Jazz Pharmaceuticals(JAZZ) - 2024 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Jazz Pharmaceuticals PLC's unaudited condensed consolidated financial statements and related notes for Q1 2024 and Q1 2023 Condensed Consolidated Balance Sheets This table presents the condensed consolidated balance sheets for Jazz Pharmaceuticals PLC as of March 31, 2024, and December 31, 2023 Balance Sheet Highlights | Metric | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $11,327,075 | $11,393,359 | $(66,284) | | Cash and cash equivalents | $1,443,385 | $1,506,310 | $(62,925) | | Investments | $375,000 | $120,000 | $255,000 | | Total current assets | $3,539,898 | $3,435,428 | $104,470 | | Intangible assets, net | $5,235,496 | $5,418,039 | $(182,543) | | Total Liabilities | $7,628,594 | $7,648,659 | $(20,065) | | Total current liabilities | $1,562,206 | $1,536,692 | $25,514 | | Long-term debt, less current portion | $5,105,111 | $5,107,988 | $(2,877) | | Total Shareholders' Equity | $3,696,461 | $3,736,997 | $(40,536) | Condensed Consolidated Statements of Income (Loss) This table presents the condensed consolidated statements of income (loss) for the three months ended March 31, 2024 and 2023 Income Statement Highlights | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Total revenues | $901,983 | $892,812 | $9,171 | 1% | | Total operating expenses | $835,776 | $766,757 | $69,019 | 9% | | Income from operations | $66,207 | $126,055 | $(59,848) | (47)% | | Net income (loss) | $(14,618) | $69,420 | $(84,038) | (121)% | | Net income (loss) per ordinary share - Basic | $(0.23) | $1.09 | $(1.32) | (121)% | | Net income (loss) per ordinary share - Diluted | $(0.23) | $1.04 | $(1.27) | (122)% | Condensed Consolidated Statements of Comprehensive Income (Loss) This table presents the condensed consolidated statements of comprehensive income (loss) for the three months ended March 31, 2024 and 2023 Comprehensive Income Highlights | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Net income (loss) | $(14,618) | $69,420 | $(84,038) | | Other comprehensive income (loss) | $(40,247) | $145,279 | $(185,526) | | Total comprehensive income (loss) | $(54,865) | $214,699 | $(269,564) | Condensed Consolidated Statements of Shareholders' Equity This table presents the condensed consolidated statements of shareholders' equity for the three months ended March 31, 2024 and 2023 Shareholders' Equity Highlights | Metric | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Shareholders' Equity | $3,696,461 | $3,736,997 | $(40,536) | | Additional paid-in capital | $3,714,283 | $3,699,954 | $14,329 | | Accumulated other comprehensive loss | $(882,394) | $(842,147) | $(40,247) | | Retained earnings | $864,038 | $878,656 | $(14,618) | Condensed Consolidated Statements of Cash Flows This table presents the condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 Cash Flow Highlights | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Net cash provided by operating activities | $267,229 | $320,708 | $(53,479) | | Net cash used in investing activities | $(271,904) | $(4,822) | $(267,082) | | Net cash used in financing activities | $(56,552) | $(29,788) | $(26,764) | | Net increase (decrease) in cash and cash equivalents | $(62,925) | $286,429 | $(349,354) | | Cash and cash equivalents, at end of period | $1,443,385 | $1,167,911 | $275,474 | Notes to Condensed Consolidated Financial Statements This section provides detailed notes to the condensed consolidated financial statements, explaining significant accounting policies and financial instrument details 1. The Company and Summary of Significant Accounting Policies This note describes Jazz Pharmaceuticals plc's business, key products, and significant accounting policies - Jazz Pharmaceuticals plc is a global biopharmaceutical company focused on developing life-changing medicines for serious diseases, with a diverse portfolio in sleep disorders, epilepsy, and cancer treatments[21][30] - Key marketed products include Neuroscience therapies like Xywav, Xyrem, and Epidiolex/Epidyolex, and Oncology treatments such as Rylaze/Enrylaze, Zepzelca, Defitelio/defibrotide, and Vyxeos[26] - The business remains significantly dependent on oxybate revenues (Xywav and Xyrem), facing risks from competition (authorized generics, Avadel's Lumryz), pricing pressure, and intellectual property challenges[33] - The company manages foreign currency transaction risk and interest rate risk using derivatives, with outstanding foreign exchange forward contracts totaling $537.1 million and interest rate swap contracts totaling $500.0 million as of March 31, 2024[37] - Five customers accounted for 78% of gross accounts receivable as of March 31, 2024, with ESSDS at 41%, McKesson at 12%, and ASD at 12%[38] - The company relies on single-source suppliers for most products, product candidates, and active pharmaceutical ingredients (APIs), including oxybate products[39] 2. Cash and Available-for-Sale Securities This note details the composition of cash, cash equivalents, and available-for-sale securities, including interest income Cash and Investments Breakdown | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------ | :----------------------------- | :------------------------------- | | Cash | $444,140 | $437,724 | | Time deposits | $585,000 | $420,000 | | Money market funds | $789,245 | $768,586 | | Totals | $1,818,385 | $1,626,310 | | Cash and cash equivalents | $1,443,385 | $1,506,310 | | Investments | $375,000 | $120,000 | - Interest income from available-for-sale securities increased to $23.3 million in Q1 2024 from $10.6 million in Q1 2023[41] 3. Fair Value Measurement This note provides fair value measurements for various assets and liabilities, categorized by valuation input levels Fair Value Measurements | Asset/Liability Type | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Assets: | | | | Money market funds (Level 1) | $789,245 | $768,586 | | Time deposits (Level 2) | $585,000 | $420,000 | | Interest rate contracts (Level 2) | $5,464 | $3,784 | | Foreign exchange forward contracts (Level 2) | $708 | $18,035 | | Total Assets | $1,380,417 | $1,210,405 | | Liabilities: | | | | Interest rate contracts (Level 2) | $0 | $3,410 | | Foreign exchange forward contracts (Level 2) | $357 | $681 | | Total Liabilities | $357 | $4,091 | - The estimated fair values of the 2024 Notes, 2026 Notes, Secured Notes, and Dollar Term Loan as of March 31, 2024, were approximately $566 million, $1.0 billion, $1.4 billion, and $2.7 billion, respectively, estimated using Level 2 quoted market prices[45] 4. Derivative Instruments and Hedging Activities This note describes the company's use of derivative instruments for managing foreign currency and interest rate risks - The company uses foreign exchange forward contracts (notional $537.1 million as of March 31, 2024) to manage foreign currency transaction risk and interest rate swap agreements (notional $500.0 million) to manage interest rate risk on variable rate debt[47][48] Derivative Instruments Summary | Derivative Type | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | Derivative Assets: | | | | Interest rate contracts | $5,464 | $3,784 | | Foreign exchange forward contracts | $708 | $18,035 | | Total Derivative Assets | $6,172 | $21,819 | | Derivative Liabilities: | | | | Interest rate contracts | $0 | $3,410 | | Foreign exchange forward contracts | $357 | $681 | | Total Derivative Liabilities | $357 | $4,091 | - Foreign exchange contracts not designated as hedging instruments resulted in a loss of $(4.086) million in Q1 2024, compared to a gain of $4.275 million in Q1 2023[48] - Cash flow hedges for interest rate contracts resulted in a gain of $5.177 million recognized in accumulated other comprehensive income (loss) and a reclassification loss of $(1.356) million to interest expense, net, for Q1 2024[49] 5. Inventories This note provides a breakdown of inventory components, including raw materials, work in process, and finished goods Inventory Composition | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------ | :----------------------------- | :------------------------------- | | Raw materials | $17,769 | $25,595 | | Work in process | $390,882 | $431,732 | | Finished goods | $168,670 | $139,712 | | Total inventories | $577,321 | $597,039 | - Inventories included $297.3 million (March 31, 2024) and $328.0 million (December 31, 2023) related to the purchase accounting inventory fair value step-up from the GW Acquisition[53] 6. Goodwill and Intangible Assets This note details the carrying amounts of goodwill and intangible assets, along with estimated amortization expenses Goodwill and Intangible Assets Summary | Asset Type | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Goodwill | $1,739,495 | $1,753,130 | | Acquired developed technologies, net | $5,235,496 | $5,418,039 | | Manufacturing contracts, net | $0 | $0 | | Trademarks, net | $0 | $0 | | Total finite-lived intangible assets, net | $5,235,496 | $5,418,039 | - The decrease in goodwill and intangible assets is primarily due to negative foreign currency translation adjustments, mainly from the weakening of sterling against the U.S. dollar[54] Estimated Amortization Expense | Year Ending December 31, | Estimated Amortization Expense (in thousands) | | :----------------------- | :------------------------------------------ | | 2024 (remainder) | $466,008 | | 2025 | $621,344 | | 2026 | $621,344 | | 2027 | $621,344 | | 2028 | $620,012 | | Thereafter | $2,285,444 | | Total | $5,235,496 | 7. Certain Balance Sheet Items This note provides a detailed breakdown of property, plant and equipment, other current assets, and accrued liabilities Property, Plant and Equipment, Net | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Property, plant and equipment, net | $166,236 | $169,646 | | Manufacturing equipment and machinery | $85,717 | $82,897 | | Land and buildings | $69,750 | $70,912 | | Leasehold improvements | $69,600 | $67,722 | | Computer software | $38,159 | $38,134 | | Construction-in-progress | $17,274 | $18,661 | | Computer equipment | $16,704 | $15,398 | | Furniture and fixtures | $9,297 | $9,273 | | Less accumulated depreciation and amortization | $(140,265) | $(133,351) | Other Current Assets and Accrued Liabilities | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Other current assets | $314,535 | $320,809 | | Deferred charge for income taxes on intercompany profit | $178,684 | $171,507 | | Other | $135,851 | $149,302 | | Accrued liabilities | $826,530 | $793,914 | | Rebates and other sales deductions | $369,301 | $325,711 | | Employee compensation and benefits | $118,966 | $121,209 | | Consulting and professional services | $39,539 | $19,538 | | Clinical trial accruals | $38,406 | $44,757 | | Accrued interest | $23,392 | $36,443 | | Accrued facilities expenses | $5,333 | $55,455 | 8. Debt This note details the company's various debt instruments, including notes and term loans, and their maturities Debt Summary | Indebtedness Type | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | 2024 Notes, net | $574,376 | $573,954 | | 2026 Notes, net | $994,218 | $993,600 | | Secured Notes | $1,481,011 | $1,480,214 | | Term Loan | $2,660,881 | $2,665,174 | | Total debt | $5,710,486 | $5,712,942 | | Less current portion | $(605,375) | $(604,954) | | Total long-term debt | $5,105,111 | $5,107,988 | - In January 2024, Jazz Lux amended its Credit Agreement, repricing the Dollar Term Loans, resulting in the applicable margin for Tranche B-1 Dollar Term Loans decreasing by 50 basis points to 3.00% (Term SOFR) and 2.00% (prime lending rate)[63] - As of March 31, 2024, the interest rate and effective interest rate on the Tranche B-1 Dollar Term Loans were 8.44% and 9.04%, respectively, with an undrawn Revolving Credit Facility of $500.0 million[63] Scheduled Long-Term Debt Maturities | Year Ending December 31, | Scheduled Long-Term Debt Maturities (in thousands) | | :----------------------- | :----------------------------------------------- | | 2024 (remainder) | $598,250 | | 2025 | $31,000 | | 2026 | $1,031,000 | | 2027 | $31,000 | | 2028 | $2,598,500 | | Thereafter | $1,500,000 | | Total | $5,789,750 | 9. Commitments and Contingencies This note outlines the company's legal proceedings, including antitrust and patent infringement litigations - The company is involved in several legal proceedings, including antitrust litigation related to Xyrem, patent infringement suits against Avadel (Lumryz), Lupin and Teva (Xywav), Alkem (Xyrem), and multiple ANDA filers (Epidiolex)[70][94][104][108][111][114] - In the Xyrem Antitrust Litigation, a jury found Jazz's asserted patents valid and awarded damages for Avadel's past sales of Lumryz, with a motion for permanent injunction and ongoing royalties filed on April 12, 2024[100][101] - Settlement agreements have been reached with Alkem for Xyrem (license to sell generic on or after December 31, 2025) and with Padagis, Teva, and Alkem for Epidiolex (confidential license terms), while litigation against other Epidiolex ANDA filers is ongoing[113][119][120][121][122] - The company filed a lawsuit against FDA challenging the approval of Avadel's Lumryz, alleging FDA acted outside its authority under the Orphan Drug Act by finding Lumryz clinically superior to Xywav and Xyrem[127] - The MSP Litigation, alleging conspiracy to increase Xyrem and Prialt prices, had its initial complaint dismissed, and a motion to dismiss the amended complaint was filed on February 20, 2024[125][126] 10. Shareholders' Equity This note details changes in shareholders' equity, including share repurchase programs and accumulated other comprehensive loss - As of March 31, 2024, $161.4 million remained authorized under the share repurchase program, with no shares repurchased during the three months ended March 31, 2024[129] Accumulated Other Comprehensive Loss (AOCI) Components | Component of AOCI | December 31, 2023 (in thousands) | Other comprehensive income (loss), net (in thousands) | March 31, 2024 (in thousands) | | :------------------------------------------ | :------------------------------- | :---------------------------------------------------- | :----------------------------- | | Net Unrealized Gain From Hedging Activities | $235 | $3,821 | $4,056 | | Foreign Currency Translation Adjustments | $(842,382) | $(44,068) | $(886,450) | | Total Accumulated Other Comprehensive Loss | $(842,147) | $(40,247) | $(882,394) | - Other comprehensive loss for Q1 2024 primarily reflects negative foreign currency translation adjustments due to the weakening of sterling and the euro against the U.S. dollar[130] 11. Net Income (Loss) per Ordinary Share This note presents the calculation of basic and diluted net income (loss) per ordinary share Net Income (Loss) per Ordinary Share Calculation | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $(14,618) | $69,420 | | Weighted-average ordinary shares - basic (in thousands) | 62,537 | 63,494 | | Weighted-average ordinary shares - diluted (in thousands) | 62,537 | 73,771 | | Net income (loss) per ordinary share - Basic | $(0.23) | $1.09 | | Net income (loss) per ordinary share - Diluted | $(0.23) | $1.04 | - Potentially dilutive ordinary shares from Exchangeable Senior Notes (6.42 million) and employee equity incentive plans (3.5 million) were excluded from diluted EPS calculation in Q1 2024 due to their anti-dilutive effect[133] 12. Revenues This note provides a detailed breakdown of revenues by product, geographic source, and major customers Revenue Breakdown by Product | Product/Category | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | % Change | | :------------------------ | :--------------------------------------------- | :--------------------------------------------- | :--------- | | Xywav | $315,300 | $277,761 | 14% | | Xyrem | $64,232 | $178,130 | (64)% | | Epidiolex/Epidyolex | $198,716 | $188,909 | 5% | | Sativex | $2,735 | $7,098 | (61)% | | Total Neuroscience | $580,983 | $651,898 | (11)% | | Rylaze/Enrylaze | $102,750 | $85,927 | 20% | | Zepzelca | $75,100 | $67,181 | 12% | | Defitelio/defibrotide | $47,676 | $39,079 | 22% | | Vyxeos | $32,023 | $36,700 | (13)% | | Total Oncology | $257,549 | $228,887 | 13% | | Other product sales | $3,570 | $3,434 | 4% | | Product sales, net | $842,102 | $884,219 | (5)% | | High-sodium oxybate AG royalty revenue | $49,947 | $2,096 | N/A | | Other royalty and contract revenues | $9,934 | $6,497 | 53% | | Total revenues | $901,983 | $892,812 | 1% | Revenue by Geographic Source | Geographic Source | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | | United States | $808,214 | $810,116 | | Europe | $71,355 | $65,900 | | All other | $22,414 | $16,796 | | Total revenues | $901,983 | $892,812 | Revenue by Major Customer | Customer | Three Months Ended March 31, 2024 (% of total revenues) | Three Months Ended March 31, 2023 (% of total revenues) | | :------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | ESSDS | 42% | 51% | | McKesson | 12% | 12% | | Cardinal Health, Inc. | 8% | 10% | 13. Share-Based Compensation This note details share-based compensation expense by category and information on RSU and PRSU grants Share-Based Compensation Expense | Expense Category | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Selling, general and administrative | $40,213 | $37,402 | | Research and development | $18,831 | $15,492 | | Cost of product sales | $2,397 | $3,458 | | Total share-based compensation expense, pre-tax | $61,441 | $56,352 | | Income tax benefit from share-based compensation expense | $(3,399) | $(8,619) | | Total share-based compensation expense, net of tax | $58,042 | $47,733 | RSU/PRSU Grants | RSU/PRSU Type | Q1 2024 Grants (in thousands) | Q1 2024 Grant Date Fair Value | Q1 2023 Grants (in thousands) | Q1 2023 Grant Date Fair Value | | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Restricted Stock Units (RSUs) | 1,955 | $118.89 | 1,571 | $146.20 | | Performance-Based RSUs (PRSUs) | 297 | $136.19 | 252 | $158.13 | - As of March 31, 2024, unrecognized compensation cost for unvested RSUs, PRSUs, ESPP, and share options totaled $435.9 million, $51.5 million, $8.3 million, and $0.3 million, respectively, to be recognized over weighted-average periods of 3.0, 1.8, 1.1, and 0.5 years[140] 14. Income Taxes This note discusses income tax expense, contested assessments, and the impact of Ireland's Global Minimum Tax Pillar Two rules - Income tax expense was $11.7 million for Q1 2024, primarily due to tax deficiencies from share-based compensation, a shift from a $15.3 million income tax benefit in Q1 2023[141] - The company is contesting proposed additional Luxembourg income tax assessments of approximately $24.2 million for the years 2017-2019[143] - The company is within the scope of Ireland's Global Minimum Tax Pillar Two rules, effective January 1, 2024, and expects to be subject to top-up tax for its Irish operations, though the impact in 2024 is not significant[144] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, growth strategy, R&D pipeline, and key risks Overview This section provides an overview of Jazz Pharmaceuticals' business, growth strategy, and key marketed products - Jazz Pharmaceuticals is a global biopharmaceutical company focused on developing life-changing medicines for serious diseases, with a diverse portfolio in sleep disorders, epilepsy, and cancer treatments[147] - The company's growth strategy centers on strong commercial execution, expanding and advancing its R&D pipeline, strategic corporate development, and delivering robust financial performance, aligned with its Vision 2025[148][149][150] - Key marketed products include Xywav, Xyrem, Epidiolex/Epidyolex in Neuroscience, and Rylaze/Enrylaze, Zepzelca, Defitelio/defibrotide, and Vyxeos in Oncology, approved in various global markets[151][153] Neuroscience This section details the performance and market position of key neuroscience products like Xywav and Epidiolex/Epidyolex - Xywav, a low-sodium oxybate, is a standard of care for narcolepsy and the first and only FDA-approved therapy for idiopathic hypersomnia (IH), holding Orphan Drug Exclusivity (ODE) for narcolepsy through July 2027 and for IH through August 2028[154][156][157] - As of Q1 2024, approximately 12,950 patients were taking Xywav, including 9,900 for narcolepsy (up 9% YoY) and 3,050 for IH (up 53% YoY)[159] - Epidiolex/Epidyolex, acquired in May 2021, is approved for seizures associated with Lennox-Gastaut syndrome (LGS), Dravet syndrome (DS), and tuberous sclerosis complex (TSC) in patients one year of age or older in the U.S. and other markets[160] Oncology This section highlights the performance and development of oncology products such as Rylaze, Zepzelca, Defitelio, and Vyxeos - Rylaze, approved by FDA in June 2021, is the only recombinant erwinia asparaginase manufactured product approved in the U.S. for ALL/LBL patients hypersensitive to E. coli-derived asparaginase, and received EC marketing authorization in September 2023 under the trade name Enrylaze[161][162] - Zepzelca is approved for metastatic small cell lung cancer (SCLC) with disease progression on or after platinum-based chemotherapy, and the company is collaborating with Roche on a Phase 3 trial for first-line extensive stage SCLC[162] - Defitelio is the first and only approved treatment for severe hepatic veno-occlusive disease (VOD) following hematopoietic stem cell transplantation (HSCT), while Vyxeos treats newly-diagnosed therapy-related acute myeloid leukemia (t-AML) or AML with myelodysplasia-related changes (AML-MRC)[163][164] Research and Development Progress This section outlines advancements in the company's R&D pipeline, including zanidatamab and other neuroscience programs - The company is advancing zanidatamab, a bispecific HER2 antibody, with a rolling BLA submission for accelerated approval in second-line HER2-amplified biliary tract cancer (BTC) completed in March 2024, and Phase 3 trials are ongoing for first-line HER2-positive gastroesophageal adenocarcinoma (GEA) and BTC[166] - Oncology pipeline includes JZP815 (pan-RAF kinase inhibitor, Phase 1) and JZP898 (conditionally-activated IFNα INDUKINE™ molecule, Phase 1)[169][170] - Neuroscience R&D includes a Phase 3 trial of Epidyolex in Japan, Phase 2 trials for suvecaltamide (JZP385) for essential tremor and Parkinson's disease tremor, and early-stage development of JZP324 (extended-release low sodium oxybate)[171][172] - The JZP441 (orexin-2 receptor agonist) program is paused due to safety findings related to visual disturbances and cardiovascular effects, but the company remains committed to orexin-2 agonist development with a backup program[173] Operational Excellence This section describes the company's focus on building competitive advantages through agile commercialization and customer engagement - The company focuses on building competitive advantages through an agile commercialization engine, strengthening customer-focused market expertise, and refining customer engagement via in-person and digital initiatives[177] Other Challenges, Risks and Trends Related to Our Business This section discusses key challenges and risks, including dependence on oxybate revenues, generic competition, and regulatory scrutiny - The business remains substantially dependent on oxybate revenues (Xywav and Xyrem), with no guarantee that revenues will remain at current levels due to competition from authorized generics (AGs) and Avadel's Lumryz[178][180][181] - Xywav and Xyrem face competition from AG versions of high-sodium oxybate launched by Hikma (January 2023) and Amneal (July 2023), with Hikma paying royalties for up to four years[181][182] - Epidiolex/Epidyolex faces future generic competition, with notices from ten ANDA filers received in late 2022, and ongoing litigation[184] - The company is subject to increasing healthcare cost containment and drug pricing scrutiny, including impacts from the Inflation Reduction Act of 2022, which could negatively affect product pricing and revenues[190] - Government investigations and litigation related to business practices, including Xywav/Xyrem REMS and patent litigation settlements, could result in significant monetary charges and reputational harm[192] Results of Operations This section analyzes the company's financial performance, including revenue and expense trends, and the shift in net income Key Financial Metrics | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | % Change | | :-------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | | Product sales, net | $842,102 | $884,219 | (5)% | | Royalties and contract revenues | $59,881 | $8,593 | N/A | | Cost of product sales (excluding amortization) | $95,487 | $128,644 | (26)% | | Selling, general and administrative | $351,712 | $297,917 | 18% | | Research and development | $222,847 | $189,410 | 18% | | Intangible asset amortization | $155,730 | $149,786 | 4% | | Acquired in-process research and development | $10,000 | $1,000 | N/A | | Interest expense, net | $66,116 | $74,147 | (11)% | | Foreign exchange (gain) loss | $1,693 | $(3,193) | (153)% | | Income tax expense (benefit) | $11,669 | $(15,324) | (176)% | | Equity in loss of investees | $1,347 | $1,005 | 34% | - Total revenues increased by 1% to $902.0 million in Q1 2024, driven by a significant increase in high-sodium oxybate AG royalty revenue (from $2.1 million to $49.9 million) and growth in Xywav, Rylaze, Zepzelca, and Defitelio sales, partially offset by a 64% decrease in Xyrem sales[196][198][199][201] - Operating expenses increased by 9% to $835.8 million, primarily due to higher selling, general and administrative (SGA) expenses (up 18% due to compensation, marketing, and litigation costs) and research and development (R&D) expenses (up 18% due to zanidatamab, JZP385 programs, and personnel costs)[195][203][207] - Net income shifted from a $69.4 million gain in Q1 2023 to a $14.6 million loss in Q1 2024, largely due to decreased income from operations and increased income tax expense[13][195] Liquidity and Capital Resources This section discusses the company's cash position, investments, debt, and cash flow activities for the period - As of March 31, 2024, the company had $1.8 billion in cash, cash equivalents, and investments, $500.0 million in revolving credit facility availability, and a long-term debt principal balance of $5.8 billion[214] - Net cash provided by operating activities decreased by $53.5 million to $267.2 million in Q1 2024, primarily due to a $52.2 million payment of accrued facility expenses[221][222] - Net cash used in investing activities increased by $267.1 million to $271.9 million in Q1 2024, driven by a $255.0 million net increase in investment acquisitions and a $10.0 million upfront payment for the KRAS Inhibitor Program[221][223] - Net cash used in financing activities increased by $26.8 million to $56.6 million in Q1 2024, mainly due to a $20.7 million decrease in proceeds from employee equity incentive plans and a $6.0 million increase in employee withholding taxes related to share-based awards[221][223] - The company believes existing cash, investments, and operating cash flows, along with the Revolving Credit Facility, will be sufficient to fund operations and meet obligations for the foreseeable future, but acknowledges risks related to debt servicing and capital access[216][217] Critical Accounting Estimates This section highlights critical accounting estimates involving significant judgments and assumptions, particularly for revenue deductions and valuations - Critical accounting estimates involve significant judgments and assumptions, particularly in determining deductions from gross revenues, acquisition and valuation of intangibles, and income taxes, where actual results may differ[228] Cautionary Note Regarding Forward-Looking Statements This section warns that forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from projections, including inability to maintain oxybate sales, competition, regulatory restrictions, supply chain issues, R&D failures, and healthcare cost containment pressures[230][231] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to the company's market risk disclosures were reported for the three months ended March 31, 2024 - No material changes to market risk disclosures were reported for the three months ended March 31, 2024[235] Item 4. Controls and Procedures Management concluded that disclosure controls were effective, with no material changes to internal control over financial reporting during Q1 2024 - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[236] - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2024[238] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section incorporates detailed information on legal proceedings by reference from Note 9, Commitments and Contingencies - Legal proceedings information is incorporated by reference from Note 9, Commitments and Contingencies[239] Item 1A. Risk Factors This section details supplemental risk factors, focusing on supply chain disruptions, single-source supplier reliance, and manufacturing complexities - The company faces risks from delays or problems in product supply, loss of single-source suppliers, and failure to comply with manufacturing regulations, which could materially affect business and financial results[241] - Reliance on single-source suppliers for most products and APIs, including oxybate products, creates a risk of supply interruption if a supplier fails or refuses to provide materials[243] - Manufacturing Epidiolex/Epidyolex and other cannabinoid product candidates involves complex processes from cultivation to packaging, requiring strict GMP compliance and chemical consistency, with potential for delays or supply interruptions[245] - The sole supplier for zanidatamab is based in the People's Republic of China, introducing potential manufacturing and supply-chain risks due to regulatory and political structures or international relations[248] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds were reported[250] Item 5. Other Information This section summarizes insider trading arrangements, including a Rule 10b5-1 plan modification for an executive Rule 10b5-1 Plan Modification | Name and Position | Date | Action | Rule 10b5-1 | Expiration Date | Total Ordinary Shares to be Sold | | :------------------------------------------------- | :----------- | :----------- | :---------- | :-------------- | :------------------------------- | | Robert Iannone, Executive Vice President, Global Head of Research and Development | March 7, 2024 | Modification | X | March 7, 2025 | 10,681 | Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including key corporate documents and certifications - The exhibits include key corporate documents such as the Transaction Agreement (February 3, 2021), Amended and Restated Memorandum and Articles of Association (August 4, 2016), and Indenture (April 29, 2021)[254] - Recent additions include an Offer Letter to Philip Johnson (January 30, 2024) and an Amended and Restated Non-Employee Director Compensation Policy (approved April 25, 2024)[254] - Certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Rules 13a-14(a), 15d-14(a), and 18 U.S.C. Section 1350) are also included[254] SIGNATURES This section contains the signatures of the registrant's authorized officers, certifying the filing of the report on May 2, 2024 - The report was signed by Bruce C. Cozadd (Chairman and CEO), Philip L. Johnson (EVP and CFO), and Patricia Carr (SVP, Chief Accounting Officer) on May 2, 2024[258]