
Income tax provision
29,160

 
32,339

 
(10
)%
Equity in loss of investee
161

 
—

 
N/A(1)

_____________________________
(1)
Comparison to prior period not meaningful.

37

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/
 
2017
 
2016
 
(Decrease)
Xyrem
$
272,326

 
$
249,537

 
9
%
Erwinaze/Erwinase
51,388

 
51,173

 
—
%
Defitelio/defibrotide
35,900

 
17,897

 
101
%
Prialt® (ziconotide) intrathecal infusion
7,717

 
6,209

 
24
%
Other
6,347

 
9,100

 
(30
)%
Product sales, net
373,678

 
333,916

 
12
%
Royalties and contract revenues
2,375

 
2,094

 
13
%
Total revenues
$
376,053

 
$
336,010

 
12
%
Product Sales, Net
Xyrem product sales increased in the three months ended March 31, 2017 compared to the same period in 2016, primarily due to a higher average net selling price and, to a lesser extent, an increase in sales volume.  A price increase was instituted in January 2017. Erwinaze product sales in the three months ended March 31, 2017 increased slightly compared to product sales for the same period in 2016 primarily due to a change in payer mix, partially offset by a decrease in sales volume. The Erwinaze sales volume decrease was primarily driven by the impact of continuing supply challenges that caused inventory fluctuations which disrupted our ability to supply certain markets. Defitelio/defibrotide product sales increased in the three months ended March 31, 2017 compared to the same period in 2016, primarily due to the launch of Defitelio in the U.S. in April 2016 and, to a lesser extent, higher net sales outside the U.S primarily due to higher sales volume. Prialt product sales increased in the three months ended March 31, 2017 compared to the same period in 2016 primarily due to a change in the relative mix of vial sizes sold and inventory restocking resulting from a temporary supply disruption. Other product sales decreased in the three months ended March 31, 2017 compared to the same period in 2016 primarily due to a decrease in sales of our psychiatry products due to generic competition. We expect total product sales will increase in 2017 over 2016, primarily due to anticipated growth in sales of Xyrem and Defitelio, as well as sales from the anticipated U.S commercial launch of Vyxeos.
Royalties and Contract Revenues
Royalties and contract revenues increased in the three months ended March 31, 2017 compared to the same period in 2016. We expect royalties and contract revenues in 2017 to increase compared to 2016 primarily due to higher contract revenues from out-licensing agreements.

Cost of Product Sales
Cost of product sales increased in the three months ended March 31, 2017 compared to the same period in 2016. Gross margin as a percentage of net product sales was 93.3% in the three months ended March 31, 2017 compared to 93.0% for the same periods in 2016. The increase in our cost of product sales in the three months ended March 31, 2017 was primarily due to an increase in product sales. The increase in our gross margin percentage in the three months ended March 31, 2017 was primarily due to a change in product mix. We expect that our gross margin as a percentage of net product sales will not change materially in 2017 compared to 2016.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased in the three months ended March 31, 2017 compared to the same period in 2016, primarily due to an increase in compensation-related expenses of $8.1 million driven by higher headcount, higher marketing and promotion expenses of $2.9 million, primarily driven by costs relating to our narcolepsy general awareness program, Xyrem promotion costs, expenses related to the potential U.S. launch of Vyxeos and an increase in other expenses related to the expansion and support of our business. We expect selling, general and administrative expenses in 2017 to increase compared to 2016, primarily due to an increase in compensation-related expenses driven by higher headcount and

38

increases in expenses related to the potential U.S. launch of Vyxeos, higher promotion costs and patient access and support services for Xyrem, and other expenses related to the expansion and support of our business.
Research and Development Expenses
Research and development expenses consist primarily of costs related to clinical studies and outside services, personnel expenses 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,
 
2017
 
2016
Clinical studies and outside services
$
22,931

 
$
18,556

Personnel expenses
16,655

 
10,228

Other
5,342

 
2,468

Total
$
44,928

 
$
31,252

Research and development expenses increased by $13.7 million in the three months ended March 31, 2017 compared to the same period in 2016 primarily due to higher personnel costs. Personnel expenses increased by $6.4 million in the three months ended March 31, 2017 compared to the same period in 2016, primarily due to salary and benefit-related expenses (including share-based compensation) primarily driven by increased headcount in support of our development programs and, to a lesser extent, increased headcount due to the Celator Acquisition in the third quarter of 2016. Clinical studies and outside services costs increased in the three months ended March 31, 2017 compared to the same period in 2016 primarily due to higher expenses in respect of our rolling NDA submission for Vyxeos, which was completed in March 2017, and higher expenses incurred for development our sleep product candidates.
For 2017 and beyond, we expect that our research and development expenses will continue to increase from historical levels particularly as we prepare for a number of anticipated regulatory submissions, initiate and undertake additional clinical trials and related development work and potentially acquire rights to additional product candidates. A discussion of the risks and uncertainties with respect to our research and development activities, including completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Acquired In-Process Research and Development
Acquired in-process research and development, or IPR&D, expense in the three months ended March 31, 2016 related to an upfront payment of $8.8 million we made in connection with the acquisition of intellectual property and know-how related to recombinant crisantaspase.
Intangible Asset Amortization
Intangible asset amortization increased in the three months ended March 31, 2017 compared to the same period in 2016 primarily due to the commencement of amortization of the Defitelio U.S. intangible asset upon FDA approval in March 2016, partially offset by the impact of foreign exchange rates on euro-denominated assets. Intangible asset amortization is expected to increase in 2017 compared to 2016, subject to FDA approval of Vyxeos and commencement of amortization of the related intangible asset.

39

Interest Expense, Net
In July 2016, we entered into the amended credit agreement, which provides for a revolving credit facility of $1.25 billion, of which $1.0 billion was drawn to partially fund the Celator Acquisition of which $700.0 million remained outstanding as of March 31, 2017, and a $750.0 million term loan facility, of which $703.8 million principal amount remained outstanding as of March 31, 2017. Interest expense, net increased by $6.7 million in the three months ended March 31, 2017 compared to the same period in 2016, primarily due to the increase in our average debt balance and increased interest rates on borrowings under the amended credit agreement as compared to the 2015 credit agreement. We expect interest expense will be higher in 2017 compared to 2016 primarily due to the increase in our average debt balance.
Foreign Exchange Loss
The foreign currency loss in the three months ended March 31, 2017 primarily related to the translation of euro-denominated net monetary liabilities, including intercompany balances, held by subsidiaries with a U.S. dollar functional currency.
Income Tax Provision
Our income tax provision was $29.2 million in the three months ended March 31, 2017 compared to $32.3 million for the same period in 2016. The effective tax rate was 25.2% for the three months ended March 31, 2017 compared to 29.9% in the same period in 2016. The decrease in the effective tax rate for the three months ended March 31, 2017, compared to the same period in 2016, was primarily due to changes in income mix among the various jurisdictions in which we operate. The effective tax rate for the three months ended March 31, 2017 was higher than the Irish statutory rate of 12.5% primarily due to income taxable at a rate higher than the Irish statutory rate, unrecognized tax benefits, and various expenses not deductible for tax purposes, partially offset by originating tax credits and deductions available in relation to subsidiary equity.
Equity in Net Loss of Investee
Equity in net loss of investee relates to our share in the net loss of a company in which we have made an investment accounted for under the equity method of accounting.

Liquidity and Capital Resources
As of March 31, 2017, we had cash, cash equivalents and investments of $407.0 million, borrowing availability under our revolving credit facility of $550.0 million and long-term debt principal balance of $2.0 billion. Our long-term debt included $703.8 million aggregate principal amount term loan, $700.0 million in outstanding borrowings under our revolving credit facility and $575.0 million principal amount of the 2021 Notes. We generated cash flows from operations of$164.5 million during the three months ended March 31, 2017, and we expect to continue to generate positive cash flows from operations during 2017.
We believe that our existing cash balances, cash we expect to generate from operations and funds available under our revolving credit facility will be sufficient to fund our operations and to meet our existing obligations for the foreseeable future. The adequacy of our cash resources depends on many assumptions, including primarily our assumptions with respect to product sales and expenses, as well as the other risk factors under the headings “Xyrem is our largest selling product, and our inability to maintain or increase sales of Xyrem would have a material adverse effect on our business, financial condition, results of operations and growth prospects,” “The launch of a generic version of Xyrem or other sodium oxybate products that compete with Xyrem would adversely affect sales of Xyrem” “The distribution and sale of Xyrem are subject to significant regulatory oversight and restrictions and the requirements of a risk evaluation and mitigation strategy, and these restrictions and requirements, as well as the potential impact of changes to these restrictions and requirements, subject us to increased risks and uncertainties, any of which could negatively impact sales of Xyrem” and “To continue to grow our business, we will need to commit substantial resources, which could result in future losses or otherwise limit our opportunities or affect our ability to operate our business.” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. Our assumptions may prove to be wrong or other factors may adversely affect our business, and as a result we could exhaust or significantly decrease our available cash resources, and we may not be able to generate sufficient cash to service our debt obligations which could, among other things, force us to raise additional funds and/or force us to reduce our expenses, either of which could have a material adverse effect on our business.
To continue to grow our business over the longer term, we plan to commit substantial resources to product acquisition and in-licensing, product development, clinical trials of product candidates and expansion of our commercial, manufacturing and other operations. In this regard, we have evaluated and expect to continue to evaluate a wide array of strategic transactions as part of our strategy to acquire or in-license and develop additional products and product candidates. Acquisition

40

opportunities that we pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition, we may pursue new operations or continue the expansion of our existing operations. Accordingly, we expect to continue to opportunistically seek access to additional capital to license or acquire additional products, product candidates or companies to expand our operations or for general corporate purposes. Raising additional capital could be accomplished through one or more public or private debt or equity financings, collaborations or partnering arrangements. Any equity financing would be dilutive to our shareholders, and the consent of the lenders under the amended credit agreement could be required for certain financings.
In November 2016, our board of directors authorized a new 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 million, exclusive of any brokerage commissions. 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. In the three months ended March 31, 2017, we spent a total of $13.9 million to purchase 0.1 million of our ordinary shares under the share repurchase program at an average total purchase price, including commissions, of $117.65 per share.
The following table presents a summary of our cash flows for the periods indicated (in thousands):
 
Three Months Ended
March 31,
 
2017
 
2016
Net cash provided by operating activities
$
164,540

 
$
151,654

Net cash used in investing activities
(3,574
)
 
(11,995
)
Net cash used in financing activities
(181,674
)
 
(152,458
)
Effect of exchange rates on cash and cash equivalents
1,740

 
3,794

Net decrease in cash and cash equivalents
$
(18,968
)
 
$
(9,005
)
Net cash provided by operating activities of $164.5 million for the three months ended March 31, 2017 related to net income of $86.5 million, adjusted for non-cash items of $47.0 million primarily related to intangible asset amortization and share-based compensation expense and a net cash inflow of $31.0 million related to changes in operating assets and liabilities. Net cash provided by operating activities of $151.7 million for the three months ended March 31, 2016 related to net income of $75.8 million, adjusted for non-cash items of $60.2 million primarily related to intangible asset amortization and share-based compensation expense and a net cash inflow of $15.6 million related to changes in operating assets and liabilities.
Net cash used in investing activities for the three months ended March 31, 2017 related to purchases of property and equipment. Net cash used in investing activities for the three months ended March 31, 2016 primarily related to an upfront payment of $8.8 million to acquire IPR&D and purchases of property and equipment of $2.5 million.
Net cash used in financing activities for the three months ended March 31, 2017 primarily related to repayment of borrowings under our revolving credit facility of $150.0 million, payment of employee withholding taxes of $14.4 million related to share-based awards, repurchase of ordinary shares under our share repurchase program of $13.9 million and repayment of our term loan principal of $9.0 million, partially offset by proceeds from employee equity incentive and purchase plans of $5.7 million. Net cash used in financing activities for the three months ended March 31, 2016 primarily related to repurchase of ordinary shares under our prior share repurchase program of $134.4 million, payment of employee withholding taxes of $12.5 million related to share-based awards and repayment of our term loan principal of $9.4 million, partially offset by proceeds from employee equity incentive and purchase plans of $3.8 million.
Credit Agreement
On June 18, 2015, Jazz Pharmaceuticals plc, as guarantor, and certain of our wholly owned subsidiaries, as borrowers, entered into the 2015 credit agreement that provided for a $750.0 million principal amount term loan, which was drawn in full at closing, and a $750.0 million revolving credit facility, of which $160.0 million was drawn at closing and subsequently repaid. We used the proceeds from initial borrowings under the 2015 credit agreement to repay in full the $893.1 million principal amount of term loans outstanding under the previous credit agreement, and to pay related fees and expenses. The previous credit agreement was terminated upon repayment of the term loans outstanding thereunder.
On July 12, 2016, Jazz Pharmaceuticals plc, as guarantor, and certain of our wholly owned subsidiaries, as borrowers, entered into Amendment No. 1 to our 2015 credit agreement. The amended credit agreement provides for a revolving credit facility of $1.25 billion, which replaces the revolving credit facility of $750.0 million provided for under the 2015 credit agreement, and a $750.0 million term loan facility, of which $703.8 million principal amount was outstanding as of March 31,

41

2017. We used the proceeds of $1.0 billion of loans under the revolving credit facility, of which $700.0 million was outstanding as of March 31, 2017, together with cash on hand, to fund the Celator Acquisition, and we expect to use the proceeds from future loans under the revolving credit facility, if any, for general corporate purposes, including corporate development activities.
Under the amended credit agreement, the term loan matures on July 12, 2021 and the revolving credit facility terminates, and any loans outstanding thereunder become due and payable, on July 12, 2021.
Borrowings under the amended credit agreement bear interest, at our option, at a rate equal to either (a) the LIBOR rate, plus an applicable margin ranging from 1.50% to 2.25% per annum, based upon our secured leverage ratio, or (b) the prime lending rate, plus an applicable margin ranging from 0.50% to 1.25% per annum, based upon our secured leverage ratio. The revolving credit facility has a commitment fee payable on the undrawn amount ranging from 0.25% to 0.35% per annum based upon our secured leverage ratio.
Jazz Pharmaceuticals plc and certain of our wholly owned subsidiaries are borrowers under the amended credit agreement. The borrowers’ obligations under the amended credit agreement and any hedging or cash management obligations entered into with a lender are guaranteed on a senior secured basis by Jazz Pharmaceuticals plc and certain of our subsidiaries (including the issuer of the 2021 Notes as described below) and are secured by substantially all of Jazz Pharmaceuticals plc’s, the borrowers’ and the guarantor subsidiaries’ assets.
We may make voluntary prepayments of principal at any time without payment of a premium. We are required to make mandatory prepayments of the term loan (without payment of a premium) with (1) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (2) net cash proceeds from issuances of debt (other than certain permitted debt), and (3) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions).
Principal repayments of the term loan, which are due quarterly, began in December 2016 and are equal to 5.0% per annum of the principal amount outstanding on July 12, 2016 of $721.9 million during the first two years, 7.5% per annum during the third year, 10.0% per annum during the fourth year and 12.5% per annum during the fifth year, with any remaining balance payable on the maturity date.
The amended credit agreement contains financial covenants that require Jazz Pharmaceuticals plc and its restricted subsidiaries to not (a) exceed a maximum secured net leverage ratio or (b) fall below a cash interest coverage ratio. We were, as of March 31, 2017, and are currently, in compliance with these financial covenants.
Exchangeable Senior Notes
In August 2014, Jazz Pharmaceuticals plc, through our wholly owned finance subsidiary Jazz Investments I Limited, completed a private placement of $575.0 million principal amount of the 2021 Notes. The 2021 Notes are the senior unsecured obligations of Jazz Investments I Limited and are fully and unconditionally guaranteed on a senior unsecured basis by Jazz Pharmaceuticals plc. Interest on the 2021 Notes is payable semi-annually in cash in arrears on February 15 and August 15 of each year, beginning on February 15, 2015, at a rate of 1.875% per year. In certain circumstances, we may be required to pay additional amounts as a result of any applicable tax withholding or deductions required in respect of payments on the 2021 Notes. The 2021 Notes mature on August 15, 2021, unless earlier exchanged, repurchased or redeemed.
The holders of the 2021 Notes have the ability to require us to repurchase all or a portion of their 2021 Notes for cash in the event we undergo certain fundamental changes, such as specified change of control transactions, our liquidation or dissolution or the delisting of our ordinary shares from The NASDAQ Global Select Market. Prior to August 15, 2021, we may redeem the 2021 Notes, in whole but not in part, subject to compliance with certain conditions, if we have, or on the next interest payment date would, become obligated to pay to the holder of any 2021 Note additional amounts as a result of certain tax-related events. We also may redeem the 2021 Notes on or after August 20, 2018, in whole or in part, if the last reported sale price per ordinary share has been at least 130% of the exchange price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide the notice of redemption.
The 2021 Notes are exchangeable at an initial exchange rate of 5.0057 ordinary shares per $1,000 principal amount of 2021 Notes, which is equivalent to an initial exchange price of approximately $199.77 per ordinary share. Upon exchange, the 2021 Notes may be settled in cash, ordinary shares or a combination of cash and ordinary shares, at our election. Our intent and policy is to settle the principal amount of the 2021 Notes in cash upon exchange. The exchange rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain make-whole fundamental changes occurring prior to the maturity date of the 2021 Notes or upon our issuance of a notice of redemption, we will in certain circumstances increase the exchange rate for holders of the 2021 Notes who elect to exchange

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their 2021 Notes in connection with that make-whole fundamental change or during the related redemption period. Prior to February 15, 2021, the 2021 Notes will be exchangeable only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.

Contractual Obligations
The table below presents a summary of our contractual obligations as of March 31, 2017 (in thousands): 
 
Payments Due By Period
Contractual Obligations (1)
Total
 
Less than
1 Year
 
1-3 Years  
 
3-5 Years  
 
More than
  5 years  
Term loan - principal
$
703,828

 
$
36,094

 
$
108,281

 
$
559,453

 
$
—

Term loan - interest (2)
90,845

 
23,650

 
43,536

 
23,659

 
—

2021 Notes - principal
575,000

 
—

 
—

 
575,000

 
—

2021 Notes - interest (3)
48,516

 
10,781

 
21,563

 
16,172

 
—

Revolving credit facility - principal
700,000

 
—

 
—

 
700,000

 
—

Revolving credit facility - interest (2)
88,635

 
21,514

 
40,956

 
26,165

 
—

Revolving credit facility - commitment fee (4)
8,358

 
1,952

 
3,909

 
2,497

 
—

Commitment to equity method investees
30,000

 
7,000

 
14,000

 
9,000

 
—

Purchase obligations (5)
33,073

 
31,912

 
430

 
475

 
256

Operating and facility lease obligations (6)
122,089

 
15,101

 
22,503

 
18,875

 
65,610

Total
$
2,400,344

 
$
148,004

 
$
255,178

 
$
1,931,296

 
$
65,866

 __________________________
(1)
This table does not include potential future milestone payment or royalty obligations to third parties under asset purchase, product development, license and other agreements as the timing and likelihood of such milestone payments are not known, and, in the case of royalty obligations, as the amount of such obligations are not estimable. In 2014, we signed a definitive agreement with Aerial under which we acquired worldwide development, manufacturing and commercial rights to JZP-110 (other than in certain jurisdictions in Asia where SK retains rights). Aerial and SK are currently eligible to receive milestone payments up to an aggregate of $270 million based on development, regulatory and sales milestones and tiered royalties from high single digits to mid-teens based on potential future sales of JZP-110. In July 2016, we entered into an agreement with Pfenex Inc., or Pfenex, under which Pfenex granted us worldwide rights to develop and commercialize multiple early-stage hematology product candidates. The agreement also includes an option for us to negotiate a license for a recombinant pegaspargase product candidate with Pfenex. Under the agreement, Pfenex received upfront, option and development milestone payments totaling $15.8 million and may be eligible to receive additional payments of up to $165 million based on the achievement of development, regulatory and sales milestones. Potential future milestone payments to other third parties under other agreements could be up to an aggregate of $256 million, of which up to $120 million will become due and payable to Perrigo Company plc (formerly Elan Pharmaceuticals, Inc.) in tiered contingent payments, with the first such payment becoming due if net sales of Prialt of at least $75 million are achieved in a calendar year. The remainder would become due and payable to other third parties upon the achievement of certain developmental, clinical, regulatory and/or commercial milestones, the timing and likelihood of which are not known. We are also obligated under these agreements to pay royalties on net sales of certain products at specified rates, which royalties are dependent on future product sales and are not provided for in the table above as they are not estimable.
(2)
Estimated interest for variable rate debt was calculated based on the interest rates in effect as of March 31, 2017. The interest rates for our term loan and revolving credit facility borrowings were 2.98% and 2.88%, respectively, as of March 31, 2017. Interest that is fixed, associated with our interest rate swaps, is calculated based on the fixed interest swap rate as of March 31, 2017.
(3)
We used the fixed interest rate of 1.875% to estimate interest owed on the 2021 Notes as of March 31, 2017 until the final maturity date in August 2021.
(4)
Our revolving credit facility has a commitment fee payable on the undrawn amount ranging from 0.25% to 0.35% per annum based upon our secured leverage ratio. In the table above, we used a rate of 0.35% and assumed undrawn amounts of $550.0 million as of March 31, 2017 to estimate commitment fees owed.
(5)
Consists primarily of non-cancelable commitments to third party manufacturers.
(6)
Consists primarily of the minimum lease payments for our office buildings and automobile lease payments for our sales force, including a lease agreement we entered into in January 2015 to lease office space located in Palo Alto, California.  We expect to occupy this office space by the end of 2017.  We are obligated to make lease payments totaling

43

approximately $88 million over the initial term of the lease.  Not included in the table above are our estimated costs of approximately $20 million associated with the design, development and construction of tenant improvements under this lease agreement, which estimate does not include a tenant improvement allowance to be provided by the landlord. Operating expenses associated with our leased office buildings are also not included in table above.
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. In addition, our liability for unrecognized tax benefits has been excluded from the above contractual obligations table as the nature and timing of future payments, if any, cannot be reasonably estimated. We do not anticipate that the amount of our existing liability for unrecognized tax benefits will significantly change in the next twelve months.

Critical Accounting Estimates
To understand our financial statements, it is important to understand our critical accounting estimates. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in determining the amounts to be deducted from gross revenues, in particular estimates of government rebates, which include Medicaid and TRICARE rebates, and estimated product returns. Significant estimates and assumptions are also required to determine whether to capitalize intangible assets, the amortization periods for identifiable intangible assets, the potential impairment of goodwill and other intangible assets, income taxes and share-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable. Although we believe our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made.
Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2016. Our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.

Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s current plans, objectives, estimates, expectations and intentions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “propose,” “intend,” “continue,” “potential,” “possible,” “foreseeable,” “likely,” “unforeseen” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other risk factors in greater detail under Part II, Item 1A of this Quarterly Report on Form 10-Q. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our plans, objectives, estimates, expectations and intentions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results and the timing of events may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we undertake no obligation to update or supplement any forward-looking statements publicly, or to update or supplement the reasons that actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Except as set forth below, during the three months ended March 31, 2017, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Swap Agreements and Interest Rate Risk. We are exposed to risks associated with changes in interest rates in connection with our term loan and borrowings under our revolving credit facility. On July 12, 2016, we entered into the amended credit agreement, which provides for a revolving credit facility of $1.25 billion replacing our prior revolving credit facility of $750.0 million, and a $750.0 million term loan facility, of which $703.8 million principal amount was outstanding as of March 31, 2017. We used the proceeds of $1.0 billion of loans under the revolving credit facility, of which $700.0 million was outstanding as of March 31, 2017, together with cash on hand, to fund the Celator Acquisition. To achieve a desired mix of floating and fixed interest rates on our term loan, we entered into interest rate swap agreements in March 2017 that are designated as cash flow hedges. The interest rate swap agreements have a notional amount of $300.0 million and are effective from March 3, 2017 through July 12, 2021 and convert the floating rate on a portion of our term loan to a fixed rate of 1.895%, plus the borrowing spread. The impact of a hypothetical increase or decrease in interest rates on the fair value of our interest rate swap contracts would be offset by a change in the value of the underlying liability. If interest rates were to increase or decrease by 1%, interest expense for the remainder of 2017 would increase or decrease by $8.4 million, based on the unhedged portion of our outstanding variable rate borrowings.
     
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We have carried out an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2017.
Limitations on the Effectiveness of Controls.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
Changes in Internal Control over Financial Reporting.  During the quarter ended March 31, 2017, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

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PART II – OTHER INFORMATION

Item 1.
Legal Proceedings
Xyrem ANDA Matters Relating to the First ANDA Filer. On October 18, 2010, we received a notice of Paragraph IV Patent Certification, or Paragraph IV Certification, from West-Ward Pharmaceuticals Corp. (a wholly owned subsidiary of Hikma Pharmaceuticals PLC), which acquired Roxane Laboratories, Inc., or West-Ward, that it had submitted an abbreviated new drug application, or ANDA, to the U.S. Food and Drug Administration, or FDA, requesting approval to market a generic version of Xyrem. West-Ward’s initial notice alleged that three patents then listed for Xyrem in the FDA’s publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” or Orange Book, on the date of the notice are invalid, unenforceable or not infringed by West-Ward’s proposed generic product. On November 22, 2010, we filed a lawsuit against West-Ward in response to West-Ward’s initial notice in the U.S. District Court for the District of New Jersey, or the District Court, in which we sought a permanent injunction to prevent West-Ward from introducing a generic version of Xyrem that would infringe our patents. Additional patents covering Xyrem have been issued both before and since December 2010, and after receiving Paragraph IV Certification notices from West-Ward with respect to those patents, we filed additional lawsuits against West-Ward to include these additional patents in the litigation. All of the lawsuits filed against West-Ward between 2010 and 2012 were consolidated by the District Court into a single case, which we refer to as the first West-Ward consolidated case. In the first West-Ward consolidated case, we alleged that 10 of our patents covering Xyrem are or will be infringed by West-Ward’s ANDA and sought a permanent injunction to prevent West-Ward from launching a generic version of Xyrem that would infringe these patents.
After receiving additional Paragraph IV Certification notices from West-Ward, we filed three actions against West-Ward in the District Court on February 20, 2015, June 1, 2015 and January 27, 2016 that were consolidated by the District Court into a second case, which we refer to as the second West-Ward consolidated case. In the second West-Ward consolidated case, we alleged that five of our patents covering Xyrem are or will be infringed by West-Ward’s ANDA and sought a permanent injunction to prevent West-Ward from introducing a generic version of Xyrem that would infringe those patents.
In December 2013, the District Court permitted West-Ward to amend its answer in the first West-Ward consolidated case to allege certain equitable defenses, and the parties were given additional time for discovery on those new defenses. In addition, in March 2014, the District Court granted our motion to bifurcate and stay the portion of the first West-Ward consolidated case regarding patents related to the distribution system for Xyrem, or the risk evaluation and mitigation strategy, or REMS, patents.
In July 2016, the District Court determined that it would try all of the patents at issue in the first and second West-Ward consolidated cases together, including the REMS patents that were previously bifurcated and stayed, and set trial in this combined consolidated case for the second quarter of 2017. In the first quarter of 2017, the District Court bifurcated and stayed the part of the combined consolidated case involving the REMS patents. Also in the first quarter of 2017, the FDA approved West-Ward’s ANDA with a REMS that is separate from the Xyrem REMS.
On August 12, 2016, we filed a lawsuit against West-Ward in the District Court in which we alleged that an additional later-issued REMS patent is or will be infringed by West-Ward’s ANDA and sought a permanent injunction to prevent West-Ward from introducing a generic version of Xyrem that would infringe that patent. In September 2016, West-Ward moved to dismiss the lawsuit.
On April 5, 2017, we entered into a settlement agreement and related agreements resolving our patent infringement litigation against West-Ward in the District Court. On April 10, 2017, the District Court approved an order dismissing the litigation. We have released West-Ward from all claims asserting that patents covering Xyrem are or would be infringed by the West-Ward ANDA, and West-Ward has released us from all claims asserting that the patents covering Xyrem are unenforceable, unpatentable, invalid or not infringed by the generic version of Xyrem covered by West-Ward’s ANDA. In accordance with legal requirements, we and West-Ward have submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review. For more information regarding the settlement agreement with West-Ward, see “Overview—Significant Developments Affecting Our Business” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

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Xyrem ANDA Matters Relating to Second Filers. On December 10, 2012, we received notice of Paragraph IV Certification from Amneal Pharmaceuticals, LLC, or Amneal, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On January 18, 2013, we filed a lawsuit against Amneal in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Amneal’s ANDA and seeking a permanent injunction to prevent Amneal from introducing a generic version of Xyrem that would infringe these patents. On November 21, 2013, we received notice of Paragraph IV Certification from Par Pharmaceutical, Inc., or Par, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On December 27, 2013, we filed a lawsuit against Par in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Par’s ANDA and seeking a permanent injunction to prevent Par from introducing a generic version of Xyrem that would infringe these patents.
In April 2014, Amneal asked the District Court to consolidate its case with the Par case, stating that both cases would proceed on the schedule for the Par case. The District Court granted this request in May 2014. The order consolidating the cases extended Amneal’s 30-month stay period to coincide with the date of Par’s 30-month stay period. The stay expired on May 20, 2016.
Additional patents covering Xyrem have issued since April 2014 and have been listed in the Orange Book for Xyrem. Amneal and Par have given us additional notices of Paragraph IV Certifications regarding such patents, and we have filed additional lawsuits against Amneal and Par in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Amneal’s and Par’s ANDAs and seeking a permanent injunction to prevent Amneal and Par from introducing a generic version of Xyrem that will infringe these patents. In March 2016, Par moved to dismiss claims involving our patents covering a part of the Xyrem label that instructs prescribers on adjusting the dose of Xyrem when it is being co-administered with divalproex sodium (also known as valproate or valproic acid), or our method of administration patents relating to a drug-drug interaction, or DDI patents. In August 2016, we and Par stipulated to dismiss claims relating to our patents covering the formulation of Xyrem on the grounds that Par had notified FDA that it had converted its Paragraph IV Certifications to a Paragraph III Certification.
On June 4, 2014, we received a notice of Paragraph IV Certification from Ohm Laboratories Inc., formerly known as Ranbaxy, Inc., or Ohm, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On July 15, 2014, we filed a lawsuit against Ohm in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Ohm’s ANDA and seeking a permanent injunction to prevent Ohm from introducing a generic version of Xyrem that will infringe these patents. Since June 2014, we have received additional notices of Paragraph IV Certification from Ohm regarding newly issued patents for Xyrem listed in the Orange Book, and we have filed additional lawsuits against Ohm in the District Court alleging that our patents covering Xyrem are infringed or will be infringed by Ohm’s ANDA and seeking a permanent injunction to prevent Ohm from introducing a generic version of Xyrem that will infringe these patents. In May 2016, the Ohm litigation was settled as described below. In the first quarter of 2017, the FDA tentatively approved the ANDAs of Amneal and Ohm.
On October 30, 2014, we received a notice of Paragraph IV Certification from Teva Pharmaceutical Industries Ltd., formerly known as Watson Laboratories, Inc., or Teva, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On December 11, 2014, we filed a lawsuit against Teva in the District Court alleging that our patents covering Xyrem are or will be infringed by Teva’s ANDA and seeking a permanent injunction to prevent Teva from introducing a generic version of Xyrem that would infringe these patents. In March 2015, Teva moved to dismiss the portion of the case based on our Orange Book-listed REMS patents on the grounds that these patents do not cover patentable subject matter. In November 2015, the District Court administratively terminated this motion to dismiss (without prejudice) pending the outcome of inter partes review, or IPR, proceedings before the Patent Trial and Appeal Board, or PTAB, relating to the patents that were the subject of Teva’s motion. Since March 2015, we have received an additional notice of Paragraph IV Certification from Teva regarding newly issued patents for Xyrem listed in the Orange Book, and we have filed an additional lawsuit against Teva in the District Court alleging that our patents covering Xyrem are or will be infringed by Teva’s ANDA and seeking a permanent injunction to prevent Teva from introducing a generic version of Xyrem that would infringe these patents.
In April 2015, the District Court issued an order that consolidated all then-pending lawsuits against Amneal, Par, Ohm and Teva into one case.

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On June 8, 2015, we received a Paragraph IV Certification from Wockhardt Bio AG, or Wockhardt, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On July 17, 2015, we filed a lawsuit in the District Court alleging that our patents covering Xyrem were or would be infringed by Wockhardt’s ANDA and seeking a permanent injunction to prevent Wockhardt from introducing a generic version of Xyrem that would infringe our patents. On November 26, 2015, we received an additional notice of Paragraph IV Certification from Wockhardt regarding newly issued patents listed in the Orange Book, and we filed an additional lawsuit against Wockhardt in the District Court alleging that our patents covering Xyrem were or would be infringed by Wockhardt’s ANDA and seeking a permanent injunction to prevent Wockhardt from introducing a generic version of Xyrem that would infringe these patents. In April 2016, the Wockhardt litigation was settled as set forth below.
On July 23, 2015, we received a Paragraph IV Certification from Lupin Inc., or Lupin, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. On September 2, 2015, we filed a lawsuit in the District Court alleging that our patents covering Xyrem are or will be infringed by Lupin’s ANDA and seeking a permanent injunction to prevent Lupin from introducing a generic version of Xyrem that would infringe our patents.
In January, April and June 2016, the District Court issued orders consolidating all of the cases then pending against Amneal, Par, Ohm, Teva, Wockhardt and Lupin into a single case for all purposes. No trial date has been set in that consolidated case.
Additional patents covering Xyrem have issued since June 2016 and have been listed in the Orange Book for Xyrem. We have received additional Paragraph IV notices from Amneal regarding such patents and have filed new lawsuits in the District Court, alleging that our additional patents covering Xyrem are or will be infringed by Amneal’s ANDA and seeking a permanent injunction to prevent Amneal from introducing a generic version of Xyrem that would infringe our patents.
We entered into settlement agreements with Wockhardt and Ohm on April 18, 2016 and May 9, 2016, respectively, that resolved our patent litigation against Wockhardt and Ohm. Under the settlement agreements, we granted each of Wockhardt and Ohm a license to manufacture, market, and sell its generic version of Xyrem on or after December 31, 2025, or earlier depending on the occurrence of certain events. The specific terms of the settlement agreements are confidential.
The settlements with Wockhardt and Ohm do not resolve the litigation against Amneal, Par, Teva and Lupin, which is ongoing. We cannot predict the specific timing or outcome of events in this matter with respect to the remaining defendants or the impact of developments involving any specific parties or patents on other ongoing proceedings with any ANDA filer.
Xyrem Post-Grant Patent Review Matters. In January 2015, certain of the ANDA filers filed petitions for IPR with respect to the validity of the six REMS patents. In July 2016, the PTAB issued final decisions that the claims of these six patents are unpatentable; as a result, if the United States Court of Appeals for the Federal Circuit upholds those decisions on appeal, these claims will be canceled. We have filed notices of appeal with respect to these IPR decisions to the United States Court of Appeals for the Federal Circuit. In September 2015, certain of the ANDA filers filed a petition for IPR with respect to the validity of an additional REMS patent. In March 2016, the PTAB partially instituted an IPR on three claims of a seventh REMS patent, declining to review 25 of 28 claims. In March 2017, the PTAB issued a final decision that the three claims that were reviewed by the PTAB are unpatentable. We have not yet decided whether to appeal that ruling.
In October 2015, Ohm and Par filed petitions for IPR with respect to the validity of one of our DDI patents, and Amneal filed an IPR petition on the same patent in February 2016. In April 2016, the PTAB denied Par’s petition in its entirety and issued a decision on Ohm’s petition, instituting an IPR trial with respect to 16 of the claims under the patent subject to this petition and denying the petition with respect to the other 18 claims. In July 2016, the PTAB denied Amneal’s petition in its entirety. In March 2016, Ohm filed a petition for IPR with respect to the validity of the second of our DDI patents. In connection with settlement of our litigation with Ohm, both of the IPR petitions filed by Ohm were terminated.
In December 2015, Wockhardt filed a petition for IPR with respect to the validity of one of our patents covering the formulation of Xyrem. In connection with settlement of our patent litigation with Wockhardt, this IPR petition was terminated.
We cannot predict whether additional post-grant patent review challenges will be filed by any of the ANDA filers or any other entity, the outcome of any pending IPR or other proceeding, the outcome of any appeal of the July 2016 IPR decisions with respect to the six REMS patents or the impact any IPR or other proceeding might have on ongoing ANDA litigation proceedings or other aspects of our Xyrem business.

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Shareholder Litigation Matters Relating to Celator Acquisition. On June 21, 2016, a putative class-action lawsuit challenging our acquisition of Celator Pharmaceuticals, Inc., or Celator, captioned Dunbar v. Celator Pharmaceuticals, Inc., or the Dunbar action, was filed in the Superior Court of New Jersey. We refer to our acquisition of Celator in this report as the Celator Acquisition. The complaint was filed against Celator, each member of the Celator board of directors, Jazz Pharmaceuticals plc and our wholly owned subsidiary Plex Merger Sub, Inc., or Plex. The complaint generally alleges that the Celator directors breached their fiduciary duties in connection with the Celator Acquisition, and that Jazz Pharmaceuticals plc and Plex aided and abetted these alleged breaches of fiduciary duty. The complaint also generally asserts that the Celator directors breached their fiduciary duties to Celator’s public stockholders by, among other things, (i) agreeing to sell Celator to us at an inadequate price, (ii) implementing an unfair process, (iii) agreeing to certain provisions of the merger agreement for the Celator Acquisition that allegedly favored us and deterred alternative bids, and (iv) failing to disclose purportedly material information in Celator’s Schedule 14D-9 filing with the U.S. Securities and Exchange Commission, or SEC. The plaintiff sought, among other things, an injunction against the consummation of the Celator Acquisition and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees.
Between June 27, 2016 and June 29, 2016, two putative class-action lawsuits challenging the Celator Acquisition, captioned Palmisciano v. Celator Pharmaceuticals, Inc., or the Palmisciano action, and Barreto v. Celator Pharmaceuticals, Inc., or the Barreto action, were filed in the District Court. The complaints were filed against Celator and each member of the Celator board of directors. The complaints assert causes of action under sections 14 and 20 of the Securities Exchange Act of 1934, as amended, predicated on Celator’s and the Celator directors’ alleged failure to disclose purportedly material information in Celator’s Schedule 14D-9 filing with the SEC. The plaintiffs sought, among other things, an injunction against the consummation of the Celator Acquisition and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees. Neither Jazz Pharmaceuticals plc nor Plex were named defendants in these actions.
On July 6, 2016, the defendants to the Dunbar action, the Palmisciano action and the Barreto action entered into a memorandum of understanding, or MOU, regarding settlement of these actions with the plaintiffs. The MOU outlines the terms of the parties’ agreement in principle to settle and release all claims which were or could have been asserted in these actions. In consideration for such settlement and release, the parties to these actions agreed, among other things, that Celator would amend its Schedule 14D-9 to include certain supplemental disclosures. The Schedule 14D-9 was amended by Celator on July 6, 2016, and the Celator Acquisition was completed on July 12, 2016. The settlement remains subject to, among other items, confirmatory discovery, the execution of a stipulation of settlement by the parties, final approval of the settlement by the District Court in the Barreto action and dismissal with prejudice of the Dunbar action and the Palmisciano action.
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.

Item 1A.
Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly imp