Jazz Pharmaceuticals plc Proxy Statement 2018 Annual Report J a z z P h a r m a c e u t i c a l s p l c P r o x y S t a t e m e n t — 2 0 1 8 A n n u a l R e p o r t June 14, 2019 DEAR SHAREHOLDERS, Over the last year, Jazz Pharmaceuticals has continued to deliver life-changing medicines to patients across the world. With four globally marketed products, more than 20 active or planned research and development programs across two key therapeutic areas and access to three innovative platform technologies, the company is well positioned for sustainable long-term growth. In the past five years, we generated approximately $3 billion in cash from operations, allowing us to invest significantly in R&D and corporate development transactions to diversify and expand our commercial and development portfolios with differentiated products and product candidates. In our sleep therapeutic area, we remain dedicated to expanding available options for patients suffering from chronic and debilitating sleep disorders. In 2018 and early 2019, our significant accomplishments included: • U.S. Food and Drug Administration (FDA) approval of Xyrem® (sodium oxybate) oral solution for the treatment of cataplexy or excessive daytime sleepiness (EDS) in children and adolescents with narcolepsy. Narcolepsy is often underdiagnosed, especially in children, and we are pleased Xyrem is now available for narcolepsy patients seven years of age and older. • Announcement of positive top-line results from our Phase 3 study evaluating the efficacy and safety of JZP-258 for the treatment of EDS and cataplexy in adult patients with narcolepsy. JZP-258 is a novel oxybate product candidate with a 92% reduction in sodium content compared to Xyrem. Given the extensive body of evidence linking excessive consumption of sodium to increased risk of stroke, cardiovascular disease and other adverse outcomes, we believe this reduction in sodium represents a significant benefit for patients on chronic therapy. We are focused on submitting a New Drug Application package for JZP-258 to the FDA and look forward to bringing this new therapeutic option to narcolepsy patients. • Initiation of a Phase 3 study of JZP-258 in idiopathic hypersomnia, a sleep disorder characterized by chronic and disabling EDS for which there are no approved therapies. • FDA approval of Sunosi™ (solriamfetol) in March 2019. Sunosi is the first dual-acting dopamine and norepinephrine reuptake inhibitor approved to treat EDS in adults living with narcolepsy or OSA. MEET JACKIE Our patient story highlights Jackie. In 2002, Jackie was diagnosed with obstructive sleep apnea (OSA), a highly prevalent disease in which excessive daytime sleepiness (EDS) is a major presenting complaint. EDS can negatively impact the lives of people living with OSA at work, at home or in daily activities. Prior to her diagnosis, Jackie was working full-time as a nurse practitioner while raising four children with her husband. During this time in her life, Jackie struggled with EDS and would fall asleep during daily activities and even while driving, regardless of how much sleep she obtained. After her diagnosis, Jackie received Continuous Positive Airway Pressure (CPAP) therapy to manage her OSA. Despite CPAP therapy, Jackie’s EDS persisted and she struggled to stay awake during the day. Jackie’s doctor advised her of a clinical trial for Sunosi (known then as JZP-110) which, at that time, was an investigational medicine under evaluation for patients with excessive sleepiness associated with OSA or with narcolepsy. Jackie had a positive clinical trial experience with Sunosi which she credits for allowing her to stay alert throughout the day. In March 2019, the U.S. Food and Drug Administration (FDA) approved Sunosi™ (solriamfetol) to improve wakefulness in adults living with EDS associated with narcolepsy or OSA.1 The patient story shared in this communication depicts an individual patient’s response to our medicine and is not representative of all patient responses. 1 Jazz expects Sunosi will be commercially available in the U.S. in July 2019. • Submission of a marketing authorization application to the European Medicines Agency for solriamfetol as a treatment to improve wakefulness in adult patients with EDS associated with narcolepsy or OSA. In our hematology/oncology therapeutic area, we are committed to growing and advancing our R&D pipeline, including leveraging multiple technologies and approaches to develop innovative cancer therapies. In 2018 and early 2019, our key advancements included: • European Union (EU) approval of Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion for the treatment of adults with newly diagnosed, therapy- related acute myeloid leukemia (t-AML) or AML with myelodysplasia-related changes and initiation of a rolling launch of the product in key European countries. • Initiation of multiple clinical studies of Vyxeos alone and in combination with other therapeutic agents for AML and myelodysplastic syndrome. • Advancement of two ongoing studies of Defitelio® (defibrotide sodium) in the prevention and treatment of life-threatening conditions associated with endothelial cell damage. • Initiation of Investigational New Drug (IND)-enabling activities for one of our solid tumor opportunities, as well as pre-IND exploration of several other hematologic targets, all using our CombiPlex® technology. • Advancement of our recombinant crisantaspase program aimed at developing a new asparaginase product with a potentially improved target product profile and reliable supply chain. • Initiation of a collaboration with Codiak BioSciences, Inc. focused on the research, development and commercialization of exosome therapeutics to treat cancer. This novel therapeutic approach complements our development efforts using our CombiPlex platform as well as our ongoing collaboration with ImmunoGen, Inc. using its antibody drug conjugate technology. 2018 FINANCIAL HIGHLIGHTS In 2018, we delivered strong top- and bottom-line growth with total revenues increasing 17% to $1.9 billion and adjusted earnings per share of $13.708, a 24% increase compared to 2017. In 2018, we invested $197 million in non-GAAP R&D9 and returned $524 million of capital to shareholders through share repurchases. At the end of 2018, we had $2.4 billion in capital available for deployment to support corporate development activities and further diversification of our commercial and R&D portfolios. 2019 AND BEYOND In 2019, we anticipate strong top-line growth and a substantial increase in our investments to support our R&D efforts and key growth initiatives, including the launch of Sunosi in the U.S. this year and its potential launch in the EU next year. Our R&D investments are critical to advancing multiple early-, mid- and late-stage clinical programs that will support future products or expanded indications for existing products. We continue to explore opportunities offering highly differentiated products and product candidates with the potential to provide new therapeutic options to patients and a meaningful return to shareholders. In closing, I thank you for your continued support as we focus on transforming biopharmaceutical discoveries into novel medicines. With over 1,400 employees around the globe, we are committed to conducting our business with the utmost integrity while making a meaningful contribution to the communities where we operate. Most importantly, I would like to thank the many patients who inspire us each day and are the driving force behind our dedication and mission to deliver important, new treatment options. Sincerely, Bruce C. Cozadd Chairman and Chief Executive Officer GROWING R&D PIPELINE PRE-CLINICAL PHASE 1 PHASE 2 PHASE 3 REGULATORY Oxybate Once Nightly Formulation CombiPlex Solid tumors candidate Vyxeos + gemtuzumab4 R/R AML or HMA Failure MDS Vyxeos + venetoclax5 Low Intensity Dosing for unfit AML (Phase 1/2) Defitelio Prevention of aGvHD JZP-258 Cataplexy & EDS in narcolepsy Solriamfetol EU EDS in OSA and Narcolepsy Defitelio5 Treatment of TA-TMA JZP-258 Idiopathic hypersomnia CombiPlex Hem/Onc exploratory activities Vyxeos4,5 Low Intensity Dosing for higher risk MDS Defitelio5 Prevention of CAR-T associated neurotoxicity Defitelio Prevention of VOD Asparaginase ALL/other hematological malignancies IMGN7792 CD33+ AML Vyxeos + venetoclax4 de novo or R/R AML Vyxeos7 AML or HR-MDS (AML19) Recomb. Pegaspargase2 Hematological malignancies IMGN6322 CD123+ Hematological malignancies6 Vyxeos5,7 MDS Vyxeos7 AML or HR-MDS (AML18) Defitelio Exploratory activities Exosome NRAS candidate3 Hematological malignancies Exosome STAT3 candidate3 Hematological malignancies Exosome-based candidates3 Solid tumors/Hematological malignancies Vyxeos7 R/R AML (COG) 2 Opt-in opportunity, 3 Jazz & Codiak collaboration, 4 Jazz & MD Anderson Cancer Center collaboration study, 5 Planned , 6 Including AML and BPDCN, 7 Cooperative group study aGvHD = Acute Graft-vs-Host Disease, ALL = Acute Lymphoblastic Leukemia, BPDCN = Blastic Plasmacytoid Dendritic Cell Neoplasm, CAR-T = Chimeric Antigen Receptor T-cell Therapy, COG = Children’s Oncology Group, HMA = Hypomethylating Agent, HR-MDS = High-Risk MDS, MDS = Myelodysplastic Syndrome, R/R = Relapsed/Refractory, TA-TMA = Transplant Associated Thrombotic Microangiopathy, VOD = Hepatic Veno-occlusive Disease Sleep Hematology/Oncology STRONG FINANCIAL EXECUTION TOTAL REVENUES $ in millions (audited) NON-GAAP ADJUSTED NET INCOME PER DILUTED SHARE8 (unaudited) TOTAL ADJUSTED SG&A and R&D9 $ in millions (unaudited) $1,891 $1,488 $1,619 $1,325 $13.70 $9.45 $10.14 $11.04 R&D SG&A $745 10% 29% $452 7% 27% $551 10% 27% $617 10% 28% 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 12.6% 3 YEAR CAGR 13.2% 3 YEAR CAGR 18.1% 3 YEAR CAGR 8 Reconciliations of GAAP net income per diluted share to non-GAAP adjusted net income per diluted share can be found on page 52 of the enclosed Proxy Statement. 9 Reconciliations of GAAP selling, general and administrative (SG&A) and research and development (R&D) expenses to adjusted SG&A and R&D expenses can be found after the last page of the enclosed Annual Report on Form 10-K for the year ended December 31, 2018. CAGR = Compound Annual Growth Rate Percentages provided are R&D as a % of total revenues and SG&A as a % of total revenues JAZZ PHARMACEUTICALS PUBLIC LIMITED COMPANY Registered in Ireland – No. 399192 Fifth Floor, Waterloo Exchange Waterloo Road Dublin 4, Ireland NOTICE OF 2019 ANNUAL GENERAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 1, 2019 y x o r P Dear Shareholder: You are cordially invited to attend the 2019 annual general meeting of shareholders (the “annual meeting”) of Jazz Pharmaceuticals plc, a public limited company formed under the laws of Ireland (the “company”). The annual meeting will be held on Thursday, August 1, 2019, at 10:30 a.m. local time at our corporate headquarters located at Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland, for the following purposes: 1. 2. 3. To elect by separate resolutions each of the four nominees for director named in the accompanying proxy statement (the “proxy statement”) to hold office until the 2022 annual meeting of shareholders (Proposal 1). To ratify, on a non-binding advisory basis, the appointment of KPMG, Dublin, or KPMG, as the independent auditors of the company for the fiscal year ending December 31, 2019 and to authorize, in a binding vote, the board of directors, acting through the audit committee, to determine the independent auditors’ remuneration (Proposal 2). To approve, on a non-binding advisory basis, the compensation of the company’s named executive officers, or NEOs, as disclosed in the accompanying proxy statement (Proposal 3). 4. To conduct any other business properly brought before the annual meeting. Proposals 1, 2 and 3 are ordinary resolutions, requiring the affirmative vote of a majority of the votes cast (in person or by proxy) at the annual meeting. In addition to the above proposals, the annual meeting will also receive and consider the company’s Irish statutory financial statements for the fiscal year ended December 31, 2018 and the reports of the directors and auditors thereon. There is no requirement under Irish law that the Irish statutory financial statements be approved by the shareholders, and no such approval will be sought at the annual meeting. Under the company’s Amended and Restated Constitution, or our constitution, and the Irish Companies Act 2014, or the 2014 Act, Proposals 1 and 2 are deemed to be ordinary business, and Proposal 3 is deemed to be special business. The annual meeting will also include a review of the company’s affairs. The record date for the annual meeting is June 5, 2019. Only shareholders of record at the close of business on that date may vote at the annual meeting or any adjournment or postponement thereof. A shareholder entitled to attend and vote at the annual meeting is entitled to appoint one or more proxies to attend, speak and vote instead of him or her at the annual meeting, using the proxy card provided (or the form of proxy contained in section 184 of the 2014 Act) or using an electronic proxy card by telephone or via the internet in the manner described in this proxy statement. A proxy need not be a shareholder of record. Important Notice Regarding the Availability of Proxy Materials for the annual meeting of shareholders to be held on August 1, 2019, at 10:30 a.m. local time at our corporate headquarters located at Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. The proxy statement and our annual report are available at https://materials.proxyvote.com/G50871. By order of the board of directors, /s/ Aislinn Doody Aislinn Doody Company Secretary Dublin, Ireland June 14, 2019 You are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please vote as soon as possible. You may vote your shares over the telephone or via the internet. If you received a proxy card or voting instruction card by mail, you may submit your proxy card or voting instruction card by completing, signing, dating and mailing your proxy card or voting instruction card in the envelope provided. Proxy cards must be received by July 31, 2019. Electronic proxy cards submitted via the internet or by telephone must be received by 11:59 p.m., U.S. Eastern Time, on July 31, 2019. It may not be possible to count proxy cards received after the relevant time towards voting. Proxy cards received will be forwarded to the company’s registered office electronically before commencement of the annual meeting to comply with Irish law. Even if you have voted by proxy, you may still vote in person if you attend the meeting. Please note, however, that if the record holder of your ordinary shares is a broker, bank or other agent, and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder. Table of Contents PROXY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 CORPORATE GOVERNANCE AND BOARD MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Independence of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Board Leadership Structure and Risk Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 y x o r P Meetings of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Director Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Information About Board Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Report of the Audit Committee of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Compensation Committee Processes and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Compensation Consultant Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Nominating and Corporate Governance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Other Corporate Governance Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Summary of Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 Description of Compensation Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 Outstanding Equity Awards at Fiscal Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60 Option Exercises and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 Potential Payments upon Termination or Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62 Pay Ratio Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 DIRECTOR COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 PROPOSAL 1 ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 PROPOSAL 2 RATIFY, ON A NON-BINDING ADVISORY BASIS, THE APPOINTMENT OF INDEPENDENT AUDITORS AND AUTHORIZE, IN A BINDING VOTE, THE BOARD OF DIRECTORS, ACTING THROUGH THE AUDIT COMMITTEE, TO DETERMINE THE INDEPENDENT AUDITORS’ REMUNERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 Table of Contents (continued) Independent Registered Public Accounting Firm Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 Pre-Approval Policies and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78 Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78 PROPOSAL 3 NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81 Presentation of Irish Statutory Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81 Registered and Principal Executive Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81 Shareholder Proposals and Director Nominations for the 2020 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81 Householding of Proxy Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81 Annual Report on Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 Special Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 2019 NOTICE OF MEETING AND PROXY STATEMENT PROXY OVERVIEW This overview highlights certain information contained elsewhere in this proxy statement and does not contain all of the information that you should consider. You should read the entire proxy statement carefully before voting. For more complete information regarding our business and 2018 performance, please review our Annual Report on Form 10-K for the year ended December 31, 2018 that we filed with the Securities and Exchange Commission, or SEC, on February 26, 2019, which we refer to throughout this proxy statement as the 2018 Annual Report on Form 10-K. In this proxy statement, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the company,” “we,” “us” and “our” refer to Jazz Pharmaceuticals plc and its consolidated subsidiaries, except when the context makes clear that the time period being referenced is prior to January 18, 2012, in which case such terms are references to Jazz Pharmaceuticals, Inc. and its consolidated subsidiaries. See “General—Basis of Presentation” on page 9 below. y x o r P Meeting and Voting Information Time and Date: 10:30 a.m., local time on Thursday, August 1, 2019 Place: Our corporate headquarters Fifth Floor, Waterloo Exchange Waterloo Road Dublin 4, Ireland You are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please vote as soon as possible. Please see “Questions and Answers About These Proxy Materials and Voting—How Do I Vote?” beginning on page 11 below. Business Overview Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing life-changing medicines for people with limited or no options. As a leader in sleep medicine and with a growing hematology/oncology portfolio, we have a diverse portfolio of products and product candidates in development, 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 United States for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in adult and pediatric patients with narcolepsy; Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the United States and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia who have developed hypersensitivity to E. coli- derived asparaginase; Defitelio® (defibrotide sodium), a product approved in the United States for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome with renal or pulmonary dysfunction following hematopoietic stem cell transplantation, or HSCT, and in Europe (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children undergoing HSCT therapy; and Vyxeos® (daunorubicin and cytarabine) liposome for injection, a product approved in the United States and in Europe (where it is marketed as Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion) for the treatment of adults with newly-diagnosed therapy-related acute myeloid leukemia or acute myeloid leukemia with myelodysplasia-related changes. In March 2019, the FDA approved our new drug application, or NDA, for Sunosi™ (solriamfetol) as a treatment to improve wakefulness in adult patients with EDS associated with narcolepsy or obstructive sleep apnea, and we expect the product will be commercially available in the U.S. in July 2019. We are also seeking approval for solriamfetol in Europe and submitted a marketing authorization application to the European Medicines Agency in the fourth quarter of 2018. JAZZ PHARMACEUTICALS | Proxy Statement 1 Proxy Overview (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT In March 2019, we announced positive top-line results from our Phase 3 study evaluating the efficacy and safety of JZP-258, an oxybate product candidate that contains 92% less sodium than Xyrem, for the treatment of cataplexy and EDS in adult patients with narcolepsy. We expect to submit an NDA for approval of this product by as early as the end of 2019. Our strategy to create shareholder value is focused on: • • • Strong financial execution through growth in sales of our current lead marketed products; Building a diversified product portfolio and development pipeline through a combination of our internal research and development efforts and obtaining rights to clinically meaningful and differentiated on- or near-market products and early- to late-stage product candidates through acquisitions, collaborations, licensing arrangements, partnerships and venture investments; and Maximizing the value of our products and product candidates by continuing to implement our comprehensive global development plans, including through generating additional clinical data and seeking regulatory approval for new indications. In 2018, in support of our strategy, we continued to expand and advance our research and development pipeline in our sleep and hematology/oncology therapeutic areas, both by conducting activities internally and by leveraging partnerships with third parties. Corporate Governance, Human Capital and Social Highlights Director Nominees and Continuing Directors The following table provides summary information about each director nominee and continuing director as of June 1, 2019. See pages 15 to 17 and 71 to 76 for more information. Name 2019 Director Nominees Paul L. Berns Patrick G. Enright Seamus Mulligan Norbert G. Riedel, Ph.D. Continuing Directors Bruce C. Cozadd Peter Gray Heather Ann McSharry Kenneth W. O’Keefe Anne O’Riordan Elmar Schnee Catherine A. Sohn, Pharm.D. Rick E Winningham Age Principal Position Independent Other Current Public Boards 52 57 58 61 55 64 57 52 51 60 66 59 2010(1) Venture Partner, ARCH and Executive Chair, BlackThorn Therapeutics 2009(1) Managing Director, Longitude Capital 2012 Director, Emergent BioSolutions, Inc. 2013 Chief Executive Officer and President, Aptinyx, Inc. 2003(1) Chairman and Chief Executive Officer, Jazz Pharmaceuticals plc 2013 Chairman, UDG Healthcare plc 2013 Director, CRH plc and Greencore Group plc 2004 Managing Director, Beecken Petty O’Keefe & Company 2019 Group Director of Digital, Jardines Matheson Limited 2014 2012 Chairman, Calliditas Therapeutics AB and Santhera Pharmaceuticals Holding AG Chairperson, BioEclipse Therapeutics, Inc., and Director, Rubius Therapeutics and Landec Corporation 2010(1) Chairman and Chief Executive Officer, Theravance Biopharma, Inc. Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes 2 2 1 2 0 1 2 0 0 2 2 1 (1) Includes service on the board of directors of Jazz Pharmaceuticals, Inc., our predecessor. JAZZ PHARMACEUTICALS | Proxy Statement 2 y x o r P 2019 NOTICE OF MEETING AND PROXY STATEMENT Proxy Overview (continued) Director Dashboards We examine the experience and expertise of our board as a whole to ensure alignment between the abilities and contributions of our board and our strategic priorities and long-range plan, emphasizing, among other things, expertise in global and U.S. sales and marketing, in product development, in financial management and in corporate development transactions. All of our directors exhibit high integrity, collegiality, innovative thinking, sound business judgment and a knowledge of corporate governance requirements and practices. The charts below show key skills and experience our directors bring to our boardroom: Sales and Marketing Accounting/Audit 6 7 7 Risk Oversight and Risk Management Talent Development/Culture/HR/Compensation 9 Partner/Alliance Management Senior Leadership/CEO Corporate Development 10 10 11 Our board is substantially independent and has a mix of relatively newer and longer-tenured directors. The charts below show board makeup by various characteristics: Director Independence Tenure Residency Gender 1 3 1 1 3 11 Independent Directors Non-independent 4 5 0-6 years 7-9 years > 9 years 3 7 US Ireland Switzerland Hong Kong 9 Men Women JAZZ PHARMACEUTICALS | Proxy Statement 3 2019 NOTICE OF MEETING AND PROXY STATEMENT Proxy Overview (continued) Corporate Governance Strengths We are committed to exercising good corporate governance practices. We believe that good governance promotes the long-term interests of our shareholders and strengthens board and management accountability. The highlights of our corporate governance practices include the following: • 11 out of 12 of our directors are independent • Director participation in continuing education and related • Regular executive sessions of independent directors • Audit, compensation and nominating and corporate governance reimbursement policy • Lead Independent Director with clearly delineated duties committees are comprised solely of independent directors • Corporate Governance Guidelines • Diverse board in terms of tenure, residency, gender, sexual • Majority voting for elections of directors for a three-year term orientation, experience and skills • Annual board self-evaluation • Share ownership guidelines for directors and executive officers, which increased in May 2018 • Risk oversight by the full board and committees • Anti-hedging/pledging policy • Board and committees may engage outside advisors • Code of Conduct independently of management • Independent compensation consultant reporting directly to the compensation committee • Annual advisory approval of executive compensation • Shareholder ability to call extraordinary meetings(1) (1) Irish law provides that shareholders holding 10% or more of the total voting rights may at any time request that the directors call an extraordinary general meeting (i.e., special meeting). If the directors do not proceed to convene a meeting within a specified period, those shareholders (or any of them representing more than half of the total voting rights of all of them) may themselves convene a meeting within a specified period. For more information, see “Corporate Governance and Board Matters—Other Corporate Governance Matters—Shareholder Ability to Call Extraordinary Meetings.” Human Capital Management We are committed to creating a company where the work culture reflects our core values of integrity, collaboration, passion, innovation and pursuit of excellence. Our strong patient focus is something our employees believe in and pursue every day, and we are committed to acting responsibly, safely and with transparency in our interactions with patients, healthcare providers and other stakeholders in the healthcare system. We strive to create a workplace culture that supports a diverse, multi-cultural workforce, treats individuals fairly, and provides an inclusive environment where all employees are empowered to contribute and succeed. Differences in race, age, gender, sexual orientation, gender identity and thinking style enhance our work environment and allow us to better understand the patients we serve—which is at the core of everything we do. Created and led by our employees, our Employee Diversity and Inclusion program is designed to empower employees to guide and support our strategy and programs related to hiring diverse talent and using education and communication to continue fostering an inclusive environment. We also have a Diversity and Inclusion Delegation, a committee of employees focused on helping to embed diversity and inclusion into all we do. Each year, we conduct an employee feedback survey designed to help us measure overall employee engagement. The feedback employees provide during the survey helps us measure our performance in delivering a positive work experience for employees both at local team levels and across the organization and provides important insight into the areas where we need to focus in the year ahead. Our compensation committee maintains oversight of matters related to human capital management and in that capacity reviews the results of the employee feedback survey. For more information, see the section entitled “Corporate Governance and Board Matters—Board Leadership Structure and Risk Oversight” on page 15. In 2018, our participation rate in the employee feedback survey was approximately 90%. JAZZ PHARMACEUTICALS | Proxy Statement 4 2019 NOTICE OF MEETING AND PROXY STATEMENT Proxy Overview (continued) Corporate Responsibility Highlights Patient Assistance We recognize that many patients today face financial obstacles that keep them from accessing important medications. We are committed to improving patient care through unique patient and physician programs and ongoing collaboration with patients, physicians and advocacy groups. Disease Education As part of our efforts to improve patients’ lives, we provide disease-focused resources that support healthcare providers, patients and caregivers along their journey by helping to increase the understanding of disease risk factors, signs and symptoms, diagnosis and other support services. y x o r P Corporate Giving We view our global corporate giving as an opportunity for us to help improve patients’ lives by filling unmet needs, demonstrating our commitment to the communities we serve, and making an impact through meaningful support to organizations, initiatives, and causes that reflect our mission, values and strategic focus. Medical Education As part of our ongoing efforts to improve patient outcomes, we support medical education through our grant-making program. We are particularly interested in supporting requests from the therapeutic areas of hematology/oncology and sleep and fund a variety of activities, including medical education meetings, conferences and symposia, enduring medical education activities, medical center grand rounds lectures, fellowships, and similar educational activities. Transfers of Value to Healthcare Professionals and Healthcare Organizations In line with local transparency reporting requirements, we disclose on national portals and, in countries that do not have their own national portals, our company website our interactions with healthcare professionals and healthcare organizations. Environment, Health and Safety We seek to operate our manufacturing facilities in an environmentally responsible way to protect our people, our business, our environment and the local communities in which we operate. In light of the potential impact of our business on the environment, we have adopted a number of internal environmental policies and management systems to manage our operations in compliance with applicable laws, directives and regulations on environmental protection and in support of environmental sustainability and local biodiversity. Our environmental policies and management systems include procedures for assessing compliance with applicable environmental laws and regulations and reporting incidents of non-compliance to applicable governmental authorities. For example, the environmental policy governing our manufacturing facility in Athlone, Ireland requires us to minimize resource use (e.g., energy and water) and waste generation, optimize the use of raw materials, and undertake continuous improvement in environmental performance, with an emphasis on pollution prevention. Shareholder Engagement A priority for our board of directors is soliciting and listening to the views of our shareholders on a variety of topics, including our business and growth strategy, corporate governance practices and executive compensation matters. Discussions with our investors have been productive and informative, and have provided valuable feedback to our board of directors to help ensure that our board’s decisions align with shareholder objectives. The graphic under the section entitled “Executive Compensation—Compensation Discussion and Analysis— How We Determine Executive Compensation—2018 Advisory Vote on Executive Compensation and Shareholder Engagement” on page 36 below describes our typical shareholder outreach and engagement cycle. JAZZ PHARMACEUTICALS | Proxy Statement 5 Proxy Overview (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Summary of Shareholder Voting Matters and Board Recommendations For the reasons set forth below and in the rest of this proxy statement, our board of directors recommends that you vote your shares “FOR” each of the nominees named below for director to hold office until the 2022 annual meeting of shareholders and “FOR” both of the other proposals. Proposal 1 — Election of Directors The board of directors recommends a vote “FOR” each of the named nominees. Vote required to elect each nominee to hold office until the 2022 annual meeting of shareholders: Affirmative vote of a majority of the votes cast on his election. For more information, see Proposal 1 starting on page 71. y x o r P We are asking our shareholders to vote, by separate resolutions, on the election of each of Paul L. Berns, Patrick G. Enright, Seamus Mulligan and Norbert G. Riedel to hold office until the 2022 annual meeting of shareholders. Detailed information about each nominee’s background and experience can be found beginning on page 72. Each of the nominees for director was nominated for election by the board of directors upon the recommendation of our nominating and corporate governance committee. Our board of directors believes that each nominee has the specific experience, qualifications, attributes and skills to serve as a member of the board of directors and has demonstrated the ability to devote sufficient time and attention to board duties and to otherwise fulfill the responsibilities required of directors. See “Corporate Governance and Board Matters— Director Commitments” beginning on page 16 for more information Proposal 2 — Ratify, on a Non-Binding Advisory Basis, the Appointment of Independent Auditors and Authorize, in a Binding Vote, the Board of Directors, Acting Through the Audit Committee, to Determine the Independent Auditors’ Remuneration The board of directors recommends a vote “FOR” this proposal. Vote required for approval: Affirmative vote of a majority of the votes cast on the proposal. For more information, see Proposal 2 starting on page 77. Under Irish law, KPMG will be deemed to be reappointed as our independent auditors for the financial year ending December 31, 2019, without needing a shareholder vote at the annual meeting. However, our shareholders are being asked to ratify KPMG’s appointment on a non-binding advisory basis because we value our shareholders’ views on the company’s independent auditors. The board of directors and the audit committee intend to consider the results of this vote in making determinations in the future regarding the appointment of the company’s independent auditors. Our shareholders are also being asked to authorize the board of directors, acting through the audit committee, to determine KPMG’s remuneration. This authorization is required by Irish law. Less than 1% of the total fees that KPMG billed us for services last year were for services other than audit, audit-related and tax compliance services. JAZZ PHARMACEUTICALS | Proxy Statement 6 Proxy Overview (continued) Proposal 3 — Non-Binding Advisory Vote on Executive Compensation 2019 NOTICE OF MEETING AND PROXY STATEMENT The board of directors recommends a vote “FOR” this proposal. Vote required for approval: Affirmative vote of a majority of the votes cast on the proposal. For more information, see Proposal 3 starting on page 79 We are asking our shareholders for advisory approval of our NEOs’ compensation. This non-binding advisory vote is commonly referred to as a “say-on-pay” vote. Our executive compensation program is aligned with our business strategy and priorities and encourages executive officers to work for meaningful shareholder returns consistent with our pay-for-performance philosophy. Our executive compensation program focuses on total compensation, combining short- and long-term components, cash and equity, and fixed and variable payments, in the proportions that we believe are the most appropriate to incentivize and reward our executive officers for achieving our corporate goals while minimizing incentives for excessive risk taking or unethical conduct. Our annual bonus awards are not earned unless pre-determined levels of performance are achieved against annual corporate objectives approved by our board of directors at the beginning of the year. Likewise, our stock option awards will not provide realizable value and our restricted stock unit, or RSU, awards will not provide increased value unless there is an increase in the value of our shares, which benefits all shareholders. We also have executive share ownership guidelines to further support our ownership culture and align the interests of executive officers and shareholders. Our 2018 advisory say-on-pay proposal was approved by approximately 92% of total votes cast. y x o r P JAZZ PHARMACEUTICALS | Proxy Statement 7 Proxy Overview (continued) Index of Frequently Requested Information 2019 NOTICE OF MEETING AND PROXY STATEMENT y x o r P Anti-Hedging/Pledging Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Auditor Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Auditor Tenure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board Meeting Attendance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Code of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Consultant Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Governance Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Biographies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environment, Health and Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Human Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Majority Voting for Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay Ratio Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peer Group Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Procedures for Shareholder Proposals and Director Nominations for the 2020 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Oversight Severance Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share Ownership Guidelines for Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share Ownership Guidelines for Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholder Ability to Call Extraordinary Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholder Communications with the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 23 77 77 22 15 16 23 21 23 5 72 16 15 71 5 4 71 65 34 81 70 15 62 67 50 23 23 JAZZ PHARMACEUTICALS | Proxy Statement 8 2019 NOTICE OF MEETING AND PROXY STATEMENT PROXY STATEMENT FOR THE 2019 ANNUAL GENERAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 1, 2019 GENERAL y x o r P Purpose of this Proxy Statement and Other General Information Our board of directors is soliciting proxies for use at our 2019 annual general meeting of shareholders, or the annual meeting. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the annual meeting. Please read it carefully. The Notice of Internet Availability of Proxy Materials and our proxy materials, which include this proxy statement, our annual letter to shareholders and our 2018 Annual Report on Form 10-K, are first being mailed to shareholders on or about June 18, 2019. Our proxy materials are also available online at https://materials.proxyvote.com/G50871. The specific proposals to be considered and acted upon at the annual meeting are summarized in the accompanying Notice of 2019 Annual General Meeting of Shareholders. Each proposal is described in more detail in this proxy statement. This solicitation is made on behalf of our board of directors and all solicitation expenses, including costs of preparing, assembling and mailing proxy materials and notices, will be borne by us. In addition to these proxy materials, our directors and employees may also solicit proxies in person, by telephone, or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners. In addition, we have retained Alliance Advisors, a proxy solicitation firm, to assist in the solicitation of proxies for a fee of approximately $12,500, plus reimbursement of expenses. Our board of directors has set the close of business on June 5, 2019 as the record date for the annual meeting. Shareholders of record who owned our ordinary shares on that date are entitled to vote at and attend the annual meeting. Each ordinary share is entitled to one vote. There were 56,635,552 of our ordinary shares outstanding and entitled to vote on the record date. Basis of Presentation In this proxy statement, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the company,” “we,” “us,” and “our” refer to Jazz Pharmaceuticals plc and its consolidated subsidiaries, except when the context makes clear that the time period being referenced is prior to January 18, 2012, in which case such terms are references to Jazz Pharmaceuticals, Inc. and its consolidated subsidiaries. On January 18, 2012, the businesses of Jazz Pharmaceuticals, Inc. and Azur Pharma Public Limited Company, or Azur Pharma, were combined in a merger transaction, or the Azur Merger, in connection with which Azur Pharma was re-named Jazz Pharmaceuticals plc, and we became the parent company of and successor to Jazz Pharmaceuticals, Inc., with Jazz Pharmaceuticals, Inc. becoming our wholly owned subsidiary. In addition, on June 12, 2012, we completed our acquisition of EUSA Pharma Inc., which we refer to in this proxy statement as the EUSA Acquisition. In January 2014, we completed our acquisition of a controlling interest in Gentium S.r.l., or Gentium, which we refer to in this proxy statement as the Gentium Acquisition, and, in July 2016, we completed the acquisition of Celator Pharmaceuticals, Inc., which we refer to in this proxy statement as the Celator Acquisition. JAZZ PHARMACEUTICALS | Proxy Statement 9 2019 NOTICE OF MEETING AND PROXY STATEMENT QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING Why am I receiving these materials? Our board of directors is soliciting your proxy to vote at the annual meeting, including at any adjournments or postponements of the annual meeting. This proxy statement contains important information regarding the annual meeting, the proposals on which you are being asked to vote, information you may find useful in determining how to vote and voting procedures. Why did I receive a notice in the mail regarding the internet availability of proxy materials instead of a full set of proxy materials? We are pleased to take advantage of SEC rules that allow companies to furnish their proxy materials over the internet. Most of our shareholders will not receive paper copies of our proxy materials (unless requested), and will instead be sent a Notice of Internet Availability of Proxy Materials, or Notice. All shareholders receiving a Notice will have the ability to access the proxy materials on the website referred to in the Notice and to request a printed set of the proxy materials. Instructions on how to access the proxy materials via the internet or to request a printed set of the proxy materials may be found in the Notice. Why did I receive a full set of proxy materials in the mail instead of a notice regarding the internet availability of proxy materials? We are providing shareholders who have previously requested a printed set of our proxy materials with paper copies of our proxy materials instead of a Notice. What is the annual report included in the proxy materials? Under applicable U.S. securities laws, we are required to send an annual report to security holders along with this proxy statement. We intend to satisfy this annual report requirement by sending the 2018 Annual Report on Form 10-K together with this proxy statement. How do I attend the annual meeting? You are invited to attend the annual meeting to vote on the proposals described in this proxy statement. The annual meeting will be held on Thursday, August 1, 2019, at 10:30 a.m. local time at our corporate headquarters located at Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. For directions to attend the annual meeting in person, please contact our Investor Relations department at +353.1.634.7892 (Ireland) or +1.650.496.2800 (United States) or by email at investorinfo@jazzpharma.com. Information on how to vote in person at the annual meeting is discussed below. However, you do not need to attend the annual meeting to vote your shares. Who can vote at the annual meeting? Only shareholders of record at the close of business on June 5, 2019, the record date for the annual meeting, will be entitled to vote at the annual meeting. Shareholders of Record: Shares registered in your name If, at the close of business on June 5, 2019, your shares were registered directly in your name with our transfer agent, Computershare Trust Company, N.A., then you are a shareholder of record. As a shareholder of record, you may vote in person at the annual meeting or vote by proxy. Whether or not you plan to attend the annual meeting, we urge you to vote by proxy over the telephone or via the internet as instructed below, or, for those shareholders who receive a paper proxy card in the mail, by mailing a completed proxy card. Beneficial Owners: Shares registered in the name of a broker, bank or other agent If, at the close of business on June 5, 2019, your shares were held not in your name, but rather in an account at a brokerage firm, bank or other agent, then you are the beneficial owner of shares held in “street name” and a Notice is being sent to you by that broker, bank or other agent. The broker, bank or other agent holding your account is considered to be the shareholder of record for purposes of voting at the annual meeting. As a beneficial owner, you have the right to direct your broker, bank or other agent regarding how to vote the shares in your account as set forth in the voting instructions in the Notice from your broker, bank or other agent. You are also invited to attend the annual meeting. However, since you are not the shareholder of record, you may not vote your shares in person at the annual meeting unless you request and obtain a valid proxy from your broker, bank or other agent. 10 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT Questions and Answers About These Proxy Materials and Voting (continued) What am I voting on? There are three matters scheduled for a vote at the annual meeting: • • • Election by separate resolutions of the four named nominees for director to hold office until the 2022 annual meeting of shareholders (Proposal 1). Ratification, on a non-binding advisory basis, of the appointment of KPMG as the independent auditors of the company for the fiscal year ending December 31, 2019 and the authorization, in a binding vote, of the board of directors, acting through the audit committee, to determine the independent auditors’ remuneration (Proposal 2). Approval, on a non-binding advisory basis, of the compensation of our NEOs as disclosed in this proxy statement (Proposal 3). y x o r P What are the board’s voting recommendations? The board of directors recommends that you vote your shares “FOR” each of the director nominees named below to hold office until the 2022 annual meeting of shareholders, and “FOR” both of the other two proposals. What if another matter is properly brought before the annual meeting? The board of directors knows of no other matters that will be presented for consideration at the annual meeting. If any other matters are properly brought before the annual meeting, it is the intention of the persons named in the accompanying proxy, referred to in this proxy statement as the “proxy holders,” to vote on those matters in accordance with their best judgment. How do I vote? For the election of directors (Proposal 1), you may vote “FOR” or “AGAINST” each nominee, or you may abstain from voting for all or any of the nominees. For each of the other two proposals, you may vote “FOR” or “AGAINST” or abstain from voting. Shareholders of Record: Shares registered in your name If you are a shareholder of record, you may vote in person at the annual meeting, you may vote by electronic proxy over the telephone or via the internet as instructed below, or, for those shareholders who receive a paper proxy card in the mail, by mailing a completed proxy card. Whether or not you plan to attend the annual meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the annual meeting and vote in person even if you have already voted by proxy. • • • • To vote in person, come to the annual meeting and we will give you a ballot when you arrive. Please bring your admission ticket or proof of ownership, as further discussed under “Do I need a ticket to attend the annual meeting?” below. To vote using a proxy card, simply complete, sign and date the proxy card that was mailed to you and return it promptly in the envelope provided. Proxy cards must be received by July 31, 2019. If you return your signed proxy card before this time, we will forward it to the company’s registered office electronically in accordance with Irish law and we will vote your shares as you direct. To vote by telephone, dial toll-free +1.800.690.6903 within the United States, U.S. territories and Canada using a touch-tone phone and follow the recorded instructions to submit an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., U.S. Eastern Time, on July 31, 2019 to be counted. To vote via the internet, go to www.proxyvote.com to complete an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., U.S. Eastern Time, on July 31, 2019 to be counted. Beneficial Owners: Shares registered in the name of a broker, bank or other agent If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a Notice or the full set of proxy materials containing voting instructions from that broker, bank or other agent rather than from us. Simply follow the voting instructions in the Notice or the full set of proxy materials to ensure that your vote is counted. Alternatively, you may vote by telephone or via the internet as instructed by your broker, bank or other agent. To vote in person at the annual meeting, you must request and obtain a valid proxy from your broker, bank, or other agent. Follow the voting instructions from your broker, bank or other agent, or contact your broker, bank or other agent to request a proxy form. We provide internet proxy voting to allow you to vote your shares online, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your internet access, such as usage charges from internet access providers and telephone companies. JAZZ PHARMACEUTICALS | Proxy Statement 11 2019 NOTICE OF MEETING AND PROXY STATEMENT Questions and Answers About These Proxy Materials and Voting (continued) How many votes do I have? On each matter to be voted upon, you have one vote for each ordinary share you owned as of the close of business on June 5, 2019. If I am a shareholder of record and I do not vote, or if I return a proxy card or otherwise vote without giving specific voting instructions, what happens? If you are a shareholder of record and you do not vote by completing your proxy card, vote by proxy via the internet or by telephone, or vote in person at the annual meeting, your shares will not be voted. If you are a shareholder of record and you do not specify your vote on each proposal individually when voting by proxy via the internet or by telephone, or if you sign and return a proxy card without giving specific voting instructions, then the proxy holders will vote your shares in the manner recommended by the board of directors on all matters presented in this proxy statement and as the proxy holders may determine in their discretion with respect to any other matters properly presented for a vote at the annual meeting. The voting recommendations of the board of directors are set forth under “What are the board’s voting recommendations?” above. If I am a beneficial owner of shares held in street name and I do not provide my broker or bank with voting instructions, what happens? If you are a beneficial owner of shares held in street name and you do not instruct your broker, bank or other agent how to vote your shares, your broker, bank or other agent may still be able to vote your shares in its discretion. In this regard, under the rules of the New York Stock Exchange (NYSE), brokers, banks and other securities intermediaries that are subject to NYSE rules may use their discretion to vote your “uninstructed” shares with respect to matters considered to be “routine” under NYSE rules, but not with respect to “non-routine” matters. In this regard, Proposals 1 and 3 are considered to be “non-routine” under NYSE rules meaning that your broker may not vote your shares on those proposals in the absence of your voting instructions. However, Proposal 2 is considered to be a “routine” matter under NYSE rules meaning that if you do not return voting instructions to your broker by its deadline, your shares may be voted by your broker in its discretion on Proposal 2. If you are a beneficial owner of shares held in street name, in order to ensure your shares are voted in the way you would prefer, you must provide voting instructions to your broker, bank or other agent by the deadline provided in the materials you receive from your broker, bank or other agent. What does it mean if I receive more than one set of proxy materials, more than one Notice, or a combination thereof? If you receive more than one set of proxy materials, more than one Notice, or a combination thereof, your shares may be registered in more than one name or are registered in different accounts. Please follow the voting instructions on each set of proxy materials or Notices to ensure that all of your shares are voted. Can I change my vote after submitting my proxy? Yes. You can revoke your proxy at any time before the commencement of the annual meeting. If you are the record holder of your shares, you may revoke your proxy in any one of the following ways: • • • • • You may submit another properly completed proxy card with a later date. You may grant a subsequent proxy by telephone or via the internet. You may send a timely written notice that you are revoking your proxy to our Company Secretary at Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. You may attend the annual meeting and vote in person. Simply attending the annual meeting will not, by itself, revoke your proxy. Your most recent proxy card or telephone or internet proxy is the one that is counted. If your shares are held by your broker, bank or other agent as a nominee or agent, you should follow the instructions provided by your broker, bank or other agent. 12 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT Questions and Answers About These Proxy Materials and Voting (continued) Do I need a ticket to attend the annual meeting? Yes, you will need an admission ticket or proof of ownership of ordinary shares to enter the annual meeting. If you are a shareholder of record and you received a full set of proxy materials in the mail, your admission ticket is attached to the proxy card sent to you. If you plan to attend the annual meeting, please so indicate when you vote and bring the ticket and valid photo identification with you to the annual meeting. If you are a shareholder of record and you received a Notice in the mail, your admission ticket is your Notice. Please bring your Notice and valid photo identification with you to the annual meeting. If your shares are held in the name of a bank, broker or other holder of record, your admission ticket is on your voting instruction form. If you do not bring your admission ticket, you will need proof of ownership to be admitted to the annual meeting. A recent brokerage statement or letter from a bank or broker is an example of proof of ownership. If you arrive at the annual meeting without an admission ticket, we will admit you only if we are able to verify that you are a shareholder of our company. For directions to attend the annual meeting in person, please contact our Investor Relations department at +353.1.634.7892 (Ireland) or +1.650.496.2800 (United States) or by email at investorinfo@jazzpharma.com. y x o r P How are votes counted? Votes will be counted by the inspector of elections appointed for the meeting. The inspector of elections will separately count, with respect to the proposal to elect directors (Proposal 1), votes “FOR,” “AGAINST,” abstentions and broker non-votes; and, with respect to the two other proposals, votes “FOR,” “AGAINST,” abstentions, and, as applicable, broker non-votes. What are “broker non-votes”? As discussed above, when a beneficial owner of shares held in street name does not give voting instructions to his or her broker, bank or other securities intermediary holding his or her shares as to how to vote on matters deemed to be “non-routine” under NYSE rules, the broker, bank or other such agent cannot vote the shares. These un-voted shares are counted as “broker non-votes.” Proposals 1 and 3 are considered to be “non-routine” under NYSE rules and we therefore expect broker non-votes in connection with those proposals. As a reminder, if you are a beneficial owner of shares held in street name, in order to ensure your shares are voted in the way you would prefer, you must provide voting instructions to your broker, bank or other agent by the deadline provided in the materials you receive from your broker, bank or other agent. How many votes are needed to approve each proposal? Assuming that a quorum is present at the annual meeting, the following votes will be required for approval: Proposal Proposal 1 . . . . . . . . . . . Proposal 2 . . . . . . . . . . . Proposal 3 . . . . . . . . . . . Vote Required for Approval Each director nominee must receive the affirmative vote of a majority of the votes cast on his or her election to hold office until the 2022 annual meeting of shareholders. Affirmative vote of a majority of the votes cast Affirmative vote of a majority of the votes cast What are the treatment and effect of abstentions and broker non-votes? Abstentions and broker non-votes will be treated as shares present for purposes of determining the presence of a quorum for the transaction of business at the annual meeting. Abstentions and broker non-votes will not, however, be considered votes cast at the annual meeting. Because the approval of all of the proposals is based on the votes cast at the annual meeting, abstentions and, as applicable, broker non-votes will not have any effect on the outcome of voting on the proposals. What is the quorum requirement? A quorum of shareholders is necessary to hold a valid meeting. A quorum will be present if shareholders holding a majority of the issued and outstanding ordinary shares entitled to vote as of the record date are present at the annual meeting or represented by proxy. On the record date, there were 56,635,552 ordinary shares outstanding and entitled to vote. Your shares will be counted towards the quorum only if you submit a valid proxy (or if one is submitted on your behalf by your broker, bank or other agent) or, provided that you are a shareholder of record, if you vote in person at the annual meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum within one hour of the time scheduled for the annual meeting, the annual meeting will stand adjourned to August 8, 2019 at 10:30 a.m. local time at the same location, or such other time or place as the board of directors may determine. JAZZ PHARMACEUTICALS | Proxy Statement 13 Questions and Answers About These Proxy Materials and Voting (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT How can I find out the results of the voting at the annual meeting? Preliminary voting results will be announced at the annual meeting. In addition, final voting results will be published in a quarterly report on Form 10-Q or a current report on Form 8-K that we expect to file with the SEC within four business days after the annual meeting. If final voting results are not available to us in time to file a Form 10-Q or a Form 8-K within four business days after the annual meeting, we intend to file a Form 8-K to publish preliminary results and, within four business days after the final results are known to us, file an additional Form 8-K to publish the final results. What are the Irish statutory financial statements and where can I access them? We are presenting for consideration our Irish statutory financial statements, and the respective reports of the directors and the auditors thereon, at the annual meeting. Since we are an Irish company, we are required to prepare Irish statutory financial statements under applicable Irish company law and to deliver those financial statements together with the respective reports of the directors and the auditors thereon to shareholders of record in connection with our annual meetings of shareholders. The Irish statutory financial statements cover the results of operations and financial position of Jazz Pharmaceuticals plc for the year ended December 31, 2018. The Irish statutory financial statements were prepared in accordance with the International Financial Reporting Standards as adopted by the European Union and as applied in accordance with the 2014 Act. There is no requirement under Irish law that the Irish statutory financial statements be approved by the shareholders, and no such approval will be sought at the annual meeting. Our Irish statutory financial statements, and the respective reports of the directors and the auditors thereon, will be delivered to shareholders of record in accordance with our obligations under Irish law. We will mail without charge, upon written request, a copy of the Irish statutory financial statements, together with the respective reports of the directors and the auditors thereon, to beneficial “street name” owners of our shares. Requests should be sent to: Jazz Pharmaceuticals plc, Attention: Company Secretary, Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. What proxy materials are available on the internet? This proxy statement, our letter to shareholders and the annual report are available at https://materials.proxyvote.com/G50871. Who should I call if I have any questions? If you require any assistance in voting your shares or have any other questions, please contact Alliance Advisors, our proxy solicitor, at +1.855.600.8108. 14 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT CORPORATE GOVERNANCE AND BOARD MATTERS Overview We are committed to exercising good corporate governance practices. In furtherance of this commitment, we regularly monitor developments in the area of corporate governance and review our processes, policies and procedures in light of such developments. Key information regarding our corporate governance initiatives can be found on our website, www.jazzpharmaceuticals.com, including our Corporate Governance Guidelines, Code of Conduct, and the charters for our audit, compensation and nominating and corporate governance committees. We believe that our strong corporate governance policies and practices, including the substantial percentage of independent directors on our board of directors and the robust duties of our Lead Independent Director, empower our independent directors to effectively oversee our management—including the performance of our Chief Executive Officer—and provide an effective and appropriately balanced board governance structure. In addition, we believe that our directors are all actively and constructively engaged in the exercise of their duties and responsibilities, with each independent director, other than Ms. O’Riordan who recently joined our board in February 2019, serving on at least one board committee and engaging with management between board meetings to remain well-informed of our strategy and our business. y x o r P Independence of the Board of Directors As required under the Nasdaq listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our board of directors consults with counsel to ensure that the board’s determinations are consistent with relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in the applicable Nasdaq listing standards, as in effect from time to time. Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and our company, our senior management and our independent registered public accounting firm, the board of directors affirmatively determined that all of our current directors are independent directors within the meaning of the applicable Nasdaq listing standards, except that Bruce Cozadd, our Chairman and Chief Executive Officer, is not independent by virtue of his employment with our company. In addition, our board of directors has determined that each member of the audit committee, compensation committee and nominating and corporate governance committee meets the applicable Nasdaq and SEC rules and regulations regarding “independence” and that each member is free of any relationship that would impair his or her individual exercise of independent judgment with regard to the company. In determining that Seamus Mulligan is independent within the meaning of the applicable Nasdaq listing standards, the Board considered Mr. Mulligan’s former employment relationship with us, which ended more than six years ago. Board Leadership Structure and Risk Oversight Mr. Cozadd has served as our Chairman and Chief Executive Officer since the closing of the Azur Merger in January 2012. He co-founded Jazz Pharmaceuticals, Inc. in 2003 and served as its Chairman and Chief Executive Officer since April 2009 and, prior to that, as Executive Chairman. The board of directors believes that the Chief Executive Officer is best suited to serve as our Chairman because he is the member of the board of directors who is most familiar with our business as a whole, and the most capable of identifying and bringing to the attention of the full board of directors the strategic priorities and key issues facing the company. The board of directors also believes that having Mr. Cozadd in particular in a combined Chairman/Chief Executive Officer role helps provide strong, unified leadership for our management team and optimizes communication with our board of directors. In addition, having previously served for many years as a director of other publicly-traded and privately-held companies, as well as in executive management roles, Mr. Cozadd brings both a strategic and operational perspective to this combined position. To counterbalance concerns regarding our board’s decision to have a combined Chairman and Chief Executive Officer, our Corporate Governance Guidelines require that the independent directors elect a Lead Independent Director when the roles of Chairman and Chief Executive Officer are held by the same person. Since 2014, Rick Winningham has served as our Lead Independent Director. A critical function of the Lead Independent Director is to help to ensure the effective independent functioning of the board of directors in its oversight responsibilities and to provide an appropriate balance in the company’s leadership. Specific roles and responsibilities of the Lead Independent Director, which are detailed in our Corporate Governance Guidelines, include: • • serving as the principal liaison between the independent directors and the Chairman; coordinating the activities of the independent directors, including developing agendas for and presiding at executive sessions of the independent directors; JAZZ PHARMACEUTICALS | Proxy Statement 15 Corporate Governance and Board Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT • • • advising the Chairman on board and committee agendas, meeting schedules and information provided to other board members, including the quality, quantity and timeliness of such information that is necessary or appropriate for the directors to effectively and responsibly perform their duties; discussing the results of the Chief Executive Officer’s performance evaluation with the chairperson of the compensation committee; and presiding at all meetings of the board of directors at which the Chairman is not present. The Lead Independent Director also has the authority to call meetings of the independent directors of the board of directors and is available for consultation and communication with significant shareholders. In addition to fulfilling the basic requirements of his role as Lead Independent Director, Mr. Winningham attends meetings of committees where he is not a member to remain informed and engaged, communicates with the Chief Executive Officer on matters involving the company on a regular basis, regularly seeks input from other independent directors relating to significant developments at the company between regular board meetings, attends certain meetings at the company involving strategic portfolio and/or scientific reviews, and makes himself available for direct communication with significant shareholders as necessary. In addition, our board of directors is currently comprised of 12 directors, of whom 11 are independent. At meetings of our board of directors, the independent directors regularly convene executive sessions without the presence of our Chairman and Chief Executive Officer and other members of management. We believe that our directors provide effective oversight of risk management for our company (including financial, operational, business, intellectual property, information technology (including cybersecurity), reputational and governance risks), particularly as a result of the work of our committees and the ongoing dialogue between the full board, our Chairman and Chief Executive Officer and our active and engaged Lead Independent Director. Our audit committee is responsible for overseeing our financial reporting process on behalf of our board of directors and reviewing with management and our auditors, as appropriate, our major financial risk exposures and the steps taken by management to monitor and control these exposures. In 2018, our board of directors formalized our audit committee’s role in oversight of risks related to information security, including cybersecurity. In its oversight role, the audit committee receives quarterly updates on information security developments, cybersecurity incidents and the steps taken by management to monitor and mitigate risk exposures in these areas. Our compensation committee approves compensation of executive officers and all material compensation plans for our company and reviews our compensation practices to ensure that they do not encourage excessive risk taking and provide appropriate incentives for meeting both short-term and long-term objectives and increasing shareholder value over time. Our compensation committee also works with our full board of directors to oversee matters related to human capital management, which includes reviewing workforce trends, executive succession plans and talent risk and maintaining compensation objectives and corporate policies that appropriately incentivize creating and maintaining a positive workplace and corporate culture. Our nominating and corporate governance committee oversees the company’s risk management, other than with respect to the company’s major financial risk exposures or risks related to our compensation programs and policies, on behalf of our board of directors. At its meetings, our full board of directors receives reports concerning the management of the relevant risks from each committee, in addition to reports concerning material risks and concerns or significant updates on such matters from our General Counsel and other executive officers, as necessary. Meetings of the Board of Directors The board of directors met five times during 2018 and did not act by written consent during the year. All directors attended at least 75% of the aggregate number of meetings of the board of directors and of the committees on which they served that were held during 2018. As required under applicable Nasdaq listing standards, in 2018, the independent directors generally met at each regular board meeting in scheduled executive sessions at which only independent directors were present. Director Commitments Our board of directors believes that all members of the board should have sufficient time and attention to devote to board duties and to otherwise fulfill the responsibilities required of directors. In assessing whether directors and nominees for director have sufficient time and attention to devote to board duties, the nominating and corporate governance committee and our board of directors consider, among other things, whether directors may be “overboarded,” which refers to the situation where a director serves on an excessive number of boards. Our Corporate Governance Guidelines also require that directors seek approval from the Chairman, the Lead Independent Director and the chairperson of the nominating and corporate governance committee prior to accepting an invitation to serve on any additional corporate boards. Our board of directors believes that each of our directors, including each of our director nominees, has demonstrated the ability to devote sufficient time and attention to board duties and to otherwise fulfill the responsibilities required of directors. However, we understand that certain institutional investors and proxy advisory firms may deem Dr. Riedel overboarded based on the number of public company boards 16 JAZZ PHARMACEUTICALS | Proxy Statement y x o r P Corporate Governance and Board Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT on which he serves. In addition to our board of directors, Dr. Riedel serves on the boards of directors of two other public companies: Eton Pharmaceuticals, Inc., or Eton, and Aptinyx Inc., or Aptinyx, where he also serves as Chief Executive Officer and President. Our board of directors does not believe that Dr. Riedel’s outside boards or other commitments limit his ability to devote sufficient time and attention to his duties as a director of Jazz Pharmaceuticals. Our board of directors believes that Dr. Riedel has demonstrated, and will continue to demonstrate, his ability to dedicate sufficient time to carry out his board duties effectively and believes that it is in the company’s best interest that he continue to serve as a director for the following reasons: • • • • • • Dr. Riedel has served tirelessly on our board for over six years and has assured our board of directors that he is fully committed to continuing to dedicate the appropriate amount of time to fulfill his duties as a member of the board and compensation committee. Dr. Riedel is consistently prepared and has exemplary participation at meetings of the board and compensation committee, as demonstrated by his insightful questions and comments, and he contributes significantly to discussions and decision making. He is also appropriately engaged with management and the other members of the board outside of meetings of the board and compensation committee including attending certain meetings at the company involving strategic portfolio, scientific and similar reviews. Dr. Riedel’s attendance record demonstrates his commitment to our board, participating in 100% of board meetings and 100% of compensation committee meetings for the past three years. Dr. Riedel’s experience in senior management positions in the pharmaceutical industry provides significant industry knowledge and operational and management expertise to our board of directors. His experience on the boards of directors of other public companies will benefit us by providing him with insight and experience that enhances his value to our board of directors. Each of Eton and Aptinyx is a clinical-stage pharmaceutical company headquartered in Illinois, where Dr. Riedel resides. Dr. Riedel has attended 100% of the board meetings of Aptinyx since 2015. He has also attended 100% of the board and committee meetings of Eton since he joined the board in 2017. Limited travel is required to attend Eton and Aptinyx board meetings and the travel required to attend our board meetings has not hindered Dr. Riedel’s ability to be present and involved as a member of our board of directors. In addition, Eton and Aptinyx completed initial public offerings in 2018 and each is a smaller reporting company within the meaning of applicable SEC rules. As reported in their respective annual reports on Form 10-K for the year ended December 31, 2018, Eton and Aptinyx had 15 and 63 full-time employees, respectively, as of the dates specified therein. Dr. Riedel has served as the CEO of Aptinyx, or its predecessor company, since 2014 and as a member of the board of directors of Eton since 2017. Dr. Riedel has assured our board that his ongoing commitments to Aptinyx and Eton are not expected to exceed the demands that existed in past years and the fact that both companies transitioned from private to public companies in 2018 will not detract from his service on our board going forward. Information About Board Committees The standing committees of the board of directors include an audit committee, a compensation committee and a nominating and corporate governance committee. Each of these committees is comprised solely of independent directors, has a chairperson and has a written charter approved by the board of directors reflecting applicable standards and requirements adopted by the SEC and Nasdaq. A copy of each committee charter can be found on our website, www.jazzpharmaceuticals.com, in the section titled “About” under the subsection titled “Board of Directors.” The following table provides membership information for 2018 for each of the audit, compensation, and nominating and corporate governance committees of our board of directors: Name Paul L. Berns Patrick G. Enright Peter Gray Heather Ann McSharry Kenneth W. O’Keefe Norbert G. Riedel, Ph.D. Elmar Schnee Catherine A. Sohn, Pharm.D. Rick E Winningham C = committee chairperson; M = committee member Audit M C M M Compensation M M C M Nominating and Corporate Governance C M M M JAZZ PHARMACEUTICALS | Proxy Statement 17 2019 NOTICE OF MEETING AND PROXY STATEMENT Corporate Governance and Board Matters (continued) Audit Committee The audit committee of the board of directors oversees our corporate accounting and financial reporting processes, our systems of internal control over financial reporting and audits of our financial statements, the quality and integrity of our financial statements and reports, the qualifications, independence and performance of the auditors engaged as our independent registered public accounting firm for purposes of preparing or issuing an audit report or performing audit services and certain enterprise risk issues. Specific responsibilities of the audit committee include: • • • • • • • • • • • • • evaluating the performance of and assessing the qualifications of the independent auditors; determining and approving the engagement and remuneration of the independent auditors; determining whether to retain or terminate the existing independent auditors or to appoint and engage new independent auditors; determining and approving the engagement of the independent auditors to perform any proposed permissible non-audit services; monitoring the rotation of partners of the independent auditors on our audit engagement team as required by applicable laws and rules; reviewing and advising on the selection and removal of the head of our internal audit function, the activities and organizational structure of the internal audit function and the results of internal audit activities; reviewing and approving the internal audit charter at least annually and the annual internal audit plan and budget; meeting to review our annual audited financial statements, our quarterly financial statements and our financial press releases with management and the independent auditors, including reviewing our disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual and quarterly reports filed with the SEC; reviewing, overseeing and approving transactions between our company and any related persons; conferring with management, the internal audit function and the independent auditors regarding the scope, adequacy and effectiveness of our internal control over financial reporting; reviewing with management, the internal audit function and the independent auditors, as appropriate, major financial risk exposures, including reviewing, evaluating and approving our hedging and other financial risk management policies, as well as the steps taken by management to monitor and control these exposures; establishing procedures, when and as required under applicable laws and rules, for the receipt, retention and treatment of any complaints received by our company regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and reviewing with management our information security (including cybersecurity) risk exposures and the steps taken by management to monitor and mitigate these exposures. The audit committee was during all of 2018 and is currently composed of four directors: Mr. Enright, Mr. Gray, Ms. McSharry and Mr. O’Keefe. Mr. Gray serves as chairperson of the audit committee. Our board of directors has determined that each of Mr. Enright, Mr. Gray, Ms. McSharry and Mr. O’Keefe meets the independence requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Nasdaq listing standards with respect to audit committee members. Our board of directors has also determined that each of Mr. Enright, Mr. Gray, Ms. McSharry and Mr. O’Keefe is an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K of the Exchange Act. In making this determination, our board of directors considered the overall knowledge, experience and familiarity of each of Mr. Enright, Mr. Gray, Ms. McSharry and Mr. O’Keefe with accounting matters and in analyzing and evaluating financial statements, and, in the case of Mr. O’Keefe, managing private equity investments, and, in the case of Mr. Enright, managing venture capital investments. The audit committee met four times during 2018 and did not act by written consent during the year. The audit committee also had a number of informal discussions and consultations with one another, with our Chief Financial Officer, Principal Accounting Officer and our Head of Internal Audit and with Mr. Cozadd during 2018. 18 JAZZ PHARMACEUTICALS | Proxy Statement Corporate Governance and Board Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Report of the Audit Committee of the Board of Directors(1) The audit committee has reviewed and discussed the company’s audited financial statements for the fiscal year ended December 31, 2018 with management of the company. The audit committee has discussed with KPMG, the independent registered public accounting firm that audited the company’s financial statements for the fiscal year ended December 31, 2018, the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board, or PCAOB, and the SEC. The audit committee has also received the written disclosures and the letter from KPMG required by applicable requirements of the PCAOB regarding the independent accountants’ communications with the audit committee concerning independence, and has discussed with KPMG that firm’s independence. Based on the foregoing, the audit committee recommended to the board of directors that the audited financial statements be included in the 2018 Annual Report on Form 10-K filed with the SEC. y x o r P Respectfully submitted, The Audit Committee of the Board of Directors Mr. Peter Gray (Chairperson) Mr. Patrick Enright Ms. Heather Ann McSharry Mr. Kenneth W. O’Keefe (1) The material under the heading “Report of the Audit Committee of the Board of Directors” in this proxy statement is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing of the company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. Compensation Committee The compensation committee of the board of directors reviews and oversees our compensation policies, plans and programs and reviews and generally determines the compensation to be paid to the executive officers and directors, and prepares and reviews the compensation committee report included in our annual proxy statement. Specific responsibilities and authority of our compensation committee include: • • • • • • • • • reviewing, modifying (as needed) and approving overall compensation strategy and policies; recommending to our board of directors for determination and approval the compensation and other terms of employment of our Chief Executive Officer and evaluating our Chief Executive Officer’s performance in light of relevant goals and objectives; reviewing and approving the goals and objectives of our other executive officers and determining and approving the compensation and other terms of employment of these executive officers, as appropriate; reviewing and recommending to our board of directors the type and amount of compensation to be paid or awarded to the members of our board of directors; having the full power and authority of our board of directors regarding the adoption, amendment and termination of our compensation plans and programs and administering these plans and programs; having direct responsibility for appointing, and providing compensation and oversight of the work of, any compensation consultants and other advisors retained by the compensation committee and considering the independence of each such advisor; reviewing our practices and policies of employee compensation as they relate to risk management and risk-taking incentives, to determine whether such compensation policies and practices are reasonably likely to have a material adverse effect on our company; periodically reviewing with our Chief Executive Officer the plans for succession to the offices of our executive officers and making recommendations to our board of directors with respect to the selection of appropriate individuals to succeed to these positions; and reviewing and discussing with management our disclosures contained under the caption “Compensation Discussion and Analysis” in our annual proxy statement. JAZZ PHARMACEUTICALS | Proxy Statement 19 Corporate Governance and Board Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT The compensation committee was during all of 2018 and is currently composed of four directors: Mr. Berns, Mr. Enright, Dr. Riedel and Dr. Sohn. Dr. Riedel currently serves as the chairperson of the compensation committee. Each member of the compensation committee meets the independence requirements of the Nasdaq listing standards with respect to compensation committee members. In determining whether Mr. Berns, Mr. Enright, Dr. Riedel and Dr. Sohn are independent within the meaning of the Nasdaq listing standards pertaining to compensation committee membership, our board of directors determined, based on its consideration of factors specifically relevant to determining whether any such director has a relationship to us that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, that no member of the compensation committee has a relationship that would impair that member’s ability to make independent judgments about compensation of our executive officers. The compensation committee held six meetings during 2018 and did not act by written consent during the year. The compensation committee also had a number of informal discussions and consultations with one another and with Mr. Cozadd. Compensation Committee Processes and Procedures Our compensation committee meets as often as it determines necessary to carry out its duties and responsibilities through regularly scheduled meetings and, if necessary, special meetings. The agenda for each compensation committee meeting is usually developed by members of our human resources department and our Chief Executive Officer, with input from members of our legal department, and is reviewed and finalized with the chairperson of the compensation committee. Members of our human resources and legal departments also attend compensation committee meetings. From time to time, various other members of management and other employees as well as outside advisors or consultants may be invited by the compensation committee to make presentations, provide financial or other background information or advice or otherwise participate in the compensation committee meetings. In making executive compensation determinations (other than for our Chief Executive Officer), the compensation committee considers recommendations from our Chief Executive Officer. In making his recommendations, our Chief Executive Officer receives input from our human resources department and from the individuals who manage or report directly to the other executive officers, and he reviews various third party compensation surveys and compensation data provided by the independent compensation consultant to the compensation committee, as described in the section of this proxy statement entitled “Executive Compensation—Compensation Discussion and Analysis.” While our Chief Executive Officer discusses his recommendations for the other executive officers with the compensation committee, he does not participate in the deliberations and recommendations to our board of directors concerning, or our board of directors’ determination of, his own compensation. The charter of the compensation committee grants the compensation committee full access to all books, records, facilities and personnel of the company, as well as authority to obtain, at our expense, advice and assistance from compensation consultants and internal and external legal, accounting or other advisors and consultants and other external resources that the compensation committee considers necessary or appropriate in the performance of its duties. In particular, the compensation committee has the authority, in its sole discretion, to retain or obtain, at the expense of the company, compensation consultants to assist in its evaluation of executive compensation, and is directly responsible for the appointment, compensation and oversight of the work of its compensation consultants. The compensation committee engages an independent compensation consultant each year to provide a competitive compensation assessment with respect to the executive officers to assist the compensation committee in making annual compensation decisions. Since 2010, Radford, a business area within Aon plc, or Aon, has been engaged by the compensation committee each year to provide peer company and industry compensation data and provide the compensation committee with advice regarding executive officers’ compensation, including base salaries, performance- based bonuses and long-term equity compensation, and similar advice regarding non-employee director compensation. The charter of the compensation committee provides that the compensation committee may delegate any responsibility or authority of the compensation committee under its charter to the chairperson of the committee or to one or more committee members, including subcommittees, except to the extent inconsistent with any applicable laws and rules, including the Nasdaq listing standards. Our compensation committee does not, however, delegate any of its functions to others in determining or recommending executive or director compensation. For additional information regarding our processes and procedures for the consideration and determination of executive compensation, including the role of Radford in determining and recommending executive compensation, see the section of this proxy statement entitled “Executive Compensation—Compensation Discussion and Analysis.” With respect to director compensation matters, our compensation committee recommends to our board of directors and our board of directors determines and sets non-employee director compensation. Our compensation arrangements for our non-employee directors are described under the section of this proxy statement entitled “Director Compensation.” 20 JAZZ PHARMACEUTICALS | Proxy Statement Corporate Governance and Board Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Compensation Committee Interlocks and Insider Participation None of the members of our compensation committee during 2018 was at any time our officer or employee. None of our executive officers serve, or in the past fiscal year served, as a member of the board of directors or the compensation committee of any entity that has one or more of its executive officers serving on our board of directors or compensation committee. Compensation Consultant Fees As described above, since 2010, Radford has been engaged by the compensation committee each year to provide peer company and industry compensation data and provide the compensation committee with advice regarding executive officers’ compensation, including base salaries, performance-based bonuses and long-term equity compensation, and similar advice regarding non-employee director compensation. In 2018, the cost of Radford’s executive compensation and director compensation consulting services provided to the compensation committee was approximately $204,000. In addition, in 2018 management also engaged Radford to provide survey data relating to non-executive employee compensation and other affiliates of Aon to provide director and officer liability insurance-related services, pension-related services, other insurance brokerage services and risk services. The aggregate cost of such other consulting services provided in 2018 by Radford and other affiliates of Aon (not related to Radford’s executive compensation and director compensation consulting services provided to the compensation committee) was approximately $97,000, of which approximately $86,000 related to various insurance-related and benefits consulting services and approximately $11,000 related to general survey data. Although the compensation committee was aware of the nature of the services performed by affiliates of Aon and the non-executive employee compensation survey data provided by Radford, the compensation committee did not review and approve such services and surveys, as those were reviewed and approved by management in the ordinary course of business. y x o r P Compensation Committee Report(1) The compensation committee has reviewed and discussed with management the Compensation Discussion and Analysis contained herein. Based on this review and discussion, the compensation committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in our proxy statement for the 2019 annual meeting of shareholders and be included in the Annual Report on Form 10-K we filed with the SEC for the fiscal year ended December 31, 2018. Respectfully submitted, The Compensation Committee of the Board of Directors Dr. Norbert G. Riedel, Ph.D. (Chairperson) Mr. Paul L. Berns Mr. Patrick G. Enright Dr. Catherine A. Sohn, Pharm.D. (1) The material under the heading “Compensation Committee Report” in this proxy statement is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing of the company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. Nominating and Corporate Governance Committee The nominating and corporate governance committee of our board of directors is responsible for, among other things: • • • • • • overseeing all aspects of our corporate governance functions on behalf of our board of directors; making recommendations to our board of directors regarding corporate governance issues; identifying, reviewing and evaluating candidates to serve on our board of directors, and reviewing and evaluating incumbent directors; reviewing, evaluating and considering the recommendation for nomination of incumbent members for reelection to our board of directors and monitoring the size of our board; recommending director candidates to our board of directors; overseeing on behalf of our board of directors the company’s compliance with applicable laws and regulations, other than the financial compliance issues overseen by the audit committee; JAZZ PHARMACEUTICALS | Proxy Statement 21 Corporate Governance and Board Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT • • • overseeing on behalf of our board of directors the company’s risk management matters, other than with respect to risks that are financial or information security risks (as to which the audit committee has oversight responsibility on behalf of our board of directors) or risks related to compensation policies (as to which the compensation committee has oversight responsibility on behalf of our board of directors); evaluating director nominations and proposals by our shareholders and establishing policies, requirements, criteria and procedures in furtherance of the foregoing; and reviewing, discussing and assessing the performance of our board of directors, including committees of our board of directors, seeking input from all board members, senior management and others. The nominating and corporate governance committee believes that candidates for director should have certain minimum qualifications, including the ability to read and understand basic financial statements, being over 21 years of age, and the highest personal integrity and ethics. The nominating and corporate governance committee also intends to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to our affairs, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our shareholders. However, the nominating and corporate governance committee retains the right to modify these qualifications from time to time. Members of the nominating and corporate governance committee obtain recommendations for potential directors from their and other board members’ contacts in our industry, and we or the nominating and corporate governance committee have in the past and may from time to time again in the future engage a search firm to assist in identifying potential directors. Candidates for director nominees are reviewed in the context of the then current composition of the board of directors, the operating requirements of the company and the long-term interests of shareholders. In this regard, we examine the experience and expertise of our board as a whole to ensure alignment between the abilities and contributions of our board and our strategic priorities and long-range plan, emphasizing, among other things, expertise in global and U.S. sales and marketing, in product development, in financial management and in corporate development transactions. In addition, while we do not have specific numerical targets with respect to board diversity, the nominating and corporate governance committee’s policy is to take into account a broad range of considerations when assessing director candidates, including individual backgrounds, gender, skill sets, professional experience, geographic residency and other factors. The nominating and corporate governance committee assesses the effectiveness of its diversity policy through its periodic evaluation of the composition of the full board of directors. Recently, in recruiting and nominating candidates for our board of directors, our nominating and corporate governance committee has focused on increasing diversity overall, including with respect to gender and geographic residency. Our board of directors has three female directors and five European directors, four of whom are Irish. The most recent member of our board of directors, Ms. O’Riordan, is Irish and resides in Hong Kong. In addition to her other qualifications, the board of directors considered diversity in its election of Ms. O’Riordan, including the value of adding additional gender and geographic residency diversity to our board of directors. In the case of incumbent directors whose terms of office are set to expire, the nominating and corporate governance committee reviews these directors’ overall service to the company during their terms, including the number of meetings attended, level of participation, quality of performance and any other relationships and transactions that might impair the directors’ independence, as well as the results of the board of directors’ self-evaluation, which is generally conducted annually, to determine whether to recommend them to the board of directors for nomination for a new term. In the case of new director candidates, the nominating and corporate governance committee also determines whether the nominee is “independent” based upon applicable Nasdaq listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary. The nominating and corporate governance committee conducts appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the board of directors. The nominating and corporate governance committee meets to discuss and consider the candidates’ qualifications and then selects a nominee for recommendation to the board of directors. The nominating and corporate governance committee will consider director candidates recommended by shareholders on a case-by-case basis, as appropriate. Shareholders wishing to recommend individuals for consideration by the nominating and corporate governance committee may do so by delivering a written recommendation to our Company Secretary at Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland with the candidate’s name, biographical data and qualifications and a document indicating the candidate’s willingness to serve if elected. The nominating and corporate governance committee does not intend to alter the manner in which it evaluates candidates based on whether the candidate was recommended by a shareholder or not. To date, the nominating and corporate governance committee has not received any such nominations nor has it rejected a director nominee from a shareholder or shareholders. 22 JAZZ PHARMACEUTICALS | Proxy Statement y x o r P Corporate Governance and Board Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Our nominating and corporate governance committee was during all of 2018 and is currently composed of four directors: Ms. McSharry, Mr. Schnee, Dr. Sohn and Mr. Winningham. Ms. McSharry serves as chairperson of the nominating and corporate governance committee. Each member of the nominating and corporate governance committee meets the independence requirements of the Nasdaq listing standards. The nominating and corporate governance committee met four times during 2018 and did not act by written consent during the year. Other Corporate Governance Matters Corporate Governance Guidelines. As a part of our board of directors’ commitment to enhancing shareholder value over the long term, our board of directors has adopted a set of Corporate Governance Guidelines to provide the framework for the governance of our company and to assist our board of directors in the exercise of its responsibilities. Our Corporate Governance Guidelines cover, among other topics, board composition, structure and functioning, director qualifications and board membership criteria, director independence, board and board committee annual self-evaluations, committees of the board, board access to management and outside advisors, board share ownership guidelines, and director orientation and education. Our Corporation Governance Guidelines are available on our website at www.jazzpharmaceuticals.com under the section entitled “About” under “Board of Directors.” Anti-Hedging/Pledging Policy. Our insider trading policy prohibits directors, executive officers and other employees from engaging in speculative trading activities, including hedging transactions or other inherently speculative transactions with respect to our securities. Our insider trading policy also prohibits directors, executive officers and other employees from pledging our securities as collateral for any loans. Share Ownership Guidelines for Directors and Executive Officers. We maintain and periodically review share ownership guidelines for our non-employee directors, Chief Executive Officer and certain other employees who serve on our executive committee. More information about our share ownership guidelines (including the increased thresholds adopted in May 2018) can be found under the sections of this proxy statement entitled “Executive Compensation—Compensation Discussion and Analysis—Additional Compensation Information—Ownership Guidelines for Executive Officers” and “Director Compensation—Ownership Guidelines for Directors.” Irish law provides that shareholders holding 10% or more of the total voting rights Shareholder Ability to Call Extraordinary Meetings. may at any time request that the directors call an extraordinary general meeting (i.e., special meeting). The shareholders who wish to request an extraordinary general meeting must deliver to our principal executive office a written notice, signed by the shareholders requesting the meeting and stating the purposes of the meeting. If the directors do not, within 21 days of the date of delivery of the request, proceed to convene a meeting to be held within two months of that date, those shareholders (or any of them representing more than half of the total voting rights of all of them) may themselves convene a meeting within a specified period, but any meeting so convened cannot be held after the expiration of three months from the date of delivery of the request. Code of Conduct. Our Code of Conduct applies to all of our employees, directors and officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and those of our subsidiaries. The Code of Conduct is available on our website at www.jazzpharmaceuticals.com under the section entitled “About” under “Corporate Ethics.” We intend to satisfy the disclosure requirements under Item 5.05 of SEC Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Conduct by posting such information on our website at the website address and location specified above. Shareholder Communications with the Board of Directors. Our board of directors believes that shareholders should have an opportunity to communicate with the board, and efforts have been made to ensure that the views of shareholders are heard by the board of directors or individual directors, as applicable, and that appropriate responses are provided to shareholders in a timely manner. We believe that our responsiveness to shareholder communications to the board of directors has been excellent. Shareholders interested in communicating with the board of directors or a particular director (including our Chairman or our Lead Independent Director) may do so by sending written communication to: Jazz Pharmaceuticals plc, Attention: Company Secretary, Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. Each communication should set forth the name and address of the shareholder as it appears on our records (and, if the shares are held by a nominee, the name and address of the beneficial owner of the shares), and the number of our ordinary shares that are owned of record by the record holder or beneficially by the beneficial owner, as applicable. The Company Secretary will, in his or her discretion, screen out communications from shareholders that are not related to the duties and responsibilities of the board of directors. The purpose of this screening is to allow the board of directors to avoid having to consider irrelevant or inappropriate communications (such as advertisements, solicitations and hostile communications). If deemed an appropriate communication, the Company Secretary will forward the communication, depending on the subject matter, to the Chairman, the Lead Independent Director or the chairperson of the appropriate committee of the board of directors. JAZZ PHARMACEUTICALS | Proxy Statement 23 2019 NOTICE OF MEETING AND PROXY STATEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of our ordinary shares as of May 13, 2019 (except as noted) by: (i) each director; (ii) each of the executive officers named in the Summary Compensation Table under “Executive Compensation” below (referred to throughout this proxy statement as our NEOs); (iii) all of our executive officers and directors as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our ordinary shares. Name and Address of Beneficial Owner(1) 5% Shareholders: The Vanguard Group(3) 100 Vanguard Blvd. Malvern, PA 19355 FMR LLC(4) 245 Summer Street Boston, MA 02210 Putnam Investments, LLC(5) 100 Federal Street Boston, MA 02109 Named Executive Officers and Directors: Bruce C. Cozadd(6) Daniel N. Swisher, Jr.(7) Matthew P. Young(8) Suzanne Sawochka Hooper(9) Michael P. Miller(10) Paul L. Berns(11) Patrick G. Enright(12) Peter Gray(13) Heather Ann McSharry(14) Seamus Mulligan(15) Kenneth W. O’Keefe(16) Anne O‘Riordan Norbert G. Riedel, Ph.D.(17) Elmar Schnee(18) Catherine A. Sohn, Pharm.D.(19) Rick E Winningham(20) All directors and executive officers as a group (18 persons)(21) Beneficial Ownership(2) Number of Shares Percentage of Total 5,044,866 8.9% 4,734,301 8.4% 3,144,814 5.6% 667,212 19,887 111,565 163,179 74,829 35,936 31,741 31,655 30,977 1,125,341 57,867 — 29,964 23,267 35,627 18,703 2,449,346 1.2% * * * * * * * * 2.0% * * * * * * 4.3% Less than 1%. * (1) Unless otherwise provided in the table above or in the notes below, the address for each of the beneficial owners listed is c/o Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. (2) This table is based upon information supplied by officers and directors as well as Schedules 13G or 13D filed with the SEC by beneficial owners of more than five percent of our ordinary shares. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole voting and investment power with respect to the ordinary shares indicated as beneficially owned. Applicable percentages are based on 56,584,756 ordinary shares outstanding on May 13, 2019, adjusted as required by rules promulgated by the SEC. The number of shares beneficially owned includes ordinary shares issuable pursuant to the exercise of stock options that are exercisable and RSUs that will vest within 60 days of May 13, 2019, and shares credited to individual non-employee director phantom stock accounts under our Directors Deferred Plan as of May 13, 2019. Amounts credited to individual non-employee director phantom stock accounts under our Directors Deferred Plan are payable solely in our ordinary shares, but such shares do not have current voting or investment power. Shares issuable pursuant to the exercise of stock options that are exercisable and RSUs that will vest within 60 days of May 13, 2019 and shares issuable pursuant to our Directors Deferred Plan are deemed to be outstanding and beneficially owned by the person to whom such shares are issuable for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. 24 JAZZ PHARMACEUTICALS | Proxy Statement y x o r P Security Ownership of Certain Beneficial Owners and Management (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT (3) This information is based on a Schedule 13G/A filed with the SEC on February 13, 2019 by The Vanguard Group, or Vanguard. According to the Schedule 13G/A, as of December 31, 2018, Vanguard has sole power to vote or direct the vote of 46,284 ordinary shares, shared power to vote or direct the vote of 11,962 ordinary shares, sole power to dispose or direct the disposition of 4,988,277 ordinary shares, and shared power to dispose or direct the disposition of 56,589 shares. The Schedule 13G/A also indicates that Vanguard Fiduciary Trust Company, a wholly-owned subsidiary of Vanguard, is the beneficial owner of 26,521 ordinary shares as a result of its serving as investment manager of collective trust accounts, and Vanguard Investments Australia, Ltd., a wholly-owned subsidiary of Vanguard, is the beneficial owner of 49,229 ordinary shares as a result of its serving as investment manager of Australian investment offerings. The Schedule 13G/A provides information only as of December 31, 2018 and, consequently, the beneficial ownership of the above-mentioned entities may have changed between December 31, 2018 and May 13, 2019. (4) This information is based on a Schedule 13G/A filed with the SEC on February 13, 2019 by FMR LLC, or FMR, and Abigail P. Johnson. According to the Schedule 13G/A, as of December 31, 2018, FMR has sole power to vote or direct the vote of 301,552 ordinary shares and the sole power to dispose or direct the disposition of 4,734,301 ordinary shares, and Ms. Johnson has the sole power to dispose or direct the disposition of 4,734,301 ordinary shares. The Schedule 13G/A indicates that FMR is acting as a parent holding company or control person for a number of its relevant entities that beneficially owned the ordinary shares being reported, including FMR Co., Inc., an investment adviser reported as beneficially owning 5% or greater of our ordinary shares. In addition, Ms. Johnson is a Director, the Chairman, and the Chief Executive Officer of FMR. Ms. Johnson and members of her family are the predominant owners, directly or through trusts, of Series B voting common shares of FMR, representing 49% of the voting power of FMR. The Johnson family group and all other Series B shareholders have entered into a shareholders’ voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, or Investment Company Act, to form a controlling group with respect to FMR. Neither FMR nor Ms. Johnson has the sole power to vote or direct the voting of the shares owned directly by the various investment companies registered under the Investment Company Act, or the Fidelity Funds, advised by Fidelity Management & Research Company, or FMRC, a wholly owned subsidiary of FMR, which power resides with the Fidelity Funds’ Boards of Trustees. FMRC carries out the voting of the shares under written guidelines established by the Fidelity Funds’ Boards of Trustees. The Schedule 13G/A provides information only as of December 31, 2018 and, consequently, the beneficial ownership of the above-mentioned persons and entities may have changed between December 31, 2018 and May 13, 2019. (5) This information is based on a Schedule 13G/A filed with the SEC on February 14, 2019 by Putnam Investments, LLC d/b/a Putnam Investments, or Putnam, on behalf of itself and on behalf of Putnam Investment Management, LLC, or PIM and The Putnam Advisory Company, LLC, or PAC. According to the Schedule 13G/A, as of December 31, 2018, Putnam has sole power to vote or direct the vote of 47,733 ordinary shares and sole power to dispose or the direct the disposition of 3,144,814 ordinary shares. Of these shares, PIM, a wholly-owned subsidiary of Putnam, is the beneficial owner of 3,099,419 ordinary shares, with sole power to vote or direct the vote of 4,661 ordinary shares and sole power to dispose or direct the disposition of 3,099,419 ordinary shares in its capacity as investment adviser to the Putnam family of mutual funds; and PAC, a wholly owned subsidiary of Putnam, is the beneficial owner of 45,395 ordinary shares, with sole power to vote or direct the vote of 43,072 ordinary shares and sole power to dispose or direct the disposition of 45,395 ordinary shares in its capacity as investment adviser to Putnam’s institutional clients. The Schedule 13G/A provides information only as of December 31, 2018 and, consequently, the beneficial ownership of the above-mentioned entities may have changed between December 31, 2018 and May 13, 2019. (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) Includes 457,297 ordinary shares Mr. Cozadd has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 16,876 ordinary shares Mr. Swisher has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 101,665 ordinary shares Mr. Young has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 140,145 ordinary shares Ms. Hooper has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Ms. Hooper resigned from her position as Executive Vice President and General Counsel as of March 1, 2019 and is expected to continue as a part-time, non- executive employee until September 30, 2019. Includes 63,957 ordinary shares Mr. Miller has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019 and 250 shares Mr. Miller is expected to receive pursuant to RSUs scheduled to vest within 60 days of May 13, 2019. Includes 4,691 ordinary shares issuable to Mr. Berns pursuant to our Directors Deferred Plan as of May 13, 2019 and 25,968 ordinary shares Mr. Berns has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 9,929 ordinary shares issuable to Mr. Enright pursuant to our Directors Deferred Plan as of May 13, 2019 and 6,838 ordinary shares Mr. Enright has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 24,968 ordinary shares Mr. Gray has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 24,968 ordinary shares Ms. McSharry has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 25,968 ordinary shares Mr. Mulligan has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 11,195 ordinary shares held by The Kenneth W. O’Keefe Trust U/A/D 2/12/1997, of which Mr. O’Keefe is the sole trustee and sole beneficiary, and 22,249 ordinary shares issuable to Mr. O’Keefe pursuant to our Directors Deferred Plan as of May 13, 2019 and 21,468 ordinary shares Mr. O’Keefe has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. (17) Includes 24,968 ordinary shares Dr. Riedel has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. JAZZ PHARMACEUTICALS | Proxy Statement 25 Security Ownership of Certain Beneficial Owners and Management (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT (18) (19) (20) (21) Includes 18,668 ordinary shares Mr. Schnee has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 29,468 ordinary shares Dr. Sohn has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 16,968 ordinary shares Mr. Winningham has the right to acquire pursuant to options exercisable within 60 days of May 13, 2019. Includes 981,311 ordinary shares that our executive officers and non-employee directors have the right to acquire pursuant to options exercisable within 60 days of May 13, 2019, 250 ordinary shares that one of our executive officers is expected to receive pursuant to RSUs scheduled to vest within 60 days of May 13, 2019, and 36,869 ordinary shares issuable to non-employee directors pursuant to our Directors Deferred Plan as of May 13, 2019. See footnotes (6) through (8) and (10) through (20) above. Because Ms. Hooper is not currently serving as an executive officer of Jazz Pharmaceuticals, the number of ordinary shares and percentage ownership indicated in the table above with respect to the beneficial ownership of all directors and executive officers as a group do not include any ordinary shares beneficially owned by Ms. Hooper. 26 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT The following table provides information regarding our executive officers as of June 1, 2019. EXECUTIVE OFFICERS Name Bruce C. Cozadd Daniel N. Swisher, Jr. Robert Iannone Michael P. Miller Matthew P. Young Iain McGill(1) Paul Treacy Karen J. Wilson Age 55 56 52 62 50 47 58 56 Position Chairman and Chief Executive Officer President and Chief Operating Officer Executive Vice President, Research and Development Executive Vice President, U.S. Commercial Executive Vice President and Chief Financial Officer Senior Vice President, Jazz Pharmaceuticals Europe and Rest of World Senior Vice President, Technical Operations Senior Vice President, Finance and Principal Accounting Officer y x o r P (1) In April 2019, Mr. McGill notified us of his decision to resign from his position as Senior Vice President, effective as of June 28, 2019. Bruce C. Cozadd. Biographical information regarding Mr. Cozadd is set forth below under “Proposal 1—Election of Directors— Class III Directors Continuing in Office Until the 2020 Annual Meeting.” Daniel N. Swisher, Jr. was appointed our President and Chief Operating Officer as of January 2018. From December 2003 to December 2017, Mr. Swisher was Chief Executive Officer and a member of the board of directors of Sunesis Pharmaceuticals, Inc., a biopharmaceutical company focused on the development of novel targeted cancer therapeutics in hematologic and solid tumor malignancies. He also served as Chief Business Officer and Chief Financial Officer of Sunesis from 2001 to 2003. Prior to 2001, Mr. Swisher served in various management roles, including Senior Vice President of Sales and Marketing, for ALZA Corporation from 1992 to 2001. He currently serves as Chairman of the board of directors of Cerus Corporation, a biomedical products company focused on the field of blood transfusion safety, and as a member of the board of directors of Corcept Therapeutics Inc., a pharmaceutical company focused on cortisol-modulating therapeutics to address metabolic and other serious medical conditions. Mr. Swisher received a B.A. from Yale University and an M.B.A. from the Stanford Graduate School of Business. Robert Iannone, M.D., M.S.C.E. was appointed our Executive Vice President, Research and Development as of May 2019. From April 2018 until May 2019, Dr. Iannone served as Head of Research and Development and Chief Medical Officer of Immunomedics, Inc., a biopharmaceutical company. Prior to that, from July 2014 to April 2018, he served in the roles of Senior Vice President and Head of Immuno-oncology, Global Medicines Development and the Global Products Vice President at AstraZeneca plc, a global science-led biopharmaceutical company. From 2004 to 2014, Dr. Iannone served in management roles at Merck Co., Inc., a global biopharmaceutical company, culminating in his role as Executive Director and Section Head of Oncology Clinical Development. From 2001 to 2004, he served as Assistant Professor of Pediatrics and from 2004 to 2012 as Adjunct Assistant Professor of Pediatrics at the University of Pennsylvania School of Medicine. Since 2011, he has been serving on the Cancer Steering Committee of the Foundation for the National Institutes of Health. Dr. Iannone received a B.S. from The Catholic University of America, an M.D. from Yale University and an M.S.C.E. from University of Pennsylvania and completed his residency in Pediatrics and fellowship in Pediatric Hematology-Oncology at Johns Hopkins University. Michael P. Miller was appointed our Executive Vice President, U.S. Commercial, as of May 2017 and served as our Senior Vice President, U.S. Commercial, from April 2014 until May 2017. From April 2010 to January 2014, Mr. Miller was Senior Vice President and Chief Commercial Officer of Vivus, Inc., a biopharmaceutical company. From February 2006 to April 2010, he served as Vice President, Sales and Marketing, leading the HER Family Oncology Franchise, of Genentech, Inc., a biotechnology company and wholly owned subsidiary of Roche Holding Ltd. From January 2003 to December 2005, Mr. Miller served as the Senior Vice President, Chief Commercial Officer of Connetics Corporation, a specialty pharmaceutical company acquired by Stiefel Laboratories, Inc. Previously, from 1997 to 2001, he served as Vice President of the Urology Business Unit of ALZA Corporation, a pharmaceutical company acquired by Johnson & Johnson. Prior to 1997, Mr. Miller served 13 years in various sales and marketing positions at Syntex Corporation, a pharmaceutical company acquired by Roche Holding Ltd. He currently serves as a director on the board of Puma Biotechnology, Inc., a biopharmaceutical company, and as a member of two non-profit boards, the Leukemia and Lymphoma Society (Silicon Valley Chapter) and the Zane Beadles Parade Foundation. Mr. Miller received a B.S. in Business Administration and Finance from the University of San Francisco and an M.B.A. in Information and Computer Systems from San Francisco State University. JAZZ PHARMACEUTICALS | Proxy Statement 27 Executive Officers (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Matthew P. Young was appointed our Executive Vice President and Chief Financial Officer as of February 2015 and previously served as our Senior Vice President and Chief Financial Officer from March 2014 to February 2015 and as our Senior Vice President, Corporate Development from April 2013 to March 2014. Prior to joining us, Mr. Young worked in investment banking for approximately 20 years. From February 2009 to April 2013, he served as a managing director in global healthcare of Barclays Capital Inc., an investment banking firm, where his role included acting as the co-head of life sciences at Barclays Capital. From 2007 to 2008, Mr. Young served as a managing director of Citigroup Global Markets Inc., an investment banking firm, and from 2003 to 2007, as a managing director of Lehman Brothers Inc., an investment banking firm. From 1992 to 2003, he served in various capacities at other investment banking firms. In 2015, Mr. Young joined the board of directors of PRA Health Sciences, Inc., a contract research company, where he currently serves on the compensation and audit committees. He also serves as lead independent director and Chairman of the audit committee of CytomX Therapeutics, Inc., a biopharmaceutical company. Mr. Young received a B.S. in Economics and an M.B.A. from the Wharton School of the University of Pennsylvania. Iain McGill was appointed our Senior Vice President, Jazz Pharmaceuticals Europe and Rest of World as of March 2015. Mr. McGill served as Head of EUSA International and Senior Vice President, Jazz Pharmaceuticals from March 2014 to March 2015 and our Chief Commercial Officer, EUSA Pharma, from June 2012, when he joined Jazz Pharmaceuticals in connection with the EUSA Acquisition. From October 2011 until he joined Jazz Pharmaceuticals, Mr. McGill served as Chief Commercial Officer at EUSA Pharma (Europe) Ltd., where he previously served from August 2010 to September 2011 as President, Europe, International & Global Marketing, and from January 2010 to July 2010 as President of Europe. From 2006 to 2009, he served as Vice President and Global Business Manager at Wyeth, a pharmaceutical company acquired by Pfizer Inc. Mr. McGill began his pharmaceutical career in sales and over 20 years, held various positions in sales management, market research, marketing, business development and general management at Syntex Corporation (acquired by Roche Holding Ltd.), Roche Holding Ltd. and Novartis AG. In 2016, he joined the board of directors and the audit committee of Otonomy Inc., a biopharmaceutical company. Mr. McGill received a B.Sc in Biochemistry from the University of London. Paul Treacy was appointed our Senior Vice President, Technical Operations in July 2014. From April 2010 to May 2013, Mr. Treacy was Head of CMC, Supply Chain and Manufacturing at Janssen Alzheimer Immunotherapy Research & Development, LLC, a biotechnology company and a subsidiary of Johnson & Johnson. From August 2005 to April 2010, he served as General Manager of Janssen Biologics Ireland, a biopharmaceutical company and a subsidiary of Johnson & Johnson. From August 2002 to August 2005, Mr. Treacy was Vice President, Manufacturing Operations at Centocor Inc., a subsidiary of Johnson & Johnson, and from February 1999 to August 2002, he served as Executive Director, Operations, at Centocor BV. Mr. Treacy received a B.S. and an M.S. in Microbiology and a Higher Diploma in Computer Science from University College Cork and a Higher Diploma in Pharmaceutical Manufacturing Technology from Trinity College Dublin. Karen J. Wilson was appointed our Senior Vice President, Finance and Principal Accounting Officer as of February 2013 and served as our Vice President, Finance and Principal Accounting Officer from the closing of the Azur Merger in January 2012 until February 2013. Prior to the Azur Merger, she served as Jazz Pharmaceuticals, Inc.’s Vice President, Finance beginning in February 2011 and was appointed Principal Accounting Officer in March 2011. From 2009 to January 2011, she served as Vice President of Finance and Principal Accounting Officer at PDL BioPharma, Inc., a biotechnology company. From 2005 to 2009, she served as a principal at the consulting firm Wilson Crisler LLC. Prior to that, from 2001 to 2004, she was Chief Financial Officer of ViroLogic, Inc., a biosciences company. Prior to joining ViroLogic, Ms. Wilson served as Chief Financial Officer and Vice President of Operations for Novare Surgical Systems, Inc. from 1999 to 2001. Prior to 1999, Ms. Wilson worked for Deloitte & Touche LLP for ten years, serving clients in both the life sciences and technology fields. Ms. Wilson is a Certified Public Accountant in the State of California and received a B.S. in Business from the University of California, Berkeley. 28 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT EXECUTIVE COMPENSATION Compensation Discussion and Analysis The following Compensation Discussion and Analysis describes the material elements of compensation for the following individuals who served as our principal executive officer, principal financial officer and three other most highly compensated executive officers as of December 31, 2018. These individuals are our named executive officers, or NEOs, for 2018. Bruce C. Cozadd Chairman and Chief Executive Officer (CEO) Daniel N. Swisher, Jr. President and Chief Operating Officer (COO) Matthew P. Young Executive Vice President and Chief Financial Officer (CFO) Suzanne Sawochka Hooper Former Executive Vice President and General Counsel (GC) Michael P. Miller Executive Vice President, U.S. Commercial Table of Contents to Compensation Discussion and Analysis y x o r P Page Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2018 Performance Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Key Features of Our Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2018 Pay-for-Performance Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Compensation Philosophy and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 How We Determine Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Role of Our Compensation Committee and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Role of the Independent Compensation Consultant Competitive Assessment of Compensation – Peer Companies and Market Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Factors Used in Determining Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2018 Advisory Vote on Executive Compensation and Shareholder Engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Key Components and Design of the Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Total Direct Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Components of Total Direct Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2018 Performance Bonus Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Quantitative Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Qualitative Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2018 Compensation Decisions for Our Named Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 General Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Summary of 2018 Compensation Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Individual NEO Compensation Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Additional Compensation Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Ownership Guidelines for Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Change in Control Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Equity Grant Timing and Equity Plan Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Accounting and Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Risk Assessment Concerning Compensation Practices and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Reconciliations of Non-GAAP Financial Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 JAZZ PHARMACEUTICALS | Proxy Statement 29 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) Executive Summary Our compensation policies and elements are intended to provide the necessary incentives to properly align our executive officers’ performance with the interests of our shareholders while maintaining equitable and competitive executive compensation practices that enable us to attract and retain the highest caliber of executive officers. 2018 Performance Highlights In 2018, we delivered record revenues and made substantial progress on key milestones, including advancing multiple pre-clinical and early- and late-stage clinical development programs. In support of our strategy, we continued to expand and advance our research and development pipeline in our sleep and hematology/oncology therapeutic areas, both by conducting activities internally and by leveraging partnerships with third parties. Total Revenues Millions $ 2018 vs. 2017 Change 17% 1,891 1,488 1,619 1,325 GAAP EPS(1)(2) $ 2018 vs. 2017 Change (8)% 7.96 7.30 6.41 5.23 Non-GAAP Adjusted EPS(1)(3) $ 2018 vs. 2017 Change 24% 13.70 9.45 10.14 11.04 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 13% 3 YR CAGR(4) 12% 3 YR CAGR(4) 13% 3 YR CAGR(4) (1) Generally accepted accounting principles, or GAAP, net income per diluted share (GAAP earnings per share, or EPS) and non-GAAP adjusted net income per diluted share (Non-GAAP Adjusted EPS) for the 2015 period are attributable to Jazz Pharmaceuticals plc. (2) For 2017, GAAP net income included a net tax benefit of $149 million resulting from provisional estimates based on our analysis of the U.S. Tax Cuts and Jobs Act, or the U.S. Tax Act. Among other adjustments, the net tax benefit resulting from the U.S. Tax Act for 2017 was excluded from non-GAAP adjusted net income. (3) See the section “Reconciliations of Non-GAAP Financial Measures” below for reconciliations between GAAP net income and non-GAAP adjusted net income (and the related per share measures) and, for the 2015 period, GAAP net income attributable to Jazz Pharmaceuticals plc and non-GAAP adjusted net income attributable to Jazz Pharmaceuticals plc (and the related per share measure). (4) Represents the compound annual growth rate (CAGR) for the period from 2015 through 2018. Financial • 2018 total revenues of $1,891 million increased 17% over 2017 • 2018 GAAP net income of $447 million, or $7.30 per diluted share, compared to $488 million, or $7.96 per diluted share, for 2017 (as noted above, 2017 GAAP net income included a net tax benefit of $149 million resulting from provisional estimates based on our analysis of the U.S. Tax Act) • 2018 non-GAAP adjusted net income of $839 million, or $13.70 per diluted share, compared to $677 million, or $11.04 per diluted share, for 2017 Xyrem • 2018 net sales of Xyrem of $1,405 million increased 18% over 2017 • Settled all remaining patent infringement litigation against the nine companies that filed an abbreviated new drug application, or ANDA, for a generic version of Xyrem • In October 2018, received approval from U.S. Food and Drug Administration, or FDA, for Xyrem in the treatment of cataplexy or excessive daytime sleepiness, or EDS, in pediatric narcolepsy patients ages seven and older, with pediatric exclusivity which added six months to the expiration date of our existing Orange Book-listed Xyrem patents Defitelio/defibrotide • 2018 net sales of Defitelio of $149 million increased 12% over 2017 30 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Vyxeos Regulatory Submissions Research & Development • • • • • 2018 net sales of Vyxeos of $101 million compared to $34 million in 2017 In August 2018, received approval from European Commission for Vyxeos for adults with newly- diagnosed therapy-related acute myeloid leukemia, or t-AML, or AML with myelodysplasia-related changes, or AML-MRC, and shortly thereafter, commenced a rolling launch in the European Union, or EU In March 2018, FDA accepted for filing our new drug application, or NDA, for SunosiTM (solriamfetol) as a treatment to improve wakefulness in adult patients with EDS associated with obstructive sleep apnea or narcolepsy, and, in the first quarter of 2019, FDA approved Sunosi y x o r P In November 2018, submitted a marketing authorization application, or MAA, to the European Medicines Agency for solriamfetol In August 2018, announced a five-year collaboration with The University of Texas MD Anderson Cancer Center to evaluate potential treatment options for hematologic malignancies, with a near-term focus on Vyxeos, and shortly thereafter commenced activities under this collaboration • During 2018, commenced and/or advanced several development programs in both sleep and hematology/oncology, including (i) completing patient enrollment in our Phase 3 clinical trial evaluating JZP-258 for the treatment of EDS and cataplexy in narcolepsy, (ii) commencing patient enrollment in our Phase 3 clinical trial evaluating JZP-258 for the treatment of idiopathic hypersomnia and (iii) commencing patient enrollment in our Phase 2 clinical trial evaluating defibrotide for the prevention of acute Graft-versus-Host Disease Key Features of Our Executive Compensation Program What We Do What We Don’t Do Í Design executive compensation to align pay È No excessive change in control or severance with performance payments Í Balance short-term and long-term incentive compensation, with the majority of executive compensation being “at-risk” Í Use same performance bonus plan for all non-sales employees, including executives, with 100% of CEO’s bonus based on pre-established corporate performance goals È No “single-trigger” cash or equity change in control benefits È No repricing of underwater stock options without prior shareholder approval Í Establish maximum payout amount under È No excessive perquisites performance bonus plan and require threshold level of achievement for payout with respect to financial metrics Í Maintain share ownership guidelines È No tax gross ups on severance or change in control benefits Í Provide “double-trigger” change in control È No post-termination retirement or pension benefits benefits that are not available to employees generally Í Prohibit hedging and pledging by executive È No guaranteed bonuses or base salary officers and directors increases Í Have 100% independent directors on the compensation committee Í Hire independent compensation consultant who reports directly to the compensation committee JAZZ PHARMACEUTICALS | Proxy Statement 31 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) 2018 Pay-for-Performance Overview A significant portion of target total direct compensation for our CEO and other NEOs is structured in the form of “at-risk” compensation, consisting of annual performance bonus and equity incentive awards, with the performance bonus payouts and equity award values dependent upon our company performance. This aligns our executives’ interests with those of our shareholders for near- and long-term performance. Target total direct compensation for 2018, as shown below, reflects annual base salary paid, annual target performance bonus, the cash signing bonus Mr. Swisher received in connection with his appointment as President and COO and the grant date fair value of equity awards granted during the year (as such equity awards are reported in the Summary Compensation Table). 2018 Target Total Direct Compensation Pay Mix k s R i - t A % 1 9 46% Restricted Stock Units 37% Stock Options k s R i - t A % 5 8 42% Restricted Stock Units 34% Stock Options 9% Target Performance Bonus 9% Base Salary CEO* 8% Target Performance Bonus 15% Base Salary Other NEO Average* * Numbers do not add to 100% due to rounding Compensation Philosophy and Objectives Our executive compensation program is designed with the following objectives and philosophy: • • • Attract, incentivize, reward and retain diverse, talented individuals with relevant experience in the life sciences industry through a competitive pay structure. We reward individuals fairly over time and seek to retain those individuals who continue to meet our high expectations. Deliver balanced total compensation packages to accomplish our business objectives and mission. Our executive compensation program focuses on total compensation, combining short- and long-term components, cash and equity, and fixed and variable payments, in the proportions that we believe are the most appropriate to incentivize and reward our executive officers for achieving our corporate goals while minimizing incentives for excessive risk-taking or unethical conduct. Align pay with our performance. Our annual bonus awards are not earned unless pre-determined levels of performance are achieved against annual corporate objectives approved by our board of directors at the beginning of the year. Likewise, our stock option awards will not provide realizable value and our restricted stock unit, or RSU, awards will not provide increased value unless there is an increase in the value of our shares, which benefits all shareholders. We also have executive share ownership guidelines to further support our ownership culture and align the interests of executive officers and shareholders. 32 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) How We Determine Executive Compensation Role of Our Compensation Committee and Executive Officers The compensation committee is (and was at all times during 2018) composed entirely of independent directors, as defined by Rule 5605(a)(2) of the Nasdaq listing standards. Our compensation committee meets as often as it determines necessary to carry out its duties and responsibilities through regularly scheduled meetings and, if necessary, special meetings. Our compensation committee also has the authority to take certain actions by written consent of all members. The agenda for each compensation committee meeting is usually developed by members of our human resources department and our CEO, with input from members of our legal department, and is reviewed and finalized with the chairperson of the compensation committee. In 2018, the compensation committee met six times and did not act by unanimous written consent. As of the date of this proxy statement, in 2019, the compensation committee has met three times and has not acted by unanimous written consent. y x o r P The compensation committee reviews and oversees our compensation policies, plans and programs and reviews and generally determines the compensation to be paid to the executive officers, including the NEOs. Either the compensation committee or the independent members of our board of directors, upon recommendation from the compensation committee, who receives input and advice from its independent compensation consultant, approve the compensation of our CEO. References in this Compensation Discussion and Analysis to our board of directors approving our CEO’s compensation are to the independent members of our board of directors. The compensation committee does not delegate any of its functions to others in determining executive compensation. In making other executive compensation determinations, the compensation committee considers recommendations from our CEO. In making his recommendations, our CEO receives input from our human resources department and from the individuals who manage or report directly to the other executive officers, and he reviews various third party compensation surveys and compensation data provided by the independent compensation consultant to the compensation committee, as described below. While our CEO discusses his recommendations for the other executive officers with the compensation committee, he does not participate in the deliberations and recommendations to our board of directors concerning, or our board of directors’ determination of, his own compensation. Members of our human resources and legal departments also attend compensation committee meetings. Below are the highlights of the annual cycle our compensation committee follows in reviewing and making decisions with respect to our executive compensation program. Q1 Review prior year’s performance and determine bonus payout; set current year components and levels of compensation Q2 Consider any compensation- related proxy proposals and disclosures; review non-employee director compensation Q3 Review compensation-related corporate governance trends and any feedback received from shareholders; determine peer group for next year Q4 Discuss compensation philosophy and policy direction for next year, including components of compensation Role of the Independent Compensation Consultant The compensation committee engages an independent compensation consultant each year to provide a competitive compensation assessment with respect to the executive officers to assist the compensation committee in making annual compensation decisions. Since 2010, Radford has been engaged by the compensation committee each year to provide peer company and industry compensation data and provide the compensation committee with advice regarding executive officers’ compensation, including base salaries, performance- based bonuses and long-term equity compensation, and similar advice regarding non-employee director compensation. The compensation committee has also consulted with Radford to update the peer company and industry compensation data on an annual basis and as needed with respect to specific questions that arise and on an advisory basis with respect to addressing other responsibilities arising under the compensation committee charter, including trends and best practices regarding executive compensation and compensation committees, in order to help inform the compensation committee’s decisions. Radford reports directly to the compensation committee, which maintains the authority to direct Radford’s work and engagement, and advises the compensation committee and our human resources department on projects from time to time. Radford interacts with management to gain access to company information that is required to perform services and to understand the culture and policies of the organization. Radford attends compensation committee meetings, and the compensation committee and Radford meet in executive session with no members of management present, as needed, to address various compensation matters, including deliberations regarding our CEO’s compensation. JAZZ PHARMACEUTICALS | Proxy Statement 33 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT In assessing Radford’s independence from management in providing executive compensation services to the compensation committee, the compensation committee considered that Radford is only engaged by, takes direction from, and reports to, the compensation committee for such services and, accordingly, only the compensation committee has the right to terminate or replace Radford as its compensation consultant at any time. The compensation committee also analyzed whether the work of Radford as a compensation consultant with respect to executive and director compensation raised any conflict of interest, taking into consideration the following factors: ✓ the provision of other services to our company by Radford ✓ any business or personal relationship of the individual and its affiliates; compensation advisors with any compensation committee member; ✓ the amount of fees we paid to Radford and its affiliates as a ✓ Radford’s policies and procedures that are designed to percentage of Radford’s total revenue; prevent conflicts of interest; and ✓ any business or personal relationship of Radford or the individual compensation advisors employed by it with any executive officer of our company; ✓ any ordinary shares of our company owned by Radford or the individual compensation advisors employed by it. The compensation committee has determined, based on its analysis of the above factors, that the work of Radford and the individual compensation advisors employed by Radford as compensation consultants to our company has not created any conflict of interest. Competitive Assessment of Compensation – Peer Companies and Market Data Because we aim to attract and retain the most highly qualified executive officers in an extremely competitive market, the compensation committee believes that it is important when making its compensation decisions to be informed as to the current practices of comparable public companies with which we compete for top talent. To this end, the compensation committee reviews market data for each executive officer’s position, compiled by Radford as described below, including information relating to the mix and levels of compensation for executive officers in the life sciences industry, with a focus on target total direct compensation in line with the compensation committee’s holistic approach to executive compensation. 2018 Peer Group. When developing a proposed list of peer companies to be used in connection with making compensation decisions for 2018, Radford re-examined our compensation philosophy and peer group criteria and companies to recommend changes to our 2017 peer group company list to reflect our growth, the increase in our revenues and market capitalization and the consolidation in our industry. Radford recommended considering companies: • • • • in the life sciences industry (specifically biotechnology and specialty bio/pharma companies) with commercial products on the market; with revenue of approximately one-fourth (0.25x) to three times (3x) our then-projected revenue (resulting in a range of $375 million to $5 billion in revenue); with market values of approximately one-fourth (0.25x) to four times (4x) our market capitalization at the time (resulting in a range of between $2.3 billion to $36 billion in market capitalization); and primarily located in the U.S. with a secondary focus on companies that are headquartered in Europe. Based on these criteria, in August 2017, to form our 2018 peer group, Radford recommended, and our compensation committee approved, eliminating Actelion Ltd. and Medivation, Inc. (which were acquired since the 2017 peer group company list was approved) from our peers and adding Bioverativ Inc. to form our 2018 peer group. 2019 Peer Group. When developing a proposed list of peer companies to be used in connection with making compensation decisions for 2019, Radford recommended companies based on the same criteria used for the 2018 peer group, adjusted for then-current revenue and market values. Based on these criteria, in October 2018, Radford recommended, and our compensation committee approved, eliminating Bioverativ Inc. (which was acquired since the 2018 peer group company list was approved), Shire plc (which announced its intent to be 34 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT acquired in May 2018) and The Medicines Company (which fell below the then-current revenue criteria) from our peers and adding Exelixis, Inc. (which met both the revenue and market capitalization criteria) and Nektar Therapeutics, Neurocrine Biosciences, Inc. and Sarepta Therapeutics, Inc. (which each met the market capitalization criteria) to form our 2019 peer group. Name Actelion Ltd. Alexion Pharmaceuticals, Inc. Alkermes plc BioMarin Pharmaceutical Inc. Bioverativ Inc. Endo International plc Exelixis, Inc. Horizon Therapeutics plc (formerly Horizon Pharma plc) Incyte Corporation Ionis Pharmaceuticals, Inc. Mallinckrodt plc Medivation, Inc. Nektar Therapeutics Neurocrine Biosciences, Inc. Regeneron Pharmaceuticals, Inc. Sarepta Therapeutics, Inc. Seattle Genetics Inc. Shire plc The Medicines Company United Therapeutics Corporation Vertex Pharmaceuticals Incorporated Peer Group Metrics ($ in millions) Peer Revenue – 50th Percentile Jazz Revenue Jazz Revenue Percentile Rank Peer Market Cap – 50th Percentile Jazz Market Cap Jazz Market Cap Percentile Rank y x o r P Peer Group Inclusion 2018 2019 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 1,226 1,528 56th 8,785 9,152 57th 1,221 1,687 65th 8,234 10,576 67th 2017 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 1,144 1,352 55th 8,229 8,683 51st The Jazz percentile ranks shown above reflect trailing 12 months’ revenue and 30-day average market capitalization for our company and the median of each peer group, measured as of the time Radford prepared its final recommendations regarding each peer group for the compensation committee. 2018 Market Data. In early 2018, Radford completed an assessment of executive compensation based on our 2018 peer group to inform the compensation committee’s determinations of executive compensation for 2018. This assessment used market data that was compiled from multiple sources, including: (i) data from the Radford Global Life Sciences Survey with respect to the 2018 peer group companies listed above, or the peer survey data; (ii) the 2018 peer group companies’ publicly disclosed information, or public peer data; and (iii) data from public biotechnology and pharmaceutical companies in the Radford Global Life Sciences Survey that had revenue from $375 million to $5 billion, or the general survey data, which included survey data with respect to our selected 2018 peer group companies. The components of the market data were based on the availability of sufficient comparative data for an executive officer’s position. Generally, peer survey data and public peer data are used in establishing market data reference points, and the general survey data is used when there is a lack of peer survey data and public peer data for an executive officer’s position. The peer survey data, the general survey data, and the public peer data, collectively referred to in this proxy statement as market data, were reviewed by the compensation committee, with the assistance of Radford, and used as one reference point, in addition to other factors, in setting our NEOs’ compensation. Use of 2018 Market Data. The compensation committee reviews target total direct compensation, comprising both target total cash compensation and equity compensation, against the market data described above primarily to ensure that our executive compensation JAZZ PHARMACEUTICALS | Proxy Statement 35 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT program, as a whole, is positioned competitively to attract and retain the highest caliber of executive officers and that the total direct compensation opportunity for the executive officer group is aligned with our corporate objectives and strategic needs. The compensation committee does not target a specific percentile for setting the level of compensation for the NEOs and does not otherwise use a formulaic approach to setting pay against the market data; rather, the compensation committee reviews a range of market reference points (generally at the 25th, 50th, 60th and 75th percentiles of the market data) for target total direct compensation including the elements of pay (base salary, target annual performance bonus and equity awards) as one factor before making compensation determinations. The compensation committee believes that over-reliance on benchmarking can result in compensation that is unrelated to the value delivered by our executive officers because compensation benchmarking does not take into account company-to-company variations among actual roles with similar titles or the specific performance of the executive officers. Factors Used in Determining Executive Compensation Our compensation committee sets the compensation of our executive officers at levels that the compensation committee determines to be competitive and appropriate for each NEO, using the compensation committee’s professional experience and judgment. The compensation committee’s pay decisions are not driven by a particular target level of compensation to market data, and the compensation committee does not otherwise use a formulaic approach to setting executive pay. Instead, the compensation committee believes that executive pay decisions require consideration of multiple relevant factors, which may vary from year to year. The figure below reflects the factors the compensation committee considers in determining and approving the amount, form and mix of pay for our NEOs. Company performance Each NEO’s target total and equity ownership Each NEO’s criticality to the business CEO’s recommendations (other than for himself), based on direct knowledge of NEO performance and his extensive industry experience Internal pay equity The need to attract and retain talent Aggregate compensation cost and impact on shareholder dilution Factors Used in Determining NEO Compensation Range of market data reference points (generally the 25th, 50th, 60th and 75th percentiles of the market data) Radford’s recommendations on compensation policy, design and structure Shareholder feedback Each NEO’s past performance Independent judgment of members of compensation committee 2018 Advisory Vote on Executive Compensation and Shareholder Engagement At our 2018 annual meeting, the shareholders approved, on an advisory basis, the compensation of the NEOs, as disclosed in the proxy statement for that meeting pursuant to the compensation disclosure rules of the SEC. The compensation committee reviewed the final vote results for the proposal, and, given the significant level of shareholder support (92% of total votes cast with respect to the advisory proposal), concluded that our compensation program continues to provide a competitive pay-for-performance package that effectively incentivizes the NEOs and encourages long-term retention. Accordingly, the compensation committee and, with respect to our CEO’s compensation, our board of directors, determined not to make any significant changes to our executive compensation policies or decisions as a result of the vote. Our compensation committee and, with respect to our CEO’s compensation, our board of directors, will continue to consider the outcome of our say-on-pay votes and our shareholders’ views when making future compensation decisions for the NEOs. We also engage with our shareholders when they have topics of particular concern, which may include issues related to executive compensation. Shareholder feedback is reported to our compensation committee throughout the year. The following graphic describes our typical shareholder outreach and engagement cycle. 36 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Annual General Meeting Ongoing Shareholder Outreach and Engagement Prior to Annual General Meeting Discuss business strategy and performance Seek feedback on any matters for shareholder consideration Publish Annual Report on Form 10-K and proxy statement, highlighting recent board and company activities After Annual General Meeting Discuss vote outcomes from Annual General Meeting in light of existing governance and compensation practices, as well as any feedback received from shareholders during proxy season Review corporate governance trends, recent regulatory developments, and our own policies and procedures y x o r P Off-Season Engagement and Evaluation of Practices Consider any shareholder feedback regarding our board governance and executive compensation practices to better understand investor viewpoints and inform discussions in the boardroom Evaluate potential changes to board, governance or executive compensation practices in light of shareholder feedback and review of practices Key Components and Design of the Executive Compensation Program Total Direct Compensation Our compensation program focuses on target total direct compensation, which consists of base salary, target bonus opportunity (which, together with base salary, we refer to as target total cash compensation), and long-term equity awards (valued based on an approximation of grant date fair value). Performance Bonus Opportunity Base Salary Long-Term Incentive Awards TOTAL DIRECT COMPENSATION JAZZ PHARMACEUTICALS | Proxy Statement 37 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT We also offer our executive officers severance benefits upon certain types of involuntary terminations in connection with a change in control. The table below captioned “Components of Total Direct Compensation” provides an explanation of key features of each of the primary components of our executive compensation program and why we provide the particular compensation component. The compensation committee takes a holistic approach to compensation and seeks to ensure that the aggregate level of pay across all of the pay elements is meeting the company’s desired objectives for each executive officer. The compensation committee does not have any formal policies for allocating compensation among salary, performance bonus opportunity and equity grants. Instead, the compensation committee uses its experience and business judgment to establish a total compensation program for each NEO that is a mix of current, short-term and long-term incentive compensation, and cash and non-cash compensation, which it believes appropriate to achieve the goals of our executive compensation program and our corporate goals. Because we believe it is important to our success to pursue long-term corporate objectives, to avoid excessive risk-taking, and to preserve our cash resources, a significant portion of the NEOs’ total direct compensation is comprised of “at-risk” compensation, consisting of performance- based bonus opportunities and long-term equity awards, which align the executive officers’ incentives with the interests of our shareholders. This allocation between “at-risk” and fixed compensation is consistent with our pay-for-performance philosophy. Components of Total Direct Compensation Component Base Salary Key Features Purpose • Fixed cash compensation • No amount is guaranteed • Provides fixed level of compensation that is competitive within our industry and geographic areas Performance Bonus Award • Amounts are reviewed and determined annually, and are generally effective by March 1 each year • Cash compensation under the performance bonus plan, which is “at-risk” because the realized value is dependent upon achievement of performance objectives • Target bonuses are reviewed and determined annually and expressed as a percentage of annual base salary earned • Bonus opportunity is directly dependent on achievement of specific corporate objectives derived from our annual corporate goals • Actual bonuses paid shortly after the end of each year, based on the extent corporate goals are attained as determined by the compensation committee, and for executive officers other than our CEO, their individual contributions toward such achievements • Provides financial incentives for our executives officers to achieve key corporate objectives that drive our business • Rewards our executive officers for attaining corporate objectives and, for executive officers other than our CEO, their individual contributions toward such achievements 38 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Component Key Features Purpose Long-Term Incentive Compensation • Equity compensation generally in the form of stock options and RSUs granted under the 2011 Equity Incentive Plan, which is “at-risk” because the realized value is dependent upon our share price • Awards are discretionary and reviewed and generally granted annually, early in the year, at time of hire or promotion or in other rare circumstances such as recognition of outstanding performance • Awards to executive officers are granted shortly after annual or quarterly financial results released to public • Stock options and RSUs generally vest over a 4-year period subject to executive officer’s continued service with us; stock option exercise price is set equal to fair market value on date of grant (i.e., closing price on Nasdaq Global Select Market) • We have executive share ownership guidelines to further support our ownership culture and align the interests of executive officers and shareholders • Fosters ownership culture • Links compensation to long-term success • Stock options are a key aspect of our pay-for-performance culture, by providing a return to our executive officers only if the market price of our ordinary shares appreciates over the stock option term y x o r P • RSU awards cover fewer shares than the stock options that deliver a similar value to an executive officer, and as a result, RSU awards enable the company to minimize dilution to shareholders while reinforcing the importance of shareholder value creation • RSU awards provide a return based on the market price of our ordinary shares; if our share price declines, RSU awards correspondingly decline in value but still maintain value, and therefore, a mix of RSU awards and stock options aligns executive officers’ interests with those of shareholders by minimizing incentive for short-term risk-taking at the expense of realizing long-term value Other Benefits. Executive officers based in the United States are eligible to participate in all of our benefit plans, such as the 401(k) Plan (see the section below “Description of Compensation Arrangements–401(k) Plan”), our medical, dental, vision, short-term disability, long- term disability and group life insurance plans, in each case generally on the same basis as other employees. Executive officers based in the United States or Ireland are eligible to participate in our Employee Stock Purchase Plan, or ESPP, generally on the same basis as other employees. We also have a section 125 flexible benefits healthcare plan and a flexible benefits childcare plan under which employees can set aside pre-tax funds to pay for qualified healthcare expenses and qualified childcare expenses not reimbursed by insurance. We do not currently offer pension or other retirement benefits in the United States, but do offer pension or other retirement benefits in certain other countries. Severance Benefits upon Change in Control. Executive officers based in the United States are also eligible to participate in our Amended and Restated Executive Change in Control and Severance Benefit Plan, or the change in control plan, which is described below under the headings “Additional Compensation Information—Change in Control Plan” and “Potential Payments upon Termination or Change in Control—Amended and Restated Executive Change in Control and Severance Benefit Plan.” The change in control plan provides certain severance benefits to participants, in connection with specified involuntary termination events, including termination without cause and constructive termination, following a change in control. Certain executive officers who are not employed by our U.S. affiliates receive comparable change in control benefits pursuant to their employment agreements. The compensation committee believes these severance benefits are important from a retention perspective to provide some level of protection to our executives who might be terminated following a change in control and that the amounts are reasonable and maintain the competitiveness of our executive compensation and retention program. The compensation committee believes this structure serves to mitigate the distraction and loss of key executive officers that may occur in connection with rumored or actual fundamental corporate changes. Such payments protect the interests of our shareholders by enhancing executive focus during rumored or actual change in control activity, retaining executives despite the uncertainty that generally exists while a transaction is under consideration and encouraging the executives responsible for negotiating potential transactions to do so with independence and objectivity. We do not provide any tax gross up payments on severance benefits. Clawback Requirement. As a public company, if we are required to restate our financial results due to our material noncompliance with any financial reporting requirements under the federal securities laws as a result of misconduct, our CEO and CFO may be legally required to reimburse our company for any bonus or other incentive-based or equity-based compensation they receive in accordance with the provisions of section 304 of the Sarbanes-Oxley Act of 2002. JAZZ PHARMACEUTICALS | Proxy Statement 39 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) 2018 Performance Bonus Program The corporate objectives and relative weightings established by the board of directors for the 2018 performance bonus program that were communicated to the NEOs in early 2018 are described in the chart below. The total revenue objective described below included stretch goals with the opportunity to earn up to an additional 15% bonus program funding. Bonus Opportunity 70% Quantitative Corporate Objectives 30% Qualitative Corporate Objectives 30% Total Revenue 15% Adjusted Net Income 25% Product Development 20% Corporate Development 10% Organizational Following the end of the year, after adding together the resulting bonus pool funding percentages for the quantitative and qualitative objectives based on their relative weightings of 70% and 30%, respectively, the compensation committee approved an overall bonus pool funding percentage of 100.1% of the target bonus pool for the 2018 plan year, as further described below. The compensation committee did not set specific objectives for individual executive officers. Each executive officer is responsible for contributing to the corporate objectives, individually and as part of the leadership team, with each objective deemed to be important in determining the level of the company’s performance during the year. In approving individual bonus awards, the compensation committee considers the individual contribution towards the company’s achievement of the corporate objectives by each executive officer (other than our CEO). The actual bonus payments approved for each of the NEOs for 2018 are described below under “2018 Compensation Decisions for Our Named Executive Officers.” Quantitative Objectives Each of the three main quantitative, or objectively measurable, objectives for 2018, with a total relative overall weighting of 70%, is described in the table and accompanying footnotes below, including each objective’s weighting, actual results and performance multipliers, as well as the total bonus pool funding percentage resulting from the level of achievement of the quantitative objectives. The compensation committee approved an algorithm with respect to each main quantitative objective (as well as the total revenue stretch goals discussed below) for calculating the bonus pool funding attributable to the extent of achievement for each such objective. With respect to the total revenue objective, the compensation committee approved three related additional, or stretch, goals, each with its own individual weighting. The compensation committee set specific threshold and maximum levels of achievement for the total revenue objective and the related stretch goals, which are described in the footnotes to the table below. For the quantitative product development objectives, the compensation committee established various objectively measurable target goals within these objectives but did not set a threshold performance level; rather, an overall achievement of between 0% and 200%, measured against the multiple targets as described in more detail below, was determined by the compensation committee and used to calculate the applicable bonus pool funding percentage attributable to the product development objectives. 40 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Quantitative Objectives Weighting Actual Results Multiplier Bonus Pool Funding(3) 1. Total Revenue Objective: Achieve total revenue in 2018 of 30% Below target: Total revenue 97%(2) 29.2% $1,908 million (at budgeted foreign currency exchange rates)(1) of $1,898 million • Stretch goal: Achieve certain Xyrem year-over-year bottle 7% Above target 100% 7.0% volume growth(4) • Stretch goal: Exceed budgeted Vyxeos U.S. sales volume(5) 5.75% Below threshold • Stretch goal: Achieve market access for Vyxeos in UK, France 2.25% Achieved in UK and Germany(6) 2. Adjusted Net Income Objective: Achieve non-GAAP adjusted net income* in 2018 of $801 million(1) 15% Above target: non-GAAP adjusted net income* of $840 million 0% 33% 0% 0.75% 124%(7) 18.7% y x o r P 3. Product Development Objectives: advance internal molecule 25% Achieved at 90% level(8) 90% 22.5% strategies and execute on defined R&D projects(8) Total 78.14%(9) (1) (2) (3) If the specified threshold annual performance level was met (90% of target for the total revenue objective and the adjusted net income objective), then a pre-established scaled performance multiplier (ranging from 50% to 150% for the total revenue objective and 50% to 200% for the adjusted net income objective) would be used to calculate the applicable bonus pool funding percentage attributable to such quantitative objective. The performance multiplier would be zero if performance was below the threshold level, 50% if performance was at the threshold level, and then scaled for performance above 50% up to the applicable maximum level. The performance multiplier was capped for performance above the specified maximum performance level (110% of target for the total revenue objective and 120% of target for the adjusted net income objective). To calculate the threshold performance achievement level and performance multiplier, the reported revenue of $1,890.9 million was increased by approximately $7.7 million to adjust for certain budgeted revenues following the closing of the sale of our Prialt® (ziconotide) intrathecal infusion, or Prialt, assets and reduced by approximately $0.5 million to adjust for the impact of foreign currency exchange rates that were more favorable than the budgeted rates. The percentages in this column represent, for each quantitative corporate objective, the weight of the quantitative objective multiplied by the performance multiplier that corresponds to the actual achievement of such quantitative objective. (4) With respect to the Xyrem total bottle growth stretch goal, 3.8% annual bottle volume growth would have resulted in 3.5% added to the total bonus pool funding percentage, and 4.8% annual bottle volume growth would have resulted in another 3.5% added to the total bonus pool funding percentage. Actual achievement of 5.5% bottle volume growth for 2018 was above the threshold level of achievement. (5) With respect to the Vyxeos U.S. sales volume stretch goal, the performance levels were set at achievement above the budgeted U.S. sales volume. This stretch goal was inherently difficult to achieve from the outset given that we are still in the early stages of our launch of Vyxeos in a competitive and complex marketplace for AML. Exceeding the sales volume budget by 5% would have resulted in 2.875% added to the total bonus pool funding percentage, and exceeding the sales volume budget by 10% would have resulted in another 2.875% added to the total bonus pool funding percentage. Actual Vyxeos U.S. sales volume for 2018 was below the budgeted U.S. sales volume. (6) With respect to the Vyxeos market access stretch goal, the performance goal consisted of achievement of market access for Vyxeos in three European countries: UK, France and Germany. Achieving market access in each of those countries would result in 0.75% per country being added to the total bonus pool funding percentage, for a potential total of 2.25%. We were able to achieve market access only in the UK in 2018, which resulted in 0.75% added to the total bonus pool funding percentage. (7) To calculate the threshold performance achievement level and performance multiplier, both reported non-GAAP adjusted net income and the related performance objective were increased by approximately $1.4 million to account for certain budgeted earnings following the closing of the sale of our Prialt assets. JAZZ PHARMACEUTICALS | Proxy Statement 41 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT (8) With respect to the product development objectives, the compensation committee determined that the actual achievement by the company was 90%, resulting in a performance multiplier of 90%, and therefore, a 22.5% bonus pool funding percentage, based on achievement with respect to the target goals as described below: Performance Category Sleep Therapeutic Area Clinical Activities Hematology/Oncology Therapeutic Area Clinical Activities Molecule Strategies Target Goals and Results This performance category consisted of the following goals: (i) FDA approval of Sunosi (solriamfetol) by the fourth quarter of 2018; (ii) solriamfetol MAA submission in the EU by the fourth quarter of 2018; (iii) achieving last patient out in Phase 2 trial of Sunosi for the treatment of excessive sleepiness in Parkinson’s disease by the fourth quarter of 2018; (iv) supplemental NDA, or sNDA, and pediatric written request submission for Xyrem by the second quarter of 2018; (v) achieving NDA submission readiness for JZP-507 by mid-2018; and (vi) completion of patient randomization in Phase 3 trial of JZP-258 by the fourth quarter of 2018. The compensation committee determined that we had met each of the performance goals for this category except for FDA approval of Sunosi by the end of 2018. This performance category consisted of the following goals: (i) receiving regulatory approval from European Commission for Vyxeos for adults with newly-diagnosed t-AML or AML-MRC by the fourth quarter of 2018; (ii) cumulative enrollment of 200 patients in Phase 3 trial of defibrotide for prevention of veno-occlusive disease by the third quarter of 2018; (iii) first patient enrolled in Phase 2 trial of defibrotide for prevention of acute Graft versus Host Disease by the first quarter of 2018; (iv) specific progress on a new recombinant crisantaspase program; and (v) selection of formulation for investigational new drug-, or IND-, enabling activities for a new CombiPlex product candidate by the fourth quarter of 2018. The compensation committee determined that we had met each of these performance goals for this category. This performance category consisted of the following goals: (i) delivering updated integrated molecule strategy plans and 2018 portfolio recommendations by the fourth quarter of 2018 and (ii) delivering a plan to generate data to inform use in specific patient subpopulations by the second quarter of 2018. The compensation committee determined that we had met each of these performance goals for this category. With respect to the product development objectives, each of the three “top priority” goals – those relating to FDA approval of Sunosi, JZP-258 Phase 3 trial patient randomization and EU regulatory approval of Vyxeos – carried a 20% weight, for a collective weight of 60%. The three “high priority” goals – those relating to sNDA and pediatric written request submission for Xyrem, specific progress on a new recombinant crisantaspase program and selection of formulation for IND-enabling activities for CombiPlex – collectively carried a 20% weight. The molecule strategy development goals collectively carried a 10% weight. All other goals carried a 10% weight. In determining that the actual achievement by the company was 90% for the product development objective, the compensation committee employed a holistic analysis that took into account the compensation committee’s assessment of the degree to which the product development objective criteria were met as a whole against the backdrop of competing development priorities. In this regard, the compensation committee took into account the fact that the company had multiple planned milestones in 2018 and that the Xyrem sNDA submission and regulatory approval and the solriamfetol MAA submission in particular required dedication of significant development resources that made achieving the established performance criteria more difficult. In addition, certain of the 2018 development criteria were aggressive and set at challenging levels. Although we had achieved 12 out of our 13 performance criteria, the compensation committee considered that the FDA’s decision on approval of Sunosi, one of the three “top priority” goals, was postponed to 2019 through an extension of the Prescription Drug User Fee Act date resulting from a submission we made during the course of discussions with the FDA regarding draft labeling. After considering the extent to which the performance criteria had been met as a whole against the backdrop of competing priorities, and after factoring in the difficulty of achievement of the performance criteria that were met and that were not met, the compensation committee determined that, on balance, the achievement by the company was at the 90% level. Amounts may not total due to rounding. Non-GAAP adjusted net income is a non-GAAP financial measure that both excludes certain items from our GAAP reported net income and includes certain tax-related adjustments. For more information on our presentation and calculation of non-GAAP adjusted net income, and a reconciliation of non-GAAP adjusted net income to GAAP net income, see “Reconciliations of Non-GAAP Financial Measures” below. In addition, solely for purposes of calculating the performance multiplier for 2018, non-GAAP adjusted net income and the performance objective included additional adjustments as set forth in footnote (7) to this table. (9) * 42 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) Qualitative Objectives y x o r P The qualitative corporate objectives approved by the board of directors fell into two categories: (1) progress on corporate development activities, with a relative weighting of 20%, and (2) a demonstrated commitment to and progress on certain organizational goals, with a relative weighting of 10%. Achievement of the qualitative objectives is inherently less objectively measurable than with respect to the quantitative objectives. Corporate Development Objective. The objective relating to progress on corporate development activities consisted of identifying and implementing new collaborations and acquisitions and expanding our development and commercial portfolio of innovative products through a range of strategic and partnering transactions with a focus on sleep, hematology/oncology and identification of additional therapeutic area opportunities. The multiplier applied to the corporate development objective ranged from 0% to 200%, based on the compensation committee’s determination of the extent to which the corporate development objective was achieved during the year. In considering the company’s corporate development accomplishments in 2018, the compensation committee noted that we had identified one significant opportunity which we ultimately determined not to pursue and completed a significant strategic partnership deal with Codiak, Inc., which closed in the first week of 2019, that we believe will allow us to potentially develop multiple new therapies as we seek to add long-term value for patients and shareholders. The compensation committee weighed heavily our successful divestiture of our Prialt assets, our efforts to enhance our internal corporate development approval process and governance structure, our successful refinancing of our credit agreement, and our active and thoughtful corporate development process that led to the evaluation of several other opportunities during the year. However, because we were not able to close at least one significant corporate development transaction, the compensation committee determined that, as a whole, our achievement resulted in a multiplier of 60% and, therefore, a 12% bonus pool funding percentage for the 2018 corporate development objective. Organizational Objective. With respect to the organizational objective, the compensation committee established three sub-goals. Because the sub-goals are not objectively measurable, they were not assigned individual weightings. The multiplier applied to the organizational corporate objective ranged from 0% to 200%, based on the compensation committee’s determination of the extent to which the aggregate organizational corporate objective, including sub-goals, were achieved, as a whole, during the year. The organizational corporate objective sub-goals were: • • • developing, implementing and recognizing inclusive people leadership practices and behaviors across the company; continuing to attract and retain talent to drive execution of initiatives in line with the company’s strategy, mission and values; and enhancing our differentiating capabilities and driving organizational efficiencies. In evaluating the organizational objective, the compensation committee determined that, among other things, the following organizational and operational accomplishments were relevant: entry into innovative settlement agreements with our remaining Xyrem ANDA filers which provide additional clarity related to our Xyrem intellectual property; refinement of our global molecule team and project team structures to enhance accountability for strategy development and execution and to achieve a more scalable, streamlined and thoughtful portfolio management process; specified hiring quality scores and voluntary turnover rates at or below certain thresholds; and implementation of a launch framework for Vyxeos in the EU and Sunosi in the U.S. After taking into consideration both our accomplishments and challenges with respect to these sub-goals, the compensation committee determined that as a whole, our overall achievement resulted in a multiplier of 100% and therefore, a 10% bonus pool funding percentage for the 2018 organizational objective. 2018 Compensation Decisions for Our Named Executive Officers General Approach In making compensation decisions for 2018, the compensation committee considered the factors discussed in “Factors Used in Determining Executive Compensation” above and the compensation committee’s specific compensation objectives for 2018. Our compensation committee did not use a formula or assign a particular weight to any one factor in determining each NEO’s target total direct compensation. Rather, our compensation committee’s determination of the target total direct compensation, mix of cash and equity and fixed and “at-risk” pay opportunities was a subjective, individualized decision for each NEO. The compensation committee reviewed and considered each element of pay in the context of the overall target total direct compensation for each NEO. When the compensation committee made changes to one element of pay, those changes were made in the context of the levels of the other elements of pay, and the resulting target total direct compensation for each NEO. As a result, the 2018 pay decisions for each NEO are presented holistically in this section. JAZZ PHARMACEUTICALS | Proxy Statement 43 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT The compensation committee also reviewed market data with respect to target total direct compensation for similarly-situated executives of our peer companies, and also had access to market data with respect to target total cash compensation and target equity award grants. However, as described above, the compensation committee believes that over-reliance on benchmarking can result in compensation that is unrelated to the value delivered by our executive officers because compensation benchmarking does not take into account company-by-company variations among actual roles with similar titles or the specific performance of our executive officers. Summary of 2018 Compensation Decisions Target Total Cash Compensation. The compensation committee increased each NEO’s base salary for 2018, and the new base salary rates were effective February 17, 2018. There were no changes to the 2018 target performance bonuses (expressed as a percentage of base salary) for any of the NEOs because the compensation committee determined the current percentages remained at appropriate levels and were consistent with our philosophy that the target percentages should generally vary based on each NEO’s job level in order to promote internal equity for positions of similar scope and impact and to reinforce teamwork across the executive group. Mr. Cozadd’s annual target performance bonus (as a percentage of salary) was set at a higher percentage than the percentages for other NEOs to reflect that he has ultimate responsibility for our company’s performance. Mr. Cozadd’s target bonus percentage has remained the same since 2012. Target Equity Compensation and Impact on Target Total Direct Compensation. In determining the appropriate size of 2018 equity award grants, at the time the compensation committee (and the board of directors, with respect to Mr. Cozadd) made its decisions, after careful consideration, the compensation committee aimed to deliver equity awards to each executive officer of a similar value to those delivered in 2017 to balance the need to manage overall dilution to our shareholders, maintain equity opportunities competitive with the market and serve the retention and incentive purposes of the awards. As a result of our share price decreasing slightly between when the compensation committee approved the equity awards and when the equity awards were granted pursuant to our equity incentive grant policy, as further described below under “Equity Grant Timing and Equity Plan Information,” certain NEOs’ equity award grant date values, and resulting target total direct compensation for 2018, were modestly lower than in 2017, as shown in the tables below. Form and Mix of Equity Awards and Share Amount Determinations. The compensation committee intended to deliver approximately 50% of the potential value of each NEO’s equity award in the form of stock options and 50% of the potential value in the form of RSUs, in each case based on an approximation of grant date fair value, using an approximately 2.5 to 1 ratio of stock option grants to RSUs, in order to mitigate dilution and to reflect the increased value of receiving shares at full value without the payment of an exercise price. The 50/50 value split was consistent with our historical practices for both our executive officers and other employees and took into consideration peer practices and market data. The actual share amounts granted to each executive officer were determined by applying the company’s 90-day average share price (as of December 31, 2017) to the grant date fair value of the award, which the compensation committee and, in the case of Mr. Cozadd, the board of directors, intended to deliver (dividing such value by the average share price, in the case of RSUs, and applying a Black-Scholes option pricing model calculation using the average share price, in the case of stock options). A 90-day average share price was used, rather than a single day share price, in order to provide a more stabilized share value less susceptible to possible swings in the market. The exercise price of each stock option is equal to our closing share price on Nasdaq Global Select Market on the date of grant. The compensation committee understands that this process can result in the actual reported grant date value of an award being higher or lower than the intended value approved by the compensation committee, but has considered, in consultation with Radford, various approaches to granting equity awards, each of which have advantages and disadvantages, and determined that the process described above, which has been used historically by the compensation committee, is the most appropriate for the company at this time. The shares subject to the option awards vest over four years, with 25% vesting on the one-year anniversary of the grant date and the remainder vesting in equal monthly installments thereafter over the remaining 36 months. The RSUs vest over four years in equal annual installments. On an annual basis, the compensation committee reviews market trends, including market peer use of performance-based vesting for equity awards, which are often favored by proxy advisory firms and certain institutional investors. For 2018, the compensation committee determined that equity awards vesting over time continued to be the most appropriate incentive structure for our executive officers to reward performance over time and achieve our retention objectives. Our time-based vesting schedules deliver retention incentives for the company over the long-term and, unlike awards that vest based on pre-determined operational or market goals, do not create incentives for inappropriate short-term risk-taking at the expense of realizing long-term value or the potential incentive for unethical conduct. In addition, we deliver a meaningful portion of compensation in the form of annual incentive compensation that is directly tied to, and incentivizes our executives to work towards, achievement of our key corporate goals. The key purposes served by time-vesting options and RSUs for 2018 are further discussed above in the chart captioned “Components of Total Direct Compensation.” 44 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) Individual NEO Compensation Decisions Below are summaries, for each NEO individually, of the compensation committee’s decisions about 2018 target total direct compensation and the changes from each NEO’s 2017 target total direct compensation. As described above, when making the 2018 compensation decisions, the compensation committee focused primarily on the target total direct compensation for each NEO while considering the factors set forth in the section titled “Factors Used in Determining Executive Compensation” and the compensation committee’s specific compensation objectives for 2018. The footnotes to the tables also include the actual performance bonus paid to each of the NEOs for 2018 and how that actual bonus compared to each NEO’s target bonus. Bruce C. Cozadd, Chairman and CEO Target Total Cash Compensation Base Salary(2) Target Performance Bonus(3) Target Equity Compensation(4) Options RSUs 2018 Pay Relative to Market Data (percentile)(1) 2017 Pay ($) 2018 Pay ($) Change (%) 1,905,385 1,962,985 3.0% 955,000 950,385 983,700 979,285 8,381,703 9,470,396 13.0% 3,669,875 4,711,828 4,265,610 5,204,786 Target Total Direct Compensation(5) 10,287,088 11,433,381 11.1% 50th (1) Reflects where the 2018 target total direct compensation (annual base salary, target performance bonus and the target equity compensation value approved by the compensation committee) fell within the market data at the time reviewed and approved by the compensation committee. The target equity compensation delivered (as presented in the chart) reflects the fair value of the awards as of the grant date, in accordance with FASB Accounting Standards Codification Topic 718, Compensation—Stock Compensation, or ASC 718, which was modestly lower than the target equity compensation value approved by the compensation committee as a result of the timing of the grant and a slight decrease in our share price as of the grant date, as described above. y x o r P (2) Represents annual base salary rate for the applicable year. (3) (4) (5) Target amounts are as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively, and reflect the target percentage of base salary earned for each fiscal year. The 2018 amount reflects a target performance bonus of 100% of base salary earned, unchanged from the target performance bonus percentage for 2017. The actual 2018 performance bonus paid was $980,300, reflecting 100.1% of the target performance bonus, based entirely on the overall 2018 bonus pool funding percentage of 100.1%. The compensation committee (with approval from the board of directors) determined that the overall 2018 bonus pool funding percentage of 100.1% was applicable to Mr. Cozadd, because, as CEO, Mr. Cozadd is responsible for the company meeting all of its objectives. Target equity compensation dollar amounts represent the grant date fair value of each stock option and RSU award, as applicable, and have been calculated in accordance with ASC 718 as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively. See the Grants of Plan-Based Awards Table for the number of shares subject to each award. The compensation committee and board of directors designed Mr. Cozadd’s target total direct compensation to be competitive compared to the market data, appropriate from an internal equity perspective and more heavily weighted towards equity compensation, in line with our pay-for-performance philosophy. The compensation committee believed it was appropriate to provide a modest increase to his base salary and an increase in the value of equity awards granted to Mr. Cozadd in 2018 in recognition of his individual performance, the performance of the company under his leadership and an assessment of internal equity and to remain in line with general market increases. As described above, Mr. Cozadd’s target bonus percentage remained the same as in 2017, and while the increase in his base salary resulted in a higher target performance bonus opportunity, Mr. Cozadd’s target total direct compensation for 2018 did not exceed the median of the market data. JAZZ PHARMACEUTICALS | Proxy Statement 45 Executive Compensation (continued) Daniel N. Swisher, Jr., President and COO Target Total Cash Compensation Base Salary(3) Target Performance Bonus(4) Signing Bonus(5) Target Equity Compensation(6) Options RSUs Target Total Direct Compensation(7) 2019 NOTICE OF MEETING AND PROXY STATEMENT 2017 Pay ($) 2018 Pay ($) Change (%)(1) 2018 Pay Relative to Market Data (percentile)(2) N/A N/A N/A 1,084,495 625,000 334,495 125,000 4,607,220 2,075,162 2,532,058 5,691,715 N/A N/A N/A 50th (1) In December 2017, we entered into an employment offer letter with Mr. Swisher pursuant to which he agreed to serve as our President and COO effective January 3, 2018. (2) Reflects where the 2018 target total direct compensation (annual base salary, target performance bonus and the target equity compensation value approved by the compensation committee) fell within the market data for a newly hired President and COO at the time reviewed and approved by the compensation committee. The target equity compensation delivered (as presented in the chart) reflects the fair value of the awards as of the grant date, in accordance with ASC 718. (3) Represents annual base salary rate for 2018. (4) Target amounts are as reported in the Grants of Plan-Based Awards Table for 2018 and reflect the target percentage of base salary earned for 2018. The actual 2018 performance bonus paid was $400,000, reflecting 119.0% of target performance bonus, based on the overall 2018 bonus pool funding percentage of 100.1% and Mr. Swisher’s individual contributions to such achievement. Specifically, the compensation committee considered that Mr. Swisher oversaw a large and complex function, and, with the vacancy in the company’s role of head of research and development for the majority of the year, the compensation committee took into account Mr. Swisher’s scope of responsibility and the criticality of his role. (5) Represents the cash signing bonus Mr. Swisher received in connection with his appointment as President and COO. To the extent Mr. Swisher had voluntarily resigned within one year of his employment start date, he would have been required to repay the full amount of the signing bonus on or within 30 days of the later of his resignation or termination date. (6) (7) Target equity compensation dollar amounts represent the grant date fair value of each stock option and RSU award, as applicable, and have been calculated in accordance with ASC 718 as reported in the Grants of Plan-Based Awards Table for 2018. See the Grants of Plan-Based Awards Table for the number of shares subject to each award. As a result of the timing of Mr. Swisher’s new-hire equity awards, he was not eligible to receive regular annual equity awards during 2018. The compensation committee designed Mr. Swisher’s target total direct compensation to be competitive compared to the market data, appropriate from an internal equity perspective and more heavily weighted towards equity compensation, in line with our pay-for-performance philosophy. In determining his compensation package, the compensation committee considered the company’s executive compensation program and received advice from Radford to design a competitive, market-based compensation package appropriate for a senior executive with Mr. Swisher’s skills and experience. 46 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) Matthew P. Young, Executive Vice President and CFO Target Total Cash Compensation Base Salary(2) Target Performance Bonus(3) Target Equity Compensation(4) Options RSUs 2019 NOTICE OF MEETING AND PROXY STATEMENT 2017 Pay ($) 2018 Pay ($) Change (%) 849,962 550,000 299,962 896,462 580,000 316,462 5.5% 2,422,458 2,405,993 (0.7)% 1,060,658 1,361,800 1,083,695 1,322,297 2018 Pay Relative to Market Data (percentile)(1) y x o r P Target Total Direct Compensation(5) 3,272,420 3,302,454 0.9% 50th (1) Reflects where the 2018 target total direct compensation (annual base salary, target performance bonus and the target equity compensation value approved by the compensation committee) fell within the market data at the time reviewed and approved by the compensation committee. The target equity compensation delivered (as presented in the chart) reflects the fair value of the awards as of the grant date, in accordance with ASC 718, which was modestly lower than the target equity compensation value approved by the compensation committee as a result of the timing of the grant and a slight decrease in our share price as of the grant date, as described above. (2) Represents annual base salary rate for the applicable year. (3) (4) (5) Target amounts are as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively, and reflect the target percentage of base salary earned for each fiscal year. The 2018 amount reflects a target performance bonus of 55% of base salary earned, unchanged from the target performance bonus percentage for 2017. The actual 2018 performance bonus paid was $365,000, reflecting 115% of target performance bonus, based on the overall 2018 bonus pool funding percentage of 100.1% and Mr. Young’s significant individual contributions to such achievement. Specifically, the compensation committee considered Mr. Young’s overall leadership across the company, including our finance organization, investor relations, facilities and information technology, his performance with respect to the execution of corporate development and capital financing priorities in 2018, particularly with respect to the refinancing of our credit agreement and in light of the vacancy in the company’s role of head of corporate development for a majority of the year, and his criticality to the company’s business as a whole. Target equity compensation dollar amounts represent the grant date fair value of each stock option and RSU award, as applicable, and have been calculated in accordance with ASC 718 as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively. See the Grants of Plan-Based Awards Table for the number of shares subject to each award. The compensation committee designed Mr. Young’s target total direct compensation to be competitive compared to the market data, appropriate from an internal equity perspective and more heavily weighted towards equity compensation, in line with our pay-for-performance philosophy. Consistent with the approach for 2018 equity award grants described above, the compensation committee generally aimed to deliver equity awards to the executive vice presidents of a similar grant date value to those delivered to executive vice presidents in 2017. Mr. Young’s target equity award grant date value and resulting target total direct compensation for 2018 were comparable to 2017. The compensation committee determined it was appropriate to increase Mr. Young’s base salary from an internal pay equity perspective, in an amount that reflects his knowledge and expertise in the role and the criticality of Mr. Young’s role as our CFO and to bring his base salary closer to other NEOs who contribute similarly. In addition, the compensation committee considered the retention value of his compensation given Mr. Young’s criticality to the company’s business development strategy and the breadth of his impact on the business. As described above, Mr. Young’s target bonus percentage remained the same as in 2017, and the increase in his base salary resulted in the higher target performance bonus opportunity shown above. JAZZ PHARMACEUTICALS | Proxy Statement 47 Executive Compensation (continued) Suzanne Sawochka Hooper, Former Executive Vice President and GC Target Total Cash Compensation Base Salary(2) Target Performance Bonus(3) Target Equity Compensation(4) Options RSUs 2019 NOTICE OF MEETING AND PROXY STATEMENT 2017 Pay ($) 2018 Pay ($) Change (%) 2018 Pay Relative to Market Data (percentile)(1) 850,385 550,000 300,385 896,462 580,000 316,462 2,422,458 1,060,658 1,361,800 2,405,993 1,083,695 1,322,297 5.4% (0.7)% Target Total Direct Compensation(5) 3,272,843 3,302,454 0.9% 50-60th (1) Reflects where the 2018 target total direct compensation (annual base salary, target performance bonus and the target equity compensation value approved by the compensation committee) fell within the market data at the time reviewed and approved by the compensation committee. The target equity compensation delivered (as presented in the chart) reflects the fair value of the awards as of the grant date, in accordance with ASC 718, which was modestly lower than the target equity compensation value approved by the compensation committee as a result of the timing of the grant and a slight decrease in our share price as of the grant date, as described above. (2) Represents annual base salary rate for the applicable year. (3) (4) (5) Target amounts are as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively, and reflect the target percentage of base salary earned for each fiscal year. The 2018 amount reflects a target performance bonus of 55% of base salary earned, unchanged from the target performance bonus percentage for 2017. The actual 2018 performance bonus paid was $400,000, reflecting 126.0% of target performance bonus, based on the overall 2017 bonus pool funding percentage of 100.1% and Ms. Hooper’s significant individual contributions to such achievement. Specifically, the compensation committee considered Ms. Hooper’s leadership in settling the company’s litigation with the last remaining Xyrem ANDA filers, her oversight of complex strategic matters relating to Xyrem and our other products and her performance with respect to executing financing priorities in 2018. Target equity compensation dollar amounts represent the grant date fair value of each stock option and RSU award, as applicable, and have been calculated in accordance with ASC 718 as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively. See the Grants of Plan-Based Awards Table for the number of shares subject to each award. The compensation committee designed Ms. Hooper’s target total direct compensation to be competitive compared to the market data, appropriate from an internal equity perspective and more heavily weighted towards equity compensation, in line with our pay-for-performance philosophy. Consistent with the approach for 2018 equity award grants described above, the compensation committee generally aimed to deliver equity awards to the executive vice presidents of a similar grant date value to those delivered to executive vice presidents in 2017. Ms. Hooper’s target equity award grant date value and resulting target total direct compensation for 2018 were comparable to 2017. Ms. Hooper’s resulting target total direct compensation fell between the 50th and 60th percentile of the market data, which the compensation committee determined was appropriate because of Ms. Hooper’s experience, her oversight of multiple functions including legal, compliance, corporate affairs and government relations, and her sustained contribution and overall criticality to our business. The compensation committee determined it was appropriate to increase Ms. Hooper’s base salary because of her contributions to achieving strategic initiatives in line with corporate objectives. As described above, Ms. Hooper’s target bonus percentage remained the same as in 2017, and the increase in her base salary resulted in the higher target performance bonus opportunity shown above. In January 2019, Ms. Hooper notified us of her decision to resign from her position as Executive Vice President and GC, effective as of March 1, 2019. 48 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) Michael P. Miller, Executive Vice President, U.S. Commercial Target Total Cash Compensation Base Salary(2) Target Performance Bonus(3) Target Equity Compensation(4) Options RSUs 2019 NOTICE OF MEETING AND PROXY STATEMENT 2017 Pay ($) 2018 Pay ($) Change (%) 2018 Pay Relative to Market Data (percentile)(1) 770,769 500,000 270,769 811,635 525,000 286,635 2,092,403 915,873 1,176,530 2,047,653 922,294 1,125,359 5.3% (2.1)% y x o r P Target Total Direct Compensation(5) 2,863,172 2,859,288 (0.1)% 60th (1) Reflects where the 2018 target total direct compensation (annual base salary, target performance bonus and the target equity compensation value approved by the compensation committee) fell within the market data at the time reviewed and approved by the compensation committee. The target equity compensation delivered (as presented in the chart) reflects the fair value of the awards as of the grant date, in accordance with ASC 718, which was modestly lower than the target equity compensation value approved by the compensation committee as a result of the timing of the grant and a slight decrease in our share price as of the grant date, as described above. (2) Represents annual base salary rate for the applicable year. (3) (4) (5) Target amounts are as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively, and reflect the target percentage of base salary earned for each fiscal year. The actual 2018 performance bonus paid was $275,000, reflecting 96.0% of target performance bonus, based on the overall 2018 bonus pool funding percentage of 100.1%. The compensation committee awarded Mr. Miller a bonus that was closer to the corporate funding percentage given Mr. Miller’s U.S. commercial organization delivered solid overall performance in 2018. Target equity compensation dollar amounts represent the grant date fair value of each stock option and RSU award, as applicable, and have been calculated in accordance with ASC 718 as reported in the Grants of Plan-Based Awards Table for 2017 and 2018, respectively. See the Grants of Plan-Based Awards Table for the number of shares subject to each award. The compensation committee designed Mr. Miller’s target total direct compensation to be competitive compared to the market data, appropriate from an internal equity perspective, in line with our pay-for-performance philosophy. Consistent with the approach for 2018 equity award grants described above, the compensation committee aimed to deliver equity awards to Mr. Miller of a similar grant date value to those delivered to Mr. Miller in 2017. Mr. Miller’s resulting target total direct compensation fell at the 60th percentile of the market data, which the compensation committee determined was appropriate because of Mr. Miller’s experience and overall contribution to our business. The compensation committee determined it was appropriate to increase Mr. Miller’s base salary in line with the market data. As described above, Mr. Miller’s target bonus percentage increased in 2018, and the increase in his base salary resulted in the higher target performance bonus opportunity shown above. JAZZ PHARMACEUTICALS | Proxy Statement 49 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) Additional Compensation Information Ownership Guidelines for Executive Officers We maintain share ownership guidelines for our CEO and certain other employees who serve on our executive committee, including our NEOs. Under the guidelines, which were amended in May 2018, these individuals are expected to own a number of the company’s ordinary shares with a value equal to six times base salary (increased from three times base salary) for the company’s CEO, two times base salary (increased from one times base salary) for each other member of the company’s executive committee who is an officer for purposes of Section 16 of the Exchange Act, and one times base salary for each other member of the company’s executive committee. The guidelines provide that the officers are expected to establish the minimum ownership levels within five years of first becoming subject to the guidelines (and, with respect to the increased amounts established by the amended guidelines, by the last day of 2021 for officers who were subject to the guidelines as of January 1, 2018). Each of our continuing NEOs was in compliance with the guidelines as of May 13, 2019, except as noted below. Ownership Guidelines and Compliance Name Bruce C. Cozadd Daniel N. Swisher, Jr.(3) Matthew P. Young Michael P. Miller Ownership Requirement(1) 6.0x Actual Ownership(2) 27.9x 2.0x 2.0x 2.0x 0.6x 2.2x 2.7x (1) (2) This column reflects the increased ownership requirement in the guidelines as amended in May 2018 (increased from three times to six times for the CEO and one times to two times for each Section 16 officer). Actual ownership calculated based on (a) value of shares owned as of May 13, 2019, using the closing price of the company’s ordinary shares on May 13, 2019 of $135.79, divided by (b) 2019 base salary. Under the guidelines as amended in May 2018, once an officer has reached his or her compliance deadline, such officer’s share ownership will be assessed annually at the end of each fiscal year using the average closing price of the company’s ordinary shares over the 90-day period ending on the last day of the company’s immediately preceding fiscal year. (3) Mr. Swisher was appointed our President and COO as of January 3, 2018 and, accordingly, has five years from his appointment, or until 2023, to comply with the guidelines. Shares that count toward satisfaction of these guidelines include: shares owned outright by the individual (including RSUs that have vested but not yet settled, net of taxes); shares retained after an option exercise or issuance under another type of equity award granted under the company’s equity incentive plans; shares retained after purchase under the ESPP; and shares held in trust for the benefit of the individual. The compensation committee has discretion to develop an alternative individual guideline or an alternative method of complying with the applicable individual guideline for an individual covered by the guidelines if compliance would place a significant hardship on such individual. Change in Control Plan Our compensation committee periodically reviews the terms of our change in control plan, including its “double-trigger” structure and benefits, against market data to ensure that the benefits we offer remain appropriate. The compensation committee last made refinements to the program in 2016 to provide greater clarity, reflect market practice and improvements for both the executives and our company and updates in applicable law since the plan was originally adopted in 2007. Only our executive officers who are employees of our U.S. affiliates are eligible to participate in the change in control plan, which includes all of our NEOs. Certain executive officers who are not employed by our U.S. affiliates receive comparable change in control benefits pursuant to their employment agreements. The compensation committee believes that the change in control benefits we provide are representative of market practice, both in terms of design and cost, and are sufficient to retain our current executive team and to recruit talented executive officers in the future. The terms of the change in control plan are described below under the heading “Potential Payments upon Termination or Change in Control—Amended and Restated Executive Change in Control and Severance Benefit Plan.” 50 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT Executive Compensation (continued) Equity Grant Timing and Equity Plan Information Our equity incentive grant policy, which was initially approved by our board of directors after the Azur Merger and amended and restated most recently in November 2017, provides that all equity grants that are approved for executive officers will be granted on the second trading day following the filing date of our next quarterly or annual report filed under the Exchange Act that occurs after the date on which such grants are approved by our board of directors or compensation committee, as applicable. Accordingly, our equity incentive grant policy requires that grants to our executive officers, if any, be made shortly after we have released information about our financial performance to the public for the applicable annual or quarterly period, so that the market will have an opportunity to absorb the financial and other information included in our annual and periodic reports before such grants are awarded. As a result, the timing of equity awards is not coordinated in a manner that intentionally benefits our executive officers; rather, the policy is designed with the objective that the market price of our ordinary shares at the time of grant can generally be expected to reflect our then-current results and prospects. y x o r P We currently grant equity awards to the NEOs, including stock options and RSUs, under the 2011 Equity Incentive Plan, or the 2011 Plan. The 2011 Plan was adopted by Jazz Pharmaceuticals, Inc.’s board of directors and approved by Jazz Pharmaceuticals, Inc.’s stockholders in connection with their approval of the Azur Merger in December 2011 and was assumed by us upon the completion of the Azur Merger. Before the 2011 Plan was adopted, we granted stock options under our 2007 Equity Incentive Plan, or the 2007 Plan, which was adopted by Jazz Pharmaceuticals, Inc.’s board of directors and approved by Jazz Pharmaceuticals, Inc.’s stockholders in connection with Jazz Pharmaceuticals, Inc.’s initial public offering. Awards granted under the 2007 Plan continue to be governed by the terms of the 2007 Plan, but subsequent equity awards have been, and continue to be, awarded under the 2011 Plan. The 2011 Plan affords the compensation committee the flexibility to utilize a broad array of equity incentives and performance cash incentives in order to secure and retain the services of employees of our company and its subsidiaries and to provide long-term incentives that align the interests of employees with the interests of our shareholders. Additional long-term equity incentives are provided through the ESPP, which we assumed upon the completion of the Azur Merger. Pursuant to the ESPP, all eligible employees, including the NEOs, may allocate up to 15% of their base salary to purchase our stock at a 15% discount to the market price, subject to specified limits. Accounting and Tax Considerations Under ASC 718, the company is required to estimate and record an expense for each award of equity compensation (including stock options and RSUs) over the vesting period of the award. We record share-based compensation expense on an ongoing basis according to ASC 718. The compensation committee has considered, and may in the future consider, the grant of performance-based or other types of stock awards to executive officers in lieu of or in addition to stock option and time-based RSU grants in light of the accounting impact of ASC 718 and other considerations. Under Section 162(m) of the Internal Revenue Code, or Section 162(m), compensation paid to any publicly held corporation’s “covered employees” that exceeds $1 million per taxable year for any covered employee is generally non-deductible for tax purposes. Prior to the enactment of the U.S. Tax Act, Section 162(m) provided a performance-based compensation exception, pursuant to which the deduction limit under Section 162(m) did not apply to any compensation that qualified as “performance-based compensation” under Section 162(m). Pursuant to the U.S. Tax Act, the performance-based compensation exception under Section 162(m) was repealed with respect to taxable years beginning after December 31, 2017, except that certain transition relief is provided for compensation paid pursuant to a written binding contract which was in effect on November 2, 2017 and which is not modified in any material respect on or after such date. Compensation paid to each of the company’s “covered employees” in excess of $1 million per taxable year generally will not be deductible unless it qualifies for the performance-based compensation exception under Section 162(m) pursuant to the transition relief described above. Because of certain ambiguities and uncertainties as to the application and interpretation of Section 162(m), as well as other factors beyond the control of the compensation committee, no assurance can be given that any compensation paid by the company will be eligible for such transition relief and be deductible by the company in the future. Although the compensation committee will continue to consider tax implications as one factor in determining executive compensation, the compensation committee also looks at other factors in making its decisions and retains the flexibility to provide compensation for the company’s NEOs in a manner consistent with the goals of the company’s executive compensation program and the best interests of the company and its stockholders, which may include providing for compensation that is not deductible by the company due to the deduction limit under Section 162(m). The compensation committee also retains the flexibility to modify compensation that was initially intended to be exempt from the deduction limit under Section 162(m) if it determines that such modifications are consistent with the company’s business needs. JAZZ PHARMACEUTICALS | Proxy Statement 51 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Risk Assessment Concerning Compensation Practices and Policies The compensation committee annually reviews the company’s compensation policies and practices to assess whether they encourage employees to take inappropriate risks. After reviewing each of the company’s compensation plans, and the checks and balances built into, and oversight of, each plan, in February 2019, the compensation committee determined that any risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on our company as a whole. In addition, the compensation committee believes that the mix and design of the elements of executive compensation do not encourage management to assume excessive risks, and significant compensation decisions, as well as decisions concerning the compensation of the company’s executive officers, include subjective considerations by the compensation committee or the board of directors, which restrain the influence of formulae or objective factors on excessive risk-taking. Finally, the mix of short-term compensation (in the form of salary and annual bonus, if any), and long-term compensation (in the form of stock options and RSUs) also prevents undue focus on short-term results and helps align the interests of the company’s executive officers with the interests of our shareholders. y x o r P Reconciliations of Non-GAAP Financial Measures To supplement our financial results presented in accordance with GAAP, we use certain non-GAAP (also referred to as non-GAAP adjusted) financial measures in this Compensation Discussion and Analysis. In particular, we present non-GAAP adjusted net income (and the related per share measures), which exclude certain items from reported GAAP net income and reported GAAP net income attributable to Jazz Pharmaceuticals plc (and the related per share measures), as applicable, as detailed in the reconciliation table that follows, adjust for the income tax effect of the non-GAAP adjustments and, for the 2017 and 2018 periods, adjust for the U.S. Tax Act benefit, and finally, for the 2015 period, adjust for the amount attributable to non-controlling interests. We believe that each of these non-GAAP financial measures provides useful supplementary information to, and facilitates additional analysis by, investors and analysts. In particular, we believe that each of these non-GAAP financial measures, when considered together with our financial information prepared in accordance with GAAP, can enhance investors’ and analysts’ ability to meaningfully compare our results from period to period, and to identify operating trends in our business. In addition, these non-GAAP financial measures are regularly used by investors and analysts to model and track our financial performance. Our management also regularly uses these non-GAAP financial measures internally to understand, manage and evaluate our business and to make operating decisions, and compensation of our executives is based in part on these non-GAAP financial measures. Because these non-GAAP financial measures are important internal measurements for our management, we also believe that these non-GAAP financial measures are useful to investors and analysts since these measures allow for greater transparency with respect to key financial metrics we use in assessing our own operating performance and making operating decisions. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures; should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP; have no standardized meaning prescribed by GAAP; and are not prepared under any comprehensive set of accounting rules or principles. In addition, from time to time in the future, there may be other items that we may exclude for purposes of our non-GAAP financial measures, and we have ceased, and may in the future cease, to exclude items that we have historically excluded for purposes of our non-GAAP financial measures. Likewise, we may determine to modify the nature of our adjustments to arrive at our non-GAAP financial measures. Because of the non-standardized definitions of non-GAAP financial measures, the non-GAAP financial measures as used by us in this Compensation Discussion and Analysis have limits in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. 52 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Reconciliations of GAAP reported net income to non-GAAP adjusted net income (and the related per share measures) for the 2016, 2017 and 2018 periods, and of GAAP reported net income attributable to Jazz Pharmaceuticals plc to non-GAAP adjusted net income attributable to Jazz Pharmaceuticals plc (and the related per share measures) for the 2015 period, are as follows (in millions, except percentages and per share amounts): GAAP reported net income(1) Intangible asset amortization Impairment charges and disposal costs Share-based compensation expense Loss contingency Upfront and milestone payments Transaction and integration related costs Expenses related to certain legal proceedings and restructuring Non-cash interest expense Loss on extinguishment and modification of debt Income tax effect of above adjustments U.S. Tax Act benefit Amount attributable to non-controlling interests(2) Non-GAAP adjusted net income(1) GAAP reported net income per diluted share(1) Non-GAAP adjusted net income per diluted share(1) Weighted-average ordinary shares used in diluted per share calculations 2015 2016 2017 2018 $ 329.5 98.2 $ 396.8 102.0 $ 487.8 152.1 $ 447.1 201.5 2015-2018 CAGR y x o r P 31.5 91.5 — 25.0 18.2 1.6 22.7 16.8 — 98.8 — 23.7 13.6 6.1 22.1 0.6 — 106.9 — 101.5 — 6.0 30.0 — (39.6) (36.7) (58.8) — — — (148.8) — — 44.0 102.4 57.0 11.0 — — 44.0 — (60.9) (7.5) — $ 595.5 $ 627.2 $ 676.7 $ 838.6 $ 5.23 $ 6.41 $ 7.96 $ 7.30 $ 9.45 63.0 $ 10.14 61.9 $ 11.04 61.3 $ 13.70 61.2 12% 13% (1) GAAP reported net income and non-GAAP adjusted net income for the 2015 period (and the related per share measure) are attributable to Jazz Pharmaceuticals plc. (2) The adjustment for the amount attributable to non-controlling interests for the 2015 period was negligible and therefore not reflected in the table above which is measured in millions. JAZZ PHARMACEUTICALS | Proxy Statement 53 980,300 961,800 914,600 400,000 365,000 315,000 300,000 400,000 350,000 300,000 275,000 270,000 225,000 13,152 10,722 5,622 12,948 9,960 9,810 4,710 10,872 10,722 5,622 15,774 15,624 7,902 Total ($) 11,443,133 10,304,610 8,770,972 5,753,341 3,356,337 3,292,653 2,830,722 3,392,249 3,329,334 2,839,711 2,859,581 2,870,335 2,021,781 Executive Compensation (continued) Summary of Compensation The following table sets forth certain summary information for the years indicated with respect to the compensation earned by the NEOs during fiscal years 2018, 2017 and 2016, as applicable. 2019 NOTICE OF MEETING AND PROXY STATEMENT SUMMARY COMPENSATION TABLE Year Salary ($)(1) Bonus ($) Stock Awards ($)(2) Option Awards ($)(3) Non-Equity Incentive Plan Compensation ($)(4) All Other Compensation ($)(5) 2018 979,285 2017 950,385 2016 917,308 — — — 5,204,786 4,711,828 3,824,157 4,265,610 3,669,875 3,109,285 2018 608,173 125,000(7) 2,532,058 2,075,162 Name and Principal Position Bruce C. Cozadd Chairman and CEO Daniel N. Swisher, Jr.(6) President and COO Matthew P. Young Executive Vice President and CFO Suzanne Sawochka Hooper(8) Former Executive Vice President and GC Michael P. Miller Executive Vice President U.S Commercial 2018 575,385 2017 545,385 2016 513,077 2018 575,385 2017 546,154 2016 521,154 2018 521,154 2017 492,308 2016 446,923 — — — — — — — — — 1,322,297 1,361,800 1,110,239 1,322,297 1,361,800 1,110,239 1,125,359 1,176,530 740,159 1,083,695 1,060,658 902,696 1,083,695 1,060,658 902,696 922,294 915,873 601,797 (1) The dollar amounts in this column represent base salary earned during the indicated fiscal year 2018 base salary rates were effective February 17, 2018. For more information on salaries in 2018, see “Compensation Discussion and Analysis—2018 Compensation Decisions for Our Named Executive Officers—Individual NEO Compensation Decisions” above. (2) The dollar amounts in this column reflect the aggregate grant date fair value of all RSU awards granted during the indicated fiscal year computed in accordance with ASC 718. The grant date fair value of each RSU award is measured based on the closing price of our ordinary shares on the date of grant. These amounts do not necessarily correspond to the actual value recognized or that may be recognized by the NEOs. (3) The dollar amounts in this column reflect the aggregate grant date fair value of all stock option awards granted during the indicated fiscal year. These amounts have been calculated in accordance with ASC 718, using the Black-Scholes option-pricing model and excluding the effect of estimated forfeitures. Assumptions used in the calculation of these amounts are included in the notes to our audited consolidated financial statements included in the company’s 2018 Annual Report on Form 10-K. These amounts do not necessarily correspond to the actual value recognized or that may be recognized by the NEOs. (4) The dollar amounts in this column represent the cash bonus awarded under the performance bonus plan for the indicated fiscal year. For more information on the cash bonus awards for 2018, see “Compensation Discussion and Analysis—2018 Performance Bonus Program” and “Compensation Discussion and Analysis—2018 Compensation Decisions for Our Named Executive Officers” above. (5) The dollar amounts in this column for 2018 include group term life insurance premiums paid and matching contributions under the 401(k) Plan. (6) Mr. Swisher was appointed our President and COO as of January 2018. (7) Represents a cash signing bonus of $125,000 paid to Mr. Swisher in 2018. (8) Ms. Hooper resigned from her position as Executive Vice President and GC, effective as of March 1, 2019. 54 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) Grants of Plan-Based Awards The following table shows, for the fiscal year ended December 31, 2018, certain information regarding grants of plan-based awards to the NEOs. 2019 NOTICE OF MEETING AND PROXY STATEMENT Name Bruce C. Cozadd Daniel N. Swisher, Jr. Matthew P. Young Suzanne Sawochka Hooper Michael P. Miller y x o r P GRANTS OF PLAN-BASED AWARDS IN FISCAL 2018 Estimated Possible Payouts Under Non- Equity Incentive Plan Awards Target ($)(1) 979,285 — Award Type Grant Date Annual Cash Annual Option — 3/1/2018 Approval Date — 2/15/2018 Annual RSU 3/1/2018 2/15/2018 — Annual Cash Initial Option Initial RSU Annual Cash Annual Option Annual RSU Annual Cash Annual Option Annual RSU Annual Cash Annual Option Annual RSU — 3/1/2018 3/1/2018 — 3/1/2018 3/1/2018 — 3/1/2018 3/1/2018 — 3/1/2018 3/1/2018 — 2/14/2018 2/14/2018 — 2/14/2018 2/14/2018 — 2/14/2018 2/14/2018 — 2/14/2018 2/14/2018 334,495 — — 316,462 — — 316,462 — — 286,635 — — All Other Stock Awards: Number of Shares of Stock or Units (#)(2) All Other Option Awards: Number of Securities Underlying Options (#)(2) — — 37,000 — — 18,000 — — 9,400 — — 9,400 — — 8,000 — 92,500 — — 45,000 — — 23,500 — — 23,500 — — 20,000 — Exercise or Base Price of Option Awards ($/Sh)(3) — 140.67 Grant Date Fair Value of Stock and Option Awards ($)(4) — 4,265,610 — 5,204,786 — 140.67 — 2,075,162 — 2,532,058 — 140.67 — 1,083,695 — 1,322,297 — 140.67 — 1,083,695 — 1,322,297 — 140.67 — 922,294 — 1,125,359 (1) (2) This column sets forth the target bonus amount for each NEO for the year ended December 31, 2018 under the performance bonus plan. There are no thresholds or maximum bonus amounts for each individual officer established under the performance bonus plan. Target bonuses were set as a percentage of each NEO’s base salary earned for the fiscal year ended December 31, 2018 and were 100% for Mr. Cozadd and 55% for each of Messrs. Swisher, Young and Miller and Ms. Hooper. The dollar value of the actual bonus award earned for the year ended December 31, 2018 for each NEO is set forth in the Summary Compensation Table above. As such, the amounts set forth in this column do not represent either additional or actual compensation earned by the NEOs for the year ended December 31, 2018. For a description of the performance bonus plan, see “Compensation Discussion and Analysis—2018 Performance Bonus Program” above. Annual stock options and RSU awards were granted under the 2011 Plan. In January 2018, Mr. Swisher joined the company as President and COO, and received a new hire grant of stock option and RSU awards, which were granted under the 2011 Plan. Each of the annual stock option awards listed in the table above vested as to 25% of the ordinary shares underlying the stock options upon the one year anniversary of the applicable grant date and vest as to the remainder of the shares in 36 equal monthly installments thereafter. Each of the annual RSU awards vest in four equal annual installments on the anniversary of the vesting commencement date of March 5, 2018. Mr. Swisher’s initial stock option award vested as to 25% of the ordinary shares underlying the stock options upon the one year anniversary of his hire date of January 3, 2018 and vests as to the remainder of the shares in 36 equal monthly installments thereafter. His initial RSU award vests in four equal annual installments on the anniversary of his hire date of January 3, 2018. As a general matter, the vested portion of stock options granted to the NEOs will expire three months after each NEO’s last day of service, subject to extension upon certain termination situations, such as death or disability, and RSUs will cease vesting upon each NEO’s last day of service. Stock option and RSU awards are subject to potential vesting acceleration as described below under the headings “Description of Compensation Arrangements—Equity Compensation Arrangements—2011 Equity Incentive Plan” and “Potential Payments upon Termination or Change in Control—Amended and Restated Executive Change in Control Plan and Severance Benefit Plan” below. See also “Description of Compensation Arrangements—Equity Compensation Arrangements—2011 Equity Incentive Plan” below for a general description of the material terms of the 2011 Plan. JAZZ PHARMACEUTICALS | Proxy Statement 55 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT (3) (4) Stock options were granted with an exercise price equal to 100% of the fair market value on the date of grant which was $140.67 per share for the March 1, 2018 annual grants. The dollar amounts in this column represent the grant date fair value of each stock option and RSU award, as applicable, granted to the NEOs in 2018. These amounts have been calculated in accordance with ASC 718. The grant date fair value of each stock option is calculated using the Black-Scholes option-pricing model and excluding the effect of estimated forfeitures. Assumptions used in the calculation of these amounts are included in the notes to our audited consolidated financial statements included in the company’s 2018 Annual Report on Form 10-K. The grant date fair value of each RSU award is measured based on the closing price of our ordinary shares on the date of grant. Description of Compensation Arrangements Executive Employment and Severance Agreements We do not have employment agreements currently in effect with any of our NEOs. Like other employees, executive officers are eligible for annual salary increases, participation in the performance bonus plan and discretionary equity grants. We have employment agreements in effect with certain employees based outside of the United States. From time to time, we have provided an offer letter in connection with the commencement of employment of an executive officer based in the United States, which describes such executive officer’s initial terms of employment. For example, in November 2017, we provided an offer letter to Mr. Swisher that included his initial base salary and a hiring bonus of $125,000 payable in connection with commencement of employment. The employment of Mr. Swisher, as is the case for all of our employees based in the United States, is at-will and not governed by the terms of his offer letter. We do not have agreements currently in effect with any of our NEOs entitling such individuals to severance benefits (other than in connection with a change in control pursuant to our change in control plan described below). Amended and Restated Executive Change in Control and Severance Benefit Plan Each of the current NEOs is a participant in the change in control plan, a description of which is included below under the heading “Potential Payments upon Termination or Change in Control—Amended and Restated Executive Change in Control and Severance Benefit Plan.” Equity Compensation Arrangements Since the Azur Merger, we have granted stock options and RSU awards to employees, including the NEOs, under the 2011 Plan. From the initial public offering of Jazz Pharmaceuticals, Inc. until the Azur Merger, we granted stock options to our employees, including some of the NEOs, under the 2007 Plan. For more information on our current equity compensation program and decisions regarding the grants of equity awards in 2018 for our NEOs, see “Compensation Discussion and Analysis—2018 Compensation Decisions for Our Named Executive Officers.” The following is a brief summary of the material terms of each of our equity compensation plans. 2011 Equity Incentive Plan In connection with the Azur Merger, Jazz Pharmaceuticals, Inc.’s board of directors adopted the 2011 Plan in October 2011, and its stockholders approved the 2011 Plan at the special meeting of the stockholders held in December 2011. The 2011 Plan became effective immediately before the consummation of the Azur Merger and was assumed and adopted by us upon the consummation of the Azur Merger and most recently amended and restated by the board of directors in November 2016. The following is a brief summary of the material terms of the 2011 Plan, as amended and restated. Administration. The board of directors has delegated its authority to administer the 2011 Plan to the compensation committee. Subject to the terms of the 2011 Plan, the board of directors or a committee authorized by the board determines recipients, dates of grant, the numbers and types of stock awards to be granted, and the terms and conditions of the stock awards, including the period of their exercisability and vesting. The compensation committee has the authority to delegate its administrative powers under the 2011 Plan to a subcommittee consisting of members of the compensation committee and may, at any time, revest in itself some or all of the power previously delegated to the subcommittee. Our board of directors may also delegate to one or more of our officers the authority to designate employees who are not officers to be recipients of certain stock awards and the number of shares subject to such stock awards, provided that our board of directors must specify the total number of shares that may be subject to the stock awards granted by such officer(s) and such officer(s) may not grant a stock award to himself or herself. Types of Awards. The 2011 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, RSU awards, other stock awards, and performance awards that may be settled in cash, shares, or other property, which may be granted to employees, including officers. 56 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT In the event of certain significant corporate transactions (as defined in the 2011 Plan and described below), our Corporate Transactions. board of directors will have the discretion to take one or more of the following actions with respect to outstanding stock awards (contingent upon the closing or completion of such corporate transaction), unless otherwise provided in the stock award agreement or other written agreement with the participant or unless otherwise provided by our board of directors at the time of grant: • • • • • • arrange for assumption, continuation, or substitution of a stock award by a surviving or acquiring corporation (or its parent company); arrange for the assignment of any reacquisition or repurchase rights applicable to any shares issued pursuant to a stock award to the surviving or acquiring corporation (or its parent company); accelerate the vesting, in whole or in part, and exercisability of a stock award and provide for its termination if it is not exercised at or prior to the corporate transaction; y x o r P arrange for the lapse of any reacquisition or repurchase rights applicable to any shares issued pursuant to a stock award; cancel or arrange for the cancellation of a stock award, to the extent not vested or exercised prior to the effective time of the corporate transaction, in exchange for such cash consideration, if any, as the board of directors may consider appropriate; or make a payment equal to the excess, if any, of (a) the value of the property that the participant would have received upon the exercise of the stock award over (b) any exercise price payable in connection with such exercise. Our board of directors need not take the same action for each stock award or with regard to all participants. For purposes of the 2011 Plan, a “corporate transaction” generally means (i) a sale or disposition of all or substantially all our assets or a sale or disposition of at least 90% of our outstanding securities; (ii) a merger, consolidation or similar transaction after which we are not the surviving corporation; or (iii) a merger, consolidation or similar transaction after which we are the surviving corporation but our ordinary shares are converted or exchanged into other property. Change in Control. The board of directors has the discretion to provide additional acceleration of vesting and exercisability upon or after a change in control (as defined in the 2011 Plan and described below) as may be provided in a stock award agreement or any other written agreement between us or any of our affiliates and a participant. The forms of stock option agreement and RSU award agreement adopted by the board of directors under the 2011 Plan provide that in the event a participant’s service relationship with us or a successor entity is terminated due to an involuntary termination without cause (as defined in the stock award agreement and as described below) within 12 months following, or one month prior to, the effective date of a change in control, the vesting (and in the case of stock options, exercisability) of the stock award will accelerate in full. For purposes of the 2011 Plan and the forms of stock option agreement and RSU award agreement issued thereunder, a “change in control” generally means (i) a person or group acquires ownership of more than 30% of the combined voting power of our outstanding securities (other than directly from our company); (ii) certain compromises or arrangements sanctioned by the Irish courts, certain schemes, contracts or offers that have become binding on all of our shareholders, certain takeover bids, certain offers or reverse takeover transactions or a reorganization, merger, statutory share exchange, consolidation or similar transaction involving us, and (A) after which our shareholders do not own more than 50% of the combined voting power of the surviving entity or its parent in substantially the same proportion as their ownership of our outstanding voting securities immediately before the transaction, (B) a person or group acquires ownership of more than 30% of the combined voting power of the surviving entity or its parent, or (C) at least a majority of the members of the board of directors of the parent (or the surviving entity, if there is no parent) following such transaction are not incumbent board members (as defined in (v) below) at the time our board of directors approves the transaction; (iii) our shareholders or our board of directors approves a complete dissolution or liquidation of our company, or a complete dissolution or liquidation of our company otherwise occurs (except for a liquidation into a parent company); (iv) a sale, lease, exclusive license or other disposition of all or substantially all of our assets, other than to certain entities; or (v) individuals who were members of our board of directors on the date of adoption of the 2011 Plan (or members of our board of directors approved or recommended by a majority vote of such members still in office), referred to as “incumbent board members,” cease to constitute at least a majority of our board of directors. An “involuntary termination without cause” generally means that a participant’s service relationship with us is terminated for any reason other than for the following reasons (and not upon a participant’s death or disability): (i) participant’s commission of any felony or crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof (with respect to Irish participants, the participant’s conviction for any criminal offense (other than an offense under any road traffic legislation in Ireland, the United Kingdom or elsewhere for which a fine or non-custodial penalty is imposed) or any offense under any regulation or legislation relating to insider dealing, fraud or dishonesty); JAZZ PHARMACEUTICALS | Proxy Statement 57 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT (ii) participant’s attempted commission of or participation in a fraud or act of dishonesty against us; (iii) participant’s intentional, material violation of any contract or agreement with us or of any statutory duty owed to us; (iv) participant’s unauthorized use or disclosure of our confidential information or trade secrets; or (v) participant’s gross misconduct. 2007 Equity Incentive Plan The 2007 Plan, which was initially adopted by the Jazz Pharmaceuticals, Inc. board of directors and approved by the Jazz Pharmaceuticals, Inc. stockholders in connection with its initial public offering, was continued and assumed by us upon consummation of the Azur Merger. The 2007 Plan expired in April 2017, and accordingly, no new grants can be awarded under the 2007 Plan. The following is a brief summary of the material terms of the 2007 Plan. Administration. The board of directors delegated its authority to administer the 2007 Plan to the compensation committee. Subject to the terms of the 2007 Plan, the board of directors or a committee authorized by the board determined recipients, dates of grant, the numbers and types of stock awards to be granted, and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Types of Awards. The 2007 Plan provided for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, RSU awards, stock appreciation rights, performance stock awards and other forms of equity compensation, which may be granted to employees, including officers, non-employee directors, and consultants. Incentive stock options were granted only to employees, including executive officers. Since the Azur Merger, all of the new grants under the 2007 Plan were granted to non-employee directors, vest ratably over service periods of one to three years and expire no more than 10 years after the date of grant. Corporate Transactions. Pursuant to the 2007 Plan, in the event of a corporate transaction (as defined in the 2007 Plan and described below), the board of directors will have the discretion to take one or more of the following actions with respect to outstanding stock awards (contingent upon the closing or completion of such corporate transaction), unless otherwise provided in the stock award agreement or other written agreement with the participant or unless otherwise provided by our board of directors at the time of grant: • • • • • • arrange for assumption, continuation, or substitution of a stock award by a surviving or acquiring corporation (or its parent company); arrange for the assignment of any reacquisition or repurchase rights applicable to any shares issued pursuant to a stock award to the surviving or acquiring corporation (or its parent company); accelerate the vesting and exercisability of a stock award and provide for its termination if it is not exercised at or prior to the corporate transaction; arrange for the lapse of any reacquisition or repurchase rights applicable to any shares issued pursuant to a stock award; cancel or arrange for the cancellation of a stock award, to the extent not vested or exercised prior to the effective time of the corporate transaction, in exchange for such cash consideration as the board of directors may consider appropriate; or make a payment equal to the excess, if any, of (a) the value of the property that the participant would have received upon the exercise of the stock award over (b) any exercise price payable in connection with such exercise. The board of directors need not take the same action for each stock award or with respect to all participants. For purposes of the 2007 Plan, a “corporate transaction” generally means (i) a sale or disposition of all or substantially all our assets or a sale or disposition of at least 90% of our outstanding securities; (ii) a merger, consolidation or similar transaction after which we are not the surviving corporation; or (iii) a merger, consolidation or similar transaction after which we are the surviving corporation but our ordinary shares are converted or exchanged into other property. Change in Control. The board of directors has the discretion to provide additional acceleration of vesting and exercisability upon or after a change in control (as defined in the 2007 Plan and described below) as may be provided in a stock award agreement or any other written agreement between us or any of our affiliates and a participant. The forms of stock option agreement and RSU award agreement adopted by the board of directors under the 2007 Plan provide that in the event a participant’s service relationship with us or a successor entity is terminated due to an involuntary termination without cause (as defined in the stock award agreement and as described below) within 12 months following, or one month prior to, the effective date of a change in control, the vesting (and in the case of stock options, exercisability) of the stock award will accelerate in full. For purposes of the 2007 Plan and the forms of stock option agreement and RSU award agreement issued thereunder, a “change in control” generally means (i) a person or group acquires ownership of more than 50% of the combined voting power of our outstanding securities (other than in connection with a financing or a repurchase program); (ii) a merger, 58 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT consolidation or similar transaction involving us, after which our shareholders do not own more than 50% of the combined voting power of the surviving entity or its parent in substantially the same proportion as their ownership of our outstanding voting securities immediately before the transaction; (iii) our shareholders or our board of directors approves a complete dissolution or liquidation of our company, or a complete dissolution or liquidation of our company otherwise occurs (except for a liquidation into a parent company); (iv) a sale, lease, exclusive license or other disposition of all or substantially all of our assets, other than to certain entities; or (v) individuals who are members of our board of directors on the date of adoption of the 2007 Plan (or members of our board of directors approved or recommended by a majority vote of such members still in office) cease to constitute at least a majority of our board of directors. The term “involuntary termination without cause” has a similar meaning as under the 2011 Plan, as described above. y x o r P 2007 Employee Stock Purchase Plan Additional long-term equity incentives are provided through the ESPP, which was amended and restated by Jazz Pharmaceuticals, Inc.’s board of directors in October 2011 and approved by its stockholders in December 2011, to be effective immediately prior to the Azur Merger, and, in October 2012, amended and restated by our compensation committee. The ESPP was assumed by us upon the consummation of the Azur Merger. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of section 423 of the Internal Revenue Code, or the Code. Under the ESPP, all of our regular employees and employees of any of our parent or subsidiary companies designated by the board of directors as eligible to participate may participate and may contribute, normally through payroll deductions, up to 15% of their earnings up to a total of $15,000 per purchase period for the purchase of our ordinary shares under the ESPP. The ESPP is currently offered to our regular employees in Ireland, Canada and the United States, including the NEOs. The ESPP is implemented through a series of offerings of purchase rights to eligible employees. Under the ESPP, we may specify offerings with a duration of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which our ordinary shares will be purchased for employees participating in the offering. Unless otherwise determined by the board of directors, ordinary shares are purchased for accounts of employees participating in the ESPP at a price per share equal to the lower of (a) 85% of the fair market value of an ordinary share on the first date of an offering or (b) 85% of the fair market value of an ordinary share on the date of purchase. Performance Bonus Plan We maintain a performance bonus plan to reward executive officers and other employees for successful achievement of company-wide performance objectives and individual contributions toward those objectives on an annual basis. More information regarding the performance bonus plan is provided above under the headings “Compensation Discussion and Analysis—2018 Performance Bonus Program” and “Compensation Discussion and Analysis—2018 Compensation Decisions for Our Named Executive Officers.” 401(k) Plan Our employees based in the United States are eligible to participate in the 401(k) Plan. The 401(k) Plan is intended to qualify as a tax-qualified plan under section 401 of the Code. Employee contributions are held and invested by the 401(k) Plan’s trustee. The 401(k) Plan provides that each participant may contribute a portion of his or her pre-tax compensation, up to a statutory annual limit, which was $18,500 for employees under age 50, and $24,500 for employees age 50 and over in 2018. The 401(k) Plan also permits us to make discretionary contributions and matching contributions, subject to established limits and a vesting schedule. In 2013, we began making discretionary matching contributions, which for 2018, consisted of a match of 50% of up to the first 6% of eligible compensation contributed by each employee toward his or her 401(k) plan. Additional Benefits The NEOs are eligible to participate in our benefit plans generally available to all employees, as described in “Compensation Discussion and Analysis—Key Components and Design of the Executive Compensation Program.” Pension Benefits Other than with respect to tax-qualified defined contribution plans such as the 401(k) Plan, the NEOs do not participate in any plan that provides for retirement payments and benefits, or payments and benefits that will be provided primarily following retirement. JAZZ PHARMACEUTICALS | Proxy Statement 59 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Nonqualified Deferred Compensation During the year ended December 31, 2018, the NEOs did not contribute to, or earn any amounts with respect to, any defined contribution or other plan sponsored by us that provides for the deferral of compensation on a basis that is not tax-qualified. Outstanding Equity Awards at Fiscal Year-End The following table sets forth, for the fiscal year ended December 31, 2018, certain information regarding outstanding equity awards at fiscal year-end for the NEOs. OUTSTANDING EQUITY AWARDS AT 2018 FISCAL YEAR-END TABLE Option Awards Stock Awards Name Bruce C. Cozadd(5) Daniel N. Swisher, Jr. Matthew P. Young Suzanne Sawochka Hooper(18) Michael P. Miller Number of Securities Underlying Unexercised Options (#) Exercisable — 37,843 54,895 69,479 48,784 73,961 109,284 6,895 — — 10,937 15,937 19,166 12,500 9,000 19,000 — 10,937 15,937 19,166 20,000 30,309 35,337 — 989 8,203 10,625 11,979 20,000 Number of Securities Underlying Unexercised Options (#)(1) Unexercisable 92,500 (6) 48,657 (7) 22,605 (8) 3,021 (9) — (5) — (5) — (5) — (5) 45,000 (14) 23,500 (6) 14,063 (7) 6,563 (8) 834 (9) — — — 23,500 (6) 14,063 (7) 6,563 (8) 834 (9) — — — 20,000 (6) 1,511 (16) 10,547 (7) 4,375 (8) 521 (9) — Option Exercise Price ($) 140.67 136.18 123.36 175.19 166.62 59.13 46.83 11.48 140.67 140.67 136.18 123.36 175.19 130.23 166.62 58.72 140.67 136.18 123.36 175.19 166.62 59.13 46.83 140.67 155.18 136.18 123.36 175.19 141.98 Option Expiration Date(2) 2/29/2028 3/1/2027 2/24/2026 2/25/2025 2/26/2024 3/4/2023 8/8/2022 3/7/2020 2/29/2028 2/29/2028 3/1/2027 2/24/2026 2/25/2025 5/11/2024 2/26/2024 5/2/2023 2/29/2028 3/1/2027 2/24/2026 2/25/2025 2/26/2024 3/4/2023 8/8/2022 2/29/2028 5/10/2027 3/1/2027 2/24/2026 2/25/2025 5/4/2024 Number of Shares or Units of Stock That Have Not Vested (#)(3) 37,000 (10) 25,950 (11) 15,500 (12) 6,950 (13) — — — — 18,000 (15) 9,400 (10) 7,500 (11) 4,500 (12) 1,918 (13) — — — 9,400 (10) 7,500 (11) 4,500 (12) 1,918 (13) — — — 8,000 (10) 750 (17) 5,625 (11) 3,000 (12) 1,198 (13) — Market Value of Shares or Units of Stock That Have Not Vested ($)(4) 4,586,520 3,216,762 1,921,380 861,522 — — — — 2,231,280 1,165,224 929,700 557,820 237,755 — — — 1,165,224 929,700 557,820 237,755 — — — 991,680 92,970 697,275 371,880 148,504 — (1) In addition to the specific vesting schedule for each stock award, each unvested stock award is subject to the general terms of the 2011 Plan or 2007 Plan, as applicable, including the potential for future vesting acceleration described above under the heading “Description of Compensation Arrangements—Equity Compensation Arrangements” as well as the potential vesting acceleration under the terms of the change in control plan described below under the heading “Potential Payments upon Termination or Change in Control—Amended and Restated Executive Change in Control and Severance Benefit Plan.” (2) As a general matter, stock options granted to NEOs expire on the day before the tenth anniversary of their grant date, or earlier in the event of an NEO’s termination of service. In the event of an NEO’s termination of service, stock options generally expire three months after such termination of service, subject to extension under limited circumstances such as if the sale of shares during such time was prohibited by our insider trading policy or if exercise would result in violation of securities registration requirements. For more information, see description under the heading “Potential Payments upon Termination or Change in Control—Equity Compensation Plans.” (3) Each award listed in this column represents an RSU award that vests in four equal annual installments on the anniversary of the applicable vesting commencement date. 60 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT (4) The market values of the RSU awards that have not vested are calculated by multiplying the number of shares underlying the RSU awards shown in the table by $123.96, the closing price of our ordinary shares on December 31, 2018. (5) The number of shares reported reflects the transfer of beneficial ownership of a portion of the indicated stock option and RSU awards in 2015 to Mr. Cozadd’s former spouse pursuant to a domestic relations order. (6) The unexercisable shares subject to this stock option award as of December 31, 2018 vested with respect to 25% of the shares underlying the stock option on March 1, 2019, and the remainder vests monthly from April 1, 2019 to March 1, 2022. (7) The unexercisable shares subject to this stock option award as of December 31, 2018 vest monthly from January 2, 2019 to March 2, 2021. (8) The unexercisable shares subject to this stock option award as of December 31, 2018 vest monthly from January 25, 2019 to February 25, 2020. (9) The unexercisable shares subject to this stock option award as of December 31, 2018 vested monthly from January 26, 2019 to February 26, 2019. y x o r P (10) RSUs awarded on March 1, 2018, vesting in equal annual installments over four years measured from the vesting commencement date of March 5, 2018. (11) RSUs awarded on March 2, 2017, vesting in equal annual installments over four years measured from the vesting commencement date of March 5, 2017. (12) RSUs awarded on February 25, 2016, vesting in equal annual installments over four years measured from the vesting commencement date of February 25, 2016. (13) RSUs awarded on February 26, 2015, vesting in equal annual installments over four years measured from the vesting commencement date of February 26, 2015. (14) The unexercisable shares subject to this stock option award as of December 31, 2018 vest monthly from January 3, 2019 to January 3, 2022. (15) RSUs awarded on March 1, 2018, vesting in equal annual installments over four years measured from the vesting commencement date of January 3, 2018. (16) The unexercisable shares subject to this stock option award as of December 31, 2018 vest monthly from January 11, 2019 to May 11, 2021. (17) RSUs awarded on May 11, 2017, vesting in equal annual installments over four years measured from the vesting commencement date of June 5, 2017. (18) Ms. Hooper resigned from her position as Executive Vice President and GC, effective as of March 1, 2019, and is expected to continue as a part-time, non-executive employee until September 30, 2019. Option Exercises and Stock Vested The following table provides information on RSUs vested and stock options exercised, including the number of shares acquired upon exercise and the value realized, determined as described below, for the NEOs in the year ended December 31, 2018. Name Bruce C. Cozadd Daniel N. Swisher, Jr. Matthew P. Young Suzanne Sawochka Hooper Michael P. Miller Option Awards Stock Awards Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($)(1) Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($)(2) — — 5,000 13,526 — — — 560,150 1,507,269 — 30,688 4,594,038 — 9,356 9,169 7,324 — 1,394,218 1,332,651 1,077,506 (1) The value realized on exercise is based on the difference between the closing price of our ordinary shares on the date of exercise and the applicable exercise price of those options, and does not represent actual amounts received by the NEOs as a result of the option exercises. (2) The value realized on vesting is based on the number of shares underlying the RSUs that vested and the closing price of our ordinary shares on the vesting date. JAZZ PHARMACEUTICALS | Proxy Statement 61 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Potential Payments upon Termination or Change in Control Amended and Restated Executive Change in Control and Severance Benefit Plan The change in control plan provides that, in the event that an executive’s employment terminates due to an involuntary termination without cause or a constructive termination, in each case upon or within 12 months following a change in control (as such terms are defined in the change in control plan and described generally below), and assuming all of the other conditions of the change in control plan are met, each executive who is a participant in the change in control plan (including each of our NEOs) would be entitled to the following benefits under the change in control plan: • • • A single, lump sum cash severance payment equal to the sum of: (i) the applicable base salary described below, multiplied by the applicable percentage set forth below; plus (ii) the product of (A) the applicable base salary, (B) the applicable bonus percentage described below and (C) the applicable percentage set forth below; plus (iii) the product of (A) the applicable base salary, (B) the applicable bonus percentage and (C) the quotient obtained by dividing the number of full months that an executive is employed in the year of the termination by 12. O O O The “applicable base salary” is the higher of the executive’s base salary in effect (i) on the date of termination (without giving effect to any reduction in base salary that would constitute grounds for a constructive termination) or (ii) immediately prior to the change in control, without giving effect to any voluntary pay reduction taken by the executive during the 12 months preceding the date of termination or the change in control. The “applicable percentage” is 200% for our CEO, executive chairman or president, 150% for senior vice presidents and above and 100% for vice presidents. The “applicable bonus percentage” is the greater of (i) the highest amount of any annual bonus paid to the executive for either of the last two calendar years prior to (A) the date of termination or (B) the change in control, in each case expressed as a percentage of the executive’s base salary for the applicable year, and (ii) the higher of the executive’s target bonus for the calendar year in which (A) the termination occurs or (B) the change in control occurs, in each case expressed as a percentage of the executive’s base salary for such year. Full payment of all of the applicable COBRA premiums for any health, dental or vision plan sponsored by us for a period of up to (i) 24 months for our CEO, executive chairman or president, (ii) 18 months for executive vice presidents and senior vice presidents, and (iii) 12 months for vice presidents, provided that the executive timely elects continued coverage. Acceleration in full of the vesting and exercisability, as applicable, of outstanding stock options and other equity awards held by the executive. The following key terms are defined in the change in control plan: • • A “change in control” generally means: (i) a person or group acquires ownership of more than 30% of the combined voting power of our outstanding securities (other than directly from our company); (ii) certain compromises or arrangements sanctioned by the Irish courts, certain schemes, contracts or offers that have become binding on all of our shareholders, certain takeover bids, certain offers or reverse takeover transactions, or a reorganization, merger, statutory share exchange, consolidation or similar transaction involving us, after which our shareholders do not own more than 50% of the combined voting power of the surviving entity or its parent in substantially the same proportion as their ownership of our outstanding voting securities immediately before the transaction, or a person or group acquires ownership of more than 30% of the combined voting power of the surviving entity or its parent, or at least a majority of the members of the board of directors of the parent (or the surviving entity, if there is no parent) following such transaction are not incumbent board members (as defined in (v) below) at the time our board of directors approves the transaction; (iii) our shareholders or our board of directors approves a complete dissolution or liquidation of our company, or a complete dissolution or liquidation of our company otherwise occurs (except for a liquidation into a parent company); (iv) a sale, lease, exclusive license or other disposition of all or substantially all of our assets, other than to certain entities; or (v) individuals who were members of our board of directors as of February 10, 2016 (or members of our board of directors approved or recommended by a majority vote of such members still in office), referred to as “incumbent board members,” cease to constitute at least a majority of the board of directors. An “involuntary termination without cause” generally means an executive’s employment is terminated for any reason other than for the following reasons: (i) the executive’s unauthorized use or disclosure of confidential information or trade secrets which causes material harm to us; (ii) the executive’s material breach of any agreement with us (or the executive’s material violation of any statutory duty owed to us) after an opportunity to cure; (iii) the executive’s material failure to comply with our written policies or rules after an 62 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT opportunity to cure; (iv) the executive’s conviction or plea of guilty or no contest to any crime involving fraud, dishonesty or moral turpitude; (v) the executive’s gross misconduct; (vi) the executive’s continued failure to perform his or her assigned duties after notification; or (vii) the executive’s failure to reasonably cooperate in good faith with any governmental or internal investigation of us or our directors, officers or employees. An “involuntary termination without cause” also includes an executive’s termination of employment due to death or disability. • A “constructive termination” generally means an executive resigns employment after any of the following actions are taken or events occur without the executive’s written consent: (i) one or more reductions in the executive’s base salary that results in a total reduction in the executive’s base salary, as in effect immediately prior to the change in control or any higher base salary in effect following the change in control, by more than 10%; (ii) a relocation of the executive’s principal place of employment that increases the executive’s one-way commute by more than 35 miles; (iii) a substantial reduction in the executive’s authority, duties or responsibilities that are in effect immediately prior to the change in control, provided that if the executive holds the same position but the size of the executive’s employing entity or business unit has decreased significantly or our company or the executive’s employing entity ceases to be a publicly-traded corporation, the executive’s authority, duties and responsibilities will be considered to be substantially reduced; (iv) a reduction in the executive’s title; or (v) a substantial increase in executive’s required business travel as compared with the executive’s required business travel prior to the change in control. y x o r P We benefit by requiring the executive to execute an effective general waiver and release of claims in order to be eligible to receive benefits under the change in control plan. All other benefits (such as life insurance, disability coverage and 401(k) Plan eligibility) will terminate as of the executive’s termination date. The change in control plan does not provide for the gross up of any excise taxes imposed by section 4999 of the Code. If any of the severance benefits payable under the change in control plan would constitute a “parachute payment” within the meaning of section 280G of the Code, subject to the excise tax imposed by section 4999 of the Code, the change in control plan provides for a best after-tax analysis with respect to such payments, under which the executive will receive whichever of the following two alternative forms of payment would result in executive’s receipt, on an after-tax basis, of the greater amount of the transaction payment notwithstanding that all or some portion of the transaction payment may be subject to the excise tax: (i) payment in full of the entire amount of the transaction payment, or (ii) payment of only a part of the transaction payment so that the executive receives the largest payment possible without the imposition of the excise tax. The executive would not receive benefits under the change in control plan in certain circumstances, including if (i) the executive voluntarily terminates employment with us to accept employment with another entity that is controlled, directly or indirectly, by us or is otherwise affiliated with us; (ii) the executive does not confirm in writing that he or she is subject to agreements with us relating to proprietary and confidential information and our Code of Conduct; or (iii) the executive does not return all company property. In addition, benefits would be terminated under the change in control plan if the executive willfully breaches his or her agreements with us relating to proprietary and confidential information or our Code of Conduct or engages in certain solicitation or business interference activities. The structure and amount of benefits provided under the change in control plan are intended to balance our goals of attracting and retaining highly qualified individuals, providing the appropriate incentive for such individuals to perform in the best interests of our shareholders and maintaining responsible pay practices. Our compensation committee periodically reviews market data to gain a general understanding of the change in control benefits offered by our competitors and reviews the benefits offered under the change in control plan against such market data to ensure that the benefits under the change in control plan remain appropriate. Equity Compensation Plans The 2011 Plan and 2007 Plan and award agreements thereunder provide for potential vesting acceleration upon an executive’s termination in connection with a change in control and, at the discretion of the board of directors, upon certain change in control events, as further described above under the heading “Description of Compensation Arrangements—Equity Compensation Arrangements.” In addition, under the terms of the 2011 Plan and 2007 Plan and the option award agreements thereunder, the vested portion of stock options granted to the NEOs will generally expire three months after the applicable NEO’s termination of service, subject to extension under limited circumstances such as if the sale of shares during such time was prohibited by our insider trading policy or if exercise would result in violation of securities registration requirements. We refer to the period following the NEO’s termination during which he or she can continue to exercise his or her vested stock options as the post-termination exercise period. However, in termination situations involving the death or disability of an NEO, the post-termination exercise period is generally extended up to 12 months in connection with a termination due to disability and up to 18 months in connection with a termination due to death. As the value of such extended post-termination exercise periods is not quantifiable, such value is not included in the table below. JAZZ PHARMACEUTICALS | Proxy Statement 63 Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Potential Payments upon Termination or Change in Control Table The following table estimates the potential severance payments and benefits under the change in control plan to which the NEOs would have been entitled in connection with specified termination events, calculated as if each NEO’s employment had terminated as of December 31, 2018. In addition, the table sets forth the amounts to which the NEOs would have been entitled under the 2011 Plan and 2007 Plan if, upon a corporate transaction or change in control transaction, the board of directors had exercised its discretion to accelerate the vesting and exercisability of stock options and the vesting of RSU awards, and such event had occurred on December 31, 2018. There are no other agreements, arrangements or plans that entitle any NEOs to severance, perquisites or other benefits upon termination of employment or a change in control. For purposes of the table below, we have assumed that none of the potential severance benefits payable under the change in control plan would be subject to the excise tax imposed by section 4999 of the Code and therefore would not be reduced in accordance with the terms of the change in control plan. POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL AS OF DECEMBER 31, 2018 Name Bruce C. Cozadd . . . . . . . . . . . . . . Daniel N. Swisher, Jr. . . . . . . . . . . . Matthew P. Young . . . . . . . . . . . . . Suzanne Sawochka Hooper(4) . . . . . Michael P. Miller . . . . . . . . . . . . . . . Benefit Lump Sum Cash Severance Payment COBRA Payments Vesting Acceleration(3) Benefit Total Lump Sum Cash Severance Payment COBRA Payments Vesting Acceleration(3) Benefit Total Lump Sum Cash Severance Payment COBRA Payments Vesting Acceleration(3) Benefit Total Lump Sum Cash Severance Payment COBRA Payments Vesting Acceleration(3) Benefit Total Lump Sum Cash Severance Payment COBRA Payments Vesting Acceleration(3) Benefit Total Involuntary Termination Without Cause or Constructive Termination in Connection with a Change of Control($)(1) 2011 Plan and 2007 Plan—Certain Corporate Transactions($)(2) 4,918,500 77,585 10,599,738 15,595,823 2,252,604 73,832 2,231,278 4,557,714 1,717,826 57,974 2,894,435 4,670,235 1,792,727 38,802 2,894,435 4,725,964 1,509,375 55,374 2,304,932 3,869,681 — — 10,599,738 10,599,738 — — 2,231,278 2,231,278 — — 2,894,435 2,894,435 — — 2,894,435 2,894,435 — — 2,304,932 2,304,932 (1) These benefits would be payable under the change in control plan if the involuntary termination without cause or constructive termination occurred upon or within 12 months following a change in control and assuming such termination took place on December 31, 2018. The forms of stock option and RSU agreements under the 2011 Plan and the 2007 Plan provide for the same vesting acceleration benefit as shown here under the change in control plan, therefore no separate vesting acceleration benefit is listed. Pursuant to the change in control plan, an involuntary termination without cause also includes an individual’s death or disability. (2) These benefits would be payable under the 2011 Plan and the 2007 Plan if, upon a corporate transaction event, the board of directors exercised its discretion to accelerate the vesting and exercisability of outstanding stock options and RSU awards, assuming the vesting acceleration took place on December 31, 2018. For a description of the potential vesting acceleration provisions in the 2011 Plan and the 2007 Plan, see “Description of Compensation Arrangements—Equity Compensation Arrangements” above. (3) The value of stock option and RSU award vesting acceleration is based on the closing price of $123.96 per ordinary share as of December 31, 2018, minus, in the case of stock options, the exercise price of the unvested stock option shares subject to acceleration. 64 JAZZ PHARMACEUTICALS | Proxy Statement Executive Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT y x o r P (4) Ms. Hooper resigned from her position as Executive Vice President and GC, effective as of March 1, 2019. There were no severance payments or other severance benefits provided to Ms. Hooper resulting from her resignation. Pay Ratio Disclosure Under SEC rules, we are required to calculate and disclose the annual total compensation of our median employee, as well as the ratio of the annual total compensation of our median employee as compared to the annual total compensation of our CEO, or our CEO pay ratio. Consistent with the process adopted for 2017, to identify our median employee for 2018, we used the following methodology: • • • • To determine our total population of employees, we included all full-time, part-time, regular and temporary employees as of October 1, 2018. To identify our median employee from our employee population, we calculated the annual target amount of each employee’s 2018 base salary (using a reasonable estimate of the hours worked and no overtime for hourly employees) and bonus or commission, as applicable, and added the estimated value of all equity awards granted during 2018. For purposes of base salaries, bonuses and commissions, we used an estimate based on the rates in effect on October 1, 2018. To estimate the value of stock options, we multiplied the number of shares subject to each stock option by the estimated per share Black-Scholes value based on assumptions disclosed in our 2018 Annual Report on Form 10-K, and to estimate the value of other equity awards, we used the same methodology we use for reporting the value of equity awards granted to our NEOs in our Summary Compensation Table. In making this determination, we annualized the base salaries, bonuses and commissions of employees who were employed by us for less than the entire calendar year. Compensation paid in foreign currencies was converted to U.S. dollars based on the average daily exchange rates for the year to date period ending on October 1, 2018. Using this approach, we determined our median employee and then calculated the annual total compensation of this employee for 2018 in accordance with the requirements of the Summary Compensation Table. For 2018, the median of the annual total compensation of our employees (other than our CEO) was $216,797 and the annual total compensation of our CEO, as reported in our Summary Compensation Table, was $11,443,133. Based on this information, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all employees was 53 to 1. The CEO pay ratio above represents our reasonable estimate calculated in a manner consistent with SEC rules and applicable guidance. SEC rules and guidance provide significant flexibility in how companies identify the median employee, and each company may use a different methodology and make different assumptions particular to that company. As a result, and as explained by the SEC when it adopted these rules, in considering the pay ratio disclosure, shareholders should keep in mind that the rule was not designed to facilitate comparisons of pay ratios among different companies, even companies within the same industry, but rather to allow shareholders to better understand and assess each particular company’s compensation practices and pay ratio disclosures. Neither the compensation committee nor our management used our CEO pay ratio measure in making compensation decisions. JAZZ PHARMACEUTICALS | Proxy Statement 65 2019 NOTICE OF MEETING AND PROXY STATEMENT DIRECTOR COMPENSATION Non-Employee Director Compensation Policy Pursuant to our non-employee director compensation policy, or director compensation policy, each non-employee director was entitled to receive the following cash compensation for board services, as applicable, for 2018: • • • • a $60,000 annual retainer for service as a member of our board of directors (paid quarterly); a supplemental $50,000 annual retainer for service as the Lead Independent Director (paid quarterly); a supplemental annual retainer for the chairs of the following board committees in the following amounts: $25,000 for the chairperson of the audit committee, $22,500 for the chairperson of the compensation committee, $20,000 for the chairperson of the nominating and corporate governance committee and $22,500 for the chairperson of the transaction committee (each paid quarterly); and a supplemental annual retainer for each member of the following board committees other than the chairs, in the following amounts: $15,000 for service as a member of the audit committee, $12,500 for service as a member of the compensation committee, $10,000 for service as a member of the nominating and corporate governance committee and $12,500 for service as a member of the transaction committee (each paid quarterly). Our director compensation policy was originally approved by our board of directors in May 2013 and has been amended as follows: in August 2013 to, among other things, provide for cash retainers for the chairperson and members of the transaction committee; in May 2014 to provide for compensation to our Lead Independent Director and revise the number of initial and continuing equity grants; in October 2014 to provide for a tax equalization payment on any Irish tax that may be paid on company reimbursement of reasonable travel, lodging and meal expenses related to service on the board of directors; in April 2015 to revise the number of initial and continuing equity grants; in May 2016 to increase the annual retainer for service as a member of our board of directors, increase the annual retainer for service as our Lead Independent Director and revise the number of initial and continuing RSU awards; and in May 2018 to replace the fixed number of initial and continuing option and RSU awards with a specified grant date dollar value. The director compensation policy currently provides for the automatic grant of equity awards to our non-employee directors over the period of their service on our board of directors. Any individual who first becomes a non-employee director is automatically granted the following: (a) an initial option to purchase ordinary shares that vests with respect to one-third of the shares on the first anniversary of the date of such individual’s election or appointment to the board of directors, and, with respect to the balance, in a series of 24 successive equal monthly installments thereafter and (b) an initial RSU award that vests in equal annual installments over three years from the date of such individual’s election or appointment to the board of directors, subject in each case to the non-employee director’s continuous service through such dates. The grant date value of the initial option together with the initial RSU award is equal to approximately $600,000, with generally 50% of the value delivered as an initial option and 50% of the value delivered as an initial RSU award, using the applicable ratio of stock option grants to RSUs that is approved by the compensation committee on an annual basis, with the actual share amounts for the initial option and initial RSU award to be determined by applying the value methodology used by the compensation committee for determining equity grants for employees generally. If a non-employee director does not stand for reelection at an annual general meeting of our shareholders in the year in which his or her term expires or otherwise resigns effective at an annual general meeting of our shareholders and, in either case, the non-employee director’s continuous service terminates at such meeting, then effective as of the date of such meeting, any unvested portion of the initial option award will become vested and exercisable, and any unvested portion of the initial RSU award will become vested, in each case with respect to the portion of the award that would have vested through the anniversary of the award’s vesting commencement date in the year of that meeting. Under the current director compensation policy, each continuing non-employee director will automatically be granted the following continuing grants in connection with each annual general meeting: (a) a continuing option to purchase ordinary shares that vests in a series of 12 successive equal monthly installments beginning on the first day of the calendar month following the date of the annual general meeting of our shareholders with respect to which the option is granted and (b) a continuing RSU award that vests in full on the first anniversary of the date of the annual general meeting of our shareholders with respect to which the RSU award is granted, subject in each case to the non-employee director’s continuous service through such dates. The grant date value of the continuing option together with the continuing RSU award is equal to approximately $400,000, with generally 50% of the value delivered as a continuing option and 50% of the value delivered as a continuing RSU award, using the applicable ratio of stock option grants to RSUs that is approved by the compensation committee on an annual basis, with the actual share amounts for the continuing option and continuing RSU award to be determined by 66 JAZZ PHARMACEUTICALS | Proxy Statement Director Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT applying the value methodology used by the compensation committee for determining equity grants for employees generally. If a director is elected or appointed as a director for the first time other than at an annual general meeting, in order to receive automatic continuing grants, the director must have first joined the board at least four calendar months before the date of the applicable annual general meeting. If a director is elected or appointed as a director for the first time at an annual general meeting, the director will not receive automatic continuing grants for such meeting. If a non-employee director does not stand for reelection at an annual general meeting of our shareholders in the year in which his or her term expires or otherwise resigns effective at an annual general meeting of our shareholders and, in either case, the non-employee director’s continuous service terminates at such meeting, then effective as of the date of such meeting, any unvested portion of the continuing option award will become vested and exercisable in full and any unvested portion of a continuing RSU award will become vested in full. y x o r P The automatic initial and continuing options and RSU awards are granted under the Amended and Restated 2007 Non-Employee Directors Stock Award Plan, or 2007 Directors Plan. The grant date of these equity awards is the second trading day following the filing date of our next quarterly or annual report filed under the Exchange Act that occurs after the date the director first joined our board of directors (with respect to the automatic initial option and RSU awards) or the date of our annual general meeting (with respect to the automatic continuing option and RSU awards). The other terms and conditions applicable to equity awards made to our non-employee directors are included below under the heading “Equity Compensation Plans.” In addition, our non-employee directors are reimbursed for travel and other reasonable expenses incurred in attending board or committee meetings, as are our employees who serve as directors. If any reimbursement payment is subject to tax imposed by the Irish Revenue Commissioners, each non-employee director is also entitled to a tax equalization payment in order to allow them to retain the full reimbursement payment. Directors Continuing Education In furtherance of our ongoing commitment to the continuing education of our directors, our nominating and corporate governance committee adopted a policy for the reimbursement of director continuing education in February 2013, as amended in February 2014. Under this policy, we will pay or reimburse each director for enrollment fees and reasonable expenses incurred in connection with attending and participating each year in one director continuing education program and in one healthcare industry continuing education program, each sponsored by an outside provider. Directors Deferred Compensation Plan In May 2007, the Jazz Pharmaceuticals, Inc. board of directors adopted the Directors Deferred Compensation Plan, which was amended and restated in August 2010. The Directors Deferred Compensation Plan, as amended and restated, is referred to in this proxy statement as the Directors Deferred Plan. We continued and assumed the Directors Deferred Plan in connection with the Azur Merger. The Directors Deferred Plan allows each non-employee director to elect to defer receipt of all or a portion of his or her annual retainer fees to a future date or dates. Amounts deferred under the Directors Deferred Plan are credited as our ordinary shares to a phantom stock account, and the number of shares credited is based on the amount of the retainer fees deferred divided by the market value of our ordinary shares on the first trading day of the first open window period following the date the retainer fees were deemed earned. On the tenth business day following the day of separation from the board of directors or the occurrence of a change in control, or as soon thereafter as practical once the non-employee director has provided the necessary information for electronic deposit of the deferred shares, each non-employee director will receive (or commence receiving, depending upon whether the director has elected to receive distributions from his or her phantom stock account in a lump sum or in installments over time) a distribution from his or her phantom stock account in our ordinary shares. The Directors Deferred Plan may be amended or terminated at any time by the board of directors. The Directors Deferred Plan in form and operation is intended to be compliant with section 409A of the Code. Although we continue to maintain the Directors Deferred Plan, since the closing of the Azur Merger we have not permitted our non-employee directors to defer any annual retainer fees under the Directors Deferred Plan. Ownership Guidelines for Directors We maintain share ownership guidelines for our non-employee directors, originally adopted in February 2013 and amended in May 2018. Under the guidelines, giving effect to an amendment in May 2018, each non-employee director is expected to own a number of the JAZZ PHARMACEUTICALS | Proxy Statement 67 Director Compensation (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT company’s ordinary shares with a value equal to five times his or her annual cash retainer (increased from three times the annual cash retainer prior to May 2018). The guidelines provide that the individuals subject to the guidelines are expected to establish the minimum ownership levels within five years of first becoming subject to the guidelines (and, with respect to the amended guidelines in May 2018, by the last day of 2021 for individuals subject to the guidelines as of January 1, 2018). As of May 13, 2019, each non-employee director was in compliance with his or her share ownership requirement under the applicable guidelines, and Ms. O’Riordan who joined our board of directors in February 2019, has five years from her appointment, or until 2024, to comply with the guidelines. Equity Compensation Plans The 2007 Directors Plan, which was initially adopted by the Jazz Pharmaceuticals, Inc. board of directors and approved by the Jazz Pharmaceuticals, Inc. stockholders in connection with its initial public offering, was continued and assumed by us upon the consummation of the Azur Merger. The automatic initial and continuing stock awards under our director compensation policy described above are granted under the 2007 Directors Plan. With respect to options granted under the 2007 Directors Plan and 2007 Plan, if a non-employee director’s service relationship with us or any of our affiliates, whether as a non-employee director or subsequently as our employee, director or consultant or that of any of our affiliates, ceases for any reason other than disability or death, or, with respect to options granted under the 2007 Directors Plan only, after any 12-month period following a change in control, the optionee may exercise any vested options for a period of three months following the cessation of service. If such optionee’s service relationship with us, or any of our affiliates, ceases due to disability or death (or an optionee dies within a certain period following cessation of service), the optionee or a beneficiary may exercise the option for a period of 12 months in the event of disability, and 18 months in the event of death. With respect to options granted under the 2007 Directors Plan, if such optionee’s service terminates within 12 months following a specified change in control transaction, the optionee may exercise any vested portion of the option for a period of 12 months following the effective date of such a transaction. The option term may be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event, however, may an option be exercised beyond the expiration of its term. With respect to RSU awards granted under the 2007 Directors Plan and 2007 Plan, if a non-employee director’s service relationship with us or any of our affiliates, whether as a non-employee director or subsequently as our employee, director or consultant or that of any of our affiliates, ceases for any reason, any RSU awards that were unvested as of the date of such termination will be forfeited. In the event of certain significant corporate transactions (which generally have a meaning similar to “corporate transaction” under the 2011 Plan), all outstanding awards under the 2007 Directors Plan may be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue or substitute for such awards, then (a) with respect to any such awards that are held by participants then performing services for us or our affiliates, the vesting and exercisability of such awards will be accelerated in full and such awards will be terminated if not exercised (if applicable) prior to the effective date of the corporate transaction and (b) all other outstanding awards will terminate if not exercised prior to the effective date of the corporate transaction. The board of directors may also provide that the holder of an outstanding award not assumed in the corporate transaction will surrender such award in exchange for a payment equal to the excess of (i) the value of the property that the holder would have received upon exercise of the award, over (ii) the exercise price otherwise payable in connection with the exercise. In addition, the vesting and exercisability of awards under the 2007 Directors Plan held by non-employee directors who are either required to resign their position as a condition of a specified change in control transaction (which generally has a similar meaning as a “change in control” under the 2011 Plan) or are removed from their position in connection with such a change in control will be accelerated in full. The treatment of outstanding options and RSU awards under the 2007 Plan in the event of certain significant corporate transactions or a specified change in control transaction is described above under the heading “Executive Compensation—Description of Compensation Arrangements—Equity Compensation Arrangements—2007 Equity Incentive Plan.” 2018 Equity Grants In accordance with our non-employee director compensation policy described above, we made automatic continuing grants to each of our non-employee directors as a result of their continuing on the board of directors through our annual general meeting in August 2018, which continuing grants were comprised of an option to purchase 3,735 ordinary shares and an RSU award covering 1,495 ordinary shares. All options and RSUs granted to non-employee directors during 2018 were granted under the 2007 Directors Plan. 68 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT Director Compensation (continued) Director Compensation Table The following table sets forth certain information with respect to the compensation of all of our non-employee directors for the fiscal year ended December 31, 2018. Mr. Cozadd, our Chairman and CEO, is not listed in the following table because he is our employee. Mr. Cozadd’s compensation is described under “Executive Compensation.” Mr. Cozadd received no additional compensation for serving on our board of directors in 2018. In addition, Ms. O’Riordan, who joined our board of directors in February 2019, is not listed in the following table since she received no compensation from Jazz Pharmaceuticals in any capacity during the fiscal year ended December 31, 2018. In accordance with our director compensation policy, upon her appointment, Ms. O’Riordan received an option to purchase 7,100 ordinary shares and an RSU award covering 2,840 ordinary shares. y x o r P Name Paul L. Berns Patrick G. Enright Peter Gray Heather Ann McSharry Seamus Mulligan Kenneth W. O’Keefe Norbert G. Riedel, Ph.D. Elmar Schnee Catherine A. Sohn, Pharm.D. Rick E Winningham DIRECTOR COMPENSATION FOR FISCAL 2018 Fees Earned ($)(1) Stock Awards ($)(2)(4) Option Awards ($)(3)(4) All Other Compensation ($) 72,500 87,500 97,500 107,500 82,500 75,000 95,000 82,500 82,500 120,000 265,706 265,706 265,706 265,706 265,706 265,706 265,706 265,706 265,706 265,706 206,209 206,209 206,209 206,209 206,209 206,209 206,209 206,209 206,209 206,209 — — — — — — — — — — Total ($) 544,416 559,416 569,416 579,416 554,416 546,916 566,916 554,416 554,416 591,916 (1) The dollar amounts in this column represent each non-employee director’s actual annual cash retainer earned for board services in 2018, which is equal to the aggregate of his or her annual retainer of $60,000 plus his or her annual retainers for service on one or more board committees, and for Mr. Winningham, for service as Lead Independent Director. Each non-employee director’s total fees were earned and payable in four quarterly installments subject to the non-employee director’s continuous service at the end of each quarter. Fees paid to each of Ms. McSharry and Messrs. Gray, Mulligan and Schnee were paid in Euro. The conversion to U.S. dollars was calculated based on the average exchange rate for each quarter as reported by the OANDA Corporation. Following the Azur Merger, the board of directors did not permit cash retainer fees to be deferred by our non-employee directors pursuant to the Directors Deferred Plan. The total number of ordinary shares previously credited to each individual non-employee director’s phantom stock account under the Directors Deferred Plan as of December 31, 2018 was as follows: 4,691 shares for Mr. Berns; 9,929 shares for Mr. Enright; 22,249 shares for Mr. O’Keefe; and no shares for the other non-employee directors. (2) The dollar amounts in this column reflect the aggregate grant date fair value of RSU awards computed in accordance with ASC 718. The grant date fair value of each RSU award is measured based on the closing price of our ordinary shares on the date of grant. These amounts do not necessarily correspond to the actual value recognized or that may be recognized by the non-employee directors. (3) The aggregate number of shares subject to outstanding stock options and RSU awards held by the non-employee directors listed in the table above as of December 31, 2018 was as follows: 26,280 shares subject to outstanding stock options and 1,495 shares subject to outstanding RSUs for each of Messrs. Berns and Mulligan; 7,150 shares subject to outstanding stock options and 1,495 shares subject to outstanding RSUs for Mr. Enright; 29,780 shares subject to outstanding stock options and 1,495 shares subject to outstanding RSUs for Dr. Sohn; 21,780 shares subject to outstanding stock options and 1,495 shares subject to outstanding RSUs for Mr. O’Keefe; 25,280 shares subject to outstanding stock options and 1,495 shares subject to outstanding RSUs for each of Ms. McSharry, Mr. Gray and Dr. Riedel; 17,280 shares subject to outstanding stock options and 1,495 shares subject to outstanding RSUs for Mr. Winningham; and 18,980 shares subject to outstanding stock options and 1,495 shares subject to outstanding RSUs for Mr. Schnee. (4) The dollar amounts in this column represent the aggregate grant date fair value of each stock option award granted to our non-employee directors in 2018. These amounts have been calculated in accordance with ASC 718, using the Black-Scholes option-pricing model and excluding the effect of estimated forfeitures. Assumptions used in the calculation of these amounts are included in the notes to our audited consolidated financial statements included in the company’s 2018 Annual Report on Form 10-K. These amounts do not necessarily correspond to the actual value recognized or that may be recognized by the non-employee directors. JAZZ PHARMACEUTICALS | Proxy Statement 69 2019 NOTICE OF MEETING AND PROXY STATEMENT CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Policy and Procedures for Review of Related Party Transactions We have adopted a Related Party Transaction Policy that sets forth our procedures for the identification, review, consideration and approval or ratification of “related-person transactions.” For purposes of our policy, a “related-person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we are, were or will be a participant, and the amount involved exceeds $120,000, and any “related person” had, has or will have a direct or indirect material interest (other than solely as a result of being a director or a beneficial owner of less than 10% of any class of a company’s voting securities). Transactions involving compensation for services provided to us as an employee or director are not covered by this policy. A “related person” is any executive officer, director or beneficial owner of more than 5% of any class of our voting securities, including any of their immediate family members and any entity owned or controlled by such persons. Under the policy, if a transaction has been identified as a related-person transaction (including any transaction that was not a related- person transaction when originally consummated or any transaction that was not initially identified as a related-person transaction prior to consummation), our management must present information regarding the related-person transaction to our audit committee (or, if audit committee approval would be inappropriate, to another independent body of our board of directors) for review, consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related person(s), the benefits to us of the transaction and whether the transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or from employees generally. Under the policy, we will, on an annual basis, collect information that our GC deems reasonably necessary from each director, executive officer and (to the extent feasible) significant shareholder to enable us to identify any existing or potential related-person transactions and to effectuate the terms of the policy. In addition, under our Code of Conduct, our employees and directors have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest to our GC, or, if the employee is an executive officer, to our board of directors. In considering related-person transactions, our audit committee (or other independent body of our board of directors) will take into account the relevant available facts and circumstances including, but not limited to, the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products and, if applicable, the impact on a director’s independence in the event that the related person is a director, immediate family member of a director or an entity with which a director is affiliated. The policy requires that, in determining whether to approve, ratify or reject a related-person transaction, our audit committee (or other independent body of our board of directors) must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our shareholders, as our audit committee (or other independent body of our board of directors) determines in the good faith exercise of its discretion. Transactions with Related Persons; Indemnification Transactions with Related Persons. Since January 1, 2018, we have not engaged in any transactions, nor are any such transactions currently proposed, in which we were a participant and the amount involved exceeded $120,000, and in which any related person had or will have a direct or indirect material interest. Indemnification. We have entered into indemnification agreements with our directors, executive officers and certain other of our officers and employees. These indemnification agreements require us, under the circumstances and to the extent provided for therein, to indemnify such persons to the fullest extent permitted by applicable law against certain expenses and other amounts incurred by any such person as a result of such person being made a party to certain actions, suits, proceedings and other actions by reason of the fact that such person is or was a director, officer, employee, consultant, agent or fiduciary of our company or any of our subsidiaries or other affiliated enterprises. The rights of each person who is a party to an indemnification agreement are in addition to any other rights such person may have under our constitution, the 2014 Act, any other agreement, a vote of the shareholders of our company, a resolution of directors of our company or otherwise. We believe that these agreements are necessary to attract and retain qualified persons as our officers and directors. We also maintain directors’ and officers’ liability insurance. 70 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT PROPOSAL 1 ELECTION OF DIRECTORS y x o r P Our board of directors is divided into three classes, designated Class I, Class II and Class III. The term of the Class I directors will expire on the date of our 2021 annual meeting of shareholders; the term of the Class II directors will expire on the date of the annual meeting of shareholders; and the term of the Class III directors will expire on the date of our 2020 annual meeting of shareholders. At each annual meeting of shareholders, successors to the directors whose term expires at that annual meeting are put forward for election for a three- year term. The board of directors currently has 12 members and there are no vacancies. There are currently four directors in Class II, the class whose term of office expires at the annual meeting, all of whom are standing for election at the annual meeting. Our Class II directors are Paul L. Berns, Patrick G. Enright, Seamus Mulligan and Norbert G. Riedel. All four directors were nominated for election by the board of directors upon the recommendation of our nominating and corporate governance committee. All four directors were previously elected to our board of directors by our shareholders. In order to be elected as a director at the annual meeting to hold office until the 2022 annual meeting of shareholders, each nominee must be appointed by an ordinary resolution, meaning each must individually receive the affirmative vote of a majority of the votes cast by the holders of ordinary shares represented in person or by proxy at the annual meeting (including any adjournment thereof). Under our constitution, if, at any annual meeting of shareholders, the number of directors is reduced below the minimum prescribed by the board of directors pursuant to our constitution due to the failure of any director nominee to receive the affirmative vote of a majority of the votes cast, then in those circumstances, the nominee or nominees who receive the highest number of votes in favor of election will be elected in order to maintain such prescribed minimum number of directors. Each such director would remain a director (subject to the provisions of the 2014 Act and our constitution) only until the conclusion of the next annual meeting of shareholders unless he or she is re-elected at such time. If any nominee becomes unavailable for election as a result of an unexpected occurrence, the proxy holders will vote your proxy for the election of any substitute nominee as may be proposed by the nominating and corporate governance committee. Each nominee has consented to being named as a nominee in this proxy statement and has agreed to serve if elected, and we have no reason to believe that any nominee will be unable to serve. If elected at the annual meeting by the affirmative vote of a majority of the votes cast on his election, each nominee would serve as a director until the 2022 annual meeting of shareholders and until his successor has been elected and qualified, or, if sooner, until his death, resignation, retirement, disqualification or removal. It is our policy to invite directors and nominees for director to attend annual meetings of shareholders. All 11 of our then-current directors attended our 2018 annual meeting of shareholders. Vacancies on the board of directors, including a vacancy that results from an increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the directors then in office, provided that a quorum is present at the relevant board meeting. A director elected by the board of directors to fill a vacancy in a class will serve for the remainder of the full term of that class and until the director’s successor is elected and qualified, or, if sooner, until his or her death, resignation, retirement, disqualification or removal. Under our constitution, if the number of directors is increased, directors are apportioned among the classes to maintain the number of directors in each class as nearly equal as possible, or as the Chairman of our board may otherwise direct. Accordingly, Ms. O’Riordan was appointed as the fourth member of Class III, as each of Class I and II already had four members, and she will be up for election at the 2020 annual meeting. The following includes a brief biography of each nominee for director and each of our other current directors, including their respective ages, as of June 1, 2019. Each biography includes information regarding the specific experience, qualifications, attributes or skills that led the nominating and corporate governance committee and the board of directors to determine that the applicable nominee or other current director should serve as a member of the board of directors. We evaluate diversity considerations as well as the experience and expertise of our board as a whole to ensure alignment between the abilities and contributions of our board and our strategic priorities and long-range plan, emphasizing, among other things, expertise in global and U.S. sales and marketing, in product development, in financial management and in corporate development transactions. JAZZ PHARMACEUTICALS | Proxy Statement 71 Proposal 1 (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Class II Director Nominees for Election for a Three-Year Term Expiring the 2022 Annual Meeting PAUL S. BERNS Venture Partner, ARCH and Executive Chair, BlackThorn Therapeutics Age 52 Mr. Berns has served as a member of our board of directors since the closing of the Azur Merger in January 2012 and was a director of Jazz Pharmaceuticals, Inc. from 2010 until the closing of the Azur Merger. Mr. Berns is a venture partner at ARCH, a venture capital firm, and Executive Chair of BlackThorn Therapeutics, a privately-held clinical-stage biopharmaceutical company, where he serves on the board of directors. He also currently serves on the boards of two public companies, Menlo Therapeutics Inc., a late-stage biopharmaceutical company, and UNITY Biotechnology, Inc., a biotechnology company, and the board of a private company, MC2 Therapeutics, an emerging dermatology and eye care pharmaceutical company. From March 2014 to June 2016, he served as the Chief Executive Officer and President of Anacor Pharmaceuticals, Inc., a biopharmaceutical company, which was acquired by Pfizer Inc. in June 2016. He also served as a member of the board of directors of Anacor Pharmaceuticals, Inc. from 2012 until 2016, including as Chairman of its board of directors from 2013 until 2016. From September 2012 to March 2014, he was a self-employed consultant to the pharmaceutical industry. From March 2006 to September 2012, he served as President and Chief Executive Officer, and as a member of the board of directors, of Allos Therapeutics, Inc., a pharmaceutical company acquired by Spectrum Pharmaceuticals, Inc. From July 2005 to March 2006, Mr. Berns was a self-employed consultant to the pharmaceutical industry. From June 2002 to July 2005, Mr. Berns was President, Chief Executive Officer and a director of Bone Care International, Inc., a specialty pharmaceutical company that was acquired by Genzyme Corporation in 2005. From 2001 to 2002, Mr. Berns served as Vice President and General Manager of the Immunology, Oncology and Pain Therapeutics business unit of Abbott Laboratories, a pharmaceutical company. From 2000 to 2001, he served as Vice President, Marketing of BASF Pharmaceuticals/Knoll, a pharmaceutical company, and from 1990 to 2000, Mr. Berns held various positions, including senior management roles, at Bristol-Myers Squibb Company, a pharmaceutical company. Mr. Berns previously served on the boards of directors of Cellectar Biosciences, Inc. (formerly Novelos Therapeutics, Inc.) from November 2013 to June 2016 and XenoPort, Inc. from 2005 to May 2016. Mr. Berns received a B.S. in Economics from the University of Wisconsin. With his experience as Chief Executive Officer of Allos Therapeutics, Inc., Anacor Pharmaceuticals, Inc. and Bone Care International Inc., and his experience serving on the boards of directors of public companies, Mr. Berns provides significant management expertise and industry knowledge to our board of directors. PATRICK G. ENRIGHT Managing Director, Longitude Capital Age 57 Mr. Enright has served as a member of our board of directors since the closing of the Azur Merger in January 2012 and was a director of Jazz Pharmaceuticals, Inc. from 2009 until the closing of the Azur Merger. Since 2006, Mr. Enright has served as Managing Director of Longitude Capital, a venture capital firm, of which he is a founder. Prior to Longitude Capital, Mr. Enright was a Managing Director of Pequot Ventures where he co-led the life sciences investment practice. Prior to Pequot, he was a Managing Member of the Delta Opportunity Fund at Diaz & Altschul Capital Management. Mr. Enright began his investment career at PaineWebber Development Corporation. Mr. Enright also has significant life sciences operations experience including senior executive positions at Valentis, Boehringer Mannheim (acquired by Roche) and Sandoz (now known as Novartis). Mr. Enright currently serves on the boards of Aimmune Therapeutics, Inc., Aptinyx Inc., CuraSen Therapeutics, Inc., Orbus Therapeutics, Inc., Rivus Pharmaceuticals, Inc. and SutroVax, Inc. Selected prior public company board memberships include Codexis, Inc., Corcept Therapeutics, Inc., Esperion Therapeutics, Inc., Horizon Pharma plc and Threshold Pharmaceuticals, Inc. Mr. Enright received a B.S. in Biological Sciences from Stanford University and an M.B.A. from the Wharton School of Business at the University of Pennsylvania. Based on his experience as a venture capital investor focused on life sciences companies and his past work in the pharmaceutical industry, Mr. Enright brings to our board of directors over 30 years of operating experience and financial expertise in the life sciences industry. SEAMUS MULLIGAN Director, Emergent BioSolutions Inc. Age 58 Mr. Mulligan has served as a member of our board of directors since the closing of the Azur Merger in January 2012 and was a founder and principal investor of Azur Pharma. From 2014 until 2018, Mr. Mulligan served as Chairman and Chief Executive Officer of Adapt Pharma Ltd., a specialty pharmaceutical company, which was acquired in October 2018 by Emergent BioSolutions Inc., a multinational specialty biopharmaceutical company, where Mr. Mulligan currently serves on the board of directors. From 2006 until April 2017, Mr. Mulligan served as Executive Chairman of Circ Pharma Limited and its subsidiaries, a pharmaceutical development stage group. Mr. Mulligan served as our Chief Business Officer, International Business Development from the closing of the Azur Merger until February 72 JAZZ PHARMACEUTICALS | Proxy Statement y x o r P Proposal 1 (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT 2013. Mr. Mulligan served as Azur Pharma’s Chairman and Chief Executive Officer and as a member of its board of directors from 2005 until the closing of the Azur Merger. From 1984 until 2004, he held various positions with Elan Corporation, plc, a pharmaceutical company, most recently as Executive Vice President, Business and Corporate Development, and prior to that position, held the roles of President of Elan Pharmaceutical Technologies, the drug delivery division of Elan Corporation, plc, Executive Vice President, Pharmaceutical Operations, Vice President, U.S. Operations and Vice President, Product Development. He served as a member of the board of directors of the U.S. National Pharmaceutical Council until 2004. Mr. Mulligan received a B.Sc. (Pharm) and M.Sc. from Trinity College Dublin. As a founder of Azur Pharma and a pharmaceutical industry executive, Mr. Mulligan brings to our board of directors an expertise in business development and over 30 years of experience in the pharmaceutical industry. NORBERT G. RIEDEL, Ph.D. Chief Executive Officer and President of Aptinyx Inc. Age 61 Dr. Riedel has served as a member of our board of directors since May 2013 and was appointed chairperson of our compensation committee in August 2013. Since September 2015, Dr. Riedel has served as Chief Executive Officer and President of Aptinyx Inc., a biopharmaceutical company spun out of its predecessor company, Naurex, Inc., where Dr. Riedel served as Chief Executive Officer and President from January 2014 to September 2015. From 2001 to 2013, he served as Corporate Vice President and Chief Scientific Officer of Baxter International Inc., a diversified healthcare company, where from 1998 to 2001, he also served as President and General Manager of the recombinant therapeutic proteins business unit and Vice President of Research and Development of the bioscience business unit. From 1996 to 1998, Dr. Riedel served as head of worldwide biotechnology and worldwide core research functions at Hoechst-Marion Roussel, now Sanofi, a global pharmaceutical company. Dr. Riedel served on the board of directors of Ariad Pharmaceuticals, Inc., an oncology company, from May 2011 until the company was acquired in February 2017. Dr. Riedel currently serves on the boards of directors of Aptinyx Inc., Cerevel Therapeutics, a biopharmaceutical company, Eton Pharmaceuticals, Inc., a development stage pharmaceutical company where he also serves as Chairman of the board, and the Illinois Biotechnology Industry Organization. Dr. Riedel is also a member of the Austrian Academy of Sciences. Dr. Riedel is an Adjunct Professor at Boston University School of Medicine and an Adjunct Professor of Medicine at Northwestern University’s Feinberg School of Medicine. Dr. Riedel holds a Diploma in biochemistry and a Ph.D. in biochemistry from the University of Frankfurt. Dr. Riedel brings significant scientific, drug discovery and development, and commercial expertise to our board of directors with over 20 years of experience in the biotechnology and pharmaceutical industries. As described above under “Corporate Governance and Board Matters—Director Commitments” beginning on page 16, we understand that certain institutional investors and proxy advisory firms may deem Dr. Riedel overboarded based on the number of public company boards on which he serves and resulting concerns that he may face excessive time commitments and challenges in fulfilling his duties. While the board recognizes that outside board and other commitments could impact a director’s ability to devote sufficient time and attention to board duties, after discussing this issue with Dr. Riedel, our board of directors does not believe that Dr. Riedel’s outside boards or other commitments limit his ability to devote sufficient time and attention to his duties as a director of Jazz Pharmaceuticals. The board of directors recommends a vote “FOR” each nominee named above. Class III Directors Continuing in Office Until the 2020 Annual Meeting BRUCE C. COZADD Chairman and Chief Executive Officer Age 55 Mr. Cozadd has served as our Chairman and Chief Executive Officer since the closing of the Azur Merger in January 2012. He co-founded Jazz Pharmaceuticals, Inc. and has served as Chairman and Chief Executive Officer of Jazz Pharmaceuticals, Inc. since April 2009. From 2003 until 2009, he served as Jazz Pharmaceuticals, Inc.’s Executive Chairman and as a member of its board of directors. From 1991 until 2001, he held various positions with ALZA Corporation, a pharmaceutical company acquired by Johnson & Johnson, most recently as Executive Vice President and Chief Operating Officer, with responsibility for research and development, manufacturing and sales and marketing. Previously at ALZA Corporation, he held the roles of Chief Financial Officer and Vice President, Corporate Planning and Analysis. He serves on the boards of two non-profit organizations, The Nueva School and SFJAZZ. Mr. Cozadd previously served on the boards of directors of Cerus Corporation from 2001 to January 2018 and Threshold Pharmaceuticals, Inc. from 2005 to August 2017. Mr. Cozadd received a B.S. from Yale University and an M.B.A. from the Stanford Graduate School of Business. As our Chief Executive Officer, he brings to our board of directors a detailed knowledge of our business. JAZZ PHARMACEUTICALS | Proxy Statement 73 2019 NOTICE OF MEETING AND PROXY STATEMENT Proposal 1 (continued) HEATHER ANN MCSHARRY Director, CRH plc and Greencore Group plc Age 57 Ms. McSharry has served as a member of our board of directors since May 2013 and was appointed as chairperson of our nominating and corporate governance committee in August 2017. Ms. McSharry currently serves as a non-executive director on the boards of directors of several public and private companies, including CRH plc, an international building materials group, and Greencore Group plc, an international manufacturer of convenience foods, where she also serves as Chair of its remuneration committee. From 2006 to 2009, Ms. McSharry was Managing Director Ireland of Reckitt Benckiser, a multinational health, home and hygiene consumer products company. From 1989 to 2006, she held various positions at Boots Healthcare, a leading global consumer healthcare company, most recently as Managing Director of Boots Healthcare Ireland Limited. From 2007 to 2011, Ms. McSharry served on the board of directors of the Bank of Ireland, where she was a member of its audit committee from 2009 to 2011. Ms. McSharry served on the board of the Industrial Development Agency in Ireland from 2010 to 2014, where she was Chair of the audit and finance committee. Ms. McSharry holds a Bachelor of Commerce and a Master of Business Studies degree from University College Dublin. Ms. McSharry brings to our board of directors over 30 years of experience in multiple international industries, including healthcare, consumer goods and financial services. ANNE O’RIORDAN Group Director of Digital, Jardine Matheson Limited Age 51 Anne O’Riordan has served as a member of our board of directors since February 2019. Since June 2019, Ms. O’Riordan has served as Group Director of Digital of Jardine Matheson Limited, an Asian conglomerate headquartered in Hong Kong, where she also serves on the board of directors. From 1990 to March 2019, Ms. O’Riordan held various leadership positions in the life sciences industry group in each of the operating units of Accenture (formerly Andersen Consulting) in North America, Europe and Asia Pacific. She most recently served as Global Industry Senior Managing Director of Accenture’s Life Sciences Business from 2012 to 2019. Between 2008 and 2012, Ms. O’Riordan led Accenture’s life sciences practice in Asia Pacific, focusing on strategic client development, market entry and business transformation. Prior to that, she led Accenture’s European health and life sciences business, working with clients across Europe on significant regional transformation initiatives. She also spent nine years in North America working with pharmaceutical and medical products clients. She currently serves on the board of governors of the American Chamber of Commerce in Hong Kong, or AmCham Hong Kong, where she serves as the board liaison for the Healthcare Committee. She is also a long-standing member of the Women of Influence Committee of AmCham Hong Kong as well as a member of The Women’s Foundation and the 30% Club. Ms. O’Riordan received a B.Sc in Biotechnology from Dublin City University as well as a postgraduate diploma in Financial Accounting and MIS from the University of Galway, Ireland. Ms. O’Riordan brings to our board of directors over 28 years of knowledge and leadership experience advising life sciences and healthcare companies across the globe. Our board of directors also considered diversity in its election of Ms. O’Riordan and the value to our board of directors from adding an additional element of gender and geographic residency diversity to our board of directors. Ms. O’Riordan’s background in advising life sciences companies with respect to significant global markets provides an important contribution to our board of director’s mix of backgrounds, experiences and skills. RICK E WINNINGHAM Chief Executive Officer and Chairman of the Board of Directors of Theravance Biopharma, Inc. Age 59 Mr. Winningham has served as a member of our board of directors since the closing of the Azur Merger in January 2012 and was a director of Jazz Pharmaceuticals, Inc. from 2010 until the closing of the Azur Merger. In May 2014, Mr. Winningham was appointed as Lead Independent Director of our board of directors. Mr. Winningham has served as Chairman of the board of directors of Theravance Biopharma, Inc., a biopharmaceutical company, since July 2013. He has served as Chief Executive Officer of Theravance Biopharma, Inc. since its spin-off from Innoviva, Inc. in June 2014. From October 2001 to August 2014, Mr. Winningham served as Chief Executive Officer of Innoviva, Inc., where he also served as Chairman of the Board of Directors from April 2010 to October 2014. From 1997 to 2001, he served as President of Bristol-Myers Squibb Oncology/Immunology/Oncology Therapeutics Network and, from 2000 to 2001, as President of Global Marketing. Mr. Winningham is a member of Biotechnology Industry Organization’s board of directors and serves on the Health Section Governing Board Standing Committee on Reimbursement. He previously served as a member of the board of directors of OncoMed Pharmaceuticals, Inc. from June 2015 until its merger with Mereo BioPharma Group plc in April 2019. He also served as a member of the board of directors of the California Healthcare Institute from November 2011 to March 2015 and served as its Chairman from January 2014 until it merged with Bay Area Bioscience Association to become the California Life Sciences Association in March 74 JAZZ PHARMACEUTICALS | Proxy Statement Proposal 1 (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT 2015. Mr. Winningham was Chairman of California Life Sciences Association from March 2015 until November 2015. Mr. Winningham holds an M.B.A. from Texas Christian University and a B.S. from Southern Illinois University. Mr. Winningham’s experience in senior management positions in the pharmaceutical industry provides significant industry knowledge and operational and management expertise to our board of directors. Class I Directors Continuing in Office Until the 2021 Annual Meeting PETER GRAY Chairman, UDG Healthcare plc Age 64 y x o r P Mr. Gray has served as a member of our board of directors since May 2013 and was appointed as chairperson of our audit committee in April 2014. Mr. Gray currently serves as Chairman of the board of directors of UDG Healthcare plc, an international provider of healthcare services. He is also Chairman of two privately-held companies providing outsourced services to the biopharma industry and Chairman of a non-profit educational establishment. In September 2011, Mr. Gray retired from his position as Chief Executive Officer of ICON plc, a global provider of outsourced development services to the pharmaceutical, biotechnology and medical device industries, which he held since November 2002. At ICON plc, Mr. Gray previously served as Group Chief Operating Officer from June 2001 to November 2002 and Chief Financial Officer from June 1997 to June 2001. From November 1983 to November 1989, Mr. Gray served as senior financial officer at Elan Corporation plc, a pharmaceutical company. Mr. Gray holds a degree in law from Trinity College Dublin and qualified as a chartered accountant in 1981. Based on his experience as Chief Executive Officer and Chief Financial Officer of ICON plc, Mr. Gray brings to our board of directors and audit committee over 30 years of experience in financial and operational management within the pharmaceutical industry. KENNETH W. O’KEEFE Managing Director of Beecken Petty O’Keefe & Company Age 52 Mr. O’Keefe has served as a member of our board of directors since the closing of the Azur Merger in January 2012 and was a director of Jazz Pharmaceuticals, Inc. from 2004 until the closing of the Azur Merger. Since January 2018, he has been Managing Director of Beecken Petty O’Keefe & Company, a private equity firm, which he co-founded. From November 2015 to January 2018, he was Chief Executive Officer, from January 2011 to November 2015, he was Managing Partner, and from 1997 to January 2011, he was Managing Director, of Beecken Petty O’Keefe & Company. He serves on the boards of several privately-held healthcare companies. He received a B.A. from Northwestern University and an M.B.A. from the University of Chicago. As a member of Beecken Petty O’Keefe & Company, Mr. O’Keefe brings to our board of directors significant expertise in accounting and financial matters and in analyzing and evaluating financial statements, as well as substantial experience managing private equity investments. He serves or has served on the audit committee of several companies in the healthcare industry. As the former chairperson and current member of our audit committee, Mr. O’Keefe brings to our board of directors detailed knowledge of our financial position and financial statements. ELMAR SCHNEE Chairman, Calliditas Therapeutics AB and Santhera Pharmaceuticals Holding AG Age 60 Mr. Schnee has served as a member of our board of directors since August 2014 and previously served as a director of Gentium (now a subsidiary of Jazz Pharmaceuticals plc) from May 2012 until April 2014. Since April 2017, Mr. Schnee has served as Chairman of the board of Santhera Pharmaceuticals Holding AG, a specialty pharmaceutical company and, since May 2019, he has served as Chairman of the board of Calliditas Therapeutics AB, a specialty pharmaceutical company. In addition, he serves on the boards of directors of five privately- held life sciences companies. Since June 2016, Mr. Schnee has served as a management advisor to MindMaze SA, a neuro-technology company, where he also served as Chief Operating Officer from June 2016 to April 2017. From November 2013 to August 2015, Mr. Schnee served as a non-executive director of Cardiorentis Ltd., a biopharmaceutical company, where he served as Chairman and Chief Executive Officer from October 2011 until November 2013. From 2003 to 2011, Mr. Schnee held various positions in senior management at Merck KGaA, a global pharmaceutical and chemical group. In November 2005, Mr. Schnee was appointed as Deputy Member of the Executive Board responsible for the global pharmaceuticals business. In 2006, he was appointed as a member of the Executive Board and General Partner of Merck KGaA, with responsibility for global pharmaceutical activities, and served in this position until 2011. Prior to Merck KGaA, Mr. Schnee held senior positions in strategy, business development and marketing at UCB SA, Sanofi- Synthélabo SA, Migliara/Kaplan Associates, Inc. and Fisons Pharmaceuticals PLC. From June 2016 until May 2019, he served on the JAZZ PHARMACEUTICALS | Proxy Statement 75 Proposal 1 (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT board of directors of Stallergenes-Greer plc. Mr. Schnee holds both a bachelor’s degree in marketing and a master’s degree in marketing and general management from the Swiss Institute of Business Administration in Zurich. With his experience as Chairman and Chief Executive Officer of Cardiorentis Ltd., his operational experience at Merck KGaA and other companies and his experience serving on the boards of directors of life sciences companies, including Gentium, Mr. Schnee brings to our board of directors significant management expertise and industry knowledge. CATHERINE A. SOHN, PHARM.D. Chairperson, BioEclipse Therapeutics, Inc., and Director, Rubius Therapeutics and Landec Corporation Age 66 Dr. Sohn has served as a member of our board of directors since July 2012. Dr. Sohn serves as an independent director on the boards of directors of two public companies: Landec Corporation, a life sciences company, where she is currently serving as Chairperson of the compensation committee, and Rubius Therapeutics, a biotechnology company, where she is currently serving on the audit and compensation committees. She also serves as Chairman of the board of BioEclipse Therapeutics, Inc., a privately-held clinical-stage biopharmaceutical company. From January 2014 to May 2017, Dr. Sohn served as an independent director on the board of directors of Neuralstem, Inc., a life sciences company. From 1998 to 2010, she was Senior Vice President, Worldwide Business Development and Strategic Alliances at GlaxoSmithKline Consumer Healthcare. From 1994 to 1998, she was Vice President, Worldwide Strategic Product Development at SmithKline Beecham Pharmaceuticals plc in the pharmaceutical division. From 1982 to 1994, she held a series of positions in Medical Affairs, Pharmaceutical Business Development and U.S. Product Marketing at SmithKline Beecham Pharmaceuticals plc and its predecessor, Smith, Kline & French. Dr. Sohn holds the position of Adjunct Professor at the University of California, San Francisco. She received a Doctor of Pharmacy from the University of California, San Francisco, School of Pharmacy and a Certificate of Professional Development from the Wharton School at the University of Pennsylvania. Dr. Sohn was named Woman of the Year by the Healthcare Businesswomen’s Association (2003) and Distinguished Alumnus of the Year by the University of California, San Francisco (2000) and is a Certified Licensing Professional and a National Association of Corporate Directors Board Leadership Fellow. Dr. Sohn brings to our board of directors three decades of product development, strategic marketing and business development transaction experience in the pharmaceutical industry and a global perspective that is directly relevant to our company. There are no family relationships among any of our executive officers and directors. 76 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT PROPOSAL 2 RATIFY, ON A NON-BINDING ADVISORY BASIS, THE APPOINTMENT OF INDEPENDENT AUDITORS AND AUTHORIZE, IN A BINDING VOTE, THE BOARD OF DIRECTORS, ACTING THROUGH THE AUDIT COMMITTEE, TO DETERMINE THE INDEPENDENT AUDITORS’ REMUNERATION Pursuant to authority delegated by the board of directors, the audit committee of the board of directors is responsible for the appointment, remuneration and retention of our independent auditors. The audit committee has selected and appointed KPMG, Dublin, a registered public accounting firm, or KPMG, as our independent auditors to audit our consolidated financial statements for the year ending December 31, 2019. Under Irish law, KPMG will be deemed to be reappointed as our independent auditors at the annual meeting without the necessity of a shareholder vote. However, our shareholders are being asked in this proposal to ratify such appointment on a non-binding advisory basis because we value our shareholders’ views on the company’s independent auditors. The board of directors and the audit committee intend to consider the results of this vote in making determinations in the future regarding the appointment of the company’s independent auditors. In addition, our shareholders are being asked to authorize the board of directors, acting through the audit committee, to determine KPMG’s remuneration. This authorization is required by Irish law. y x o r P KPMG has been engaged to audit our financial statements, beginning with our consolidated financial statements for the fiscal year ended December 31, 2012, since the consummation of the Azur Merger. Representatives of KPMG are expected to be present at the annual meeting, will have an opportunity to make a statement if they so desire, and will be available to respond to appropriate questions. Proposal 2 is an ordinary resolution and must receive the affirmative vote of a majority of the votes cast in person or by proxy at the annual meeting (including any adjournment thereof) in order to be approved. Independent Registered Public Accounting Firm Fees and Services In connection with the audit of our 2018 financial statements, we entered into an engagement agreement with KPMG, which sets forth the terms under which KPMG performed audit and tax services for the company. The following table represents aggregate fees billed to us for the years ended December 31, 2018 and 2017 by KPMG, our independent registered public accounting firm (in thousands): Audit Fees Audit-Related Fees Tax Fees Tax compliance services Tax advisory services All Other Fees Total Fees Year Ended December 31, 2017 2018 $ $ 1,831 24 946 930 16 3 2,804 $ $ 1,543 36 1,119 1,000 119 88 2,786 Audit Fees: Consists of fees and expenses for professional services in respect of the audit of the company’s consolidated financial statements and of our internal control over financial reporting, the review of quarterly consolidated financial statements and statutory audits. Audit-Related Fees: Consists of fees for assurance and services related to audit and other attestation services performed by KPMG as required by statute, regulation or contract and which are not reported under “Audit Fees.” Tax Fees: Consists of fees and expenses for professional services for tax compliance, tax advice and tax planning. Tax compliance services consist of professional services related to domestic and international tax compliance, and assistance with domestic and international tax return preparation. Tax advisory service fees relate to tax advice and planning services provided to us in connection with certain transactions undertaken by the company in 2018 and 2017. During the year ended December 31, 2018, fees and expenses of approximately $930,000 were billed in connection with tax compliance services, and fees and expenses of approximately $16,000 were billed in connection with tax advice and planning services. During the year ended December 31, 2017, fees and expenses of approximately $1,000,000 were billed in connection with tax compliance services, and fees and expenses of approximately $119,000 were billed in connection with tax advice and planning services. JAZZ PHARMACEUTICALS | Proxy Statement 77 Proposal 2 (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT All Other Fees: Consists of fees for products and services other than the services described above. For the year ended December 31, 2018, these fees were paid in connection with access to the online accounting and tax research tool of KPMG. For the year ended December 31, 2017, these fees were paid in connection with forensic accounting services and access to the online accounting and tax research tool of KPMG. All of the services and fees described above were approved by our audit committee. As shown in the table above, less than 1% of the total fees that KPMG billed us for in 2018 were for services other than audit, audit-related and tax compliance services. Pre-Approval Policies and Procedures Our audit committee has a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm. Our policy generally requires the pre-approval of specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the audit committee’s approval of the scope of the engagement of the independent auditor or on an individual explicit case-by-case basis before the independent auditor is engaged to provide each service. The pre-approval of services may be delegated to one or more of the audit committee’s members, but the decision must be reported to the full audit committee at its next scheduled meeting. Independence Our audit committee determined that the rendering of the services other than audit services by our independent registered public accounting firm is compatible with maintaining the principal accountant’s independence. The board of directors recommends a vote “FOR” Proposal 2. 78 JAZZ PHARMACEUTICALS | Proxy Statement y x o r P 2019 NOTICE OF MEETING AND PROXY STATEMENT PROPOSAL 3 NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION Overview Under the Dodd-Frank Act and Section 14A of the Exchange Act, our shareholders are entitled to vote to approve, on a non-binding advisory basis, the compensation of our named executive officers, or NEOs, as disclosed in this proxy statement in accordance with the compensation disclosure rules of the SEC. This non-binding advisory vote is commonly referred to as a “say-on-pay” vote. At our 2018 annual meeting of shareholders, our shareholders indicated their preference that we hold a non-binding say-on-pay vote every year and our board of directors has adopted a policy that is consistent with that preference. At our 2018 annual meeting of shareholders, the shareholders also overwhelmingly approved our say-on-pay proposal, with approximately 92% of the total votes cast voting in favor of the proposal. This year, we are again asking our shareholders to vote “FOR” the advisory approval of the compensation of our NEOs as disclosed in the “Compensation Discussion and Analysis,” the compensation tables and the related narrative disclosure contained in this proxy statement beginning on page 29. As discussed in those disclosures, our compensation committee designs our executive compensation program with the following objectives and philosophy: • • • Attract, incentivize, reward and retain diverse, talented individuals with relevant experience in the life sciences industry through a competitive pay structure. We reward individuals fairly over time and seek to retain those individuals who continue to meet our high expectations. Deliver balanced total compensation packages to accomplish our business objectives and mission. Our executive compensation program focuses on total compensation, combining short- and long-term components, cash and equity, and fixed and variable payments, in the proportions that we believe are the most appropriate to incentivize and reward our executive officers for achieving our corporate goals while minimizing incentives for excessive risk-taking or unethical conduct. Align pay with our performance. Our annual bonus awards are not earned unless pre-determined levels of performance are achieved against annual corporate objectives approved by our board of directors at the beginning of the year. Likewise, our stock option awards will not provide realizable value and our RSU awards will not provide increased value unless there is an increase in the value of our shares, which benefits all shareholders. We also have executive share ownership guidelines to further support our ownership culture and align the interests of executive officers and shareholders. In line with the compensation committee’s focus on aligning pay with our performance, on an annual basis, the compensation committee reviews market trends, including market peer use of performance-based vesting for equity awards. For 2018, our compensation committee determined that equity awards in a mix of options and RSUs, vesting over time, continued to be the most appropriate incentive structure for our executive officers to reward performance over time and achieve our retention objectives. Our compensation committee believes that our long-term equity incentive program should align with our long-term growth strategy. As our shareholders are aware, our three-pronged strategy to create shareholder value has been and is currently focused on: strong financial execution through growth in sales of our current lead marketed products; building a diversified product portfolio and development pipeline through a combination of our internal research and development efforts and obtaining rights to clinically meaningful and differentiated on- or near-market products and early- to late-stage product candidates through acquisitions, collaborations, licensing arrangements, partnerships and venture investments; and maximizing the value of our products and product candidates by continuing to implement our comprehensive global development plans, including through generating additional clinical data and seeking regulatory approval for new indications. To that end, since the beginning of 2014, we have grown our revenues year over year, while closing multiple transactions that have expanded our product offerings and product candidates (including Sunosi (JZP-110) in an asset acquisition in 2014, Defitelio/ defibrotide in the Gentium Acquisition in 2014 and Vyxeos in the Celator Acquisition in 2016), we achieved notable clinical milestones with respect to solriamfetol and our low sodium oxybate product candidates, and we achieved regulatory milestones such as our NDA approvals for Defitelio, Vyxeos and Sunosi, and our 2018 regulatory submission for solriamfetol in the EU. Our compensation committee believes these accomplishments exemplify the execution of our growth strategy, which encourages flexibility and creativity and does not circumscribe what corporate opportunities our management must pursue, or when and how to pursue such opportunities. Similarly, with respect to our long-term equity incentive program, the compensation committee has determined that binding the company’s compensation of executive officers to pre-determined multi-year operational or market goals, or combination of goals, would not best incentivize our executive officers to execute on our multi-faceted growth strategy, which requires deploying our capital and resources in a dynamic JAZZ PHARMACEUTICALS | Proxy Statement 79 Proposal 3 (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT environment and across a variety of activities. Our compensation committee believes that our equity incentive program, as currently and historically designed, has been and continues to be effective in driving the type of performance that contributes to the growth of long-term shareholder value. The compensation committee regularly revisits, on an annual basis, the use of performance-based vesting for equity awards to best align our compensation program with the goals of the business. Say-on-Pay Vote This vote is not intended to address any specific item of compensation, but rather the overall compensation of our NEOs and the philosophy, policies and practices described in this proxy statement. The board of directors is asking our shareholders to indicate their support for the compensation of our NEOs as described in this proxy statement by casting a non-binding advisory vote “FOR” the following resolution: “RESOLVED, that the compensation paid to Jazz Pharmaceuticals’ NEOs, as disclosed pursuant to Item 402 of Regulation S-K of the Exchange Act, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.” Because the vote is advisory, it is not binding on the board of directors or the company. Nevertheless, the views expressed by our shareholders, whether through this vote or otherwise, are important to management and the board of directors and, accordingly, the board of directors and the compensation committee intend to consider the results of this vote in making determinations in the future regarding executive compensation arrangements. Proposal 3 is an ordinary resolution and must receive the affirmative vote of a majority of the votes cast in person or by proxy at the annual meeting (including any adjournment thereof) in order to be approved. Unless our board of directors changes the frequency of future advisory votes on the compensation of our NEOs, the next advisory vote on the compensation of our NEOs will be held at the 2020 annual meeting of shareholders. The board of directors recommends a vote “FOR” Proposal 3. 80 JAZZ PHARMACEUTICALS | Proxy Statement 2019 NOTICE OF MEETING AND PROXY STATEMENT OTHER MATTERS Presentation of Irish Statutory Financial Statements Our Irish statutory financial statements for the fiscal year ended December 31, 2018, together with the reports of the directors and auditors thereon, will be presented and considered at the annual meeting in accordance with the requirements of the 2014 Act. Our Irish statutory financial statements have been approved by the board of directors. There is no requirement under Irish law that such statements be approved by shareholders, and no such approval will be sought at the annual meeting. Registered and Principal Executive Offices The registered and principal executive offices of Jazz Pharmaceuticals plc are located at Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. Our telephone number there is +353.1.634.7800. y x o r P Shareholder Proposals and Director Nominations for the 2020 Annual Meeting Our shareholders may submit proposals on matters appropriate for shareholder action at shareholder meetings in accordance with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be included in our proxy materials relating to our 2020 annual meeting of shareholders, all applicable requirements of Rule 14a-8 must be satisfied and, pursuant to Rule 14a-8, such proposals must be received by us no later than February 19, 2020. However, if our 2020 annual meeting of shareholders is not held between July 2, 2020 and August 31, 2020, then the deadline will be a reasonable time prior to the time that we begin to print and mail our proxy materials. Such proposals should be delivered to Jazz Pharmaceuticals plc, Attention: Company Secretary, Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. Our constitution provides that shareholder nominations of persons to be elected to the board of directors at an annual meeting must be made following written notice to our Company Secretary which is executed by a shareholder and accompanied by certain background and other information specified in our constitution. Such written notice and information must be received by our Company Secretary not later than the close of business on March 20, 2020 nor earlier than January 20, 2020; provided, however, that in the event our 2020 annual meeting of shareholders is not held between July 2, 2020 and August 31, 2020, notice must be delivered no earlier than 150 days prior to nor later than the later of 90 days prior to the date of the 2020 annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Our constitution provides that other proposals may only be proposed at an annual meeting if either (i) it is proposed by or at the direction of our board of directors; (ii) it is proposed at the direction of the Irish High Court; or (iii) the chairman of the meeting decides, in his or her absolute discretion, that the proposal may properly be regarded as within the scope of the relevant meeting. In addition, the proxy solicited by our board of directors for the 2020 annual meeting of shareholders will confer discretionary voting authority with respect to (i) any proposal presented by a shareholder at that meeting for which we have not been provided with notice by May 4, 2020 and (ii), if we have received notice of such proposal by May 4, 2020, any matter, provided that (i) the 2020 proxy statement briefly describes such matter and how management’s proxy holders intend to vote on it and (ii) the shareholder does not comply with the requirements of Rule 14a-4(c)(2) promulgated under the Exchange Act. On any other business which may properly come before the 2020 annual meeting of shareholders, or any adjournment thereof, and whether procedural or substantive in nature (including without limitation any motion to amend a resolution or adjourn the meeting) not specified in this proxy statement, the proxy holder will act at his or her discretion. Householding of Proxy Materials The SEC has adopted rules that permit companies and intermediaries (such as brokers) to satisfy the delivery requirements for Notices and proxy materials with respect to two or more shareholders sharing the same address by delivering a single Notice or a single set of proxy materials, as applicable, addressed to those shareholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for shareholders and cost savings for companies. A number of brokers with account holders who are Jazz Pharmaceuticals shareholders will be “householding” Notices and our proxy materials. A single Notice or a single set of proxy materials, as applicable, may be delivered to multiple shareholders sharing an address unless contrary instructions have been received from the affected shareholders. Once you have received notice from your broker that it will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate Notice or set of proxy materials, as applicable, in the future you may: (1) notify your broker, (2) direct your written request to Jazz Pharmaceuticals plc, Attention: JAZZ PHARMACEUTICALS | Proxy Statement 81 Other Matters (continued) 2019 NOTICE OF MEETING AND PROXY STATEMENT Investor Relations, Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland or (3) contact our Investor Relations department at +353.1.634.7892 (Ireland) or +1.650.496.2800 (United States) or by email at investorinfo@jazzpharma.com. Shareholders who currently receive multiple copies of Notices or proxy materials at their address and would like to request “householding” of their communications should contact their broker. In addition, we will promptly deliver, upon written or oral request to the address or telephone number above, a separate copy of a Notice or set of proxy materials to a shareholder at a shared address to which a single Notice or set of proxy materials, as applicable, was delivered. Annual Report on Form 10-K We will mail without charge, upon written request, a copy of our 2018 Annual Report on Form 10-K, including the consolidated financial statements, schedules and list of exhibits, and any particular exhibit specifically requested. Requests should be sent to: Jazz Pharmaceuticals plc, Attention: Aislinn Doody, Company Secretary, Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland. Special Note Regarding Forward-Looking Statements This proxy statement contains forward-looking statements, including, but not limited to, statements related to our strategy; expectations regarding regulatory milestones, including the anticipated timing of our NDA submission for JZP-258; the anticipated launch of Sunosi in the U.S.; our belief that our partnership with Codiak, Inc. will allow us to potentially develop multiple new therapies as we seek to add long- term value for patients and shareholders; the therapeutic potential of our product candidates; and other statements that are not historical facts. These forward-looking statements are based on our current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks and uncertainties associated with: maintaining or increasing sales of and revenue from Xyrem; effectively commercializing the company’s other products and product candidates, including the risk of a potential delay in the commercial launch of Sunosi in the U.S.; the time-consuming and uncertain regulatory approval process, including the risk that the company’s regulatory submissions, including the solriamfetol MAA in the EU, may not be approved by applicable regulatory authorities in a timely manner or at all; costly and time-consuming pharmaceutical product development and the uncertainty of clinical success, including risks related to failure or delays in initiating or completing clinical trials; protecting and enhancing the company’s intellectual property rights; delays or problems in the supply or manufacture of the company’s products and product candidates; complying with applicable U.S. and non-U.S. regulatory requirements; government investigations and other actions; obtaining and maintaining adequate coverage and reimbursement for the company’s products; identifying and acquiring, in-licensing or developing additional products or product candidates, financing these transactions and successfully integrating acquired businesses; the ability to achieve expected future financial performance and results; and other risks and uncertainties affecting the company, including those described from time to time under the caption “Risk Factors” and elsewhere in Jazz Pharmaceuticals plc’s SEC filings and reports (Commission File No. 001-33500), including our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 and future filings and reports by the company. Other risks and uncertainties of which we are not currently aware may also affect our forward-looking statements and may cause actual results and timing of events to differ materially from those anticipated. The forward- looking statements herein are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by the company on its website or otherwise. We undertake no obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in our expectations or other circumstances that exist after the date as of which the forward-looking statements were made. General Your proxy is solicited on behalf of our board of directors. Unless otherwise directed, at the annual meeting (or any adjournment thereof), proxies will be voted “FOR” all of the nominees listed in Proposal 1 and “FOR” Proposals 2 and 3. If any matter other than those described in this proxy statement properly comes before the annual meeting (or any adjournment thereof), it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment. By order of the board of directors, /s/ Aislinn Doody Aislinn Doody Company Secretary June 14, 2019 82 JAZZ PHARMACEUTICALS | Proxy Statement K - 0 1 m r o F UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 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 (State or other jurisdiction of incorporation or organization) 98-1032470 (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) Securities registered pursuant to Section 12(b) of the Act: Title of each class Ordinary shares, nominal value $0.0001 per share Name of each exchange on which registered The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È 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 È No ‘ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 È Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Emerging growth company ‘ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $7,515,311,963 based upon the last sale price reported for the registrant’s ordinary shares on such date on The Nasdaq Global Select Market. The calculation of the aggregate market value of voting and non-voting common equity excludes 16,768,983 ordinary shares of the registrant held by executive officers, directors and shareholders that the registrant concluded were affiliates of the registrant on that date. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant. As of February 19, 2019, a total of 57,055,731 ordinary shares, nominal value $0.0001 per share, of the registrant were outstanding. Certain information required by Part III, Items 10-14 of this Form 10-K is incorporated by reference to the registrant’s definitive Proxy Statement for the 2019 Annual General Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, provided that if such Proxy Statement is not filed within such period, such information will be included in an amendment to this Form 10-K to be filed within such 120-day period. DOCUMENTS INCORPORATED BY REFERENCE [THIS PAGE INTENTIONALLY LEFT BLANK] JAZZ PHARMACEUTICALS PLC 2018 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV K - 0 1 m r o F Page 2 26 65 65 66 66 67 70 73 91 92 92 92 95 95 95 95 95 96 96 104 105 We own or have rights to various copyrights, trademarks, and trade names used in our business in the U.S. and/or other countries, including the following: Jazz Pharmaceuticals®, Xyrem® (sodium oxybate) oral solution, Erwinaze® (asparaginase Erwinia chrysanthemi), Erwinase®, Defitelio® (defibrotide sodium), Defitelio® (defibrotide), CombiPlex®, Vyxeos® (daunorubicin and cytarabine) liposome for injection, Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion and FazaClo® (clozapine, USP). This report also includes trademarks, service marks and trade names of other companies. Trademarks, service marks and trade names appearing in this Annual Report on Form 10-K are the property of their respective owners. [THIS PAGE INTENTIONALLY LEFT BLANK] CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K 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 beliefs and assumptions 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 factors in this Annual Report on Form 10-K in greater detail under the heading “Risk Factors.” 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 estimates and assumptions only as of the date of this filing. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results 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 assume no obligation to update our forward-looking statements publicly, or to update 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. NOTE REGARDING COMPANY REFERENCE In 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. K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 1 Item 1. Business Overview PART I Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing life-changing medicines for people with limited or no options. As a leader in sleep medicine and with a growing hematology/oncology portfolio, we have a diverse portfolio of products and product candidates in development. Our lead marketed products are: • • • • Xyrem® (sodium oxybate) oral solution, the only product approved by the U.S. Food and Drug Administration, or FDA, and marketed in the U.S. for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in adult and pediatric patients with narcolepsy; Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia, or ALL, who have developed hypersensitivity to E. coli-derived asparaginase; Defitelio® (defibrotide sodium), a product approved in the U.S. for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome, 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; and Vyxeos® (daunorubicin and cytarabine) liposome for injection, a product approved in the U.S. and in Europe (where it is marketed as Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion) for the treatment of adults with newly- diagnosed therapy-related acute myeloid leukemia, or t-AML, or acute myeloid leukemia, or AML, with myelodysplasia-related changes, or AML-MRC. We are also seeking approval in the U.S. and Europe for solriamfetol as a treatment to improve wakefulness and reduce EDS in adult patients with narcolepsy or obstructive sleep apnea, or OSA. The FDA accepted our solriamfetol new drug application, or NDA, for filing with a standard review in early 2018 and the current Prescription Drug User Fee Act, or PDUFA, date is March 20, 2019. We submitted a solriamfetol marketing authorization application, or MAA, to the European Medicines Agency, or EMA, in the fourth quarter of 2018. Our strategy to create shareholder value is focused on: • • Strong financial execution through growth in sales of our current lead marketed products; Building a diversified product portfolio and development pipeline through a combination of our internal research and development efforts and obtaining rights to clinically meaningful and differentiated on- or near-market products and early- to late-stage product candidates through acquisitions, collaborations, licensing arrangements, partnerships and venture investments; and • Maximizing the value of our products and product candidates by continuing to implement our comprehensive global development plans, including through generating additional clinical data and seeking regulatory approval for new indications. In 2018, in support of our strategy, we continued to expand and advance our research and development pipeline in our sleep and hematology/oncology therapeutic areas, both by conducting activities internally and by leveraging partnerships with third parties. For a summary of our ongoing research and development activities, see “Business—Research and Development” in this Part I, Item 1. Our Commercialized Products Xyrem Xyrem is the only treatment approved by the FDA and marketed in the U.S. for both cataplexy and EDS in patients with narcolepsy. Sodium oxybate, the active pharmaceutical ingredient, or API, in Xyrem, is a formulation of the sodium salt of gamma-hydroxybutyrate, an endogenous neurotransmitter and metabolite of gamma-aminobutyric acid. Narcolepsy is a chronic neurological disorder caused by a loss of neurons that produce the neurotransmitter hypocretin (also known as orexin), which is hypothesized to stabilize sleep-wake states. The primary symptoms of narcolepsy include EDS, cataplexy, sleep paralysis, hypnogogic hallucinations and disrupted nighttime sleep. EDS is an essential symptom of narcolepsy, is present in all narcolepsy JAZZ PHARMACEUTICALS | 2018 Annual Report 2 patients and is characterized by chronic, pervasive sleepiness as well as sudden irresistible and overwhelming urges to sleep (inadvertent naps and sleep attacks). Cataplexy, the sudden loss of muscle tone, can be one of the most debilitating symptoms of narcolepsy. Cataplexy is present in approximately 70% of patients with narcolepsy. Cataplexy can range from slight weakness or a drooping of facial muscles to the complete loss of muscle tone resulting in postural collapse. It may also impair a patient’s vision or speech. Cataplexy is often triggered by strong emotions such as laughter, anger or surprise. Cataplexy can severely impair a patient’s quality of life and ability to function. Narcolepsy may affect many areas of life, including limiting a patient’s education and employment opportunities, and may lead to difficulties at work, school, or in daily life activities like driving, operating machinery or caring for children. Patients with narcolepsy may also suffer from significant medical comorbidities, including depression, suicide risk, anxiety, diseases of the digestive system, respiratory diseases and cardiac disorders. In the fourth quarter of 2018, the average number of active Xyrem patients in the U.S. was approximately 14,300, and we believe that there are significantly more patients with narcolepsy who might benefit from treatment with Xyrem. In an effort to reach more patients, we continue to implement initiatives such as outreach to prescribers who treat narcolepsy, physician/healthcare provider education, enhanced patient and physician support services and unbranded disease awareness programs for the public. Xyrem was approved in the U.S. for the treatment of cataplexy in adult patients with narcolepsy in 2002 and was approved for EDS in adult patients with narcolepsy in 2005. In October 2018, Xyrem was also approved in the U.S. for the treatment of cataplexy or EDS in pediatric narcolepsy patients ages seven and older. The American Academy of Sleep Medicine recommends Xyrem as a standard of care for the treatment of both cataplexy and EDS associated with narcolepsy. K - 0 1 m r o F We have had exclusive agreements with Express Scripts Specialty Distribution Services, Inc., or Express Scripts, the central pharmacy for Xyrem, to distribute Xyrem in the U.S. and provide patient support services related to Xyrem since 2002. Our current agreement with Express Scripts expires on July 1, 2019, but we expect to exercise our right to extend the agreement for an additional year. The agreement may be terminated by either party at any time without cause on 180 days’ prior written notice to the other party. We own all standard operating procedures, business rules and the related intellectual property for the services Express Scripts provides related to patient support programs. The agreement provides for Express Scripts to assist in the orderly transfer of the services that Express Scripts provides to us and the related intellectual property, including intellectual property related to the patient database, to any new pharmacy that we may engage. Our marketing, sales and distribution of Xyrem in the U.S. are subject to a risk evaluation and mitigation strategy, or REMS, which is required by the FDA to mitigate the risks of serious adverse outcomes resulting from inappropriate prescribing, abuse, misuse and diversion of Xyrem. Under the Xyrem REMS, all of the Xyrem sold in the U.S. must be dispensed and shipped directly to patients or caregivers through a central pharmacy. Xyrem may not be stocked in retail pharmacies. Physicians and patients must complete an enrollment process prior to fulfillment of Xyrem prescriptions, and each physician and patient must receive materials concerning the serious risks associated with Xyrem before the physician can prescribe, or a patient can receive, the product. The central certified pharmacy must monitor and report instances of patient or prescriber behavior giving rise to a reasonable suspicion of abuse, misuse or diversion of Xyrem, and maintains enrollment and prescription monitoring information in a central database. The central pharmacy ships the product directly to the patient (or caregiver) by a courier service. For more information regarding research and development activities in our sleep franchise, see “Business—Research and Development” in this Part I, Item 1. In 2018, net product sales of Xyrem were $1.4 billion, which represented 75% of our total net product sales. Erwinaze Erwinaze (called Erwinase in markets outside the U.S., and which we refer to in this report as Erwinaze unless otherwise indicated or the context otherwise requires) is a biologic product used in conjunction with chemotherapy to treat patients with ALL who have developed hypersensitivity to E. coli-derived asparaginase. Originally developed by Public Health England, a national executive agency of the United Kingdom, or UK, Erwinaze is an asparaginase, a type of enzyme that can deprive leukemic cells of an amino acid essential for their growth. It is derived from a rare bacterium (Erwinia chrysanthemi) and is immunologically distinct from E. coli-derived asparaginase and suitable for patients with hypersensitivity to E. coli-derived treatments. For ALL patients with hypersensitivity to E. coli-derived asparaginase, Erwinaze can be a crucial component of their therapeutic regimen. Current treatment guidelines and protocols recommend switching a patient receiving E. coli-derived asparaginase to treatment JAZZ PHARMACEUTICALS | 2018 Annual Report 3 with Erwinaze if the patient’s hypersensitivity reaction to the E. coli-derived asparaginase is Grade 2-4, indicating that the hypersensitivity reaction has resulted in an intervention or interruption in infusion occurring in the patient’s treatment regimen. While pediatric treatment protocols commonly include asparaginase, adult protocols do not. First approved by the FDA under a biologics license application, or BLA, for administration via intramuscular injection in conjunction with chemotherapy, Erwinaze was launched in the U.S. in 2011. In 2014, the FDA approved a supplemental BLA for administration of Erwinaze via intravenous infusion in conjunction with chemotherapy. Erwinaze is exclusively licensed to us for worldwide marketing, sales and distribution by Porton Biopharma Limited, or PBL, a company that is wholly owned by the UK Secretary of State for Health. PBL also manufactures the product for us and is our sole supplier for Erwinaze. We are obligated to make tiered royalty payments to PBL based on worldwide net sales of Erwinaze. Our license and supply agreement with PBL, which includes our license for Erwinaze, expires on December 31, 2020. We and PBL had been engaged in discussions related to entry into a replacement agreement to extend the term of our commercial relationship with respect to Erwinaze past 2020, but we did not reach agreement. Unless we and PBL enter into a new agreement, we will lose our license to Erwinaze after December 31, 2020, other than our right to sell certain Erwinaze inventory for a post-termination sales period of 12 months. Either party also has the right to terminate the agreement prior to its expiration in the event of the other party’s uncured material breach or insolvency. To expand our asparaginase franchise beyond Erwinaze, we are pursuing activities related to the development of improved asparaginase products for patients with ALL or other hematological malignancies. For more information, see “Business—Research and Development” in this Part I, Item 1. In 2018, net product sales of Erwinaze were $174.7 million, which represented 9% of our total net product sales. Defitelio Defibrotide, the API in Defitelio, has been approved for the treatment of VOD, a potentially life-threatening complication of HSCT, and is in development for other complications following HSCT, including prevention of VOD, prevention of acute Graft versus Host Disease, or aGvHD, and treatment of transplant-associated thrombotic microangiopathy, or TA-TMA, as well as complications following anti-cancer treatment, including prevention of CAR-T-associated neurotoxicity. Defibrotide is the sodium salt of a complex mixture of single-stranded oligodeoxyribonucleotides derived from porcine DNA. Defibrotide mediates its effects via interaction with endothelial cells. Non-clinical data suggest that defibrotide stabilizes endothelial cells by reducing endothelial cell activation and by protecting them from further damage. Stem cell transplantation is a frequently used treatment modality for hematologic cancers and other conditions in both adults and children. Certain conditioning regimens used as part of HSCT can damage the cells that line the hepatic vessels, which is thought to lead to the development of VOD, also referred to as SOS, a blockage of the small vessels in the liver, that can lead to liver failure and potentially result in significant dysfunction in other organs such as the kidneys and lungs. Severe VOD is the most extreme form of VOD and is associated with multi-organ failure and high rates of morbidity and mortality. An analysis of retrospective data, prospective cohort studies and clinical trials published between 1979 and 2007 found that the 100-day mortality rate in severe VOD cases is greater than 80%. The European Commission, or EC, granted marketing authorization under exceptional circumstances for Defitelio for the treatment of severe VOD in adults and children undergoing HSCT in 2013. We commenced a rolling launch of Defitelio in European countries in 2014. In countries where we currently commercialize Defitelio, we are working to maintain current levels of market access. In 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. We acquired the rights to defibrotide for the treatment and prevention of VOD in North America, Central America and South America from Sigma-Tau Pharmaceuticals, Inc., or Sigma-Tau, in 2014. In exchange for these rights, we made an upfront payment of $75.0 million to Sigma-Tau and also made milestone payments of $175.0 million comprised of (i) $25.0 million upon the acceptance for filing by the FDA of the first NDA for defibrotide for VOD, paid in the fourth quarter of 2015; and (ii) an additional final payment of $150.0 million upon FDA approval of defibrotide for VOD, paid in the second quarter of 2016. We launched defibrotide in Canada in 2017. In October 2018, Nippon Shinyaku Co., Ltd., the partner to whom we have granted exclusive rights to develop and commercialize defibrotide in Japan, announced that it had filed an NDA for defibrotide with Japan’s Ministry of Health, Labour and Welfare. JAZZ PHARMACEUTICALS | 2018 Annual Report 4 We are also developing defibrotide for other potential indications. For more information regarding defibrotide development activities, see “Business—Research and Development” in this Part I, Item 1. In 2018, Defitelio/defibrotide product sales were $149.4 million, which represented 8% of our total net product sales. Vyxeos Vyxeos is a liposome formulation of a fixed ratio combination of daunorubicin and cytarabine for intravenous infusion that is indicated for the treatment of adults with newly-diagnosed t-AML or AML-MRC and has been shown to have synergistic effects at killing leukemia cells in vitro and in animal models. Vyxeos is the first drug delivery combination product based on our CombiPlex technology platform to be approved by the FDA and the EC. AML is a rapidly progressing and life-threatening blood cancer that begins in the bone marrow, which produces most of the body’s new blood cells. AML cells crowd out healthy cells and move aggressively into the bloodstream to spread cancer to other parts of the body. AML is a relatively rare disease representing about 1% of all new cancer cases and has the lowest survival rate of any form of leukemia. Patients with newly diagnosed t-AML or AML-MRC may have a particularly poor prognosis. In 2017, we launched Vyxeos in the U.S. after the FDA approved our NDA for the treatment of adults with newly-diagnosed t-AML or AML-MRC. In August 2018, the EC granted marketing authorization for Vyxeos, and, shortly thereafter, we commenced a rolling launch of Vyxeos in the European Union, or EU. For more information regarding our CombiPlex technology platform and Vyxeos development activities, see “Business—Research and Development” in this Part I, Item 1. K - 0 1 m r o F In 2018, Vyxeos product sales were $100.8 million, which represented 5% of our total net product sales. Other Products We also sell psychiatry and other products in the U.S. and certain markets outside the U.S. In September 2018, we sold substantially all of the assets held by us related to Prialt® (ziconotide) intrathecal infusion to TerSera Therapeutics LLC. Research and Development A key aspect of our growth strategy is continued investment in our evolving and expanding research and development pipeline. We actively explore innovative product candidates ranging from small molecules to biologics. While we are primarily focused on opportunities within our sleep and hematology/oncology therapeutic areas, we are also interested in and exploring adjacent therapeutic areas, including central nervous system disorders and solid tumors. Our development activities encompass all stages of development and currently include clinical testing of new product candidates and activities related to clinical improvements of, or additional indications or new clinical data for, our commercialized products. We have also recently expanded into preclinical exploration of novel therapies, including precision medicines in hematology and oncology. We conduct most of these activities by leveraging our growing internal research and development function, but we have also entered into collaborations with third parties for the research and development of early-stage product candidates and have supported third parties seeking to perform clinical studies that will generate additional data related to our marketed products. We also seek out investment opportunities in support of development of early-stage technologies in our therapeutic areas and adjacencies. Our current and planned development activities in our sleep therapeutic area are primarily focused on two product candidates, solriamfetol and JZP-258. Solriamfetol. Solriamfetol is a small molecule new chemical entity being developed for potential treatment of EDS in several disorders and conditions, including OSA and narcolepsy. The FDA accepted our solriamfetol NDA for filing with a standard review in early 2018, and the current PDUFA goal date is March 20, 2019. We submitted a solriamfetol MAA to the EMA in the fourth quarter of 2018. We also recently conducted a Phase 2 clinical trial of solriamfetol in patients with EDS associated with Parkinson’s disease and are evaluating future pipeline expansion opportunities in other disorders and conditions, as well as opportunities for geographic expansion. We acquired JAZZ PHARMACEUTICALS | 2018 Annual Report 5 worldwide development, manufacturing and commercial rights to solriamfetol from Aerial BioPharma LLC, or Aerial, in 2014, other than in certain jurisdictions in Asia where SK Biopharmaceuticals Co., Ltd, or SK, retains rights. JZP-258. JZP-258 is an oxybate product candidate that contains 90% less sodium than Xyrem and is being developed for the potential treatment of both cataplexy and EDS in patients with narcolepsy and potential treatment of idiopathic hypersomnia, or IH, a chronic neurological disorder that is primarily characterized by EDS. Given the well-accepted relationship between dietary sodium and blood pressure as well as published hypertension guidelines underscoring that excessive consumption of sodium is independently associated with an increased risk of stroke, cardiovascular disease and other adverse outcomes, we believe that lower sodium intake would be beneficial for patients and therefore JZP-258 would offer a clinically meaningful benefit to patients compared to Xyrem. We have conducted a Phase 3 clinical trial of JZP-258 in patients for the treatment of both cataplexy and EDS in narcolepsy and, subject to the results of our Phase 3 clinical trial, we expect to submit an NDA by as early as the end of 2019. We are conducting a Phase 3 clinical trial for the treatment of IH, which currently has no approved therapies in the U.S. We are also pursuing early-stage activities related to the potential development of an extended release oxybate formulation that we believe could provide a clinically meaningful option for some narcolepsy patients. Our current and planned development activities in our hematology/oncology therapeutic area are focused on exploring additional indications for Defitelio and Vyxeos, generating additional clinical data for Vyxeos, including in combination with other therapeutic agents, and the research and development of new product candidates. Defitelio. Our Defitelio clinical development strategy generally focuses on the prevention and treatment of serious diseases associated with endothelial cell damage. In addition to clinical trials we are sponsoring, there are more than 20 investigator-sponsored trials ongoing in the U.S. and EU to evaluate defibrotide in multiple conditions. Vyxeos. Our Vyxeos clinical development strategy is designed to target potential new patient segments across the AML landscape, to pursue indications related to myelodysplastic syndrome, or MDS, and to generate clinical data on Vyxeos when used in combination with other therapeutic agents. As reflected in the table below, we are pursuing this strategy by sponsoring clinical trials, working with cooperative groups who are conducting clinical trials, and partnering with The University of Texas MD Anderson Cancer Center, or MD Anderson. In August 2018, we announced a five-year collaboration with MD Anderson to evaluate potential treatment options for hematologic malignancies, with a near-term focus on Vyxeos, and shortly thereafter, commenced development activities under this collaboration. In addition, there are multiple ongoing investigator-sponsored trials studying Vyxeos. CombiPlex Platform. We are also evaluating the use of our CombiPlex delivery technology platform in a number of therapeutic combinations in oncology as part of our internal oncology research and development activities. CombiPlex enables the design and rapid evaluation of various combinations of therapies to deliver enhanced anti-cancer activity by identifying an optimal synergistic ratio of drugs in vitro and fixing this ratio in a nanoscale delivery complex that maintains and then coordinates the release of the synergistic combination after administration. CombiPlex utilizes two proprietary nanoscale delivery platforms: liposomes to control the release and distribution of water-soluble drugs and drugs that are both water- and fat-soluble (amphipathic), and nanoparticles to control the release and distribution of non-water-soluble (hydrophobic) drugs. We are conducting preclinical activities using our CombiPlex platform to develop a novel combination of therapeutic agents that are designed to target an undisclosed solid tumor candidate, as well as other hematology/oncology exploratory activities. Through third parties, we are also pursuing preclinical and clinical research and development activities in hematology and in precision oncology under a number of licensing and collaboration agreements, including with: • • • • ImmunoGen, Inc., or ImmunoGen, for opt-in rights to license two hematology-related antibody-drug conjugate, or ADC, product candidates granted orphan drug designation by the FDA, as well as an additional ADC product candidate; Codiak BioSciences, Inc., or Codiak, for an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize potential therapeutic candidates directed at five targets to be developed using Codiak’s engEx™ precision engineering platform for exosome therapeutics; Pfenex, Inc., or Pfenex, for rights to multiple early-stage hematology product candidates and an option to negotiate a license for a recombinant pegaspargase product candidate; and XL-protein GmbH, or XLp, for rights to use XLp’s PASylation® technology to extend the plasma half-life of selected asparaginase product candidates. JAZZ PHARMACEUTICALS | 2018 Annual Report 6 Below is a summary of ongoing and planned development projects related to our products and pipeline and their corresponding current stages of development: Sleep Product Candidates Description Submitted for Regulatory Approval Solriamfetol U.S. Solriamfetol EU In Phase 3 EDS in OSA and EDS in narcolepsy EDS in OSA and EDS in narcolepsy JZP-258 (oxybate; 90% sodium reduction) JZP-258 (oxybate; 90% sodium reduction) Cataplexy and EDS in narcolepsy IH In Phase 2 Solriamfetol Preclinical EDS in Parkinson’s disease Oxybate once-nightly formulation Narcolepsy Hematology/Oncology Product Candidates Description In Phase 3 Defitelio Vyxeos Vyxeos In Phase 2 Defitelio Defitelio Defitelio Vyxeos + venetoclax Vyxeos Vyxeos In Phase 1 Vyxeos + gemtuzumab Vyxeos + venetoclax IMGN779 IMGN632 Preclinical CombiPlex CombiPlex Asparaginase Recombinant Pegaspargase Defitelio Exosome NRAS candidate Exosome STAT3 candidate Exosome-based candidates Prevention of VOD in high-risk patients following HSCT AML or high-risk MDS (AML19) (cooperative group study) AML or high-risk MDS (AML18) (cooperative group study) Prevention of aGvHD following allogeneic HSCT Treatment of TA-TMA (planned pivotal study) Prevention of chimeric antigen receptor T-cell therapy-, or CAR-T-, associated neurotoxicity (planned study) De novo or relapsed/refractory, or R/R, AML (MD Anderson collaboration study) MDS (planned cooperative group study) R/R AML (cooperative group study) R/R AML or hypomethylating agent failure MDS (MD Anderson collaboration study) Low intensity dosing for unfit AML (planned study) CD33+ AML (Jazz opt-in opportunity with ImmunoGen) CD123+ hematological malignancies (Jazz opt-in opportunity with ImmunoGen) Solid tumors candidate I Hematology/oncology exploratory activities ALL and other hematological malignancies Hematological malignancies (Jazz opt-in opportunity with Pfenex) Exploratory activities Hematological malignancies (collaboration with Codiak) Hematological malignancies (collaboration with Codiak) Solid tumors/hematological malignancies (collaboration with Codiak) In 2019 and beyond, we expect that our research and development expenses will continue to increase from historical levels, particularly as we prepare for anticipated regulatory submissions and trial data read-outs, initiate and undertake additional clinical trials and related development work and potentially acquire rights to additional product candidates. K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 7 Sales and Marketing We have commercial operations primarily in the U.S., Europe and Canada. In the U.S., our products are marketed through our commercial teams, including experienced sales professionals who promote Xyrem, Erwinaze, Defitelio and Vyxeos directly to physicians in specialties appropriate for each product. In Canada and in approved markets in Europe where we commercialize Erwinaze, Defitelio and Vyxeos, we have a field force of hematology field specialists comprised of sales personnel and medical affairs personnel. In markets where these products either are not approved or are unable to be promoted under local regulation, we have medical science liaisons and medical directors responsible for responding to medical information requests and for providing information consistent with local treatment protocols with respect to such products. Outside the U.S., we directly market Xyrem in Canada for the treatment of cataplexy in patients with narcolepsy. We also utilize distributors in certain markets outside the U.S. where we do not market our products directly. Our commercial activities include marketing related services, distribution services and commercial support services. We employ third party vendors, such as advertising agencies, market research firms and suppliers of marketing and other sales support-related services, to assist with our commercial activities. We also provide reimbursement support for our U.S. markets. Although we have a relatively small number of sales representatives compared with most other pharmaceutical companies with marketed products, we believe that the size of our sales force is appropriate to effectively reach our target audience in the specialty markets in which we currently operate. We promote Defitelio, Erwinaze and Vyxeos to many hematology and oncology specialists who operate in the same hospitals, and we believe that we benefit from operational synergies from this overlap. Continued growth of our current marketed products and the launch of any future products, including potentially solriamfetol, may require further expansion of our sales force and sales support organization in the U.S. and internationally. Competition The biopharmaceutical industry is highly competitive. Our products compete, and our product candidates may in the future compete, with currently existing therapies, product candidates currently under development by others and/or future product candidates, including new chemical entities that may turn out to be safer or more effective than our products. Any products that we develop may be commercialized in competitive markets, and our competitors, which include large global pharmaceutical companies and small research- based companies and institutions, may succeed in developing products that render our products obsolete or noncompetitive. We also face competition, and may in the future face additional competition, from manufacturers of generic drugs. Certain U.S. state laws allow for, and in some instances in the absence of specific instructions from the prescribing physician mandate, the dispensing of generic products rather than branded products when a generic version is available. Generic competition often results in decreases in the prices at which branded products can be sold. In particular, our products and most advanced product candidates face or may face competition as described below: • Xyrem. While Xyrem is currently the only product approved by the FDA and marketed in the U.S. for the treatment of both cataplexy and EDS in patients with narcolepsy, we and others may launch products as treatment options in cataplexy and/or EDS in narcolepsy, including other branded sodium oxybate products and other new and existing branded market entrants. In addition, Xyrem will face competition from generics and authorized generics. Nine companies have filed abbreviated NDAs, or ANDAs, with the FDA seeking to market generic versions of Xyrem, and we have settled patent litigation against all of them. To date, the FDA has approved or tentatively approved three of these ANDAs, and we believe that it is likely that the FDA will approve or tentatively approve additional ANDAs. Under the settlement agreements with the nine ANDA filers, (i) we granted the first ANDA filer, West-Ward Pharmaceuticals Corp. (a wholly owned subsidiary of Hikma Pharmaceuticals PLC) the right to sell an authorized generic version of Xyrem, or AG Product, in the U.S. beginning on January 1, 2023, or earlier under certain circumstances, and a license to launch its own generic sodium oxybate product as early as six months after it has the right to sell the AG Product, unless it elects to continue to sell the AG Product, which it may do for up to a total of five years; (ii) we granted each of three of the other ANDA filers the right to sell a limited volume of an AG Product in the U.S. beginning on July 1, 2023, or earlier under certain circumstances, and a license to launch its own generic sodium oxybate product on or after December 31, 2025, or earlier under certain circumstances; and (iii) we granted each of the five other ANDA filers a license to launch its own generic sodium oxybate product on or after December 31, 2025, or earlier under certain circumstances. We will receive royalties on sales of the AG products. The actual timing of the launch of an AG Product or generic sodium oxybate product is uncertain because the launch dates of the AG Products and generic sodium oxybate products under our ANDA litigation settlement agreements are subject to acceleration JAZZ PHARMACEUTICALS | 2018 Annual Report 8 K - 0 1 m r o F under certain circumstances. For a further description of the settlement agreements, including a more complete description of circumstances that might trigger acceleration of such dates, see the risk factor under the heading “The introduction of a new product in the U.S. market that competes with, or otherwise disrupts the market for, Xyrem would adversely affect sales of Xyrem” in Part I, Item 1A of this Annual Report on Form 10-K. Avadel Pharmaceuticals plc, or Avadel, is conducting a Phase 3 clinical trial of a once-nightly formula of sodium oxybate which uses its proprietary technology for the treatment of EDS and cataplexy in patients with narcolepsy. Avadel has indicated that it intends to seek approval using an NDA approval pathway under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or FDCA, by referencing Xyrem and relying, to some degree, on the FDA’s approval of Xyrem and related determinations of safety and efficacy. Other companies may develop a sodium oxybate or similar product using, for example, an alternative formulation or a different delivery technology, and seek approval in the U.S. under Section 505(b)(2) or otherwise. For a further description of the approval process for ANDAs and NDAs under the FDA’s Section 505(b)(2) approval pathway, see “Business—Government Regulation—Marketing Exclusivity—The Hatch-Waxman Act” in this Part I, Item 1. Although Xyrem is currently the only approved treatment for EDS and cataplexy associated with narcolepsy, we are aware that prescribers often prescribe branded or generic medications for these conditions before prescribing or instead of prescribing Xyrem, and that payors often require patients to try such medications before they will cover Xyrem. For example, prescribers often treat mild cataplexy with drugs that have not been approved by the FDA for that indication, including tricyclic antidepressants and selective serotonin reuptake inhibitors or selective norepinephrine reuptake inhibitors. In addition, we are aware that Harmony Biosciences LLC, or Harmony, has exclusive U.S. rights to seek approval of and commercialize pitolisant, a wake-promoting drug that has already been approved in Europe to treat adult patients with narcolepsy with or without cataplexy. Published data and prescribing patterns in the EU suggest that pitolisant would likely be appropriately used in patients with less severe cataplexy than those treated with Xyrem. While pitolisant is not currently approved in the U.S., Harmony has established an expanded access program for pitolisant, received Breakthrough Therapy and Fast Track designations from the FDA and, in February 2019, announced that the FDA had accepted for filing with priority review its pitolisant NDA. We are also aware that branded or generic stimulants may be prescribed off label for treatment of EDS in narcolepsy. Wake-promoting agents Provigil® (modafinil) and Nuvigil® (armodafinil), and their generic equivalents, are labeled for treatment of EDS in narcolepsy and other conditions, and may be used in conjunction with or instead of Xyrem. It is possible that additional branded or generic products may be introduced to treat symptoms of narcolepsy that will similarly be prescribed before or instead of Xyrem, or that payors will require patients to try before they will cover Xyrem. Erwinaze. Erwinaze is a biologic product used in conjunction with chemotherapy and is indicated for patients with ALL who have developed hypersensitivity to E. coli-derived asparaginase. While there is currently no direct competition to Erwinaze to treat ALL patients with hypersensitivity to E. coli-derived asparaginase, other companies have developed or are developing new treatments for ALL. Some new asparaginase treatments could reduce the rate of hypersensitivity in patients with ALL, and new treatment protocols are being developed for ALL that may not include asparaginase-containing regimens, including some for the treatment of relapsed or refractory ALL patients. We have experienced frequent intermittent shortages of the product, as described in “Business—Manufacturing” in this Part I, Item 1, that have impacted prescribing habits for Erwinaze, including prescribers’ use of alternate methods to address hypersensitivity reactions. The development of these new treatments could negatively impact our ability to grow sales of Erwinaze in patient populations where the benefit of an asparaginase-containing regimen is not well established. As a biologic product, Erwinaze also faces potential competition from biosimilar products. Defitelio. Defitelio is the only approved treatment in the U.S. for the treatment of adult and pediatric patients with VOD, also known as SOS, with renal or pulmonary dysfunction following HSCT and the only approved treatment in the EU for severe VOD in adults and children undergoing HSCT. Various anti-clotting strategies have been tried by researchers in patients with VOD with mixed results, including Activase (alteplase), a recombinant tissue plasminogen activator marketed by Genentech, Inc., generic heparin sodium injection and Thrombate III (antithrombin III (human)) marketed by Grifols Therapeutics, Inc. While there is currently no direct competition to Defitelio to treat severe VOD, changes in the types of conditioning regimens used as part of HSCT may affect the incidence rate of VOD and demand for Defitelio. Vyxeos. There are a number of alternative established and recently introduced therapies in AML. A key consideration in the treatment of AML patients is the patient’s suitability for chemotherapy. The AML patient population studied in the Vyxeos Phase 3 clinical trial supporting our NDA included fit patients, or those deemed able to tolerate intensive induction chemotherapy. The existing options for the treatment of newly-diagnosed t-AML and AML-MRC in fit patients include cytarabine in combination with an anthracycline (i.e., daunorubicin), known as 7+3. In addition, we are aware of several other products that have been recently approved by the FDA or are in development as treatment options for newly diagnosed AML patients eligible for intensive chemotherapy, such as targeted agents (e.g. midostaurin, enasidenib and ivosidenib), immunotherapies (e.g., gemtuzumab ozogamicin and CAR-T-cell therapy), and agents disrupting leukemia cell survival (e.g., glasdegib). We are also aware of the use of venetoclax, an AML treatment recently approved by the FDA. Some of the patient populations being studied for, or JAZZ PHARMACEUTICALS | 2018 Annual Report 9 • • • treated by, these products overlap with the patient population studied in the Vyxeos Phase 3 clinical trial supporting our NDA. The existence of established treatment options and the development of competing products for the treatment of newly- diagnosed t-AML or AML-MRC could negatively impact our ability to successfully commercialize Vyxeos and achieve the level of sales we expect. • Solriamfetol. As discussed above, other branded and generic products used to treat EDS in patients with narcolepsy include stimulants, wake-promoting agents such as Provigil and Nuvigil, and generic versions of stimulants and wake-promoting agents. We are also aware that stimulants and wake-promoting agents are prescribed for patients who have OSA. Solriamfetol, if approved by the FDA, will likely face competition from this genericized market. In addition, we are aware of several other products in development to treat excessive sleepiness in patients with narcolepsy or OSA, including, for example, pitolisant, mazindol, modafinil combinations and Avadel’s once-nightly sodium oxybate formulation. An important part of our corporate strategy is to build a diversified product pipeline, including by acquiring or in-licensing and developing additional products and product candidates that we believe are highly differentiated and have significant commercial potential. Our ability to continue to grow our product portfolio requires that we compete successfully with other pharmaceutical companies to acquire or in-license products and product candidates. These competitors include established companies that may have a competitive advantage over us due to their size and financial resources. For more information on the competitive risks we face generally, see the risk factors under the headings “We face substantial competition from other companies, including companies with larger sales organizations and more experience working with large and diverse product portfolios” and “We may not be able to successfully identify and acquire or in-license additional products or product candidates to grow our business, and, even if we are able to do so, we may otherwise fail to realize the anticipated benefits of these acquisitions” in Part I, Item 1A of this Annual Report on Form 10-K. Customers In the U.S., our lead marketed product, Xyrem, is sold to one specialty pharmacy, a subsidiary of Express Scripts, which ships Xyrem directly to patients. Erwinaze, Defitelio and Vyxeos are sold to hospital customers through subsidiary specialty distributors of McKesson Corporation, or McKesson. We have distribution services agreements made in the ordinary course of business with McKesson and a pharmacy services agreement with Express Scripts that provides for the distribution of Xyrem to patients. For more information regarding our relationship with Express Scripts, see “Business—Our Commercialized Products” in this Part I, Item 1. Purchases are made on a purchase order basis. In certain countries in Europe, Erwinase, Defitelio and Vyxeos are sold pursuant to marketing authorizations. We distribute these products through Durbin PLC, a UK-based wholesaler and distributor, and O&M Movianto Nederland BV, our centralized European logistics services provider, to hospitals and local wholesalers in Europe where we market these products directly and, in other markets in Europe and elsewhere where we do not market these products directly, to local distributors and wholesalers. In countries where there is no marketing authorization, Erwinase, Defitelio and Vyxeos are sold pursuant to named patient programs, temporary use authorizations or similar authorizations. We directly market Xyrem in Canada for the treatment of cataplexy in patients with narcolepsy. Xyrem is also sold in 21 countries by UCB Pharma Limited, or UCB (which has rights to market Xyrem in 54 countries). Information on our total revenues by product and revenues attributed to customers who represented at least 10% of our total revenues in each of 2018, 2017 and 2016 is included in Note 17, Revenues of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. Manufacturing We have a manufacturing and development facility in Athlone, Ireland where we manufacture Xyrem and development-stage oxybate product candidates, including JZP-258. We also have a manufacturing plant in Italy where we produce the defibrotide drug substance. Other than these two facilities, we currently do not have our own commercial manufacturing capability for our products and product candidates or their APIs. As a result, our ability to develop and supply products in a timely and competitive manner depends primarily on our third party suppliers, in most cases single source suppliers, being able to meet our ongoing commercial and clinical trial needs. 10 JAZZ PHARMACEUTICALS | 2018 Annual Report Lead Marketed Products Xyrem. Xyrem is manufactured by us in our Athlone facility and by Patheon Pharmaceuticals Inc., which we refer to together with its affiliates as Patheon, under a Master Manufacturing Services Agreement, or the Patheon Agreement, entered into with Patheon in 2015. The Patheon Agreement establishes the general terms and conditions pursuant to which Patheon provides manufacturing services for multiple drug products, including Xyrem, as specified by us in product agreements we enter into from time to time. Although we manufacture Xyrem in our Athlone facility, we expect to rely on Patheon as our sole U.S.-based supplier of Xyrem for the foreseeable future. However, we are not required to purchase Xyrem exclusively from Patheon. The Patheon Agreement expires on December 31, 2020 and may be extended for additional two-year terms if Patheon is then providing manufacturing services for any product, unless either party provides 18 months’ prior notice of termination. In addition, we may terminate the Patheon Agreement for any reason upon 12 months’ prior written notice, and each party has the right to terminate the agreement in the event of the other party’s uncured material breach. Siegfried USA, LLC, or Siegfried, supplies sodium oxybate, the API of Xyrem, to Patheon and, through a Siegfried affiliate in Europe, to our Athlone facility. Although Siegfried has been our only supplier of sodium oxybate since 2012, we have the right to purchase a portion of our worldwide requirements of sodium oxybate from other suppliers. Under our agreement, entered into in 2010, we provide periodic rolling forecasts to Siegfried, and a portion of each rolling forecast constitutes a firm purchase order. The agreement with Siegfried expires in April 2021, subject to automatic three-year extensions until either party provides notice to the other of its intent to terminate the agreement at least 18 months before the end of the then-current term. Each party also has the right to terminate the agreement in the event of the other party’s uncured material breach or insolvency. During the term of the agreement and, under certain circumstances for 18 months after the agreement terminates, Siegfried is not permitted to manufacture sodium oxybate for any other company. K - 0 1 m r o F Xyrem is a controlled substance in the U.S., subject to regulation by the U.S. Drug Enforcement Administration, or DEA, under the Controlled Substances Act, or CSA. As a result, its manufacturing and distribution are highly restricted. Quotas from the DEA are required in order to manufacture and package sodium oxybate and Xyrem in the U.S. For information related to DEA quota requirements, see “Business—Government Regulation—Other Post-Approval Pharmaceutical Product Regulation—Controlled Substance Regulations” in this Part I, Item 1. Erwinaze. Erwinaze is exclusively licensed to us, and manufactured for us, by PBL, a company that is wholly owned by the UK Secretary of State for Health. PBL is our sole supplier for Erwinaze. Our license and supply agreement with PBL, which includes our license for Erwinaze, expires on December 31, 2020. For information related to our agreement with PBL, see “Business—Our Commercialized Products—Erwinaze” in this Part I, Item 1. We provide periodic rolling forecasts to PBL, and a portion of each rolling forecast constitutes a firm purchase order. The Erwinaze BLA includes a number of post-marketing commitments related to the manufacture of Erwinaze by PBL. A continuing and significant challenge to maintaining sales of Erwinaze and a barrier to increasing sales is PBL’s inability to consistently supply product adequate to meet market demand. All Erwinaze that PBL has been able to supply is currently completely absorbed by demand for the product. In addition, PBL is subject to a January 2017 warning letter issued by the FDA citing significant violations of the FDA’s current Good Manufacturing Practices, or cGMP, as well as an inspection report from the UK Medicines and Healthcare Products Regulatory Agency, or MHRA, listing several major findings, including major deficiencies and failures by PBL to comply with cGMP. PBL’s product quality and manufacturing issues have resulted, and continue to result, in disruptions in our ability to supply markets from time to time and have caused, and may in the future cause, us to implement batch-specific, modified product use instructions. We have been experiencing, and continue to experience, supply disruptions globally and expect further supply disruptions during 2019. These supply disruptions will continue to adversely impact our ability to generate sales of and revenues from Erwinaze and our business, financial condition, results of operations and growth prospects could be materially adversely affected. For a more complete description of supply issues related to Erwinaze, see the risk factor under the heading “Delays or problems in the supply of our products for sale or our for use in clinical trials, loss of our single source suppliers or failure to comply with manufacturing regulations could materially and adversely affect our business, financial condition, results of operations and growth prospects” in Part I, Item 1A of this Annual Report on Form 10-K. Defitelio/defibrotide. We are our sole supplier of, and we believe that we are currently the sole worldwide producer of, the defibrotide drug compound. We manufacture the defibrotide compound from porcine DNA in a single facility located in Villa Guardia, near Como, Italy. Patheon currently processes the defibrotide compound into its finished vial form under a specific product agreement entered into under the Patheon Agreement. Patheon is the sole provider of our commercial and clinical supply of Defitelio; however, we are not required to purchase Defitelio exclusively from Patheon. If Patheon does not or is not able to supply us with Defitelio for any reason, it may take time JAZZ PHARMACEUTICALS | 2018 Annual Report 11 and resources to implement and execute the necessary technology transfer to another processor, and such delay could negatively impact our anticipated revenues from Defitelio and could potentially cause us to breach contractual obligations with customers or to violate local laws requiring us to deliver the product to those in need. Vyxeos. Vyxeos is manufactured by Baxter Oncology GmbH, or Baxter, which is a sole source supplier from a single site location, using our CombiPlex technology platform. CombiPlex products represent formulations with increased manufacturing complexities associated with producing drug delivery vehicles encapsulating two or more drugs that are maintained at a fixed ratio and, in the case of Vyxeos, two drugs that are co-encapsulated in a freeze-dried format. There have been batch failures at Baxter due to mechanical, component and other issues, and batches have been produced that have otherwise not been in compliance with applicable specifications. We are continuing to work with Baxter to address manufacturing complexities. Our manufacturing agreement with Baxter expires in August 2022, subject to automatic three-year renewal terms, unless terminated by either party 24 months prior to the end of the initial term or any renewal term. Each party has the right to terminate the agreement for breach, subject to customary cure periods, and each party may terminate the agreement immediately in the event of the other party’s insolvency. While other contract manufacturers may be able to produce Vyxeos, the proprietary technology that supports the manufacture of Vyxeos is not easily transferable. The marketing authorization in the EU for Vyxeos also requires us to comply with certain manufacturing-related post-approval commitments. Product Candidates Siegfried has supplied us with both the API and finished product for our development activities involving solriamfetol. We expect that Siegfried will manufacture and supply solriamfetol for commercial sale if solriamfetol receives regulatory approval and that, in the short term, Siegfried will be the sole provider of our commercial supply of solriamfetol. We also expect that solriamfetol, if approved, will be subject to scheduling by the DEA after NDA approval. JZP-258 is currently manufactured at our Athlone facility, and we expect to manufacture this product commercially at our Athlone facility should this candidate proceed through development and receive regulatory approval. For further discussion of the challenges we face with respect to supply of our products and product candidates, see the risk factor under the heading “Delays or problems in the supply of our products for sale or our for use in clinical trials, loss of our single source suppliers or failure to comply with manufacturing regulations could materially and adversely affect our business, financial condition, results of operations and growth prospects” in Part I, Item 1A of this Annual Report on Form 10-K. Patents and Proprietary Rights We actively seek to patent, or to acquire or obtain licenses to third party patents, to protect our products and product candidates and related inventions and improvements that we consider important to our business. We own a portfolio of U.S and non-U.S. patents and patent applications and have licensed rights to a number of issued patents and patent applications. Our owned and licensed patents and patent applications cover or relate to our products and product candidates, including certain formulations, used to treat particular conditions, distribution methods and methods of administration, drug delivery technologies and delivery profiles and methods of production. Patents extend for varying periods according to the date of the patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The patent laws of non-U.S. countries differ from those in U.S., and the degree of protection afforded by non-U.S. patents may be different from the protection offered by U.S. patents. In addition to patents, our products and product candidates are in some instances protected by various marketing exclusivities. For a description of those exclusivities and their regulatory background, see “Business—Government Regulation—Marketing Exclusivity—The Hatch-Waxman Act” in this Part I, Item 1 and in the risk factor under the heading “It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection” in Part I, Item 1A of this Annual Report on Form 10-K. The patents, patent applications and marketing exclusivities that relate to our marketed products and product candidates include: • Xyrem. We currently have 16 issued patents in the U.S. relating to Xyrem that expire at various times from December 2019 to September 2033. All but four of these patents are listed in the FDA’s publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” or the Orange Book. Our patents relate to Xyrem’s stable and microbially resistant formulation, its manufacturing process, its method of use, including its restricted distribution system, its method of administration, and a drug- drug interaction, or DDI, between Xyrem and divalproex sodium. In October 2018, as a result of the FDA’s grant of pediatric exclusivity, an additional six months was added to the expiration dates of all of our Orange Book-listed patents that have not been invalidated. Our Xyrem patents have been subject to patent litigation with the companies who filed ANDAs seeking to market a generic version of Xyrem, including challenge through the inter partes review procedures of the Patent Trial and Appeal Board, or PTAB, 12 JAZZ PHARMACEUTICALS | 2018 Annual Report of the U.S. Patent and Trademark Office, or USPTO. In July 2018, the United States Court of Appeals for the Federal Circuit upheld on appeal PTAB decisions finding that six patents associated with the Xyrem REMS and three claims of a seventh REMS patent are unpatentable. As a result, we will not be able to enforce patents or claims that the PTAB found unpatentable. Although we have settled all patent litigation against the nine companies that filed ANDAs, it is possible that additional companies may challenge our U.S. patents for Xyrem in the future. For a description of our Xyrem settlements, see the risk factor under the heading “Risks Related to Xyrem and Our Other Marketed Products” in Part I, Item 1A of this Annual Report on Form 10-K. A Xyrem formulation patent has issued in multiple non-U.S. countries and will expire in December 2019. The European Patent Office has issued a method of administration patent relating to the DDI between Xyrem and divalproex sodium that will expire in February 2034. Those patents are licensed to UCB as the marketing authorization holder outside of the U.S. and Canada, and UCB has the right to enforce them. In addition to our issued patents, we have patent applications relating to Xyrem pending in the U.S. and other countries. Erwinaze. Erwinaze has no patent protection. It had been granted orphan drug exclusivity by the FDA for the treatment of ALL in the U.S. until November 2018, and we believe that it is protected by exclusivity that prevents approval of a biosimilar in the U.S. through late 2023 under the U.S. Biologics Price Competition and Innovation Act, or BPCIA. Defitelio. The unique process of deriving defibrotide from porcine DNA is extensive and uses both chemical and biological processes that rely on complex characterization methods. We have U.S. and non-U.S. patents and patent applications relating to various compositions, methods of use and methods of characterization, expiring at various times between June 2019 and November 2035. None of these patents are listed in the Orange Book. Defibrotide has been granted orphan drug exclusivity by the FDA to treat and prevent VOD until March 2023. Defibrotide has also been granted orphan drug designation by the EC and the Korean Ministry of Food and Drug Safety to treat and prevent VOD, by the Commonwealth of Australia-Department of Health for the treatment of VOD and by the EC for the prevention of aGvHD. K - 0 1 m r o F Vyxeos. We have a portfolio of U.S. and non-U.S. patents and patent applications for Vyxeos and the CombiPlex technology platform relating to various compositions and methods of making and use. These include six U.S. patents covering Vyxeos compositions and methods of use expiring between April 2025 and September 2034 and two U.S. patents covering CombiPlex (which also cover Vyxeos) expiring in January 2027. These patents are listed, or in the process of being listed, in the Orange Book. Vyxeos has been granted orphan drug exclusivity by the FDA until August 2024, seven years from its FDA approval, for the treatment of adults with newly-diagnosed t-AML or AML-MRC. In addition, Vyxeos has been granted orphan drug designation by the EC until August 2028, ten years from its EC approval for the treatment of adults with newly-diagnosed t-AML or AML-MRC. Solriamfetol. We acquired rights to solriamfetol from Aerial in 2014, including Aerial’s patent rights relating to solriamfetol, other than in certain jurisdictions in Asia where SK retains rights. We have a portfolio of U.S. and non-U.S. patents and patent applications for solriamfetol relating to various compositions, formulations and methods of use. Three of our U.S. patents are method of use patents covering treatment of sleep-related conditions expiring between June 2026 and August 2027. A fourth U.S. patent covers the formulation of solriamfetol and expires in September 2037. We are entitled to apply for a patent term extension for one of these patents. JZP-258. We expect that certain patents and patent applications relating to Xyrem will cover our product candidate JZP-258. There are also five additional U.S. patents that will expire in January 2033 covering the formulation and method of making for JZP-258. • • • • • We also rely on trade secrets and other unpatented proprietary information to protect our products and commercial position, particularly with respect to our products with limited or no patent protection, such as Erwinaze. In addition, we have a number of trademarks and service marks, and pending trademark and service mark applications, in the U.S. and elsewhere in the world to further protect the proprietary position of our products. For further discussion of the challenges we face in obtaining or maintaining patent and/or trade secret protection, see the risk factors under the heading “Risks Related to Our Intellectual Property” in Part I, Item 1A of this Annual Report on Form 10-K. Government Regulation As a global pharmaceutical company, our activities are subject to extensive regulation in the U.S., the EU and other countries where we do business. Regulatory requirements encompass the entire life cycle of pharmaceutical products, from research and development JAZZ PHARMACEUTICALS | 2018 Annual Report 13 activities to marketing approval, manufacturing, labeling, packaging, adverse event and safety reporting, storage, advertising, promotion, sale, pricing and reimbursement, recordkeeping, distribution, importing and exporting. Regulations differ from country to country and are constantly evolving. Testing and Approval of Pharmaceutical Products We are not permitted to market a product in a country until we receive approval from the relevant regulatory authority, such as the FDA in the U.S. and the EC or the competent authorities of the EU member states. An application for marketing approval must contain information generated by the applicant, also called a sponsor, demonstrating the quality, safety and efficacy of the product candidate, including data from preclinical and clinical trials, proposed product packaging and labeling and information pertaining to product formulation and the manufacture and analytical testing of the API and the finished product. In the U.S., the FDA reviews and, if warranted, approves applications for marketing approval. The process for obtaining marketing approval in the U.S. for a drug or biologic product candidate generally includes: • • • • conducting preclinical laboratory and animal testing and submitting the results to the FDA in an investigational new drug, or IND, application requesting approval to test the product candidate in human clinical trials; conducting adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate in the desired indication; submitting an NDA, supplemental NDA, or sNDA, or BLA, as appropriate, to the FDA seeking approval for a specific indication; and completing inspections by the FDA of the facilities where the product candidate is manufactured, analyzed and stored to demonstrate compliance with cGMP and any requested FDA audits of the clinical trial sites that generated the data supporting the application. Human clinical trials conducted before approval of a product generally proceed in three sequential phases, although the phases may overlap. In Phase 1, the initial introduction of the product candidate in humans, the product candidate is typically tested to assess metabolism, pharmacokinetics, pharmacological actions and side effects associated with increasing doses. Phase 2 usually involves clinical trials in a limited patient population to determine the effectiveness of the product candidate for a particular indication or indications, dosage tolerance and optimum dosage and to identify common adverse effects and safety risks. If a product candidate demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2, Phase 3 clinical trials are undertaken to obtain additional information about clinical efficacy and safety in a larger number of patients. Clinical trials must be conducted in accordance with specific protocols, as well as FDA requirements related to conducting the trials and recording and reporting the results, commonly referred to as good clinical practices, to ensure that the resulting data are credible and accurate and that the trial participants are adequately protected. The FDA enforces good clinical practices through periodic inspections of trial sponsors, clinical investigators and trial sites. Once an NDA, sNDA or BLA has been compiled and submitted, the FDA performs an initial review before it accepts the application for filing. The FDA may refuse to file an application and/or request additional information before acceptance. Once accepted for filing, the FDA begins an in-depth review of the application. Under the current goals and policies agreed to by the FDA under PDUFA for a new molecular entity, the FDA has ten months from the filing decision in which to complete its initial review of a standard application and respond to the applicant, and eight months for a priority application. The FDA does not always meet its PDUFA goal dates, and in certain circumstances, the PDUFA goal date may be extended. For example, in December 2018, the FDA determined that a submission we made during the course of discussions regarding draft labeling in solriamfetol constituted a major amendment to the NDA, resulting in a three- month extension of the PDUFA goal date to March 20, 2019. The FDA also has various programs, including Fast Track, Priority Review, Breakthrough Therapy and Accelerated Approval (Subpart H and E), that are intended to expedite the process for reviewing certain applications and/or provide for approval on the basis of surrogate endpoints or restricted distribution. Generally, products may be eligible for one or more of these programs if they are intended for serious or life-threatening diseases or conditions, have potential to address unmet medical needs, or may provide meaningful benefit over existing treatments. For example, the FDA granted Vyxeos Breakthrough Therapy and Fast Track designations and also granted Priority Review with respect to our NDA for Vyxeos for the treatment of t-AML and AML-MRC that was approved in August 2017. In addition, a priority review voucher, or PRV, such as the PRV that we acquired in May 2018, may be used to obtain priority review by the FDA for one of our future regulatory submissions. During its review of an application, the FDA evaluates whether the product demonstrates the required level of safety and efficacy for the indication for which approval is sought and also conducts the inspections and audits described above. The FDA may also refer an 14 JAZZ PHARMACEUTICALS | 2018 Annual Report application to an advisory committee, typically a panel of clinicians, for review, evaluation and a non-binding recommendation as to whether the application should be approved. When the FDA completes its evaluation, it issues either an approval letter or a complete response letter. A complete response letter generally outlines what the FDA considers to be the deficiencies in the application and may indicate that substantial additional testing or information is required in order for the FDA to approve the product. If and when identified deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the application, or if the decision is reversed through an administrative appeal, the FDA will issue an approval letter. Even if a product is approved, the approval may be subject to limitations based on the FDA’s interpretation of the data submitted in the application. For example, as a condition of approval, the FDA may require the sponsor to agree to certain post-marketing commitments, such as conducting Phase 4, or post-approval, clinical trials to gain additional safety data or to document a clinical benefit in the case of products approved under Accelerated Approval regulations. The FDA’s approval of the BLA for Erwinaze includes a number of post- marketing commitments related to the manufacture of Erwinaze. Several post-marketing commitments and requirements were also mandated by the FDA in connection with its approvals of Defitelio, including the requirement that we conduct a clinical trial to analyze the safety of defibrotide versus best supportive care in the prevention of VOD in adult and pediatric patients, and its approval of Vyxeos, including the requirement that we conduct a safety study to characterize infusion-related reactions in patients treated with Vyxeos and a clinical trial to determine dosing to minimize toxicity in patients with moderate and severe renal impairment. In addition, if the FDA determines that a REMS is necessary to ensure that the benefits of the product outweigh the risks, a sponsor may be required to include a proposed REMS (either as part of the application or after approval), which may include a patient package insert or a medication guide to provide information to consumers about the product’s risks and benefits; a plan for communication to healthcare providers; or conditions on the product’s prescribing or distribution referred to as elements to assure safe use. Xyrem is required to have a REMS. For more discussion regarding the Xyrem REMS, see the risk factors under the headings “The distribution and sale of Xyrem are subject to significant regulatory restrictions, including the requirements of a REMS, and these regulatory requirements subject us to risks and uncertainties, any of which could negatively impact sales of Xyrem” and “Risks Related to Our Intellectual Property” in Part I, Item 1A of this Annual Report on Form 10-K. K - 0 1 m r o F The EU and many individual countries have regulatory structures similar to the U.S. for conducting preclinical and clinical testing and applying for marketing approval or authorization, although specifics may vary widely from country to country. Clinical trials in the EU must be conducted in accordance with the requirements of the EU Clinical Trials Directive, which may be replaced with the new EU Clinical Trials Regulation in 2019, and applicable good clinical practice standards. In the EU, there are several procedures for requesting marketing authorization which can be more efficient than applying for authorization on a country-by-country basis. There is a “centralized” procedure allowing submission of a single marketing authorization application to the EMA. If the EMA issues a positive opinion, the EC will grant a centralized marketing authorization that is valid in all EU member states and three of the four European Free Trade Association countries (Iceland, Liechtenstein and Norway). The centralized procedure is mandatory for certain medicinal products, including orphan medicinal products and biotechnology-derived medicinal products, and optional for others. There is also a “decentralized” procedure allowing companies to file identical applications to several EU member states simultaneously for product candidates that have not yet been authorized in any EU member state and a “mutual recognition” procedure allowing companies that have a product already authorized in one EU member state to apply for that authorization to be recognized by the competent authorities in other EU member states. The UK’s planned withdrawal from the EU, commonly referred to as Brexit, has created significant uncertainty concerning the future relationship between the UK and the EU, and the impact on the process for obtaining or maintaining marketing authorization for pharmaceutical products manufactured or sold in the UK is unknown. The maximum timeframe for the evaluation of an application in the EU under the centralized procedure is 210 days, subject to certain exceptions. An initial marketing authorization granted in the EU is valid for five years, with renewal subject to re-evaluation of the risk- benefit profile of the product. Once renewed, the authorization is usually valid for an unlimited period unless the national competent authority or the EC decides on justified grounds to proceed with one additional five-year renewal. In the EU, if an applicant can demonstrate that comprehensive data on the efficacy and safety of the product under normal conditions of use cannot be provided due to certain specified objective and verifiable reasons, products may be granted marketing authorization “under exceptional circumstances”. A marketing authorization granted under exceptional circumstances is valid for five years, subject to an annual reassessment of conditions imposed by the EC. The marketing authorization in the EU for Defitelio was granted under exceptional circumstances because it was not possible to obtain complete information about the product due to the rarity of the disease and because ethical considerations prevented conducting a study directly comparing Defitelio with best supportive care or a placebo. As a result, the marketing authorization requires us to comply with a number of post-marketing obligations, including obligations relating to the manufacture of the drug substance and finished product, the submission of data concerning patients treated with the product collected through a third- party patient registry and the establishment of a multi-center, multinational and prospective observational patient registry to investigate the JAZZ PHARMACEUTICALS | 2018 Annual Report 15 long-term safety, health outcomes and patterns of utilization of Defitelio during normal use. We are in the process of conducting the post- authorization study in the EU to provide further data on long-term safety, health outcomes and patterns of utilization of Defitelio in normal use. Similar to the use of REMS in the U.S. to ensure that the benefits of a product outweigh its risks, in the EU and other countries we may be required to agree to post-marketing obligations in the marketing authorization for our products, to include a patient package insert or a medication guide to provide information to consumers about the product’s risks and benefits, to implement a plan for communication to healthcare providers, and to impose restrictions on the product’s distribution. For example, the marketing authorization in the EU for Vyxeos requires us to comply with certain manufacturing-related post-approval commitments. After approval, certain changes to the approved product, such as adding new indications, making certain manufacturing changes, modifying a REMS, or making certain additional labeling claims, are subject to further regulatory review and approval. Obtaining approval for a new indication generally requires that additional clinical studies be conducted to demonstrate that the product is safe and effective for the new intended use. Such regulatory reviews can result in denial or modification of the planned changes, or requirements to conduct additional tests or evaluations that can substantially delay or increase the cost of the planned changes. Manufacture of Pharmaceutical Products The manufacturing process for pharmaceutical products is highly regulated, and regulators may shut down manufacturing facilities that they believe do not comply with regulations. We and the third party suppliers of our products are subject to cGMP, which are extensive regulations governing manufacturing processes, stability testing, recordkeeping and quality standards as defined by the FDA, the EC, the EMA, competent authorities of EU member states and other regulatory authorities. The FDA also periodically inspects manufacturing facilities and the sponsor’s and manufacturer’s records related to manufacturing, and assesses compliance with cGMP. Following such inspections, the FDA may issue notices on Form FDA 483 and warning letters. For example, the FDA issued a warning letter to PBL, our Erwinaze manufacturer, in January 2017 indicating that it was not satisfied with PBL’s responses to a Form 483 issued to PBL and citing significant violations of cGMP for finished pharmaceuticals and significant deviations from cGMP for APIs. As recently as August 2018, the FDA conducted an inspection of the PBL manufacturing facility and issued an FDA Form 483 to PBL citing observations related to items referenced in the existing warning letter as well as other manufacturing practices, including data and records management. In addition to Form FDA 483 notices and warning letters, failure to comply with the statutory and regulatory requirements may result in suspension of manufacturing, product seizure, withdrawal of the product from the market, administrative, civil and criminal penalties, among other enforcement remedies both in the U.S. and in non-U.S. countries. In the EU, a manufacturing authorization is required to manufacture medicinal products, and the manufacturing authorization holder must comply with various requirements set out in applicable EU laws, regulations and guidance. These requirements include compliance with EU cGMP standards when manufacturing products and their APIs, including APIs manufactured outside of the EU with the intention of importing them into the EU. In this regard, in the UK, where PBL’s manufacturing facilities are located, PBL is subject to inspections conducted by the MHRA. Following a site inspection of PBL by the MHRA in December 2017, MHRA issued an inspection report listing several major findings, including major deficiencies and failures by PBL to comply with cGMP. In addition to inspection reports, manufacturers and marketing authorization holders may be subject to civil, criminal or administrative sanctions, including suspension of manufacturing authorization, in cases of non-compliance with the EU or EU member states’ requirements applicable to manufacturing. Sales and Marketing of Pharmaceutical Products Advertising and Promotional Activities The FDA regulates advertising and promotional activities for products in the U.S., requiring advertising, promotional materials and labeling to be truthful and not misleading, and products to be marketed only for their approved indications and in accordance with the provisions of the approved label. The FDA actively investigates allegations of off-label promotion in order to enforce regulations prohibiting these types of activities. The FDA routinely issues informal and more formal communications such as untitled letters or warning letters interpreting its authority over these matters. While such communications may not be considered final agency decisions, many companies may decide not to contest the agency’s interpretations so as to avoid disputes with the FDA, even if they believe the claims they were making to be truthful, not misleading and otherwise lawful. In the EU, the advertising and promotion of our products are subject to laws governing promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices. For example, applicable laws require that promotional materials and advertising in relation to medicinal products comply with the product’s Summary of Product Characteristics, or SmPC, as approved by the competent authorities in connection with a marketing authorization approval. The SmPC is the document that 16 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F provides information to physicians concerning the safe and effective use of the product. Promotional activity that does not comply with the SmPC is considered off-label and is prohibited in the EU. Other applicable laws at the EU level and in the individual EU member states also apply to the advertising and promotion of medicinal products, including laws that prohibit the direct-to-consumer advertising of prescription- only medicinal products and further limit or restrict the advertising and promotion of our products to the general public and to health care professionals. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment. Anti-Fraud and Abuse We are also subject to numerous anti-fraud and abuse laws and regulations globally. In the U.S., there are a variety of federal and state laws restricting certain marketing practices in the pharmaceutical industry pertaining to healthcare fraud and abuse, including anti- kickback laws and false claims laws. Our sales, marketing, patient support and medical activities may be subject to scrutiny under these laws. The U.S. federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving anything of value to induce (or in return for) the referral of business, including the purchase or prescription of a particular drug reimbursable under Medicare, Medicaid or other federally financed healthcare programs. The statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and patients, prescribers, purchasers and formulary managers on the other. Violations of the federal anti-kickback statute may be punished by civil and criminal fines, imprisonment, and/or exclusion from participation in federal healthcare programs. The federal civil False Claims Act prohibits, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of federal funds, or knowingly making, or causing to be made, a false statement to get a false claim paid. The government may assert that a claim resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution and administrative sanction, the exemptions and safe harbors are drawn narrowly and are subject to regulatory revision or changes in interpretation by the U.S Department of Justice, or DOJ, and the Office of Inspector General of the U.S. Department of Health and Human Services, or OIG. Practices or arrangements that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. The False Claims Act also permits a private individual acting as a “whistleblower” to bring actions on behalf of themselves and the federal government alleging violations of the statute and to share in any monetary recovery. Violations of the False Claims Act may result in significant financial penalties (on a per claim or statement basis), treble damages and exclusion from participation in federal health care programs. Pharmaceutical companies are subject to other federal false claim and statements laws, some of which extend to non-government health benefit programs. For example, the healthcare fraud provisions under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HIPAA, impose criminal liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private third party payors, or falsifying or covering up a material fact or making any materially false or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. The majority of individual states also have statutes or regulations similar to the federal anti-kickback law and the False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Other Post-Approval Pharmaceutical Product Regulation Safety Reporting/Pharmacovigilance The FDA, the EMA and other governmental authorities track information on side effects and adverse events reported during clinical studies and after marketing approval. We are required to file periodic safety update reports with the authorities concerning adverse events. If, upon review, an authority determines that any events and/or reports indicate a trend or signal, they can require a change in a product label, restrict sales and marketing, require post-approval safety studies, require a labor intensive collection of data regarding the risks and benefits of marketed products and ongoing assessments of those risks and benefits and/or require or conduct other actions, potentially including withdrawal or suspension of the product from the market. For example, if the EMA has concerns that the risk-benefit profile of a product has changed, it can adopt an opinion advising that the existing marketing authorization for the product be varied and requiring the marketing authorization holder to conduct post-authorization safety studies. The opinion is then submitted for approval by the EC. Also, from time to time, the FDA issues drug safety communications on its adverse event reporting system based on its review of reported adverse events. The FDA and the competent authorities of the EU member states on behalf of the EMA also periodically inspect our records related to safety reporting. Following such inspections, the FDA may issue notices on FDA Form 483 and warning letters that could cause us to JAZZ PHARMACEUTICALS | 2018 Annual Report 17 modify certain activities. An FDA Form 483 notice, if issued, can list conditions the FDA investigators believe may have violated relevant FDA regulations or guidance. Failure to adequately and promptly correct the observation(s) can result in a warning letter or other regulatory enforcement action. Similarly, the EMA’s Pharmacovigilance Risk Assessment Committee may propose to the Committee for Medicinal Products for Human Use that the marketing authorization holder be required to take specific steps. Non-compliance in all cases can lead to the variation, suspension or withdrawal of marketing authorization or imposition of financial penalties or other enforcement measures. Sunshine Act and Transparency Laws The Physician Payment Sunshine Act requires extensive tracking of payments and transfers of value to physicians and teaching hospitals and ownership interests held by physicians and their families, and provides for reporting to the federal government and public disclosure of these data. Beginning in 2022, reporting will also be required of information regarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives. A number of states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Government agencies and private entities may inquire about our marketing practices or pursue other enforcement activities based on the disclosures in those public reports. Other states restrict when pharmaceutical companies may provide meals to prescribers or engage in other marketing-related activities. Outside the U.S., interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct. The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products, which is prohibited in the EU, is governed by the national anti-bribery laws of the EU member states, as described below in “Business— Government Regulation—Anti-Corruption Legislation” in this Part I, Item 1. Violation of these laws could result in substantial fines and imprisonment. Certain EU member states require that payments made to physicians be publicly disclosed. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or the competent authorities of the individual EU member states. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment. Controlled Substance Regulations A drug product approved by the FDA may be subject to scheduling as a controlled substance under the CSA depending on the drug’s potential for abuse. Controlled substances that are pharmaceutical products are subject to a high degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing quotas, security, recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies controlled substances into five schedules. Schedule I substances by definition have a high potential for abuse, have no currently “accepted medical use” in the U.S., lack accepted safety for use under medical supervision, and may not be prescribed, marketed or sold in the U.S. Pharmaceutical products approved for use in the U.S. may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest potential for abuse or dependence and Schedule V substances the lowest relative risk of abuse. The active ingredient of Xyrem, sodium oxybate, is regulated by the DEA as a Schedule I controlled substance. Xyrem, as an FDA-approved drug product, is regulated as a Schedule III controlled substance. We expect that solriamfetol will be subject to scheduling under the CSA, which will need to be completed after any NDA approval and before commercial launch. Individual states also impose similar requirements for controlled substances. The DEA limits the quantity of certain Schedule I controlled substances that may be manufactured and procured in the U.S. in any given calendar year through a quota system and, as a result, quotas from the DEA are required in order to manufacture and package sodium oxybate and Xyrem in the U.S. Accordingly, we require DEA quotas for Siegfried, our U.S.-based sodium oxybate supplier, to procure sodium oxybate and for Patheon, our U.S.-based Xyrem supplier, to obtain the sodium oxybate from Siegfried in order to manufacture and supply us with Xyrem. Xyrem manufactured at our plant in Ireland enters the U.S. as a Schedule III drug and thus does not require a manufacturing quota. As a Schedule III drug, Xyrem is also subject to DEA and state regulations relating to manufacturing, storage, distribution and physician prescription procedures, including limitations on prescription refills. In addition, the third parties who perform our clinical and commercial manufacturing, distribution, dispensing and clinical studies for Xyrem are required to maintain necessary DEA registrations and state licenses. The DEA periodically inspects facilities for compliance with its rules and regulations. Other Regulations There are many other requirements and restrictions in the U.S. and elsewhere imposed on pharmaceutical companies and their activities, including those related to the posting of information relating to clinical studies and their outcomes, the export and importation of 18 JAZZ PHARMACEUTICALS | 2018 Annual Report products, required authorizations for distributors, the identification or licensing of sales representatives, restrictions on the ability of manufacturers to offer co-pay support to patients for certain prescription drugs, implementation of required compliance programs or marketing codes of conduct, protection of the environment, taxation and work safety. Non-compliance with such requirements may result in civil, criminal or administrative sanctions. Anti-Corruption Legislation Our business activities outside of the U.S. are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery or anti-corruption laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct or rules of other countries in which we operate, including the UK Bribery Act of 2010, or the UK Bribery Act. The FCPA and similar anti-corruption laws in other countries generally prohibit the offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to U.S. or non-U.S. government officials in order to improperly influence any act or decision, secure an improper advantage, or obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the company and to devise and maintain an adequate system of internal accounting controls. The UK Bribery Act prohibits giving, offering, or promising bribes to any person, including UK and non-UK government officials and private persons, as well as requesting, agreeing to receive, or accepting bribes from any person. In addition, under the UK Bribery Act, companies that carry on a business or part of a business in the UK may be held liable for bribes given, offered or promised to any person, including UK and non-UK government officials and private persons in any country, by employees and persons associated with the company in order to obtain or retain business or a business advantage for the company. Liability is strict, with no element of a corrupt state of mind, but a defense of having in place adequate procedures designed to prevent bribery is available. As described above, our business is heavily regulated and therefore involves significant interaction with government officials in many countries. Additionally, in certain countries, the health care providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and purchasers may be subject to the FCPA, the UK Bribery Act and similar laws. Recently the Securities and Exchange Commission, or SEC, and the DOJ have increased their FCPA enforcement activities with respect to pharmaceutical companies. In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, private individuals who report to the SEC original information that leads to successful enforcement actions may be eligible for a monetary award. We engage in ongoing efforts designed to ensure our compliance with these laws, including due diligence, training, policies, procedures, and internal controls. However, there is no certainty that all employees and third party business partners (including our distributors, wholesalers, agents, contractors, and other partners) will comply with anti-bribery laws. In particular, we do not control the actions of our suppliers and other third party agents, although we may be liable for their actions. Violation of these laws may result in civil or criminal sanctions, which could include monetary fines, criminal penalties, and disgorgement of past profits. K - 0 1 m r o F Data Protection and Privacy We are also subject to data protection and privacy laws and regulations governing the processing of personal data. The legislative and regulatory landscape for privacy and data security is subject to increasing focus and continues to evolve. For example, the EU General Data Protection Regulation, or GDPR, which became effective in May 2018, introduced new data protection requirements for all individuals within the EU and the European Economic Area, or EEA. It also addresses the export of personal data outside the EU and EEA areas. Substantial fines may be imposed for violations of GDPR. In addition, certain EU member states have adopted more stringent data protection standards, which add to the complexity of processing personal data in the EU. The California Consumer Privacy Act of 2018, effective beginning January 2020, mirrors a number of the key provisions in the GDPR. There are legal mechanisms to facilitate the transfer of personal data from the EEA and Switzerland to the U.S., including the EU-U.S. and Swiss-U.S. “Privacy Shield.” U.S.-based companies may certify compliance with the Privacy Shield principles or they may rely on other authorized mechanisms to transfer personal data. Certification for our U.S.-based subsidiaries under the Privacy Shield was approved in 2017. The EC, in its second annual review of the Privacy Shield, concluded that the U.S. continues to ensure an adequate level of protection for personal data transferred under the Privacy Shield. The U.S. Department of Commerce has strengthened the certification process and introduced new oversight procedures and will increase pressure on companies to comply with Privacy Shield. In addition, the privacy and data security landscape in the EU continues to remain in flux as the final decision on UK’s withdrawal from the EU may require organizations to revisit the way they transfer personal data from and to the UK. In the U.S., healthcare providers who prescribe our products and research institutions that we collaborate with are subject to privacy and security requirements under HIPAA. Although we are not directly subject to HIPAA other than with respect to providing certain employee benefits, we could potentially be subject to criminal penalties if we, our affiliates or our agents knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. JAZZ PHARMACEUTICALS | 2018 Annual Report 19 Marketing Exclusivity The Hatch-Waxman Act The marketing approval process described above for the U.S. is premised on the applicant being the owner of, or having obtained a right of reference to, all of the data required to prove the safety and effectiveness of a drug product. This type of marketing application, sometimes referred to as a “full” or “stand-alone” NDA, is governed by Section 505(b)(1) of the FDCA. A Section 505(b)(1) NDA contains full reports of investigations of safety and effectiveness, which includes the results of preclinical and clinical trials, together with detailed information on the manufacture and composition of the product, in addition to other information. As an alternative, the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, provides two abbreviated approval pathways for certain drug products. The first path, under Section 505(b)(2) of the FDCA, usually is used for the approval of a product that is similar, but not identical, to a previously-approved brand-name product, referred to as the reference listed drug, or RLD. Under this path, the applicant is permitted to rely to some degree on the FDA’s finding that the RLD is safe and effective and must submit its own product-specific data on safety and effectiveness only to the extent necessary to bridge the differences between the products. The second abbreviated path established under the Hatch-Waxman Act is for the approval of generic drugs. Section 505(j) of the FDCA permits the submission of an ANDA for a generic version of an approved, brand-name drug. Generally, an ANDA must contain data and information showing that the proposed generic product and the RLD (i) have the same active ingredient, in the same strength and dosage form, to be delivered via the same route of administration, (ii) are intended for the same uses, and (iii) are bioequivalent. This data and information are provided instead of data and information independently demonstrating the proposed generic product’s safety and effectiveness. The Hatch-Waxman Act requires an ANDA or a Section 505(b)(2) NDA applicant to certify that there are no patents listed for that product in the Orange Book, or that for each Orange Book-listed patent either the listed patent has expired, the listed patent will expire on a particular date and approval is sought after patent expiration, or the listed patent is invalid or will not be infringed by the manufacture, use or sale of the new product. A certification that approval is sought after patent expiration is called a “Paragraph III Certification.” A certification that the new product will not infringe the RLD’s Orange Book-listed patents or that such patents are invalid is called a “Paragraph IV Certification.” If a relevant patent covers an approved method of use, an ANDA or Section 505(b)(2) applicant can also file a statement, called, in the case of an ANDA, a “section viii statement,” that the application does not seek approval of the method of use covered by the listed patent. With such a statement, the applicant must “carve out” the protected method of use (typically an indication and related material) from the proposed product’s labeling. If the applicant makes a Paragraph III Certification, the ANDA or the Section 505(b)(2) NDA will not be approved until the listed patents claiming the RLD have expired. If the applicant has provided a Paragraph IV Certification to the FDA, the applicant must also send a notice of that certification to the NDA holder and the relevant patent holders once the FDA accepts the ANDA or the Section 505(b)(2) NDA for filing. The NDA and patent holders then have 45 days to initiate a patent infringement lawsuit. Filing the lawsuit triggers an automatic stay on FDA’s approval of the ANDA or the Section 505(b)(2) NDA until the earliest of 30 months after the NDA holder’s receipt of the notice of Paragraph IV Certification, expiration of the patent, certain settlements of the lawsuit, or a decision in the infringement case that is favorable to the applicant. The FDA may issue tentative approval of an application if the application meets all conditions for approval but cannot receive effective approval because the 30-month stay or a period of regulatory exclusivity has not expired. If an ANDA or Section 505(b)(2) NDA is approved before conclusion of any relevant patent litigation, the applicant can choose to launch the product, but does so “at risk” of being liable for damages, and potentially treble damages, if the RLD sponsor or patent holder ultimately prevails in patent litigation. Under the Hatch-Waxman Act, newly approved drugs and indications may benefit from statutory periods of non-patent marketing exclusivity that can potentially delay review or approval of an ANDA or Section 505(b)(2) application. For example, the Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning a drug containing an active moiety that the FDA has not previously approved. During this period, the FDA cannot accept for review an ANDA or a Section 505(b)(2) NDA for a product containing the same moiety, except that an application containing a Paragraph IV Certification may be submitted after four years, which may trigger the litigation and stay described above. The Hatch-Waxman Act also provides three years of marketing exclusivity with the approval of an NDA, including a Section 505(b)(2) NDA, for a product containing a previously-approved moiety but that incorporates a change (such as a new indication, dosage form or strength) from an approved product with the same moiety, if the change required clinical data from new investigations that were conducted or sponsored by the applicant. This three-year exclusivity does not preclude submission of the ANDA or Section 505(b)(2) NDA for such a product, but prevents the FDA from giving final approval to such product. The Hatch-Waxman Act also permits a patent term extension of up to five years (but not beyond 14 years from the date of approval) for an NDA, including a Section 505(b)(2) NDA, that is approved for a product that contains an active ingredient that has not previously 20 JAZZ PHARMACEUTICALS | 2018 Annual Report been approved. The extension, which compensates for patent term lost during product development and the FDA regulatory review process, is generally equal to the sum of one-half the time between the effective date of an IND application and the submission date of an NDA, and all of the time between the submission date of an NDA and the approval of that application. It is available for only one patent for a given product, and it must be a patent that claims the product or a method of using or manufacturing the product. The USPTO, in consultation with the FDA, reviews and approves applications for patent term extension. Orphan Drug and Other Exclusivities Some jurisdictions, including the U.S., may designate drugs or biologics for relatively small patient populations as orphan drugs. The FDA grants orphan drug designation to drugs or biologics intended to treat a rare disease or condition, which is one that affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals, but for which there is no reasonable expectation that the cost of developing the product and making it available in the U.S. for the disease or condition will be recovered from U.S. sales of the product. Orphan drug designation does not shorten the duration of the regulatory review process or lower the approval standards, but can provide important benefits, including consultation with the FDA. If a product is approved for its orphan designated use, it may be entitled to orphan drug exclusivity, which blocks the FDA from approving for seven years any other application for a product that is the same drug for the same indication. If there is a previously-approved product that is the same drug for the same indication, orphan drug designation requires the sponsor to provide a plausible hypothesis of clinical superiority over the approved product, whereas orphan drug exclusivity requires the sponsor to actually demonstrate clinical superiority. Clinical superiority can be by way of greater efficacy, greater safety, or making a major contribution to patient care. Additionally, a later product can be approved if the sponsor holding orphan drug exclusivity consents, or cannot adequately supply the market. Orphan drug exclusivity does not prevent approval of another sponsor’s application for different indications or uses of the same drug, or for different drugs for the same indication. Defibrotide has been granted orphan drug exclusivity by the FDA to treat and prevent VOD until March 2023. Vyxeos has been granted orphan drug exclusivity by the FDA for the treatment of AML until August 2024. K - 0 1 m r o F Biologic products approved under a BLA are subject to the BPCIA, which authorizes an abbreviated approval pathway for a biological product that is “biosimilar” to an already approved biologic, or reference product. The BPCIA provides periods of exclusivity that protect a reference product from competition by biosimilars. The FDA may not accept a biosimilar application for review until four years after the date of first licensure of the reference product, and the biosimilar cannot be licensed until 12 years after the reference product was first licensed. We believe that Erwinaze, which was approved under a BLA in November 2011, is subject to an exclusivity period that will prevent approval of a biosimilar in the U.S. into November 2023. Under certain circumstances, the exclusivity periods applicable to drugs and biologics and the patent-related protections applicable to drugs may be eligible for a six-month extension if the sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. This exclusivity may be granted even if the data does not support a pediatric indication. We will consider seeking pediatric exclusivity for our products whenever appropriate. For example, in response to a written request from the FDA, we conducted 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, and submitted study results in a supplement to the Xyrem NDA, seeking approval for this indication. In October 2018, FDA approved the sNDA and notified us that we had been granted pediatric exclusivity, extending by six months the preclusive effect of our Orange Book- listed patents for Xyrem that have not been invalidated, as well as the three-year regulatory exclusivity period granted to the Xyrem pediatric indication because of the clinical studies that were necessary for approval of the sNDA. In the EU, orphan drug designation may be granted to products that can be used to treat life-threatening diseases or chronically debilitating conditions with an incidence of no more than five in 10,000 people or that, for economic reasons, would be unlikely to be developed without incentives. Orphan designated medicinal products are entitled to a range of benefits during the development and regulatory review process and ten years of market exclusivity in all EU member states upon approval. Similar to in the U.S., a similar medicinal product with the same orphan indication may be approved, notwithstanding orphan product exclusivity, if the exclusivity holder gives consent or if the manufacturer of the original orphan medicinal product is unable to supply sufficient quantities. Marketing authorization may also be granted to a similar medicinal product with the same orphan indication if the similar product is deemed safer, more effective or otherwise clinically superior to the original orphan medicinal product. The period of market exclusivity may, in addition, be reduced to six years if it can be demonstrated on the basis of available evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of market exclusivity. Defibrotide has been granted orphan drug designation by the EC and the Korean Ministry of Food and Drug Safety to treat and prevent VOD, by the Commonwealth of Australia-Department of Health for the treatment of VOD and by the EC for the prevention of aGvHD. Vyxeos has been granted orphan drug designation by the EC until August 2028. JAZZ PHARMACEUTICALS | 2018 Annual Report 21 Pharmaceutical Pricing, Reimbursement by Government and Private Payors and Patient Access Pricing and Reimbursement Successful commercialization of our products depends in significant part on adequate financial coverage and reimbursement from third party payors, including governmental payors (such as the Medicaid and Medicare programs in the U.S.), managed care organizations and private health insurers. Third party payors decide which drugs will be reimbursed and establish reimbursement and co-pay levels and conditions for reimbursement. Third party payors are increasingly challenging the prices charged for medical products and services by examining their cost effectiveness, as demonstrated in pharmacoeconomic and/or clinical studies, in addition to their safety and efficacy. In some cases, for example, third party payors try to encourage the use of less expensive products, when available, through their prescription benefits coverage and reimbursement, co-pay and prior authorization policies. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third party payors may require prior approval before covering a specific product, or may require patients and health care providers to try other covered products first. Third party payors may also limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a particular indication. In many instances, third party payors now require rebates with some drug manufacturers in exchange for including a specific product on their formularies. In the past, we have not entered into such arrangements with third party payors for any of our products. The increasing pressure of the pharmaceutical coverage environment may lead us to do so in the future. Medicaid is a joint federal and state program that is administered by the states for low-income and disabled beneficiaries. Medicare is a federal program that is administered by the federal government covering individuals age 65 and over as well as those with certain disabilities. Medicare Part B pays physicians who administer our products. Under the Medicaid Drug Rebate program, as a condition of having federal funds being made available to the states for our drugs under Medicare Part B, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program. Medicaid rebates are based on pricing data we report on a monthly and quarterly basis to the U.S. Centers for Medicare & Medicaid Services, or CMS, the federal agency that administers the Medicaid Drug Rebate program, several state Medicaid supplemental rebate programs and other governmental pricing programs. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug which, in general, represents the lowest price available from the manufacturer to any entity in the U.S. in any pricing structure, calculated to include all applicable sales and associated rebates, discounts and other price concessions. For the federal government to determine Medicare Part B payments to physicians, we are required to provide average sales price, or ASP, information for certain of our products to the CMS on a quarterly basis. The average sales price is calculated based on a statutorily defined formula as well as regulations and interpretations of the statute by CMS. This information is used to compute Medicare payment rates, with rates for Medicare Part B drugs outside the hospital outpatient setting and in the hospital outpatient setting consisting of ASP plus a specified percentage. If we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for up to three years after those data originally were due. Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service’s 340B program, or the 340B program, in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B program, which is administered by the Health Resources and Services Administration, or HRSA, requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered drugs used in an outpatient setting. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program, and in general, products subject to Medicaid price reporting and rebate liability are also subject to the 340B ceiling price calculation and discount requirement. A new regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities became effective on January 1, 2019. HRSA also has announced that it will begin to implement a ceiling price reporting requirement related to the 340B program during the first quarter of 2019. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting. In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, we also participate in the U.S. Department of Veterans Affairs, or VA, Federal Supply Schedule, or FSS, pricing program. Under this program, we are obligated to make our products available for procurement on an FSS contract under which we must comply with standard government terms and conditions and charge a price to certain federal agencies that is no higher than the statutory Federal Ceiling Price, or FCP. The FCP is based on the non-federal average manufacturer price, or Non-FAMP, which we calculate and report to the VA on a quarterly and annual basis. We also participate in the Tricare Retail Pharmacy 22 JAZZ PHARMACEUTICALS | 2018 Annual Report program, under which we pay quarterly rebates on utilization of innovator products that are dispensed through the Tricare Retail Pharmacy network to Tricare beneficiaries. The rebates are calculated as the difference between the annual Non-FAMP and FCP. Pricing and rebate calculations vary across products and programs, are complex, and are often subject to interpretation by us, governmental or regulatory agencies and the courts. In addition, in the U.S., 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. There are numerous ongoing efforts at the federal and state level seeking to indirectly or directly regulate drug prices to reduce overall healthcare costs using tools such as price ceilings, value-based pricing and increased transparency and disclosure obligations. The House Oversight Committee of the 116th Congress has announced an investigation into the actions of a number of pharmaceutical companies in raising prescription drug prices in the U.S. Several states have passed or are considering legislation that requires companies to report proprietary pricing information. For example, in 2017, California adopted a prescription drug price transparency state bill requiring advance notice and an explanation for price increases of certain drugs that exceed a specified threshold. Similar bills have been previously introduced at the federal level and additional legislation could be introduced this year. Similar to what is occurring in the U.S., political, economic and regulatory developments outside of the U.S. are also subjecting the healthcare industry to fundamental changes and challenges. Pressure by governments and other stakeholders on prices and reimbursement levels continue to exist. In various EU member states we expect to be subject to continuous cost-cutting measures, such as lower maximum prices, lower or lack of reimbursement coverage and incentives to use cheaper, usually generic, products as an alternative. Health technology assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some EU member states, including countries representing major markets. The HTA process, which is governed by the national laws of these countries, is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted. HTA generally compares attributes of individual medicinal products, as compared with other treatment options available on the market. The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursement status granted to these medicinal products by the competent authorities of individual EU member states. On January 31, 2018, the EC adopted a proposal for an HTA regulation intended to boost cooperation among EU member states in assessing health technologies, including new medicinal products. The proposal provides that EU member states will be able to use common HTA tools, methodologies, and procedures across the EU. Individual EU member states will continue to be responsible for assessing non-clinical (e.g., economic, social and ethical) aspects of health technologies, and making decisions on pricing and reimbursement. K - 0 1 m r o F In the EU, our products are marketed through various channels and within different legal frameworks. The making available or placing on the EU market of unauthorized medicinal products is generally prohibited. However, the competent authorities of the EU member states may exceptionally and temporarily allow and reimburse the supply of such unauthorized products, either on a named patient basis or through a compassionate use process, to individual patients or a group of patients with a chronically or seriously debilitating disease or whose disease is considered to be life-threatening, and who cannot be treated satisfactorily by an authorized medicinal product. Such reimbursement may no longer be available if authorization for named patient or compassionate use programs expire or are terminated or if marketing authorization is granted for the product. In other EU member states, authorization and reimbursement policies may also delay commercialization of our products, or may adversely affect our ability to sell our products on a profitable basis. After initial price and reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiple factors, including reference pricing systems and publication of discounts by third party payors or authorities in other countries. In the EU, prices can be reduced further by parallel distribution and parallel trade, or arbitrage between low-priced and high-priced EU member states. For more information, see the risk factors under the headings “Adequate coverage and reimbursement from third party payors may not be available for our products, which could diminish our sales or affect our ability to sell our products profitably,” “The pricing of pharmaceutical products has come under increasing scrutiny as part of a global trend toward healthcare cost containment and resulting changes in healthcare law and policy may impact our business in ways that we cannot currently predict, which could have a material adverse effect on our business and financial condition” and “If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines” in Part I, Item 1A of this Annual Report on Form 10-K. Patient Assistance Programs We have various programs to help patients access our products, including patient assistance programs, which include co-pay coupons for certain of our products, services that help patients determine their insurance coverage for our products, and a free product program. We also make grants to independent charitable foundations that help financially needy patients with their premium, co-pay and JAZZ PHARMACEUTICALS | 2018 Annual Report 23 co-insurance obligations. There has been enhanced scrutiny of company-sponsored patient assistance programs, including insurance premium and co-pay assistance programs and donations to third-party charities that provide such assistance, as well as reimbursement support offerings. The OIG has established guidelines that permit pharmaceutical manufacturers to make donations to charitable organizations providing 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. In 2016 and 2017, we received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of charitable organizations that provide financial assistance to Medicare patients. In April 2018, we reached an agreement in principle with the DOJ on a proposal for a civil settlement of potential claims by the DOJ in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies, which we expect will include entry into a corporate integrity agreement with the OIG. For more information, see Note 12, Commitments and Contingencies—Legal Proceedings of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. U.S. Healthcare Reform The Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010, which we refer to together as the Healthcare Reform Act, was intended to expand healthcare coverage within the U.S., primarily through the imposition of health insurance mandates on employers and individuals, the provision of subsidies to eligible individuals enrolled in plans offered on the health insurance exchanges, and the expansion of the Medicaid program. This law has substantially changed the way healthcare is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry. Changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, benefits for patients within a coverage gap in the Medicare Part D prescription drug program (commonly known as the “donut hole”), rules regarding prescription drug benefits under the health insurance exchanges, changes to the Medicaid Drug Rebate program, expansion of the 340B program, fraud and abuse and enforcement. These changes have impacted previously existing government healthcare programs and have resulted in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program. Since the November 2016 U.S. election, President Trump and the U.S. Congress have made numerous efforts to repeal or amend the Healthcare Reform Act. Such “repeal and replace” efforts have failed to date. However, additional legislative changes to or regulatory changes under the Healthcare Reform Act remain possible. In this regard, the U.S. Tax Cuts and Jobs Act of 2017, signed into law in December 2017, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, commonly referred to as the “individual mandate,” imposed by the Healthcare Reform Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year. The nature and extent of any additional legislative or regulatory changes to the Healthcare Reform Act are uncertain at this time. Employees As of February 19, 2019, we had approximately 1,360 employees worldwide. We consider our employee relations to be good. Environment, Health and Safety Our operations are subject to complex and increasingly stringent environmental, health and safety laws and regulations in the countries where we operate and, in particular, in Italy and Ireland where we have manufacturing facilities. Our manufacturing activities involve the controlled storage, use and disposal of chemicals and solvents. Environmental and health and safety authorities in Italy and Ireland administer laws governing, among other matters, the emission of pollutants into the air (including the workplace), the discharge of pollutants into bodies of water, the storage, use, handling and disposal of hazardous substances, the exposure of persons to hazardous substances, and the general health, safety and welfare of employees and members of the public. In certain cases, such laws, directives and regulations may impose strict liability for pollution of the environment and contamination resulting from spills, disposals or other releases of hazardous substances or waste. Costs, damages and/or fines may result from the presence, investigation and remediation of such contamination at properties currently or formerly owned, leased or operated by us or at off-site locations, including where we have arranged for the disposal of hazardous substances or waste. In addition, we may be subject to third party claims, including for natural resource damages, personal injury and property damage, in connection with such contamination. 24 JAZZ PHARMACEUTICALS | 2018 Annual Report About Jazz Pharmaceuticals plc Jazz Pharmaceuticals plc was formed under the laws of Ireland (registered number 399192) as a private limited liability company in March 2005 under the name Azur Pharma Limited and was subsequently re-registered as a public limited company under the name Azur Pharma Public Limited Company, or Azur Pharma, in October 2011. On January 18, 2012, the businesses of Jazz Pharmaceuticals, Inc. and Azur Pharma were combined in a merger transaction, in connection with which Azur Pharma was re-named Jazz Pharmaceuticals plc and we became the parent company of and successor to Jazz Pharmaceuticals, Inc. Our predecessor, Jazz Pharmaceuticals, Inc., was incorporated in California in March 2003 and was reincorporated in Delaware in January 2004. Available Information The mailing address of our headquarters is Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland, and our telephone number at that location is 353-1-634-7800. Our website is www.jazzpharmaceuticals.com. We file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as applicable, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports, proxy statements and other information electronically with the SEC. Through a link on our website, we make copies of our periodic and current reports, amendments to those reports, proxy statements and other information available, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information found on, or accessible through, our website is not a part of, and is not incorporated into, this Annual Report on Form 10-K. K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 25 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 impair our business operations. Our business could be harmed by any of these risks. The trading price of our ordinary shares could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and accompanying notes. Risks Related to Xyrem and Our Other Marketed Products 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. Xyrem® (sodium oxybate) oral solution is the only product approved by the U.S. Food and Drug Administration, or FDA, and marketed in the U.S. for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in adult and pediatric patients with narcolepsy. Xyrem is our largest selling product, and our financial results are significantly influenced by sales of Xyrem, which accounted for 75% and 74% of our net product sales for the years ended December 31, 2018 and 2017, respectively. Our future plans assume that sales of Xyrem will increase, but there is no guarantee that we can maintain sales of Xyrem at or near current levels, or that Xyrem sales will continue to grow. We have periodically increased the price of Xyrem, most recently in January 2019, and there is no guarantee that price adjustments we have taken or may take in the future will not negatively affect Xyrem sales volumes and revenues from Xyrem. Our ability to maintain or increase Xyrem product sales is subject to a number of risks and uncertainties. The most important of these risks and uncertainties, any of which could have a material adverse effect on our sales of and revenue from Xyrem, are discussed in more detail in this Part I, Item 1A and include those related to: • • • • • • • • • • the introduction of new products in the U.S. market that compete with, or otherwise disrupt the market for, Xyrem in the treatment of cataplexy and/or EDS in narcolepsy; the introduction of a generic version of Xyrem in the U.S. market before the entry dates specified in our settlements with the abbreviated new drug application, or ANDA, filers or on terms that are different from those contemplated by the settlement agreements; increased pricing pressure from, changes in policies by, or restrictions on reimbursement imposed by, third party payors, including pressure to agree to discounts, rebates or other restrictive pricing terms for Xyrem; changes in healthcare laws and policy, including changes in requirements for patient assistance programs, rebates, reimbursement and coverage by federal healthcare programs, and changes resulting from increased scrutiny on pharmaceutical pricing and risk evaluation and mitigation strategy, or REMS, programs by government entities; changes to or uncertainties around our Xyrem REMS, or any failure to comply with our REMS obligations to the satisfaction of the FDA; challenges to our intellectual property around Xyrem, including the possibility of new ANDA or new drug application, or NDA, filers or new post-grant patent review proceedings; operational disruptions at the Xyrem central pharmacy; any supply or manufacturing problems, including any problems with our sole source Xyrem active pharmaceutical ingredient, or API, provider; continued acceptance of Xyrem by physicians and patients, including as a result of negative publicity that surfaces from time to time; and changes to our label, including new safety warnings or changes to our boxed warning, that further restrict how we market and sell Xyrem. If sales of Xyrem were to decline significantly, we might need to reduce our operating expenses or seek to raise additional funds, which would have a material adverse effect on our business, financial condition, results of operations and growth prospects, including on our ability to acquire, in-license or develop new products in the future to grow our business. 26 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F The introduction of a new product in the U.S. market that competes with, or otherwise disrupts the market for, Xyrem would adversely affect sales of Xyrem. While Xyrem is currently the only product approved by the FDA and marketed in the U.S. for the treatment of both cataplexy and EDS in patients with narcolepsy, we and others may launch products as treatment options in cataplexy and/or EDS in narcolepsy, including other branded sodium oxybate products and other new and existing branded market entrants. In addition, Xyrem will face competition from generics and authorized generics. We expect that the approval and launch of any other sodium oxybate or alternative product that treats narcolepsy, or the launch of an authorized generic product, or AG Product, or other generic version of Xyrem, could have a material adverse effect on our sales of and revenues from Xyrem and on our business, financial condition, results of operations and growth prospects. With respect to generic and authorized generic competition, nine companies sent us notices that they filed ANDAs with the FDA seeking approval to market a generic version of Xyrem, and we filed patent lawsuits against each of them, asserting that such generic products would violate our patents covering Xyrem. As of October 2018, we have settled patent litigation with all nine companies. In our settlement with the first filer, West-Ward Pharmaceuticals Corp. (a wholly owned subsidiary of Hikma Pharmaceuticals PLC), or West- Ward, we granted West-Ward the right to sell an AG Product in the U.S. beginning on January 1, 2023, or earlier under certain circumstances. These include circumstances related to the licensing or market entry of another generic sodium oxybate product, a final decision that all unexpired claims of the Xyrem patents are invalid and/or unenforceable, or a substantial reduction in Xyrem net sales over specified periods of time. West-Ward has a right to elect to continue to sell the West-Ward AG Product for a total of up to five years. We also granted West-Ward a license to launch its own generic sodium oxybate product as early as six months after it has the right to sell the West-Ward AG Product, but if it elects to begin selling its own generic product, it cannot continue to sell the West-Ward AG Product. In our settlements with Amneal Pharmaceuticals LLC, or Amneal, Lupin Inc., or Lupin, and Par Pharmaceutical, Inc., or Par, we granted each party the right to sell a limited volume of an AG Product in the U.S. beginning on July 1, 2023, or earlier under certain circumstances, including events related to the acceleration of West-Ward’s AG Product launch date, the earlier launch of another party’s AG Product, the launch of another generic sodium oxybate product or a final decision that all unexpired claims of the Xyrem patents are invalid and/or unenforceable. We also granted each of Amneal, Lupin and Par a license to launch its own generic sodium oxybate product under its ANDA on or after December 31, 2025, or earlier under certain circumstances, including events related to the launch of another generic sodium oxybate product or a final decision that all unexpired claims of the Xyrem patents are not infringed, or are invalid and/or unenforceable. If an acceleration event occurs, then each of Amneal, Par and Lupin will have the option to elect to market its AG Product until December 31, 2025, but will not be entitled to market its AG Product and its own generic sodium oxybate product simultaneously. Under the terms of our settlement agreements, we are entitled to receive royalty and other revenue based on sales of AG Products. In our settlements with each of the other five ANDA filers, we granted each a license to launch its own generic sodium oxybate product under its ANDA on or after December 31, 2025, or earlier under certain circumstances, including the launch of another generic sodium oxybate product. In order to launch a generic sodium oxybate product, an ANDA filer must obtain and maintain FDA approval of its ANDA. In January 2017, the FDA approved West-Ward’s ANDA and tentatively approved two additional ANDAs for generic sodium oxybate products, and we believe that it is likely that the FDA will approve or tentatively approve the additional ANDAs that have been filed. Any ANDA holder launching an AG Product or another generic sodium oxybate product will establish the price of the AG Product and/ or its own generic sodium oxybate product. Generic competition often results in decreases in the prices at which branded products can be sold. After any introduction of a generic product, whether or not it is an AG Product, a significant percentage of the prescriptions written for Xyrem may be filled with the generic product. Certain U.S. state laws allow for, and in some instances in the absence of specific instructions from the prescribing physician mandate, the dispensing of generic products rather than branded products when a generic version is available. This would result in reduction in sales of, and revenue from, Xyrem, although we would continue to receive royalty and other revenue based on sales of an AG Product in accordance with the terms of our settlement agreements. For more information on the impact of generic competition, see the risk factors under the heading “Adequate coverage and reimbursement from third party payors may not be available for our products, which could diminish our sales or affect our ability to sell our products profitably” and “The pricing of pharmaceutical products has come under increasing scrutiny as part of a global trend toward healthcare cost containment and resulting changes in healthcare law and policy may impact our business in ways that we cannot currently predict, which could have a material adverse effect on our business and financial condition” in this Part I, Item 1A. It is possible that additional companies may file ANDAs seeking to market a generic version of Xyrem which could lead to additional patent litigation or challenges with respect to Xyrem. Such patent litigation or challenges could potentially trigger acceleration of the launch dates in our settlement agreements. For example, the launch dates in our settlement agreements would be accelerated if a new ANDA filer were to obtain a final decision prior to January 1, 2023 that all unexpired claims of the Xyrem patents are invalid and/or unenforceable. Alternatively, the launch dates in our settlement agreements could be accelerated if a new ANDA filer were to obtain FDA approval for its JAZZ PHARMACEUTICALS | 2018 Annual Report 27 sodium oxybate product, and launch its generic product through a generic sodium oxybate REMS before the entry dates specified in our settlement agreements, if, for example, we are unable to obtain an injunction or because that party launches “at risk” of being held liable for damages for patent infringement. It is also possible that we could enter into a settlement agreement with a future ANDA filer that would permit such filer to enter the market on or prior to the launch date(s) in our settlement agreements. If a company launches a generic or authorized generic sodium oxybate product in any of these scenarios, except in limited circumstances related to an “at risk” launch, the launch date for West-Ward’s AG Product would be accelerated to a date on or prior to the date of such entry, which could lead to acceleration of the other settling ANDA filers’ AG Product and generic sodium oxybate product launch dates as described above. For further discussion of Xyrem-related patent matters, see the risk factors under the heading “Risks Related to Our Intellectual Property” in this Part 1, Item 1A. Another circumstance that could trigger acceleration of West-Ward’s launch date for an AG Product, which would also accelerate Amneal, Lupin and Par’s launch dates for their AG Products and ultimately could lead to acceleration of the other settling ANDA filers’ launch dates for their generic sodium oxybate products, is a substantial reduction in Xyrem net sales. Such a reduction could occur under various circumstances, including if we introduce, or a third party introduces, a product to treat EDS or cataplexy in narcolepsy that leads to a substantial decline in Xyrem net sales prior to January 1, 2023. For example, we are developing JZP-258, an oxybate product candidate that contains 90% less sodium than Xyrem. Given the well-accepted relationship between dietary sodium and blood pressure as well as published hypertension guidelines underscoring that excessive consumption of sodium is independently associated with an increased risk of stroke, cardiovascular disease and other adverse outcomes, we believe that lower sodium intake would be beneficial for patients. JZP-258 is being developed for the treatment of both cataplexy and EDS in narcolepsy as well as for other conditions, and, subject to the results of our Phase 3 clinical trial in narcolepsy, we expect to file an NDA for approval of this product by as early as the end of 2019. Other companies may similarly develop a sodium oxybate product for treatment of narcolepsy, using an alternative formulation or a different delivery technology, and seek approval in the U.S. using an NDA approval pathway under Section 505(b)(2) and referencing the safety and efficacy data for Xyrem, which could lead to additional patent litigation or challenges. We are aware that a company called Avadel Pharmaceuticals plc, or Avadel, is conducting a Phase 3 clinical trial of a once-nightly formula of sodium oxybate which uses its proprietary technology for the treatment of EDS and cataplexy in patients with narcolepsy, and has indicated that it intends to seek approval using the Section 505(b)(2) approval pathway. Approval and successful commercialization of JZP-258, or Avadel’s sodium oxybate formulation, or any other new non-generic sodium oxybate or other product for treatment of narcolepsy patients could negatively impact our ability to maintain and grow sales of Xyrem. Although, as noted above, Xyrem is currently the only product approved by the FDA and marketed in the U.S. for the treatment of cataplexy associated with narcolepsy, we are aware that prescribers often prescribe branded or generic medications for cataplexy before prescribing or instead of prescribing Xyrem, and that payors often require patients to try such medications before they will cover Xyrem, even if they are not labeled for this use. For example, prescribers often treat mild cataplexy with drugs that have not been approved by the FDA for this indication, including tricyclic antidepressants and selective serotonin reuptake inhibitors or selective norepinephrine reuptake inhibitors. These drugs have known side effects, including for example, somnolence or insomnia, that can be problematic for patients with narcolepsy. We are also aware that branded or generic stimulants may be prescribed off label for treatment of EDS in narcolepsy. Wake- promoting agents Provigil® (modafinil) and Nuvigil® (armodafinil), and their generic equivalents are labeled for treatment of EDS in narcolepsy and other conditions, and may be used in conjunction with or instead of Xyrem. Prescribers often prescribe these medications before prescribing or instead of prescribing Xyrem, and payors often require patients to try such medications before they will cover Xyrem. It is possible that additional branded or generic products may be introduced to treat symptoms of narcolepsy that will also be prescribed before or instead of Xyrem, or that payors will require patients to try before they will cover Xyrem. For example, Harmony Biosciences LLC, or Harmony, has exclusive U.S. rights to seek approval of and commercialize pitolisant, a drug that has already been approved in Europe to treat adult patients with narcolepsy with or without cataplexy. Published data and prescribing patterns in the EU suggest that pitolisant would likely be appropriately used in patients with less severe cataplexy than those treated with Xyrem. While pitolisant is not currently approved in the U.S., Harmony has established an expanded access program for pitolisant, received Breakthrough Therapy and Fast Track designations from the FDA and, in February 2019, announced that the FDA had accepted for filing with priority review its pitolisant NDA. Non-oxybate products intended for the treatment of EDS or cataplexy in narcolepsy, even if not directly competitive with Xyrem, could have the effect of changing treatment regimens and payor coverage of Xyrem, which could materially and adversely affect sales of Xyrem. The distribution and sale of Xyrem are subject to significant regulatory restrictions, including the requirements of a REMS, and these regulatory requirements subject us to risks and uncertainties, any of which could negatively impact sales of Xyrem. The active ingredient of Xyrem, sodium oxybate, is the sodium salt of gamma-hydroxybutyric acid, or GHB, a central nervous system depressant known to be associated with facilitated sexual assault as well as with respiratory depression and other serious side effects. As 28 JAZZ PHARMACEUTICALS | 2018 Annual Report a result, the FDA requires that we maintain a REMS with elements to assure safe use, or ETASU, for Xyrem to help ensure that the benefits of the drug in the treatment of cataplexy and EDS in narcolepsy outweigh the serious risks of the drug. The REMS imposes extensive controls and restrictions on the sales and marketing of Xyrem that we are responsible for implementing. For example, under the Xyrem REMS, all of the Xyrem sold in the U.S. must be dispensed and shipped directly to patients or caregivers through a central pharmacy, and may not be stocked in retail pharmacies. Physicians and patients must complete an enrollment process prior to fulfillment of Xyrem prescriptions, and each physician and patient must receive materials concerning the serious risks associated with Xyrem before the physician can prescribe, or a patient can receive, the product. The central certified pharmacy must monitor and report instances of patient or prescriber behavior giving rise to a reasonable suspicion of abuse, misuse or diversion of Xyrem, and maintains enrollment and prescription monitoring information in a central database. Any failure to comply with our REMS obligations, or a determination by the FDA that the Xyrem REMS is not meeting its goals, 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 require us to invest a significant amount of resources, any of which could materially and adversely affect our business, financial condition, results of operations and growth prospects. While we believe that the Xyrem REMS has met its goal of mitigating the risks of serious adverse outcomes resulting from inappropriate prescribing, misuse, abuse and diversion of Xyrem, we cannot guarantee that the FDA will agree or that the Xyrem REMS will continue to do so in the future. We are required to prepare and submit regular assessments of the Xyrem REMS, and the FDA has stated that it will evaluate the 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, including in connection with the submission of applications for new oxybate products, new oxybate indications, or the introduction of authorized generics, or whether the FDA will approve modifications to the Xyrem REMS that we consider warranted in connection with the submission of applications for new oxybate products. Any modifications approved, required or rejected by the FDA could change the safety profile of Xyrem, and have a significant negative impact in terms of product liability, public acceptance of Xyrem as a treatment for cataplexy and EDS in narcolepsy, and prescribers’ willingness to prescribe, and patients’ willingness to take, Xyrem, any of which could have a material adverse effect on our Xyrem business. Modifications approved, required or rejected by the FDA could also make it more difficult or expensive for us to distribute Xyrem, make distribution easier for sodium oxybate competitors, disrupt continuity of care for Xyrem patients and/or negatively affect sales of Xyrem. K - 0 1 m r o F In October 2018, the FDA approved a modification to the Xyrem REMS in connection with our submission of our pediatric supplemental NDA to include information for pediatric patients and their caregivers. We are in the process of implementing the October 2018 modification to the Xyrem REMS. We have also submitted and expect to continue to submit ongoing assessments as required by the FDA. However, we cannot guarantee that our implementation and ongoing assessments will be completed on our expected timing or 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. We depend on outside vendors, including the central certified pharmacy, to implement the requirements of the Xyrem REMS. We have an exclusive agreement with Express Scripts Specialty Distribution Services, Inc., the central pharmacy for Xyrem, which expires on July 1, 2019, but we expect to exercise our right to extend the agreement for an additional year. The agreement may be terminated by either party at any time without cause on 180 days’ prior written notice to the other party. If the central pharmacy fails to meet the requirements of the Xyrem REMS applicable to the central pharmacy or otherwise does not fulfill its contractual obligations to us, provides timely notice that it wants to terminate our agreement, refuses or fails to adequately serve patients, or fails to promptly and adequately address operational challenges or challenges in implementing REMS modifications, the fulfillment of Xyrem prescriptions and our sales would be adversely affected. If we change to a new central pharmacy, new contracts might be required with government payors and other insurers who pay for Xyrem, and the terms of any new contracts could be less favorable to us than current agreements. In addition, any new central pharmacy would need to be registered with the U.S. Drug Enforcement Administration, or DEA, and certified and would also need to implement the particular processes, procedures and activities necessary to distribute Xyrem under the Xyrem REMS. Transitioning to a new pharmacy could result in product shortages, which would 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. A generic version of a drug subject to a REMS with ETASU is required to have the same REMS as the brand drug, and generics and brands are mandated to use a single shared system REMS. However, the FDA may waive this requirement for a single shared system and approve an ANDA with a separate REMS with differing but comparable aspects of ETASU under certain circumstances. In its approval of West-Ward’s ANDA, the FDA waived the shared REMS requirement, approving West-Ward’s ANDA with a 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. In connection with the waiver, FDA issued a statement that it considers the generic sodium oxybate REMS to have the same ETASU as the JAZZ PHARMACEUTICALS | 2018 Annual Report 29 Xyrem REMS and operationalizes those elements in a comparable manner to achieve the same level of safety as the Xyrem REMS. However, the generic sodium oxybate REMS, unlike the Xyrem REMS, permits multiple certified pharmacies and multiple databases that are connected via an electronic “switch” system. The generic sodium oxybate REMS also requires the certified pharmacies in its system to contact the Xyrem REMS program to verify that the patient has no other active prescriptions for Xyrem that overlap with the generic prescription to be filled and to identify any patient and prescriber disenrollments from the Xyrem system for suspected abuse, misuse and diversion. We were not involved in development of the generic sodium oxybate REMS and were not consulted regarding any features of this REMS. A sodium oxybate distribution system that is less restrictive than the Xyrem REMS, such as the generic sodium oxybate REMS, which provides that generic sodium oxybate products and potentially sodium oxybate products approved under a Section 505(b)(2) NDA approval pathway could be distributed through multiple pharmacies, could increase the risks associated with sodium oxybate distribution. Because patients, consumers and others may not differentiate generic sodium oxybate from Xyrem or differentiate between the different REMS programs, any negative outcomes, including risks to the public, caused by or otherwise related to a separate sodium oxybate REMS, could have a significant negative impact in terms of product liability, our reputation and good will, public acceptance of Xyrem as a treatment for cataplexy and EDS in narcolepsy, and prescribers’ willingness to prescribe, and patients’ willingness to take, Xyrem, any of which could have a material adverse effect on our Xyrem business. We may face pressure to further modify the Xyrem REMS or to license or share intellectual property pertinent to the Xyrem REMS, including proprietary data required for the safe distribution of sodium oxybate, in connection with the FDA’s approval of the generic sodium oxybate REMS or otherwise. Our settlement agreements with ANDA filers do not directly impact the FDA’s waiver of the single shared system REMS requirement, any other ANDA filer’s ability to develop and implement the generic sodium oxybate REMS for its generic sodium oxybate product or our ability to take any action with respect to 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 FDA’s waiver of the single shared system REMS requirement, its approval and tentative approval of generic versions of Xyrem or the consequences of distribution of sodium oxybate through the generic sodium oxybate REMS approved by the FDA or another separate REMS. REMS programs have increasingly drawn public scrutiny from the U.S. Congress, the Federal Trade Commission, or FTC, and the FDA, with allegations that such programs are used as a means of improperly blocking or delaying competition. The U.S. Congress, for example, has introduced proposed legislation aimed at preventing companies from using REMS and other restricted distribution programs as a means to deny potential competitors access to product samples needed for bioequivalence testing. The FDA has stated that it will seek to coordinate with the FTC in identifying and publicizing practices the FTC finds to be anticompetitive and has further stated that the FDA has concerns related to the role of REMS programs in delaying approval of generic products. For example, in May 2018, FDA published a list of companies that it said had potentially been blocking access to the samples of their branded products, including one of our subsidiaries that sells FazaClo® (clozapine, USP) through a REMS program. It is possible that the FTC, the FDA, other governmental authorities or other third parties could claim that, or launch an investigation into whether, we are using our REMS programs in an anticompetitive manner or have engaged in other anticompetitive practices. The Federal Food, Drug and Cosmetic Act further states that a REMS ETASU shall not be used by an NDA holder to block or delay generic drugs or drugs covered by an application under Section 505(b)(2) from entering the market. In its 2015 letter approving the Xyrem REMS, the FDA expressed concern that we were aware that the Xyrem REMS could have the effect of blocking or delaying generic competition. We cannot predict whether we would face a government investigation or a complaint by a third party premised on a claim that the Xyrem REMS is blocking competition, or the outcome or impact of any such claim. Pharmaceutical companies, including their agents and employees, are required to monitor adverse events occurring during the use of their products and report them to the FDA. The patient counseling and monitoring requirements of the Xyrem REMS provide more extensive information about adverse events, including deaths, than is generally available for other products that are not subject to similar REMS requirements. As required by the FDA and other regulatory agencies, the adverse event information that we collect for Xyrem is regularly reported to the FDA and could result in the FDA requiring changes to Xyrem labeling, including additional warnings or additional boxed warnings, or requiring us to take other actions that could have an adverse effect on patient and prescriber acceptance of Xyrem. As required by the FDA, Xyrem’s current labeling includes a boxed warning regarding the risk of central nervous system depression and misuse and abuse. Any failure to demonstrate our substantial compliance with the REMS or any other applicable regulatory requirements to the satisfaction of the FDA or another regulatory authority could result in such regulatory authorities taking actions in the future which could have a material adverse effect on Xyrem sales and therefore on our business, financial condition, results of operations and growth prospects. For more information, see the risk factor under the heading “In addition to those specifically described in other risk factors, 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 this Part I, Item 1A. 30 JAZZ PHARMACEUTICALS | 2018 Annual Report While Xyrem remains our largest product, our success also depends on our ability to effectively commercialize our other products. In addition to Xyrem, we are commercializing a portfolio of products, including our other lead marketed products, Erwinaze, Defitelio and Vyxeos, and we are making significant investments in maximizing the value and therapeutic reach of Defitelio and Vyxeos by conducting additional research and development activities, which include generating additional supportive clinical data and seeking regulatory approval for new indications, as appropriate. Our inability to effectively commercialize our lead marketed products and to maximize their potential where possible through successful research and development activities could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Erwinaze Erwinaze® (asparaginase Erwinia chrysanthemi) is 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. Erwinaze is licensed from, and manufactured by, a single source, Porton Biopharma Limited, or PBL, a company that is wholly owned by the UK Department of Health and Social Care. Our license and supply agreement with PBL, which includes our license for Erwinaze, expires on December 31, 2020. We and PBL had been engaged in discussions related to entry into a replacement agreement to extend the term of our commercial relationship with respect to Erwinaze past 2020, but we did not reach agreement. Unless we and PBL enter into a new agreement, we will lose our license to Erwinaze after December 31, 2020, other than our right to sell certain Erwinaze inventory for a post-termination sales period of 12 months. In such event, we may not be able to replace the product sales we would lose from Erwinaze, which in 2018 totaled $174.7 million, and our business, financial condition, results of operations and growth prospects would be materially adversely affected. In addition, we cannot predict whether uncertainty related to rights to, and availability of, Erwinaze after 2020 will impact sales of and revenues from this product. K - 0 1 m r o F A continuing and significant challenge to our ability to maintain sales of Erwinaze and a barrier to increasing sales is PBL’s inability to consistently supply product adequate to meet market demand. PBL’s product quality and manufacturing issues have resulted, and continue to result, in supply disruptions, and our need for PBL to minimize or avoid additional supply disruptions due to capacity constraints, production delays, quality or regulatory challenges and other manufacturing difficulties. In addition, we have incurred and continue to incur significant internal and external costs and expenses as a result of these issues, including due to managing the increased need for regulatory and customer interaction. See the discussion regarding Erwinaze supply issues in the risk factor under the heading “Delays or problems in the supply of our products for sale or our for use in clinical trials, loss of our single source suppliers or failure to comply with manufacturing regulations could materially and adversely affect our business, financial condition, results of operations and growth prospects” in this Part I, Item 1A. Our ability to maintain sales of Erwinaze is also subject to a number of additional challenges, including the following as well as other risks and uncertainties described elsewhere in this Part I, Item 1A: • • • • • • • • the limited population of patients with ALL, and the incidence of hypersensitivity reactions to E. coli-derived asparaginase within that population; the development of new asparaginase treatments or treatment protocols for ALL that may not include asparaginase-containing regimens and prescribers’ use of alternate methods to address hypersensitivity reactions; the failure to obtain regulatory approval from the FDA or UK Medicines and Healthcare Products Regulatory Agency, or MHRA, to release batches of Erwinaze requiring batch-specific approval due to quality and manufacturing issues; difficulties with obtaining and maintaining favorable pricing and reimbursement arrangements; potential competition from future biosimilar products; PBL’s ability to meet the manufacturing post-marketing commitments imposed by the FDA in connection with its approval of our biologics license application, or BLA; our failure to comply with obligations under our agreement with PBL resulting in PBL claiming an uncured material breach; and our need to apply for and receive marketing authorizations, through the European Union’s, or EU’s, mutual recognition procedure or otherwise, in certain additional countries if we decide to launch promotional efforts in those countries. If we fail to maintain revenue from sales of Erwinaze, our business, financial condition, results of operations and growth prospects could be materially adversely affected. JAZZ PHARMACEUTICALS | 2018 Annual Report 31 To expand our asparaginase franchise beyond Erwinaze, we are pursuing activities related to the development of improved asparaginase products for patients with ALL or other hematological malignancies. Several of our external research and development collaborations are focused on these efforts, including our agreement with Pfenex, Inc. which includes worldwide rights to develop and commercialize multiple early-stage hematology product candidates and an option to negotiate a license for a recombinant pegaspargase product candidate, and our agreement with XL-protein GmbH, or XLp, for rights to use XLp’s PASylation® technology to extend the plasma half-life of selected asparaginase product candidates. If these activities are unsuccessful, our growth prospects could be materially adversely affected. Defitelio Defitelio® (defibrotide sodium) is a product approved in the U.S. in 2016 for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome, with renal or pulmonary dysfunction following hematopoietic stem cell transplantation, or HSCT, and in Europe in 2013 (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children undergoing HSCT therapy. Our ability to maintain and successfully and sustainably grow sales of Defitelio is subject to a number of risks and uncertainties, including the following as well as other risks and uncertainties described elsewhere in this Part I, Item 1A: • • • • • • • • the continued acceptance of Defitelio in the U.S., the EU and other countries by hospital pharmacy and therapeutics committees and the continued availability of favorable pricing and adequate coverage and reimbursement by government programs and third party payors; the limited experience of, and need to educate, physicians in recognizing, diagnosing and treating VOD, particularly in adults; the possibility that physicians recognizing VOD symptoms may not initiate or may delay initiation of treatment while waiting for those symptoms to improve, or may terminate treatment before the end of the recommended dosing schedule; our ability to successfully maintain or grow sales of Defitelio in Europe and other non-U.S. countries, including our ability to obtain marketing approval in new countries; 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 and by the European Commission, or EC, in connection with its marketing authorization granted “under exceptional circumstances”; and our ability to maintain favorable pricing and reimbursement approvals across Europe, particularly in countries that represent significant markets. To expand the potential of Defitelio, our clinical development strategy generally focuses on the prevention and treatment of serious diseases associated with endothelial cell damage, including an ongoing Phase 3 clinical trial in prevention of VOD in high-risk patients following HSCT, ongoing Phase 2 trials in prevention of acute Graft versus Host Disease following allogeneic HSCT, and planned Phase 2 trials in the treatment of transplant-associated thrombotic microangiopathy and the prevention of chimeric antigen receptor T-cell therapy-, or CAR-T-, associated neurotoxicity. In addition to clinical trials we are sponsoring, there are more than 20 investigator-sponsored trials ongoing in the U.S. and EU to evaluate defibrotide in multiple conditions. If these development activities are unsuccessful, our growth prospects could be materially adversely affected. Because VOD is an ultra-rare disease, we have experienced inter-quarter variability in our Defitelio sales, which makes Defitelio sales difficult to predict from period to period. As a result, Defitelio sales results or trends in any period may not necessarily be indicative of future performance. If sales of Defitelio do not reach the levels we expect, our anticipated revenue from the product would be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Vyxeos Vyxeos® (daunorubicin and cytarabine) liposome for injection is a product approved in the U.S. in 2017 and in Europe in August 2018 (where it is marketed as Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion) for the treatment of adults with newly- diagnosed therapy-related acute myeloid leukemia, or t-AML, or acute myeloid leukemia, or AML, with myelodysplasia-related changes, or 32 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F AML-MRC. We made a significant investment in Vyxeos through the acquisition of Celator Pharmaceuticals, Inc. in 2017. Our ability to realize the anticipated benefits from our investment in Vyxeos by successfully and sustainably growing sales is subject to a number of risks and uncertainties, including the following as well as other risks and uncertainties described elsewhere in this Part I, Item 1A: • • • • • • • our ability to differentiate Vyxeos from other liposomal chemotherapies and generically available chemotherapy combinations with which physicians and treatment centers are more familiar; the acceptance of Vyxeos in the U.S., the EU and other countries by hospital pharmacy and therapeutics committees and the availability of favorable pricing and adequate coverage and reimbursement by government programs and third party payors; delays or problems in the supply or manufacture of the product, including the ability of the third parties upon which we rely to manufacture Vyxeos and its APIs to manufacture sufficient quantities in accordance with applicable specifications; the increasing complexity of the AML landscape requiring changes in patient identification and treatment selection, including diagnostic tests and monitoring that clinicians may find challenging to incorporate; the use of new and novel compounds in AML that are either used off-label or are only approved for use in combination with other agents and that have not been tested in combination with Vyxeos; the limited size of the population of high-risk AML patients who may potentially be indicated for treatment with Vyxeos, particularly given the ongoing clinical trials by other companies with the same patient population; and our ability to meet the post-marketing commitments and requirements imposed by the FDA in connection with its approval of our NDA and by the EC in connection with its marketing authorization. Our U.S. launch of Vyxeos is still at an early stage. The lack of prescriber usage data from U.S. commercialization of Vyxeos makes Vyxeos sales difficult to predict from period to period, and sales results or trends in any period may not necessarily be indicative of future performance. Following receipt of marketing authorization from the EC in late 2018, as part of our rolling launch of Vyxeos in the EU, we are in the process of making pricing and reimbursement submissions. If we experience delays or unforeseen difficulties in obtaining favorable pricing and reimbursement, planned launches in the affected EU member states would be delayed, which could negatively impact anticipated revenue. To expand the potential of Vyxeos, our clinical development strategy is designed to target potential new patient segments across the AML landscape, to pursue indications related to myelodysplastic syndrome and to generate clinical data on Vyxeos when used in combination with other therapeutic agents. We are pursuing this strategy by sponsoring clinical trials, working with cooperative groups who are conducting clinical trials and partnering with The University of Texas MD Anderson Cancer Center to evaluate potential treatment options for hematologic malignancies, with a near-term focus on Vyxeos. In addition, there are multiple investigator-sponsored trials ongoing. If these development activities are unsuccessful, our growth prospects could be materially adversely affected. If sales of Vyxeos do not reach the levels we expect, our anticipated revenue from the product will be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. For a discussion of the risks inherent in implementing our research and clinical development strategy with respect to Defitelio and Vyxeos, see the discussion in the risk factor under the heading “Conducting clinical trials is costly and time-consuming, and the outcomes are uncertain. A failure to prove that our product candidates are safe and effective in clinical trials, or to generate data in clinical trials to support expansion of the therapeutic uses for our existing products, could materially and adversely affect our business, financial condition, results of operations and growth prospects” in this Part I, Item 1A. We face substantial competition from other companies, including companies with larger sales organizations and more experience working with large and diverse product portfolios. Our products compete, and our product candidates may in the future compete, with currently existing therapies, product candidates currently under development by others and/or future product candidates, including new chemical entities that may turn out to be safer or more effective than our products. Any products that we develop may be commercialized in competitive markets, and our competitors, which include large global pharmaceutical companies and small research-based companies and institutions, may succeed in developing products that render our products obsolete or noncompetitive. We also face competition, and may in the future face additional competition, from manufacturers of generic drugs. Certain U.S. state laws allow for, and in some instances in the absence of specific instructions from the prescribing physician mandate, the dispensing of generic products rather than branded products when a generic version is available. Generic competition often results in decreases in the prices at which branded products can be sold. JAZZ PHARMACEUTICALS | 2018 Annual Report 33 The commercial potential of our current products and any future products may be reduced or eliminated if our competitors develop or acquire and commercialize generic or branded products that are safer or more effective, have fewer side effects, are easier to administer or are less expensive than our products. For a discussion of specific risks relating to the launch of new products that treat cataplexy and/or EDS in narcolepsy, including generic versions of Xyrem or other sodium oxybate products, see the risk factor under the heading “The introduction of a new product in the U.S. market that competes with, or otherwise disrupts the market for, Xyrem would adversely affect sales of Xyrem” in this Part I, Item 1A. We expect that the approval and launch of any other sodium oxybate or alternative product that treats narcolepsy, or the launch of an AG Product or other generic version of Xyrem, could have a material adverse effect on our sales of and revenues from Xyrem and on our business, financial condition, results of operations and growth prospects. While there is currently no direct competition to Erwinaze to treat ALL patients with hypersensitivity to E. coli-derived asparaginase, other companies have developed or are developing new treatments for ALL. Some new asparaginase treatments could reduce the rate of hypersensitivity in patients with ALL, and new treatment protocols are being developed for ALL that may not include asparaginase- containing regimens, including some for the treatment of relapsed or refractory ALL patients. We have experienced frequent intermittent shortages of the product that have impacted prescribing habits for Erwinaze, including prescribers’ use of alternate methods to address hypersensitivity reactions. The development of these new treatments could negatively impact our ability to maintain, and potentially in the future grow, sales of Erwinaze in patient populations where the benefit of an asparaginase-containing regimen is not well established. As a biologic product, Erwinaze also faces potential competition from biosimilar products. While there is currently no direct competition to Defitelio to treat severe VOD, changes in the types of conditioning regimens used as part of HSCT may affect the incidence rate of VOD and demand for Defitelio. With respect to Vyxeos, there are a number of alternative established therapies in AML. A key consideration in the treatment of AML patients is the patient’s suitability for chemotherapy. The AML patient population studied in the Vyxeos Phase 3 clinical trial supporting our NDA included fit patients, or those deemed able to tolerate intensive induction chemotherapy. The existing options for the treatment of newly-diagnosed t-AML and AML-MRC in fit patients include cytarabine in combination with an anthracycline (i.e., daunorubicin), known as 7+3. In addition, we are aware of several other products that have been recently approved by the FDA or are in development as treatment options for newly diagnosed AML patients eligible for intensive chemotherapy, such as targeted agents (e.g. midostaurin, enasidenib and ivosidenib), immunotherapies (e.g., gemtuzumab ozogamicin and CAR-T-cell therapy), and agents disrupting leukemia cell survival (e.g., glasdegib). We are also aware of the use of venetoclax, an AML treatment recently approved by the FDA. Some of the patient populations being studied for, or treated by, these products overlap with the patient population studied in the Vyxeos Phase 3 clinical trial supporting our NDA. The existence of established treatment options and the development of competing products for the treatment of newly-diagnosed t-AML or AML-MRC could negatively impact our ability to successfully commercialize Vyxeos and achieve the level of sales we expect. Many of our competitors, particularly large pharmaceutical and life sciences companies, have substantially greater financial, operational and human resources than we do. They can spend more on, and have more expertise in, research and development, regulatory, manufacturing, distribution and sales and marketing activities. As a result, our competitors may obtain FDA or other regulatory approvals for their product candidates more rapidly than we can and may market their products more effectively than we do. Smaller or earlier stage companies may also prove to be significant competitors, particularly through focused development programs and collaborative arrangements with large, established companies. We have a relatively small number of sales representatives compared with most other pharmaceutical companies with marketed products. Each of our sales representatives is responsible for a territory of significant size. Many of our competitors deploy more personnel to market and sell their products than we do. In particular, we compete with companies with extensive sales, marketing and promotional experience in hematology/oncology markets, and our failure to compete effectively in this area could negatively affect sales of our hematology/oncology products. If our sales force and sales support organization are not appropriately resourced and sized to adequately promote our products, the commercial potential of our current and any future products may be diminished. The growth of our current products and the launch of any future products may require expansion of our sales force and sales support organization, and we may need to commit significant additional funds, management and other resources to such growth. We may not be able to expand in a timely or cost-effective manner, or we may not have the financial resources to achieve the necessary growth. We also compete with other companies to recruit, hire, train and retain pharmaceutical sales and marketing personnel, and excessive turnover in such personnel could negatively affect sales of our products. 34 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F Adequate coverage and reimbursement from third party payors may not be available for our products, which could diminish our sales or affect our ability to sell our products profitably. In both U.S. and non-U.S. markets, our ability to successfully commercialize and achieve market acceptance of our products depends in significant part on adequate financial coverage and reimbursement from third party payors. Third party payors include governmental payors (such as the Medicare and Medicaid programs in the U.S.), managed care organizations and private health insurers. Without third party payor support, patients may not be able to obtain prescribed medications due to barriers to access, including the inability to afford the medication. Third party payors’ reimbursement practices are complex, vary widely from payor to payor and can impose time-consuming burdens for patients and prescribing physicians. As part of the overall trend toward cost containment, third party payors often require prior authorization for, and require reauthorization for continuation of, prescription products or impose step edits, which require prior use of another medication, usually a generic or preferred brand, prior to approving coverage for a new or more expensive product. Such restrictive conditions for reimbursement and an increase in reimbursement-related activities can extend the time required to fill prescriptions and may discourage patients from seeking treatment. For example, we are experiencing increasingly restrictive conditions for reimbursement required by some third party payors for Xyrem, which have extended the time required to fill some prescriptions and could continue to do so in the future and which may have a material effect on the overall level of reimbursement coverage for Xyrem. We cannot predict actions that third party payors may take, or whether they will limit the access and level of reimbursement for our products or refuse to provide any approvals or coverage. From time to time, third party payors have refused to provide reimbursement for our products, and others may do so in the future. Reimbursement guidelines and incentives provided to prescribing physicians by third party payors may have a significant impact on the prescribing physicians’ willingness to prescribe our products. For example, the U.S. federal government follows a Medicare severity diagnosis-related group, or MS-DRG, payment system for certain inpatient hospital services provided under Medicare, which some states also use for Medicaid. The MS-DRG system entitles a hospital to a fixed reimbursement based on discharge diagnoses rather than actual costs incurred in providing inpatient treatment, thereby increasing the incentive for the facility to limit or control expenditures for many healthcare products. For our hematology/oncology products, all of which are used primarily or exclusively in the inpatient hospital setting, there may not be sufficient reimbursement under the relevant MS-DRG to fully cover the cost of our products. In addition, in 2017 CMS approved, and reauthorized in 2018, a New Technology Add-on Payment, or NTAP, for Defitelio, and in 2018, approved an NTAP for Vyxeos. An NTAP is in addition to the MS-DRG-based reimbursement that hospitals receive. NTAP designations are reviewed by CMS on a yearly basis, and we cannot guarantee that CMS will continue the NTAP designation. If the NTAPs for Vyxeos or Defitelio are not renewed, the relevant MS-DRG may not fully cover the cost of our products. In addition, a significant portion of our revenue from our hematology/oncology products, particularly Erwinaze and Vyxeos, is obtained through government payors, including Medicare and Medicaid, and any failure to qualify for or receive adequate reimbursement under those programs, including as a result of legislative changes to these programs, would have a material adverse effect on revenues from such products. Significant attention has been paid to legislation proposing federal rebates on Medicare Part D and Medicare Advantage utilization for drugs issued to certain groups of lower income beneficiaries and the desire to change the provisions that treat these dual- eligible patients differently from traditional Medicare patients. Any such changes could have a negative impact on revenues from sales of our affected products. Any failure to cover our products appropriately, in addition to legislative and regulatory changes and others that may occur in the future, could impact our ability to maximize revenues in the federal marketplace. On February 6, 2019, the U.S. Department of Health and Human Services, or HHS, published a proposed rule in the Federal Register proposing to modify the scope of the discount safe harbor to carve out discounts or rebates provided to pharmacy benefit managers, or other third party organizations known as PBMs, which are tasked with administering prescription drug programs for large employers, health plans and government programs, for patients receiving benefits under Medicare Part D or a managed Medicaid plan. While the potential impact of such a rule is still unclear, the potential disruption to the marketplace could have the practical effect of limiting our ability, in some instances, to effectively negotiate with PBMs for access to our products for patients. Medicaid and other governmental programs are described under the heading “Business—Pharmaceutical Pricing, Reimbursement by Government and Private Payors and Patient Access” in Part I, Item 1 of this Annual Report on Form 10-K. For a discussion of specific risks relating to our reporting and payment obligations to government payors, see the risk factor under the heading “If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines” in this Part I, Item 1A. Third party payors outside the federal government are also increasingly considering new metrics as the basis for reimbursement rates, including those used by federal government payors such as average net sales price, average manufacturer price and actual acquisition cost. It is not possible to predict the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products. JAZZ PHARMACEUTICALS | 2018 Annual Report 35 Third party payors increasingly examine the cost effectiveness of pharmaceutical products, in addition to their safety and efficacy, when making coverage and reimbursement decisions. We may need to conduct expensive pharmacoeconomic and/or clinical studies in order to demonstrate the cost-effectiveness of our products. Even with such studies, our products may be considered less safe, less effective or less cost-effective than other products, and third party payors may not provide and maintain coverage and reimbursement for our products. If our competitors offer their products at prices that provide lower treatment costs than our products, or otherwise suggest that their products are safer, more effective or more cost-effective than our products, this may result in a greater level of access for their products relative to our products, which would reduce our sales and harm our results of operations. In some cases, for example, third party payors try to encourage the use of less expensive generic products through their prescription benefits coverage and reimbursement and co-pay policies. Because some of our products compete in a market with both branded and generic products, obtaining and maintaining access and reimbursement coverage for our products may be more challenging than for products that are new chemical entities for which no therapeutic alternatives exist. A small number of third party payors and PBMs have market power and negotiating leverage to limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a particular indication, and to exclude drugs from their formularies in favor of competitor drugs or alternative treatments, or place drugs on formulary tiers with higher patient co-pay obligations, and/or to mandate stricter utilization criteria. Formulary exclusion effectively encourages patients and providers to seek alternative treatments or pay 100% of the cost of a drug. In many instances, third party payors and PBMs may also exert negotiating leverage by requiring incremental rebates from manufacturers in order to maintain their formulary position. In the past, we have not entered into such arrangements with third party payors for any of our products. The increasing pressure of the pharmaceutical coverage environment may require us to do so in the future, which could have a negative impact on our revenue from Xyrem. Specifically, we are experiencing increasing pressure from third party payors to agree to discounts, rebates or other restrictive pricing terms for Xyrem. As our business becomes more complex, we may need to enter into rebate agreements in order to ensure that patients continue to have access to Xyrem, and to support the long-term success of our sleep franchise, which might result in lower net revenues for Xyrem. If solriamfetol, our product candidate for the treatment in adult patients in EDS associated with obstructive sleep apnea, or OSA, and EDS associated with narcolepsy, is approved by the FDA, the product will enter a competitive retail pharmacy market of branded and generic products. Any delays or unforeseen difficulties in obtaining access or reimbursement approvals could delay or prevent our commercial launch and our ability to receive a return on our investment in solriamfetol. Third party payors could impose steps edits that require patients to try alternative, including generic, treatments before authorizing payment for solriamfetol, exclude solriamfetol from formulary coverage lists, limit the types of diagnoses for which coverage will be provided or demand rebates, discounts, exclusivity or other concessions for solriamfetol and potentially our other products. Additionally, at launch, many payors impose a moratorium on coverage for products while the payor makes a coverage decision. These potential utilization management strategies could limit patient access to solriamfetol and depress therapy adherence rates. We cannot predict market acceptance of, and our ability to obtain adequate formulary positions, access to and reimbursement coverage for solriamfetol. An inability to obtain adequate formulary positions could increase patient cost-sharing for solriamfetol and cause some patients to determine not to use our product. If we are unsuccessful in obtaining broad coverage for solriamfetol, our anticipated revenue from and growth prospects for an approved solriamfetol product could be negatively affected. In addition, if approved, new products indicated for the treatment of symptoms of narcolepsy, like solriamfetol or pitolisant, could impact access to Xyrem, particularly for newly diagnosed narcolepsy patients, if, for example, payors impose a step edit requiring a narcolepsy patient to try solriamfetol before authorizing payment for Xyrem. For more information on solriamfetol, see the risk factor under the heading “Our future success depends on our ability to successfully develop and obtain and maintain regulatory approval in the U.S. and Europe for our late-stage product candidates and, if approved, to successfully launch and commercialize those product candidates.” in this Part I, Item 1A. The demand for, and the profitability of, our products could be materially harmed if the Medicaid program, Medicare program or other third party payors in the U.S. or elsewhere deny reimbursement for our products, limit the indications for which our products will be reimbursed, or provide reimbursement only on unfavorable terms. We are unable to predict what additional legislation, regulations or policies, if any, relating to third party coverage and reimbursement may be enacted in the future or what effect such legislation, regulations or policies would have on our business. 36 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F The pricing of pharmaceutical products has come under increasing scrutiny as part of a global trend toward healthcare cost containment and resulting changes in healthcare law and policy may impact our business in ways that we cannot currently predict, which could have a material adverse effect on our business and financial condition. Political, economic and regulatory influences are subjecting the healthcare industry in the U.S. to fundamental changes, particularly given the current atmosphere of mounting criticism of prescription drug costs in the U.S. We expect there will continue to be legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our products profitably. The Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010, together, the Healthcare Reform Act, substantially changed the way healthcare is financed by both governmental and private insurers. These changes have impacted previously existing government healthcare programs and have resulted in the development of new programs, including Medicare payment-for-performance initiatives. Additional legislative and regulatory changes remain possible and appear likely. Their nature and extent are uncertain and they will be subject to judicial and other challenges. For example, while “repeal and replace” efforts by President Trump and the U.S. Congress have failed, aspects of the Healthcare Reform Act have been changed legislatively, such as the repeal of the requirement that certain individuals who fail to maintain qualifying health coverage for all or part of a year make a tax-based shared responsibility payment commonly referred to as the “individual mandate.” In addition, there have been delays in the implementation of key provisions of the Healthcare Reform Act, including the excise tax on generous employer-based health plans. We expect that the Healthcare Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and on our ability to maintain or increase sales of our products. Some states have elected not to expand their Medicaid programs by raising the income limit to 133% of the federal poverty level, as is permitted under the Healthcare Reform Act. For each state that does not choose to expand its Medicaid program, there may be fewer insured patients overall, which could impact our sales, business and financial condition. Where Medicaid patients receive insurance coverage under any of the new options made available through the Healthcare Reform Act, the possibility exists that manufacturers may be required to pay Medicaid rebates on drugs used under these circumstances, a decision that could impact our revenues. For details of the changes to the Medicaid Drug Rebate program and the Public Health Service’s 340B program, or the 340B program, see “Business— Pharmaceutical Pricing, Reimbursement by Government and Private Payors and Patient Access” in Part I, Item 1 of this Annual Report on Form 10-K and the risk factor under the heading “If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines” in this Part I, Item 1A. The U.S. Congress could enact additional legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. In addition to the Healthcare Reform Act, we anticipate that the U.S. Congress, state legislatures, regulators and the private sector will continue to consider and may adopt healthcare policies and reforms intended to curb healthcare costs. These cost containment measures may include federal and state controls on government-funded reimbursement for drugs, new or increased requirements to pay prescription drug rebates to government health care programs, additional pharmaceutical cost transparency bills that aim to require drug companies to justify their prices through required disclosures, controls on healthcare providers, challenges to the pricing of drugs, or limits or prohibitions on reimbursement for specific products through other means, requirements to try less expensive products or generics before a more expensive branded product, expansion of use of managed care systems in which healthcare providers contract to provide comprehensive healthcare for a fixed cost per person, and public funding for cost effectiveness research, which may be used by government and private third party payors to make coverage and payment decisions. For example, several states have passed laws or are considering legislation aimed at increasing transparency relating to drug pricing, and other states may do so in the future. There also continue to be legislative proposals to amend U.S. laws to allow the importation into the U.S. of prescription drugs, which have not been subject to U.S. regulatory oversight. The potential importation of such prescription drugs could pose significant safety concerns for patients, increase the risk of counterfeit products becoming available in the market, and have a negative impact on prescription drug prices in the U.S. If healthcare policies or reforms intended to curb healthcare costs are adopted or if we experience negative publicity with respect to pricing of our products or the pricing of pharmaceutical drugs generally, the prices that we charge for our products, including Xyrem, may be affected, our commercial opportunity may be limited and/or our revenues from sales of our products may be negatively impacted. We have periodically increased the price of Xyrem, most recently in January 2019, and may do so again in the future. We also have made and may in the future make similar price increases on our other products. There is no guarantee that such price adjustments will not negatively affect our reputation and our ability to secure and maintain reimbursement coverage for our products, which could limit the prices that we charge for our products, including Xyrem, limit the commercial opportunities for our products and/or negatively impact revenues from sales of our products. JAZZ PHARMACEUTICALS | 2018 Annual Report 37 If we become the subject of any government investigation or U.S. Congressional hearing with respect to 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. Any such investigation or hearing could also result in reduced market acceptance and demand for our products, could harm our reputation and our ability to market our products in the future, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. For more information, see Note 12, Commitments and Contingencies—Legal Proceedings of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K and the risk factor under the heading “In addition to those specifically described in other risk factors, 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 this Part I, Item 1A. In many countries outside the U.S., procedures to obtain price approvals, coverage and reimbursement can take considerable time after the receipt of marketing approval. The process of maintaining pricing and reimbursement approvals is complex and varies from country to country. Many European countries periodically review their reimbursement of medicinal products, which could have an adverse impact on reimbursement status. We cannot predict the outcome of any periodic reviews required to maintain pricing and reimbursement approvals across Europe. In addition, orphan products that have a significant impact on patient survival, such as Defitelio, may be budgeted on a local rather than national level. The balance of all of these factors will determine our ability to maintain favorable pricing and reimbursement approvals across Europe. Furthermore, after initial pricing and reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiple factors, including reference pricing systems and publication of discounts by third party payors or authorities in other countries. In the EU, prices can be reduced further by parallel distribution and parallel trade, or arbitrage between low-priced and high-priced countries. If we are unable to maintain favorable pricing and reimbursement approvals in countries that represent significant markets, especially where a country’s reimbursed price influences other countries, our anticipated revenue from and growth prospects for our products in the EU could be negatively affected. In August 2018, the EC granted marketing authorization for Vyxeos, and, as part of our rolling launch of Vyxeos in the EU, we are in the process of making pricing and reimbursement submissions in EU member states. If we experience delays or unforeseen difficulties in obtaining favorable pricing and reimbursement approvals, planned launches in the affected EU member states would be delayed, which could negatively impact anticipated revenue from Vyxeos. If we are unable to obtain favorable pricing and reimbursement approvals in the EU member states that represent significant potential markets, our anticipated revenue from and growth prospects for Vyxeos in the EU could be negatively affected. In various EU member states we expect to be subject to continuous cost-cutting measures, such as lower maximum prices, lower or lack of reimbursement coverage and incentives to use cheaper, usually generic, products as an alternative. Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some EU member states, including those representing the larger markets. The HTA process, which is governed by the national laws of these countries, is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted. The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursement status granted to these medicinal products by the competent authorities of individual EU member states. The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product currently varies between EU member states. In the EU, our products are marketed through various channels and within different legal frameworks. In certain EU member states, reimbursement for unauthorized products may be provided through national named patient programs. Such reimbursement may no longer be available if authorization for named patient programs expire or are terminated or when marketing authorization is granted. In other EU member states, authorization and reimbursement policies may also delay commercialization of our products, or may adversely affect our ability to sell our products on a profitable basis. We expect that legislators, policymakers and healthcare insurance funds in the EU will continue to propose and implement cost- containing measures to keep healthcare costs down. Such measures could include limitations on the prices we will be able to charge for our products or the amounts of reimbursement available for these products from governmental agencies or third party payors, may increase the tax obligations on pharmaceutical companies, or may facilitate the introduction of generic competition with respect to our products. Further, an increasing number of EU member states and other foreign countries use prices for medicinal products established in other countries as “reference prices” to help determine the price of the product in their own territory. Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downward trends elsewhere. Moreover, in order to obtain reimbursement for our products in some countries, including some EU member states, we may be required to conduct clinical trials that compare the cost-effectiveness of our products to other available therapies. There can be no assurance that our products will obtain favorable reimbursement status in any country. Any cost containment measures, including those listed above, or other healthcare system reforms that are adopted, could negatively affect our growth prospects in Europe. 38 JAZZ PHARMACEUTICALS | 2018 Annual Report In addition to access, coverage and reimbursement, the commercial success of our products depends upon their market acceptance by physicians, patients, third party payors and the medical community. If physicians do not prescribe our products, we cannot generate the revenues we anticipate from product sales. Market acceptance of each of our products by physicians, patients, third party payors and the medical community depends on: • • • • • • • • • • • the clinical indications for which a product is approved and any restrictions placed upon the product in connection with its approval, such as a REMS, patient registry requirements or labeling restrictions; the prevalence of the disease or condition for which the product is approved and its diagnosis; the severity of side effects; acceptance by physicians and patients of each product as a safe and effective treatment; availability of sufficient product inventory to meet demand, particularly with respect to Erwinaze; physicians’ decisions relating to treatment practices based on availability of product, particularly with respect to Erwinaze; perceived advantages over alternative treatments; relative convenience and ease of administration; with respect to Xyrem, physician and patient assessment of the burdens associated with obtaining or maintaining the certifications required under the Xyrem REMS; the cost of treatment in relation to alternative treatments, including generic products; and the availability of financial or other assistance for patients who are uninsured or underinsured. K - 0 1 m r o F Because of our dependence upon market acceptance of our products, any adverse publicity associated with harm to patients or other adverse events resulting from the use or misuse of our products or any similar products distributed by other companies, including generic versions of our products, could materially and adversely affect our business, financial condition, results of operations and growth prospects. For example, from time to time, there is negative publicity about illicit GHB and its effects, including with respect to illegal use, overdoses, serious injury and death. Because sodium oxybate, the API in Xyrem, is a derivative of GHB, Xyrem sometimes also receives negative mention in publicity relating to GHB. Patients, physicians and regulators may therefore view Xyrem as the same as or similar to illicit GHB. In addition, there are regulators and some law enforcement agencies that oppose the prescription and use of Xyrem generally because of its connection to GHB. Xyrem’s label includes information about adverse events from GHB. For additional discussion about payor acceptance, see the risk factor under the heading “Adequate coverage and reimbursement from third party payors may not be available for our products, which could diminish our sales or affect our ability to sell our products profitably” in this Part I, Item 1A. Delays or problems in the supply of our products for sale or for use in clinical trials, loss of our single source suppliers or failure to comply with manufacturing regulations could materially and adversely affect our business, financial condition, results of operations and growth prospects. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of process controls required to consistently produce the API and the finished product in sufficient quantities while meeting detailed product specifications on a repeated basis. We and our suppliers may encounter difficulties in production, including difficulties with production costs and yields, process controls, quality control and quality assurance, including testing of stability, impurities and impurity levels and other product specifications by validated test methods, and compliance with strictly enforced U.S., state and non-U.S. regulations. In addition, we and our suppliers are subject to the FDA’s current Good Manufacturing Practices, or cGMP, requirements, DEA regulations and equivalent rules and regulations prescribed by non-U.S. regulatory authorities. We have cGMP responsibilities for the products we manufacture in our facilities and also have oversight responsibilities for the manufacturing conducted by our third party suppliers operating under contract. If we or any of our suppliers encounter manufacturing, quality or compliance difficulties with respect to any of our products, we may be unable to obtain or maintain regulatory approval or meet commercial demand for such products, which could adversely affect our business, financial condition, results of operations and growth prospects. In addition, the failure of any of our suppliers to comply with cGMP or other rules and regulations while manufacturing products on our behalf could result in regulatory action directed at the adequacy of our oversight of our contract suppliers, which could result in enforcement actions against us by the FDA and other regulatory entities. We have a manufacturing and development facility in Ireland where we manufacture Xyrem and development-stage oxybate products, including JZP-258, and a manufacturing plant in Italy where we produce the defibrotide drug substance. We currently do not have JAZZ PHARMACEUTICALS | 2018 Annual Report 39 our own commercial manufacturing or packaging capability for our other products, product candidates or their APIs. As a result, our ability to develop and supply products in a timely and competitive manner depends primarily on third party suppliers being able to meet our ongoing commercial and clinical trial needs for API, other raw materials, packaging materials and finished products. For details of our arrangements with our suppliers, see “Business—Manufacturing” in Part I, Item 1 of this Annual Report on Form 10-K. In part due to the limited market size for our products and product candidates, we have a single source of supply for most of our marketed products, product candidates and their APIs. We are the sole supplier of the defibrotide compound. We have a single source for sodium oxybate, the API for Xyrem, for Erwinaze, for the finished vial form of Defitelio and for Vyxeos. Single sourcing puts us at risk of interruption in supply in the event of manufacturing, quality or compliance difficulties. There is no guarantee that our suppliers can or will continue to supply on a timely basis, or at all, the quantities of API or finished product that we need. If one of our suppliers fails or refuses to supply us for any reason, it would take a significant amount of time and expense to implement and execute the necessary technology transfer to, and to qualify, a new supplier. The FDA and similar international regulatory bodies must approve manufacturers of the active and inactive pharmaceutical ingredients and certain packaging materials used in our products. The loss of one of our suppliers could require us to obtain regulatory clearance in the form of a “prior approval supplement” and to incur validation and other costs associated with the transfer of the API or product manufacturing process. We believe that it could take up to two years, or longer in certain cases, to qualify a new supplier, and we may not be able to obtain APIs or finished products from new suppliers on acceptable terms and at reasonable prices, or at all. If there are delays in qualifying new suppliers or facilities or a new supplier is unable to meet FDA’s or similar international regulatory body’s requirements for approval, there could be a shortage of the affected products for the marketplace or for use in clinical studies, or both, which could negatively impact our anticipated revenues and could potentially cause us to breach contractual obligations with customers or to violate local laws requiring us to deliver the product to those in need. Erwinaze is licensed from, and manufactured for us by, a single source, PBL. The Erwinaze BLA includes a number of post-marketing commitments related to the manufacture of Erwinaze by PBL. 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 issued to PBL in March 2016 and citing significant violations of 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. In August 2018, the FDA conducted an inspection of the PBL manufacturing facility and issued an FDA Form 483 to PBL citing observations related to items referenced in the warning letter as well as other manufacturing practices, including data and records management. PBL continues to address the issues identified by the FDA in the warning letter and has submitted its response to the August 2018 Form 483. In the United Kingdom, or UK, where PBL’s manufacturing facilities are located, PBL is subject to similar inspections conducted by the MHRA. Following a site inspection of PBL by MHRA in December 2017, MHRA issued an inspection report listing several major findings, including major deficiencies and failures by PBL to comply with cGMP. In January 2018, PBL filed a response to the report with the MHRA. Inability to comply with regulatory requirements of the FDA, the MHRA or other competent authorities in the EU member states in which Erwinaze is subject to marketing authorization, including any failure by PBL to correct the violations and deviations referenced above to the satisfaction of the FDA and MHRA, could adversely affect Erwinaze supply, particularly in light of the ongoing limited supply of Erwinaze, and could result in enforcement actions by the FDA, MHRA or other EU member states’ competent authorities (including the issuance of the local equivalents of FDA Form 483s or warning letters), the approval of the FDA or other competent authorities being suspended, varied, or revoked, product release being delayed or suspended, including potentially the FDA refusing admission of Erwinaze in the U.S., or product being seized or recalled. Any of these actions could have a material adverse effect on our sales of, and revenues from, Erwinaze and further limit our future maintenance and potential growth of the market for this product. We have incurred and continue to incur significant internal and external costs and expenses as a result of these issues, including due to managing the increased need for regulatory and customer interaction. In addition, if the FDA or any non-U.S. regulatory authority mandates any changes to the specifications for Erwinaze, we may face challenges having product produced to meet such specifications, and PBL may increase its price to supply Erwinaze meeting such specifications, which may result in additional costs to us or a delay in supply and may decrease any profit we would otherwise achieve with Erwinaze. All Erwinaze that PBL has been able to supply is currently completely absorbed by demand for the product. As a consequence, there is no product inventory that can be used to absorb supply disruptions resulting from quality, manufacturing, regulatory or other issues. PBL has experienced and continues to experience product quality and manufacturing issues that have resulted, and continue to result, in disruptions in our ability to supply markets from time to time and have caused, and may in the future cause, us to implement batch-specific, modified product use instructions. We cannot predict whether the required remediation activities by PBL in connection with its January 2017 FDA warning letter, the December 2017 MHRA report or the August 2018 FDA Form 483 will further strain PBL’s manufacturing 40 JAZZ PHARMACEUTICALS | 2018 Annual Report capacity or otherwise further adversely affect Erwinaze supply. As capacity constraints and supply disruptions continue, whether as a result of continued quality or manufacturing challenges at PBL, regulatory issues or otherwise, we will be unable to build product inventory, our ability to supply the market will continue to be compromised and physicians’ decisions to use Erwinaze will continue to be negatively impacted. If PBL’s quality, manufacturing or regulatory issues persist and supply disruptions continue, our agreement with PBL only gives us the right to engage a backup supplier for Erwinaze in very limited circumstances, such as following termination of the agreement by us due to uncured material breach or the cessation of manufacturing by our supplier. If we are required to engage a backup or alternative supplier, the transfer of technical expertise and manufacturing process to the backup or alternative supplier would be difficult, costly and time- consuming, might not be successful and would increase the likelihood of a delay or disruption in manufacturing or exacerbate the supply shortage. If we continue to fail to obtain a sufficient supply of Erwinaze from PBL, our sales of and revenues from Erwinaze, our future maintenance and potential growth of the market for this product, our reputation and our business, financial condition, results of operations and growth prospects would continue to be materially adversely affected. The API in Defitelio is derived from porcine DNA. If our porcine DNA supplier experiences safety or other issues that impact its ability to supply porcine materials to us as needed, we may not be able to find alternative suppliers in a timely fashion, which could negatively impact our supply of Defitelio. Vyxeos is manufactured by Baxter Oncology GmbH, or Baxter, which is a sole source supplier from a single site location. Given that our Vyxeos launch is at an early stage, there is limited experience with the complex manufacturing process relating to Vyxeos. Baxter manufactured batches that were used in the Phase 3 clinical trial for Vyxeos; there have since been batch failures due to mechanical, component and other issues, and batches have been produced that have otherwise not been in compliance with applicable specifications. We are continuing to work with Baxter to address manufacturing complexities. Moreover, the proprietary technology that supports the manufacture of Vyxeos is not easily transferable. Consequently, engaging an alternate manufacturer may be difficult, costly and time- consuming. If we fail to obtain a sufficient supply of Vyxeos in accordance with applicable specifications on a timely basis for any reason or due to manufacturing or regulatory challenges, our sales of and revenues from Vyxeos, our future maintenance and potential growth of the market for this product, our ability to conduct ongoing and future clinical trials of Vyxeos, and our business, financial condition, results of operations and growth prospects could be materially adversely affected. K - 0 1 m r o F In addition, while the APIs in Vyxeos, daunorubicin and cytarabine, are available from a number of suppliers, certain suppliers have received warning letters from the FDA. As a result, we have qualified other suppliers for each API, and we provided the qualification data to the FDA. If the FDA restricts importation of API from either supplier, and we are unable to qualify API from additional suppliers in a timely manner, or at all, our ability to successfully commercialize Vyxeos and generate sales of this product at the level we expect and to conduct ongoing and future clinical trials of Vyxeos could be materially and adversely affected. To conduct our ongoing and any future clinical trials of, complete marketing authorization submissions for, and potentially launch our other product candidates, we need to have sufficient quantities of product manufactured. For example, Siegfried USA, LLC, or Siegfried, is currently our sole supplier of both the API and finished product for our development activities involving solriamfetol, and we expect that Siegfried will manufacture and supply solriamfetol drug product for commercial sale if solriamfetol receives regulatory approval. If Siegfried does not or is not able to supply us with solriamfetol for any reason, it may take time and resources to implement and execute the necessary technology transfer to another provider, and such delay could negatively impact our anticipated revenues from solriamfetol. We or our suppliers may not be able to produce sufficient supplies of our product candidates in a timely manner or in accordance with applicable specifications. If any of our suppliers fail or refuse to comply with their obligations to us under our supply and manufacturing arrangements, we may not have adequate remedies for any breach. In addition, to obtain FDA approval of any product candidate, we or our supplier or suppliers for that product must obtain approval by the FDA to manufacture and supply product, in some cases based on qualification data provided to the FDA as part of our NDA submission. Any delay in generating, or failure to generate, data required in connection with submission of the chemistry, manufacturing and controls, or CMC, portions of any NDA could negatively impact our ability to meet our anticipated submission dates, and therefore our anticipated timing for obtaining FDA approval, or our ability to obtain FDA approval at all. In addition, any failure of us or a supplier to obtain approval by the FDA to manufacture and supply product or any delay in receiving, or failure to receive, adequate supplies of a product on a timely basis or in accordance with applicable specifications could negatively impact our ability to successfully launch and commercialize products and generate sales of products at the levels we expect. Our manufacturing facilities and manufacturing facilities of our suppliers have been and are subject to periodic unannounced inspection by the FDA, the European Medicines Agency, or EMA, the DEA, the Italian Health Authority and other regulatory authorities, including state authorities and similar authorities in other jurisdictions, to confirm compliance with cGMP and other requirements. We and JAZZ PHARMACEUTICALS | 2018 Annual Report 41 our third party suppliers must continually expend time, money and effort in production, recordkeeping and quality assurance and control to ensure that our products and product candidates meet applicable specifications and other requirements for product safety, efficacy and quality. Failure to comply with applicable legal and regulatory requirements subjects us and our suppliers to possible legal or regulatory action, including restrictions on supply or shutdown, which may adversely affect our or a supplier’s ability to supply the ingredients or finished products we need. Moreover, our or our third party suppliers’ facilities could be damaged by fire, flood, earthquake, power loss, telecommunication and information system failure, terrorism or similar events. Any of these events could cause a delay or interruption in manufacturing and potentially a supply shortage of our products, which could negatively impact our anticipated revenues. Risks Related to Growth of Our Product Portfolio and Research and Development Our future success depends on our ability to successfully develop and obtain and maintain regulatory approval in the U.S. and Europe for our late-stage product candidates and, if approved, to successfully launch and commercialize those product candidates. In furtherance of our growth strategy, we have made and are making significant investments in a number of product candidates, including solriamfetol and JZP-258. Our inability to obtain and maintain regulatory approval for our product candidates in the U.S. and Europe, and, if approved, to successfully commercialize new products would have a material adverse effect on our business, financial condition, results of operations and growth prospects. Solriamfetol We are seeking approval in the U.S. and Europe for solriamfetol as a treatment to improve wakefulness and reduce EDS in adult patients with narcolepsy or OSA. The FDA accepted our solriamfetol new drug application, or NDA, for filing with a standard review in early 2018 and the current Prescription Drug User Fee Act, or PDUFA, date is March 20, 2019. We submitted a solriamfetol marketing authorization application, or MAA, to the EMA in the fourth quarter of 2018. We cannot predict whether our NDA or MAA will be approved in a timely manner, or at all, or, in the case of our NDA for solriamfetol, the results of labeling discussions with the FDA. If we fail to obtain approval for solriamfetol in the U.S. and EU, or if the FDA or EC requires product labeling that negatively impacts patient, physician or payor acceptance of the product, our growth prospects could be materially adversely affected. If approved, solriamfetol will face competition from existing and future products that treat EDS in adult patients with narcolepsy or OSA in a competitive retail pharmacy market of branded and generic products. In particular, we will need to successfully differentiate solriamfetol from other branded and generic treatments for EDS in patients with narcolepsy with which physicians are more familiar, including stimulants, wake-promoting agents, such as Provigil and Nuvigil, and generic versions of stimulants and wake-promoting agents. We are also aware that stimulants and wake-promoting agents are prescribed for patients to treat excessive sleepiness in OSA. Solriamfetol, if approved by the FDA, will likely face competition from this genericized market. In addition, we are aware of several other products in development as potential treatments for excessive daytime sleepiness in patients with narcolepsy or OSA, including, for example, pitolisant, mazindol, modafinil combinations and Avadel’s once-nightly sodium oxybate formulation. In addition to uncertainties related to obtaining regulatory approval of solriamfetol and potential competition, our ability to realize the anticipated benefits from our investment in solriamfetol is subject to a number of risks and uncertainties, including the following as well as other risks and uncertainties described elsewhere in this Part I, Item 1A: • • • • our ability to successfully launch and grow sales of any approved solriamfetol product in the U.S. and EU; potential launch delays after any approval, including due to the need for DEA scheduling review which will need to be completed after NDA approval, if any, but before commercial launch; the availability of adequate formulary positions and pricing and adequate coverage and reimbursement by third party payors, including government programs, including the impact of any delays in coverage decisions by payors; restrictions on permitted promotional activities based on limitations on the approved labeling for the product required by the FDA or the EC; • market acceptance for an approved solriamfetol product, particularly by OSA physicians; • • delays or problems in the supply or manufacture of an approved solriamfetol product; and our ability to satisfy post-marketing commitments and requirements, if any, imposed by the FDA in connection with its approval of our NDA and by the EC in connection with its marketing authorization. 42 JAZZ PHARMACEUTICALS | 2018 Annual Report If sales of an approved solriamfetol product do not reach the levels we expect, or we are unable to obtain regulatory approval for solriamfetol in a timely manner, or at all, our anticipated revenue from an approved solriamfetol product will be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. JZP-258 JZP-258 is an oxybate product candidate that contains 90% less sodium than Xyrem. Given the well-accepted relationship between dietary sodium and blood pressure as well as published hypertension guidelines, we believe that lower sodium intake would be beneficial for patients. We have conducted a Phase 3 clinical trial of JZP-258 in patients for the treatment of cataplexy and EDS in narcolepsy and are conducting a Phase 3 clinical trial for the treatment of idiopathic hypersomnia, a chronic neurological disorder that is primarily characterized by EDS. Subject to the results of our Phase 3 clinical trial in narcolepsy, we expect to submit an NDA to the FDA for JZP-258 by as early as the end of 2019. Any failure or delay in successfully completing necessary clinical trials and conducting other activities, including CMC activities, that are required to complete our planned NDA submission and obtain regulatory approval could materially and adversely affect our growth prospects. Avadel has announced that it has obtained an orphan drug designation from the FDA for its once-nightly sodium oxybate formulation for the treatment of EDS and cataplexy in patients with narcolepsy. To obtain orphan drug exclusivity upon approval, Avadel will have to show clinical superiority to Xyrem, or, if applicable, clinical superiority to JZP-258. However, if the FDA approves Avadel’s product and grants it orphan drug exclusivity before we obtain approval for JZP-258, there is a risk that JZP-258 will not be approvable for seven years unless it can establish clinical superiority to Avadel’s product. We cannot predict the timing of the two submissions or how FDA will evaluate any clinical superiority arguments that either company may make, but a delay in our ability to obtain approval for JZP-258, if at all, could be detrimental to our business. K - 0 1 m r o F For a discussion of the risks inherent in product development and regulatory approval, see the discussions in the risk factors under the headings “Conducting clinical trials is costly and time-consuming, and the outcomes are uncertain. A failure to prove that our product candidates are safe and effective in clinical trials, or to generate data in clinical trials to support expansion of the therapeutic uses for our existing products, could materially and adversely affect our business, financial condition, results of operations and growth prospects” and “The regulatory approval process is expensive, time-consuming and uncertain and may prevent us or our partners from obtaining and maintaining approvals for the commercialization of some or all of our product candidates” in this Part I, Item 1A. If we are not successful in the clinical development of these and other future product candidates, if we are unable to obtain regulatory approval for our product candidates in a timely manner, or at all, or if sales of an approved product do not reach the levels we expect, our anticipated revenue from our product candidates would be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. We may not be able to successfully identify and acquire or in-license additional products or product candidates to grow our business, and, even if we are able to do so, we may otherwise fail to realize the anticipated benefits of these acquisitions. In addition to continued investment in our research and development pipeline, we intend to grow our business by acquiring or in-licensing, and developing, additional products and product candidates that we believe are highly differentiated and have significant commercial potential. Future growth through acquisition or in-licensing will depend upon the availability of suitable products and product candidates for acquisition or in-licensing on acceptable prices, terms and conditions. Even if appropriate opportunities are available, we may not be able to successfully identify them, or we may not have the financial resources necessary to pursue them. Other companies, many of which may have substantially greater financial, sales and marketing resources, compete with us for these opportunities. In order to compete successfully to acquire attractive products or product candidates in the current business climate, we may have to pay higher prices for assets than may have been paid historically, which may make it more difficult for us to realize an adequate return on any acquisition. Even if we are able to successfully identify and acquire, in-license or develop additional products or product candidates, we may not be able to successfully manage the risks associated with integrating any products or product candidates into our portfolio or the risks arising from anticipated and unanticipated problems in connection with an acquisition or in-licensing. We may not be able to realize the anticipated benefits for a variety of reasons, including if: • • we are unable to obtain and maintain adequate funding to complete the development of, obtain regulatory approval for and commercialize an acquired product candidate; a product candidate proves not to be safe or effective in later clinical trials; JAZZ PHARMACEUTICALS | 2018 Annual Report 43 • • • a product fails to reach its forecasted commercial potential as a result of pricing pressures or for any other reason; we experience negative publicity regarding actual or potential future price increases for that product or otherwise; or the integration of a product or product candidate gives rise to unforeseen difficulties and expenditures. Any failure to identify and manage these risks and uncertainties effectively could have a material adverse effect on our business. In addition, product and product candidate acquisitions create other uncertainties and risks, particularly when the acquisition takes the form of a merger or other business consolidation. Our business acquisitions have required, and any similar future transactions will also require, significant efforts and expenditures, including with respect to transition activities and integrating the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection with potential acquisitions and similar transactions, which include: • • • • • • • • • • high acquisition costs; the need to incur substantial debt or engage in dilutive issuances of equity securities to pay for acquisitions; the potential disruption of our historical core business; the strain on, and need to continue to expand, our existing operational, technical, financial and administrative infrastructure; the difficulties in assimilating employees and corporate cultures; the failure to retain key managers and other personnel; the challenges in controlling additional costs and expenses in connection with and as a result of any acquisition; the need to write down assets or recognize impairment charges; the diversion of our management’s attention to integration of operations and corporate and administrative infrastructures; and any unanticipated liabilities for activities of or related to the acquired business or its operations, products or product candidates. If any of these or other factors impair our ability to integrate or otherwise manage an acquired business efficiently and successfully, we may be required to spend time or money on integration activities that otherwise would be spent on the development and expansion of our business. Resulting operating inefficiencies could increase costs and expenses more than we planned, could negatively impact the market price of our ordinary shares and could otherwise distract us from the execution of our strategy. Failure to maintain effective financial controls and reporting systems and procedures during and after integration of an acquired business could also impact our ability to produce timely and accurate financial statements. Conducting clinical trials is costly and time-consuming, and the outcomes are uncertain. A failure to prove that our product candidates are safe and effective in clinical trials, or to generate data in clinical trials to support expansion of the therapeutic uses for our existing products, could materially and adversely affect our business, financial condition, results of operations and growth prospects. As a condition to regulatory approval, each product candidate must undergo extensive and expensive preclinical studies and clinical trials to demonstrate to a statistically significant degree that the product candidate is safe and effective. The results at any stage of the development process may lack the desired safety, efficacy or pharmacokinetic characteristics. Results of limited preclinical studies, including studies in animal models, may not predict the results of human clinical trials. Similarly, results from early clinical trials may not be predictive of results obtained in later and larger clinical trials, and later clinical trials may fail to show the desired safety and efficacy of our product candidates despite successful initial clinical testing. Even if we believe we have successfully completed testing, the FDA or any equivalent non-U.S. regulatory agency may determine our data is not sufficiently compelling to warrant marketing approval and may require us to engage in additional clinical trials or provide further analysis which may be costly and time-consuming. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing positive results in preclinical studies or earlier clinical trials. If a product candidate fails at any stage of development or the data is otherwise not sufficient for regulatory approval, we will not be able to commercialize it and receive any return on our investment in that product candidate. If the FDA determines that our safety or efficacy data for solriamfetol or, after NDA submission, JZP-258 do not warrant marketing approval, we may be required to conduct additional clinical trials, which could be costly and time-consuming, or we may not be able to commercialize solriamfetol or JZP-258, in which event we would not receive any return on our investments in these product candidates. 44 JAZZ PHARMACEUTICALS | 2018 Annual Report The FDA may also require product labeling that negatively impacts patient, physician or payor acceptance of the product. For more information, see the risk factor under the heading “Our future success depends on our ability to successfully develop and obtain and maintain regulatory approval in the U.S. and Europe for our late-stage product candidates and, if approved, to successfully launch and commercialize those product candidates” in this Part I, Item 1A. Any adverse events or other data generated during the course of clinical trials of our product candidates and/or clinical trials related to additional indications for our commercialized products could result in action by the FDA or a non-U.S. regulatory agency, which may restrict our ability to sell, or adversely affect sales of, currently marketed products, or such events or other data could otherwise have a material adverse effect on a related commercial product, including with respect to its safety profile. Any failure or delay in completing such clinical trials could materially and adversely affect the maintenance and growth of the markets for the related marketed products, which could adversely affect our business, financial condition, results of operations and overall growth prospects. In addition to issues relating to the results generated in clinical trials, clinical trials can be delayed or halted for a variety of reasons, including: • • • • • • • • • • • • difficulty identifying or enrolling eligible patients, often based on the number of clinical trials, particularly in hematology and oncology, with enrollment criteria targeting the same patient population; delays or failures in obtaining regulatory authorization to commence a trial because of safety concerns of regulators relating to our product candidates or similar product candidates of our competitors or failure to follow regulatory guidelines; delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidate for use in trials; delays or failures in reaching agreement on acceptable terms with prospective study sites; delays or failures in obtaining approval of our clinical trial protocol from an institutional review board, known as an ethics committee in Europe, to conduct a clinical trial at a prospective study site; K - 0 1 m r o F delays or failures in recruiting patients to participate in a clinical trial; failure of our clinical trials and clinical investigators to be in compliance with the FDA and other regulatory agencies’ requirements, commonly referred to as good clinical practices; unforeseen safety issues; inability to monitor patients adequately during or after treatment; difficulty monitoring multiple study sites; failure of our third party clinical trial managers to satisfactorily perform their contractual duties, comply with regulations or meet expected deadlines; or insufficient funds to complete the trials. We rely on contract research organizations and other third parties, such as cooperative groups, to assist us in designing, coordinating, managing, monitoring and otherwise conducting clinical trials with our product candidates. If we, contract research organizations assisting us with clinical trials, other third parties conducting clinical trials with our product candidates, or our trial sites fail to comply with applicable good clinical practices, the clinical data generated in these clinical trials may be deemed unreliable, and the FDA and/or other global regulatory agencies may require us to perform additional clinical trials before approving our marketing applications. In addition, clinical trials must be conducted with product candidates produced under the FDA’s cGMP regulations and similar regulations outside of the U.S. Our failure, or the failure of our product suppliers, to comply with these regulations may require us to repeat or redesign clinical trials, which would delay the completion of clinical trials and the regulatory approval process. If third parties do not successfully carry out their contractual duties under their agreements with us, if the quality or accuracy of the data they obtain is compromised due to failure to adhere to our clinical protocols, including dosing requirements, or regulatory requirements, or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, our clinical trials may not meet regulatory requirements. If our clinical trials do not meet regulatory requirements or if these third parties need to be replaced, our clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product candidates or generate additional clinical data in support of these products. JAZZ PHARMACEUTICALS | 2018 Annual Report 45 The regulatory approval process is expensive, time-consuming and uncertain and may prevent us or our partners from obtaining and maintaining approvals for the commercialization of some or all of our product candidates. We are not permitted to market a pharmaceutical product in the U.S. or in the EU member states until we receive approval from the FDA, the EC or the competent authorities of the EU member states, as applicable. Submission of an application for marketing authorization does not assure approval for marketing in any jurisdiction, and we may encounter significant difficulties or costs in our efforts to obtain approval to market products. Although PDUFA provides a ten-month deadline for the FDA to review a new drug application, or a six-month deadline for priority review, there is no guarantee that the FDA will meet that deadline, and the FDA can extend a PDUFA action date under certain circumstances. If the FDA fails to meet PDUFA targeted action dates established for any of our product candidates, the commercialization of the affected product candidate could be delayed or impaired. In the first quarter of 2018, the FDA accepted our NDA for solriamfetol for filing with a standard review. In December 2018, the FDA determined that a submission we made during the course of discussions regarding draft labeling for solriamfetol constituted a major amendment to the NDA, resulting in a three-month extension of the PDUFA goal date to March 20, 2019, to provide time for a full review of the submission. However, if the FDA fails to meet the PDUFA target action date for our solriamfetol NDA submission, requires significant labeling restrictions as described below or requires product labeling that negatively impacts patient, physician or payor acceptance of the product, our ability to commercialize solriamfetol in the U.S. could be delayed or impaired. We also submitted an MAA to the EMA in November 2018 for solriamfetol as a treatment to improve wakefulness and reduce EDS in adult patients with narcolepsy (with or without cataplexy) or OSA. We cannot predict whether we will be able to obtain approval of our NDA for solriamfetol in the U.S. or our marketing authorization in the EU in a timely manner and on what terms, or at all. Moreover, the redemption of a rare pediatric disease priority review voucher may not result in faster review or approval compared to products considered for approval under conventional FDA procedures and, in any event, does not assure ultimate approval by FDA. Any delay or failure in obtaining approval of a product candidate, or receipt of approval for narrower indications than sought, can have a negative impact on our ability to recoup or research and development costs and to successfully commercialize that product and on our financial performance. If the FDA, the EC or the competent authorities of the EU member states determine that our quality, safety or efficacy data do not warrant marketing approval, we could be required to conduct additional clinical trials as a condition to receiving approval, which could be costly and time-consuming and could delay the approval of our application. Even if we receive approval, it may be subject to significant labeling restrictions, including limitations on the dosing of the product, indicated uses for which we may market the product, or other warnings and precautions, such as the requirement for a REMS to ensure that the benefits of the drug outweigh the risks or the imposition of a boxed warning included in the labeling for the product. A boxed warning is the strongest type of warning that the FDA can require for a drug product and warns prescribers that the drug carries a significant risk of serious or even life-threatening adverse effects. The FDA requires a REMS and a boxed warning for Xyrem, and similar restrictions could be imposed on other products in the future. Regulatory authorities may also impose post-marketing obligations as part of their approval. Post-marketing obligations may lead to additional costs and burdens associated with commercialization of the drug, and may pose a risk to maintaining approval of the drug. We are subject to certain post-marketing requirements and commitments in connection with the approval of certain of our products, including Erwinaze, Defitelio and Vyxeos. For example, for Defitelio, in the U.S. the FDA imposed several post-marketing commitments and requirements in connection with its approval, including the requirement that we conduct a clinical trial to analyze the safety of defibrotide versus best supportive care in the prevention of VOD in adult and pediatric patients, and in the EU marketing authorization was granted under exceptional circumstances and requires us to comply with a number of post-marketing obligations, including a study to provide further data on long-term safety, health outcomes and patterns of utilization of Defitelio in normal use. Similarly, the FDA imposed post- marketing requirements in connection with its approval of our NDA for Vyxeos, including the requirement that we conduct a safety study to characterize infusion-related reactions in patients treated with Vyxeos and a clinical trial to determine dosing to minimize toxicity in patients with moderate and severe renal impairment, and the marketing authorization in the EU also requires us to comply with certain manufacturing-related post-approval commitments. In the event that we are unable to comply with our post-marketing obligations imposed as part of the marketing approvals in the U.S. or EU, our approval may be varied, suspended or revoked, product supply may be delayed and our sales of and revenues from our products could be materially adversely affected. A significant proportion of the regulatory framework in the UK is derived from EU laws. For that reason, the results of the formal procedure of withdrawal from the EU, initiated by the UK in March 2017, could materially change the regulatory regime applicable to our operations, including with respect to the approval of our product candidates, as there is significant uncertainty concerning the future 46 JAZZ PHARMACEUTICALS | 2018 Annual Report relationship between the UK and the EU. For a further discussion, see the risks under the heading “The UK’s planned withdrawal from the EU, commonly referred to as Brexit, may have a negative effect on global economic conditions, financial markets and our business” in this Part I, Item 1A. Risks Related to Our Intellectual Property It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. Our commercial success depends in part on obtaining, maintaining and defending intellectual property protection for our products and product candidates, including protection of their use and methods of manufacturing and distribution. Our ability to protect our products and product candidates from unauthorized making, using, selling, offering to sell or importation by third parties depends on the extent to which we have rights under valid and enforceable patents or have adequately protected trade secrets that cover these activities. The patent position of pharmaceutical companies can be highly uncertain and involve complex and often changing legal, regulatory and factual questions. The degree of protection to be afforded by our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example: • • • • • • our patent applications, or those of our licensors or partners, may not result in issued patents; others may independently develop similar or therapeutically equivalent products without infringing our patents, or those of our licensors, such as products that are not covered by the claims of our patents, or for which we do not have adequate exclusive rights under our license agreements; our issued patents, or those of our licensors or partners, may be held invalid or unenforceable as a result of legal challenges by third parties or may be vulnerable to legal challenges as a result of changes in applicable law; K - 0 1 m r o F we or our licensors or partners might not have been the first to invent or file, as appropriate, subject matters covered by our issued patents or pending patent applications or those of our licensors or partners; competitors may manufacture products in countries where we have not applied for patent protection or that have a different scope of patent protection or that do not respect our patents; or others may be issued patents that prevent the sale of our products or require licensing and the payment of significant fees or royalties. We have patents covering many of our products in Europe and other parts of the world where patent laws operate differently and provide a different scope of protection than in the U.S. For example, in the EU, approval of a generic pharmaceutical product can occur independently of whether the reference brand product is covered by patents, and enforcement of such patents generally must await approval and an indication that the generic product is being offered for sale. Patent enforcement generally must be sought on a country-by-country basis, and issues of patent validity and infringement may be judged differently in different countries. We own a portfolio of U.S. and non-U.S. patents and patent applications and have licensed rights to a number of issued patents and patent applications that cover or relate to our products and product candidates, including Xyrem, Defitelio, Vyxeos and solriamfetol. Changes in either the patent laws or in interpretations of patent laws in the U.S. and other countries may diminish the value of our intellectual property. Even if we are able to obtain patents covering our products and product candidates, any patent may be challenged, and potentially invalidated or held unenforceable, including through patent litigation or through patent office procedures that permit challenges to patent validity. Patents can also be circumvented, potentially including by FDA approval of an ANDA or Section 505(b)(2) application that avoids infringement of our intellectual property. Xyrem is covered by patents covering its manufacture, formulation, distribution system and method of use, and we have U.S. patents that extend to 2033. We have settled patent litigation with nine companies seeking to introduce generic versions of Xyrem in the U.S. by granting those companies licenses to launch their generic products in advance of the expiration of the last of our patents. Notwithstanding our patents and settlement agreements, additional third parties may also attempt to introduce generic versions of Xyrem or other sodium oxybate products for treatment of cataplexy and/or EDS in narcolepsy that design around our patents or assert that our patents are invalid or otherwise unenforceable. If these efforts are successful, then that third party could launch a generic or 505(b)(2) product referencing Xyrem before the dates provided in our patents or settlement agreements. For example, we have several method of use patents listed in the FDA’s publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” or the Orange Book, that expire in 2033 that cover instructions on the Xyrem package insert and Xyrem REMS related to a drug-drug interaction, or DDI, with divalproex sodium. Although the FDA has stated, in granting a Citizen Petition we submitted JAZZ PHARMACEUTICALS | 2018 Annual Report 47 in 2016, that it would not approve any sodium oxybate ANDA referencing Xyrem that does not include the portions of the currently approved Xyrem package insert related to the DDI patents, we cannot predict whether a future ANDA filer, or a company that files a Section 505(b)(2) application for a drug referencing Xyrem, may pursue regulatory strategies to avoid infringing our DDI patents notwithstanding the FDA’s response to the Citizen Petition, or whether any such strategy would be successful. Likewise, we cannot predict whether we will be able to maintain the validity of these patents or will otherwise obtain a judicial determination that a generic or other sodium oxybate product, its package insert or the generic sodium oxybate REMS or another separate REMS will infringe any of our patents or, if we prevail in proving infringement, whether a court will grant an injunction that prevents a future ANDA filer or other company introducing a different sodium oxybate product from marketing its product, or instead require that party to pay damages in the form of lost profits or a reasonable royalty. Since Xyrem’s regulatory exclusivity has expired in the EU, we are aware that generic or hybrid generic applications have been approved by various EU regulatory authorities, and additional generic or hybrid generic applications may be submitted and approved. We cannot predict whether our licensee in the EU will be able to enforce our existing European patents against generic or hybrid generic filers in the EU. For a discussion regarding the risks associated with our ANDA litigation settlement agreements, the potential launch of AG Products or other generic versions of Xyrem, or the approval and launch of other sodium oxybate or other products that compete with Xyrem, as well as other risks and challenges we face with respect to Xyrem, see the risk factors under the headings “Risks Related to Xyrem and the Our Other Marketed Products” and “We have incurred and may in the future 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 this Part I, Item 1A. We also rely on trade secrets and other unpatented proprietary information to protect our products and their commercial position, particularly with respect to our products with limited or no patent protection, such as Erwinaze, which has no patent protection. We seek to protect our trade secrets and other unpatented proprietary information in part through confidentiality and invention agreements with our employees, consultants, advisors and partners. Nevertheless, our employees, consultants, advisors and partners may unintentionally or willfully disclose our proprietary information to competitors, and we may not have adequate remedies for such disclosures. Enforcing a claim that a third party illegally obtained or is using any of our inventions or trade secrets would be expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside of the U.S. are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. In some instances, we also rely on regulatory exclusivity to protect our commercial position. In addition to relying on trade secret protection, Erwinaze was granted orphan drug exclusivity by the FDA for the treatment of ALL in the U.S. for a seven-year period from its FDA approval, which had precluded approval of another product with the same principal molecular structure for the same indication until November 2018. As a biologic product approved under a BLA, Erwinaze is also subject to the U.S. Biologics Price Competition and Innovation Act, or BPCIA. We believe that Erwinaze is protected by exclusivity that prevents approval of a biosimilar in the U.S. through late 2023 under the BPCIA. However, interpretation of regulatory exclusivity under the BPCIA may evolve over time based on FDA issuance of guidance documents, proposed regulations or decisions made by the FDA in the course of considering specific applications. In addition, the BPCIA exclusivity period does not prevent another company from independently developing a product that is highly similar to Erwinaze, generating all the data necessary for a full BLA and seeking approval. BPCIA exclusivity only assures that another company cannot rely on the FDA’s prior approvals of Erwinaze to support the biosimilar product’s approval. As a result, it is possible that a potential competing drug product might obtain FDA approval before the expected BPCIA exclusivity period has expired, which would adversely affect sales of Erwinaze. In the EU, the regulatory data protection that provides an exclusivity period for Erwinase has lapsed. Any new marketing authorizations for Erwinase in other EU member states will not receive any regulatory data protection. If a biosimilar product to Erwinaze is approved as interchangeable to Erwinaze in the U.S. or in other countries where Erwinaze is sold, a significant percentage of the prescriptions that would have been written for Erwinaze may be filled with the biosimilar version, resulting in a loss in sales of Erwinaze, and there may be a decrease in the price at which Erwinaze can be sold. Competition from a biosimilar product to Erwinaze could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our research and development collaborators may have rights to publish data and other information to which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. While the ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to contractual limitations, these contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication, or if we cannot otherwise maintain the confidentiality of our innovations and other confidential information, then our ability to obtain patent protection or protect our proprietary information may be jeopardized. Moreover, a dispute may arise with our employees, consultants, advisors or partners over the ownership of rights to 48 JAZZ PHARMACEUTICALS | 2018 Annual Report inventions, including jointly developed intellectual property. Such disputes, if not successfully resolved, could lead to a loss of rights and possibly prevent us from pursuing certain new products or product candidates. We have incurred and may in the future 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. Our ability, and that of our partners, to commercialize any approved products will depend, in part, on our ability to obtain patents, enforce those patents and operate without infringing the proprietary rights of third parties. If we choose to go to court to stop a third party from infringing our patents, our licensed patents or our partners’ patents, that third party has the right to ask the court or an administrative agency to rule that these patents are invalid and/or should not be enforced. These lawsuits and administrative proceedings are expensive and consume time and other resources, and we may not be successful in these proceedings or in stopping infringement. In addition, the inter partes review, or IPR, process under the Leahy-Smith America Invents Act permits any person, whether they are accused of infringing the patent at issue or not, to challenge the validity of certain patents. As a result, many types of entities, including ANDA filers, have challenged valuable pharmaceutical patents through the IPR process, and six of our Orange Book-listed patents for Xyrem were invalidated through this process. There is a risk that a court or the Patent Trial and Appeal Board, or PTAB, of the U.S. Patent and Trademark Office, or USPTO, could decide that our patents or certain claims in our patents are not valid or infringed, and that we do not have the right to stop a third party from using the inventions covered by those claims, as happened with the decision of the PTAB that certain of our patent claims covering the Xyrem REMS are invalid. In addition, even if we prevail in establishing that another product infringes a valid claim of one of our patents, a court may determine that we can be compensated for the infringement in damages, and refuse to issue an injunction. As a result, we may not be entitled to stop another party from infringing our patents for their full term. For more information, see the risk factors under the headings “Risks Related to Xyrem and Our Other Marketed Products” and “It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection” in this Part I, Item 1A. Lawsuits or proceedings we may file in the future, or our defense against any lawsuits or other proceedings that may be brought against us, may not costly and time-consuming and may not be successful in stopping the infringement of our patents. K - 0 1 m r o F Litigation involving patent matters is frequently settled between the parties, rather than continuing to a court ruling, and we have settled patent litigation with all nine Xyrem ANDA filers. The FTC has publicly stated that, in its view, certain types of agreements between branded and generic pharmaceutical companies related to the settlement of patent litigation or the manufacture, marketing and sale of generic versions of branded drugs violate the antitrust laws and has commenced investigations and brought actions against some companies that have entered into such agreements. In particular, the FTC has expressed its intention to take aggressive action to challenge settlements that include an alleged transfer of value from the brand company to the generic company (so-called “pay for delay” patent litigation settlements) and to call on legislators to pass stronger laws prohibiting such settlements. Because there is currently no precise legal standard with respect to the lawfulness of such settlements, there could be extensive litigation over whether any settlement that we have entered into or might enter into in the future constitutes a reasonable and lawful patent settlement. Parties to such settlement agreements in the U.S. are required by law to file the agreements with the FTC and the U.S Department of Justice, or DOJ, for review. Accordingly, we have submitted our ANDA litigation settlement agreements to the FTC and the DOJ for review. We may receive formal or informal requests from the FTC regarding our ANDA litigation settlements, and there is a risk that the FTC may commence a formal investigation or action against us, or a third party may initiate civil litigation regarding such settlements, which could divert the attention of management and cause us to incur significant costs, regardless of the outcome. Any claim or finding that we or our business partners have failed to comply with applicable laws and regulations could be costly to us and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. A third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights, or that we or such partners are infringing, misappropriating or otherwise violating other intellectual property rights, and may go to court to stop us from engaging in our normal operations and activities, including making or selling our products. Such lawsuits are costly and could affect our results of operations and divert the attention of management and development personnel. There is a risk that a court could decide that we or our partners are infringing, misappropriating or otherwise violating third party patent or other intellectual property rights, which could be very costly to us and have a material adverse effect on our business. In the pharmaceutical and life sciences industry, like other industries, it is not always clear to industry participants, including us, which patents cover various types of products or methods. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid or unenforceable, which we may not be able to do. JAZZ PHARMACEUTICALS | 2018 Annual Report 49 Because some patent applications in the U.S. may be maintained in secrecy until the patents are issued, because patent applications in the U.S. and many non-U.S. jurisdictions are typically not published until 18 months after their priority date, and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for inventions covered by our or our licensors’ issued patents or pending applications, or that we or our licensors were the first inventors. Some of our competitors may be able to sustain the costs of complex patent and other intellectual property litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. For further discussion of our Xyrem-related patent matters, see the risk factors under the headings “Risks Related to Xyrem and Our Other Marketed Products” and “Risks Related to Our Intellectual Property” and Note 12, Commitments and Contingencies—Legal Proceedings of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. Other Risks Related to Our Business and Industry We have substantially expanded our international footprint and operations, and we may expand further in the future, which subjects us to a variety of risks and complexities which, if not effectively managed, could negatively affect our business. We are headquartered in Dublin, Ireland and have multiple offices in the U.S., Canada, the UK, Italy and other countries in Europe. Our headcount has grown to approximately 1,360 as of February 2019. This includes employees in 15 countries in North America and Europe, a European commercial presence, a complex distribution network for products in Europe and additional territories, and manufacturing facilities in Italy and Ireland. We may further expand our international operations into other countries in the future, either organically or by acquisition. While we have management and other personnel with substantial international experience, conducting our business in multiple countries subjects us to a variety of risks and complexities that may materially and adversely affect our business, results of operations, financial condition and growth prospects. These risks and complexities include: • • • • the diverse regulatory, financial and legal requirements in the countries where we are located or do business, including those related to data security and the use of, or access to, commercial and personal information, taxation, trade laws, including tariffs, export quotas, custom duties or other trade restrictions, and any changes to those requirements; challenges inherent in efficiently managing employees in diverse geographies, including the need to adapt systems, policies, benefits and compliance programs to differing labor and employment law and other regulations, as well as maintaining positive interactions with our unionized employees; costs of, and liabilities for, our international operations, products or product candidates; and fluctuations in currency rates. In addition, as a result of our international expansion, our business and corporate structure has become substantially more complex. Significant management time and effort is required to effectively manage the increased complexity of our company, and there can be no guarantee that we will effectively manage the increased complexity without experiencing operating inefficiencies or control deficiencies. Our failure to do so could have a material adverse effect on our business, financial condition, results of operations and growth prospects. The UK’s planned withdrawal from the EU, commonly referred to as Brexit, may have a negative effect on global economic conditions, financial markets and our business. Brexit has created significant uncertainty concerning the future relationship between the UK and the EU, particularly if the UK withdraws from the EU without a ratified withdrawal agreement in place. From a regulatory perspective, there is uncertainty about which laws and regulations will apply. A significant portion of the regulatory framework in the UK is derived from EU laws. However, it is unclear which EU laws the UK will decide to replace or replicate in connection with its withdrawal from the EU. In particular, the regulatory regime applicable to our operations, including with respect to the approval of our product candidates, may change, potentially significantly, and the impact on the process for obtaining or maintaining marketing authorization for pharmaceutical products manufactured or sold in the UK is otherwise unknown. A basic requirement related to the grant of a marketing authorization for a medicinal product in the EU is the requirement that the applicant be established in the EU. Following withdrawal of the UK from the EU, marketing authorizations previously granted to applicants established in the UK through the centralized, mutual recognition or decentralized procedures may no longer be valid. Moreover, depending upon the exact terms of the UK’s withdrawal, there is a risk that the scope of a marketing authorization for a medicinal product granted by the EC pursuant to the centralized procedure, or by the competent authorities of other EU member states through the 50 JAZZ PHARMACEUTICALS | 2018 Annual Report decentralized or mutual recognition procedures, would not encompass the UK. In that circumstance, a separate authorization granted by the UK competent authorities would be required to place medicinal products on the UK market. In addition, the laws and regulations that will apply after the UK withdraws from the EU may have implications for manufacturing sites that hold certifications issued by the UK competent authorities. Our capability to rely on these manufacturing sites for products intended for the EU market will depend on the terms of the UK’s withdrawal and, potentially, on the ability to obtain relevant exemptions under EU law to supply the EU market with products manufactured at UK-certified sites. There is also the risk that if batch release and quality control testing sites for our products are located only in the UK, manufacturers will need to use sites in other EU member states. All of these changes, if they occur, could increase our costs and otherwise adversely affect our business. Brexit has also given rise to calls for the governments of other EU member states to consider withdrawal from the EU. These developments, or the perception that they could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, including by significantly reducing global market liquidity or restricting the ability of key market participants to operate in certain financial markets. In addition, currency exchange rates for the British Pound and the euro with respect to each other and to the U.S. dollar have already been negatively affected by Brexit. Should this foreign exchange volatility continue or be exacerbated by UK’s withdrawal from the EU, it could cause volatility in our quarterly financial results. We have an office in Oxford, England which is focused on commercialization of our products outside of the U.S. We do not know to what extent, or when, the UK’s withdrawal from the EU or any other future changes to membership in the EU will impact our business, particularly our ability to conduct international business from a base of operations in the UK. The UK could lose the benefits of global trade agreements negotiated by the EU on behalf of its members, possibly resulting in increased trade barriers, which could make doing business in Europe more difficult and/or costly. Moreover, in the U.S., tariffs on certain U.S. imports have recently been imposed, and the EU and other countries have responded with retaliatory tariffs on certain U.S. exports. We cannot predict what effects these and potential additional tariffs will have on our business, including in the context of escalating global trade and political tensions. However, these tariffs and other trade restrictions, whether resulting from the UK’s withdrawal from the EU or otherwise, could increase our cost of doing business, reduce our gross margins or otherwise negatively impact our financial results. K - 0 1 m r o F If we fail to attract, retain and motivate key personnel or to retain the members of our executive management team, our operations and our future growth may be adversely affected. Our success and our ability to grow depend in part on our continued ability to attract, retain and motivate highly qualified personnel. We are highly dependent upon our executive management team and other critical personnel, all of whom work on many complex matters that are essential to our success. We do not carry “key person” insurance. The loss of services of one or more members of our executive management team or other key personnel could delay or prevent the successful completion of some of our vital activities. Any employee may terminate his or her employment at any time without notice or with only short notice and without cause or good reason. The resulting loss of institutional knowledge may negatively impact our operations and future growth. In addition, to grow our company we will need additional personnel. Competition for qualified personnel in the pharmaceutical industry is intense. If we are unable to attract, retain and motivate quality individuals, including in our research and development operations, which are continuing to expand, our business, financial condition, results of operations and growth prospects could be adversely affected. We also depend on the unique abilities, industry experience and institutional knowledge of the members of our board of directors to efficiently set company strategy and effectively guide our executive management team. We cannot be certain that future board turnover will not negatively affect our business. Significant disruptions of information technology systems or data security breaches could adversely affect our business. We are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, store, process and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality, integrity and availability of such information. We have also outsourced some of our operations (including parts of our information technology infrastructure) to a number of third party vendors who may have, or could gain, access to our confidential information. In addition, many of those third parties, in turn, subcontract or outsource some of their responsibilities to third parties. Our information technology systems are large and complex and store large amounts of confidential information. The size and complexity of these systems make them potentially vulnerable to service interruptions or to security breaches from inadvertent or JAZZ PHARMACEUTICALS | 2018 Annual Report 51 intentional actions by our employees, third party vendors and/or business partners, or from cyber-attacks by malicious third parties. Attacks of this nature are increasing in frequency, persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise, including organized criminal groups, “hacktivists,” nation states and others. In addition to the extraction of important information, such attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of our information. Although the aggregate impact on our operations and financial condition has not been material to date, we have been the target of events of this nature and expect them to continue. Significant disruptions of our, our third party vendors’ and/or business partners’ information technology systems or security breaches could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and could result in financial, legal, business and reputational harm to us. Any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could disrupt our business, result in increased costs or loss of revenue, and/or result in significant legal and financial exposure. In addition, security breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may further harm us. Moreover, the prevalent use of mobile devices to access confidential information increases the risk of security breaches. While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect our business. In addition, failure to maintain effective internal accounting controls related to security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and subject us to regulatory scrutiny. In addition to those specifically described in other risk factors, 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. FDA and Equivalent Non-U.S. Regulatory Authorities Our activities are subject to extensive regulation encompassing the entire life cycle of our products, from research and development activities to marketing approval (including specific post-marketing obligations), manufacturing, labeling, packaging, adverse event and safety reporting, storage, advertising, promotion, sale, pricing and reimbursement, recordkeeping, distribution, importing and exporting. These requirements apply both to us and to third parties we contract with to perform services and supply us with products. The failure by us or any of our third party partners, including clinical trial sites, suppliers, distributors and our central pharmacy for Xyrem, to comply with applicable requirements could subject us to administrative or judicial sanctions or other negative consequences, such as delays in approval or refusal to approve a product candidate, restrictions on our products, our suppliers, our other partners or us, the withdrawal, suspension or variation of product approval, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, product recall, withdrawal or seizure, total or partial suspension of production or distribution, interruption of manufacturing or clinical trials, operating restrictions, injunctions, suspension of licenses, civil penalties and/or criminal prosecution, any of which could result in a significant drop in our revenues from the affected products and harm to our reputation and could have a significant impact on our sales, business and financial condition. We monitor adverse events resulting from the use of our products, as do the regulatory authorities, and we file periodic reports with the authorities concerning adverse events. The authorities review these events and reports, and if they determine that any events and/or reports indicate a trend or signal, they can require a change in a product label, restrict sales and marketing and/or require or conduct other actions, potentially including withdrawal or suspension of the product from the market, any of which could result in reduced market acceptance and demand for our products, could harm our reputation and our ability to market our products in the future, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. The FDA and the competent authorities of the EU member states on behalf of the EMA also periodically inspect our records related to safety reporting. Following such inspections, the FDA may issue notices on FDA Form 483 and warning letters that could cause us to modify certain activities. The EMA’s Pharmacovigilance Risk Assessment Committee may propose to the Committee for Medicinal Products for Human Use that the marketing authorization holder be required to take specific steps or advise that the existing marketing authorization be varied, suspended or revoked. Failure to adequately and promptly correct the observation(s) can result in further regulatory enforcement action, which could include the variation, suspension or withdrawal of marketing authorization or imposition of financial penalties or other enforcement measures. The failure to adequately address and promptly correct any matters identified by the FDA or other regulatory agencies could have a material adverse effect on our business, financial condition, results of operations and growth prospects. 52 JAZZ PHARMACEUTICALS | 2018 Annual Report Erwinase, defibrotide and Vyxeos are available on a named patient basis in many countries where they are not commercially available. If any such country’s regulatory authorities determine that we are promoting such products without proper authorization, we could be found to be in violation of pharmaceutical advertising laws or the regulations permitting sales under named patient programs. In that case, we may be subject to financial or other penalties. Moreover, any failure to maintain revenues from sales of Erwinase, defibrotide and/ or Vyxeos on a named patient basis and/or to generate revenues from commercial sales of these products exceeding historical sales on a named patient basis could have a material adverse effect on our business, financial condition, results of operations and growth prospects. The FDA, the competent authorities of the EU member states and other governmental authorities require advertising and promotional labeling to be truthful and not misleading, and products to be marketed only for their approved indications and in accordance with the provisions of the approved label. Regulatory authorities actively investigate allegations of off-label promotion in order to enforce regulations prohibiting these types of activities. If we are found to have promoted an approved product for off-label uses, we may be subject to significant liability, including civil and administrative financial penalties and other remedies as well as criminal financial penalties, other sanctions and imprisonment. Even if we are not determined to have engaged in off-label promotion, an allegation that we have engaged in such activities could have a significant impact on our sales, business and financial condition. The U.S. government has also required companies to enter into complex corporate integrity agreements and/or non-prosecution agreements that impose significant reporting and other burdens on the affected companies. Failure to maintain a comprehensive and effective compliance program, and to integrate the operations of acquired businesses into a combined comprehensive and effective compliance program on a timely basis, could subject us to a range of regulatory actions that could affect our ability to commercialize our products and could harm or prevent sales of the affected products, or could substantially increase the costs and expenses of commercializing and marketing our products. In the EU, the advertising and promotion of our products are also subject to EU member states’ laws governing promotion of medicinal products, including limitations on our promotional activities with health care professionals, advertising and promotion of our products to the general public, misleading and comparative advertising and unfair commercial practices. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment. These laws may also impose limitations on our promotional activities with health care professionals. K - 0 1 m r o F Other Regulatory Authorities We are also subject to regulation by other regional, national, state and local agencies, including the DEA, the DOJ, the FTC, the United States Department of Commerce, the Office of Inspector General, or OIG, of the HHS and other regulatory bodies, as well as similar governmental authorities in those non-U.S. countries in which we commercialize our products. We are subject to numerous anti-fraud and abuse laws and regulations globally and our sales, marketing, patient support and medical activities may be subject to scrutiny under these laws and regulations. For example, the U.S. federal anti-kickback statute is broad and activities that involve providing anything of value to those who prescribe, purchase, or recommend pharmaceutical products may be subject to scrutiny. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities, the exemptions and safe harbors are drawn narrowly, and practices or arrangements that involve remuneration may be subject to scrutiny if they do not clearly qualify for an exemption or safe harbor. While we maintain a comprehensive compliance program to try to ensure that our practices and the activities of our third-party contractors and employees fall within the scope of such exceptions and safe harbors, regulators and enforcement agencies may disagree with our assessment or find fault with the conduct of our employees or contractors. In addition, existing regulations are subject to regulatory revision or changes in interpretation by the DOJ or OIG. Violations of the federal anti-kickback statute may be punished by civil and criminal fines, imprisonment, and/or exclusion from participation in federal healthcare programs. The federal civil False Claims Act prohibits, among other things, making a fraudulent claim for payment of federal funds or a false statement to get a false claim paid. The government may assert that a claim resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim under the False Claims Act. Many companies have faced government investigations or lawsuits by whistleblowers who bring a qui tam action under the False Claims Act on behalf of themselves and the government for a variety of alleged improper marketing activities, including providing free product to customers expecting that the customers would bill federal programs for the product, providing consulting fees, grants, free travel and other benefits to physicians to induce them to prescribe the company’s products, and inflating prices reported to private price publication services, which are used to set drug reimbursement rates under government healthcare programs. In addition, the government and private whistleblowers have pursued False Claims Act cases against pharmaceutical companies for causing false claims to be submitted as a result of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws, including federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs. If we become the subject of a government False Claims Act or other investigation or whistleblower suit, we could incur substantial legal costs (including settlement costs) and JAZZ PHARMACEUTICALS | 2018 Annual Report 53 business disruption responding to such investigation or suit, regardless of the outcome. Violations of the False Claims Act may result in significant financial penalties (on a per claim or statement basis), treble damages and exclusion from participation in federal health care programs. The majority of individual states also have statutes or regulations similar to the federal anti-kickback law and the False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. The Physician Payment Sunshine Act, or Sunshine provisions, currently requires us to track and report to the federal government payments and transfers of value that we make to physicians and teaching hospitals and ownership interests held by physicians and their family, and provides for public disclosures of these data. Public reporting under the Sunshine provisions has resulted in increased scrutiny of the financial relationships between industry, teaching hospitals and physicians. Such scrutiny may negatively impact our ability to engage with physicians on matters of importance to us. In addition, government agencies and private entities may inquire about our marketing practices or pursue other enforcement activities based on the disclosures in those public reports. For example, certain states require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and gifts and payments to individual physicians, and/or restrict when and to what extent pharmaceutical companies may provide meals to prescribers or engage in other marketing related activities. If the data reflected in our reports are found to be in violation of any of the Sunshine provisions or any other U.S. federal, state or local laws or regulations that may apply, or if we otherwise fail to comply with the Sunshine provisions or similar requirements of state or local regulators, we may be subject to significant civil, criminal and administrative penalties, damages or fines. Outside the U.S., interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct. The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products, which is prohibited in the EU, is governed by the national anti-bribery laws of the EU member states, as described below. Violation of these laws could result in substantial fines and imprisonment. Certain EU member states require that payments made to physicians be publicly disclosed. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or the competent authorities of the individual EU member states. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment. Xyrem is a controlled substance under the Controlled Substances Act, or CSA. Our suppliers, distributors, clinical sites and the central pharmacy for Xyrem are subject to DEA and state regulations relating to manufacturing, storage, distribution and physician prescription procedures, including limitations on prescription refills, and are required to maintain DEA registration and state licenses, when handling Xyrem and its API. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA, relevant state authorities or any comparable international requirements could lead to a variety of sanctions, including revocation or denial of renewal of DEA registrations, fines, injunctions, or civil or criminal penalties, could result in, among other things, additional operating costs to us or delays in shipments outside or into the U.S. and could have an adverse effect on our business and financial condition. DEA quotas are required for any U.S. supplier to manufacture sodium oxybate or Xyrem. New oxybate market entrants, including generic products, may impact the amount of quota available in the U.S., and if, our suppliers cannot obtain the quotas that are needed on a timely basis, or at all, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. We expect that solriamfetol will be subject to scheduling review under the CSA before it can be commercially launched. For a further discussion on controlled substance regulations, see the discussion under the heading “Business—Government Regulation—Other Post- Approval Pharmaceutical Product Regulation—Controlled Substance Regulations” in Part I, Item 1 of this Annual Report on Form 10-K. We have various programs to help patients access our products, including patient assistance programs, which include co-pay coupons for certain of our products, services that help patients determine their insurance coverage for our products, and a free product program. Co-pay coupon programs for commercially insured patients, including our program for Xyrem, have received negative publicity related to allegations regarding their use to promote branded pharmaceutical products over other less costly alternatives. In the past, payors brought class action lawsuits challenging the legality of manufacturer co-pay programs under a variety of federal and state laws and insurers have taken actions through their network pharmacies and PBMs to restrict manufacturer co-pay programs. In September 2014, the OIG issued a Special Advisory Bulletin warning manufacturers that they may be subject to sanctions under the federal anti-kickback statute and other laws if they do not take appropriate steps to exclude Medicare Part D beneficiaries from using co-pay coupons. It is possible that changes in insurer policies regarding co-pay coupons and/or the introduction and enactment of new legislation or regulatory action could restrict or otherwise negatively affect these patient support programs, which could result in fewer patients using affected products, including Xyrem, and therefore could have a material adverse effect on our sales, business and financial condition. 54 JAZZ PHARMACEUTICALS | 2018 Annual Report We have established programs to consider grant applications submitted by independent charitable organizations, including organizations that provide co-pay support to patients who suffer from the diseases treated by our drugs. The OIG has established guidelines that suggest that it is lawful for 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, such facts could be used as the basis for an enforcement action against us by the federal government. In 2016 and 2017, we received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of charitable organizations that provide financial assistance to Medicare patients. In April 2018, we reached an agreement in principle with the DOJ on a proposal for a civil settlement of potential claims by the DOJ in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies. We expect any such settlement will involve entry into a corporate integrity agreement, which will impose significant costs and operational burdens on our business. Moreover, a failure to comply with the terms of a corporate integrity agreement could result in monetary penalties or a reduction or elimination of coverage for our products by federal health care programs such as Medicare and Medicaid and state health care programs. If we do not reach a final settlement, or if we are unable to successfully negotiate and enter into a corporate integrity agreement, the outcome of this investigation could include an enforcement action against us. If the federal government were to file an enforcement action against us as a result of the investigation and could establish the elements of a violation of relevant laws, we could be subject to damages, fines and penalties, which could be substantial, along with other criminal, civil or administrative sanctions, including exclusion from participation in federal health care programs. We would expect to incur significant costs in connection with any enforcement action, regardless of the outcome. K - 0 1 m r o F We may also become subject to similar investigations by other state or federal governmental agencies or offices. Any additional investigations of our patient assistance programs or other business practices may result in damages, fines, penalties or other criminal, civil or administrative sanctions or enforcement actions. Such investigations may also result in negative publicity or other negative actions that could harm our reputation, impact our business practices, reduce demand for, or patient access to, our products and/or reduce coverage of our products, including by federal health care programs and state health care programs. If any or all of these events occur, our business, financial condition, results of operations and stock price could be materially and adversely affected. Our business activities outside of the U.S. are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate, including the UK Bribery Act of 2010, or the UK Bribery Act. Our heavily regulated business involves significant interaction with public officials, including officials of non-U.S. governments. Additionally, in certain countries, the health care providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and purchasers may be subject to regulation under the FCPA and the UK Bribery Act. Recently the U.S. Securities and Exchange Commission, or SEC, and the DOJ have increased their FCPA enforcement activities with respect to pharmaceutical companies. In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, private individuals who report original information to the SEC that leads to successful enforcement actions may be eligible for a monetary award. There is no certainty that all employees and third party business partners (including our distributors, wholesalers, agents, contractors, and other partners) will comply with anti-bribery laws. In particular, we do not control the actions of suppliers and other third party agents, although we may be liable for their actions. Violation of these laws may result in civil or criminal sanctions, which could include monetary fines, criminal penalties, and disgorgement of past profits, which could have a material adverse impact on our business and financial condition. We are also subject to data protection and privacy laws and regulations governing the processing of personal data. The legislative and regulatory landscape for privacy and data security continues to evolve, and there has been an increasing focus on privacy and data security issues which may affect our business. Failure to comply with current and future laws and regulations, such as the EU General Data Protection Regulation that became effective in May 2018 and the California Consumer Privacy Act of 2018 that will become effective beginning January 2020, could result in government enforcement actions (including the imposition of significant penalties), criminal and civil liability for us and our officers and directors, private litigation and/or adverse publicity that negatively affects our business. If we or our vendors fail to comply with applicable data privacy laws, or if the legal mechanisms we or our vendors rely upon for the transfer of personal data are ever deemed inadequate, we could be subject to government enforcement actions and significant penalties against us, and our business could be adversely impacted if our ability to transfer personal data outside of the European Economic Area or Switzerland is restricted, which could adversely impact our operating results. In addition, although we are not directly subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HIPAA, other than with respect to providing certain employee benefits, we potentially could be subject JAZZ PHARMACEUTICALS | 2018 Annual Report 55 to criminal penalties if we, our affiliates or our agents knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, agreements between branded pharmaceutical companies and potential generic competitors settling patent litigation must be submitted to the FTC and the DOJ for review. The FTC has publicly stated that, in its view, certain brand-generic settlement agreements violate the antitrust laws and has brought actions against some companies that have entered into such agreements. In particular, the FTC has expressed its intention to take aggressive action to challenge settlements that include an alleged transfer of value from the brand company to the generic company (so-called “pay for delay” patent litigation settlements) and to call on legislators to pass stronger laws prohibiting such settlements. Because there is currently no precise legal standard with respect to the lawfulness of such settlements, there could be extensive litigation over whether any settlement that we have entered into or might enter into in the future constitutes a reasonable and lawful patent settlement. We may receive formal or informal requests from the FTC regarding our Xyrem patent settlements, and there is a risk that the FTC may commence a formal investigation or action against us, or a third party may initiate civil litigation regarding such settlements, which could divert the attention of management and cause us to incur significant costs, regardless of the outcome. We cannot predict the outcome of any potential government investigation of any antitrust claims, including those described above, or the impact of any such claims. In addition to those described in this and other risk factors, numerous federal, state and non-U.S. statutes and regulations govern the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information, promotion, marketing, and pricing to government purchasers and government healthcare programs. Any claim or finding that we or our business partners have failed to comply with applicable laws and regulations could be costly to us and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines. Our reporting and payment obligations under the Medicaid Drug Rebate program and other governmental programs are described under the heading “Business—Pharmaceutical Pricing, Reimbursement by Government and Private Payors and Patient Access” in Part I, Item 1 of this Annual Report on Form 10-K. Our failure to comply with these obligations could negatively impact our financial results. The Centers for Medicare and Medicaid Services, or CMS, issued a final regulation, which became effective on April 1, 2016, to implement the changes to the Medicaid Drug Rebate program under the Healthcare Reform Act. The issuance of the final regulation, as well as any other regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program, has increased and will continue to increase our costs and the complexity of compliance, has been and will continue to be time-consuming to implement, and could have a material adverse effect on our results of operations, particularly if CMS challenges the approach we take in our implementation of the final regulation. We also participate in the 340B program, which is described in more detail under the heading “Business—Pharmaceutical Pricing, Reimbursement by Government and Private Payors and Patient Access” in Part I, Item 1A of this Annual Report on Form 10-K. The Health Resources and Services Administration, or HRSA, issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. Implementation of this regulation could affect our obligations and potential liability under the 340B program in ways we cannot anticipate. HRSA also began to implement a ceiling price reporting requirement related to the 340B program during the first quarter of 2019. There is no guarantee that our submissions will not be found by HRSA to be incomplete or incorrect. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting. We have obligations to report the average sales price for certain of our drugs to the Medicare program, as described in more detail under the heading “Business—Pharmaceutical Pricing, Reimbursement by Government and Private Payors and Patient Access” in Part I, Item 1A of this Annual Report on Form 10-K. Statutory or regulatory changes or CMS guidance could affect the average sales price calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations. Pricing and rebate calculations vary across products and programs, are complex, and are often subject to interpretation by us, governmental or regulatory agencies and the courts. In the case of our Medicaid pricing data, if we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for up to three years after those data originally were due. Such restatements and recalculations increase our costs for complying with the 56 JAZZ PHARMACEUTICALS | 2018 Annual Report laws and regulations governing the Medicaid Drug Rebate program and could result in an overage or underage in our rebate liability for past quarters. Price recalculations also may affect the ceiling price at which we are required to offer our products under the 340B program. Civil monetary penalties can be applied if we are found to have knowingly submitted any false price information to the government, if we are found to have made a misrepresentation in the reporting of our average sales price, or if we fail to submit the required price data on a timely basis, or if we are found to have charged 340B covered entities more than the statutorily mandated ceiling price. Such conduct also could be grounds for CMS to terminate our Medicaid drug rebate agreement, in which case federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs. There is no guarantee that our submissions will not be found by CMS to be incomplete or incorrect. We participate in the U.S. Department of Veterans Affairs, Federal Supply Schedule, or FSS, pricing program and the Tricare Retail Pharmacy program, as described in more detail under the heading “Business—Pharmaceutical Pricing, Reimbursement by Government and Private Payors and Patient Access” in Part I, Item 1A of this Annual Report on Form 10-K. Pursuant to applicable law, knowing provision of false information in connection with price reporting under these programs can subject a manufacturer to civil monetary penalties. These program obligations also contain extensive disclosure and certification requirements. If we overcharge the government in connection with our arrangements with FSS or Tricare, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. K - 0 1 m r o F Our business and operations could be negatively affected if we become subject to shareholder activism, which could cause us to incur significant expense, hinder execution of our business strategy and impact our stock price. Shareholder activism, which takes many forms and arises in a variety of situations, has been increasingly prevalent. If we become the subject of certain forms of shareholder activism, such as proxy contests, the attention of our management and our board of directors may be diverted from execution of our strategy. Such shareholder activism could give rise to perceived uncertainties as to our future strategy, adversely affect our relationships with business partners and make it more difficult to attract and retain qualified personnel. Also, we may incur substantial costs, including significant legal fees and other expenses, related to activist shareholder matters. Our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any shareholder activism. Product liability and product recalls could harm our business. The development, manufacture, testing, marketing and sale of pharmaceutical products are associated with significant risks of product liability claims or recalls. Side effects or adverse events known or reported to be associated with, or manufacturing defects in, the products sold by us could exacerbate a patient’s condition, or could result in serious injury or impairment or even death. This could result in product liability claims against us and/or recalls of one or more of our products. In many countries, including in EU member states, national laws provide for strict (no-fault) liability which applies even where damages are caused both by a defect in a product and by the act or omission of a third party. Product liability insurance coverage is expensive, can be difficult to obtain and may not be available in the future on acceptable terms, or at all. Our product liability insurance may not cover all of the future liabilities we might incur in connection with the development, manufacture or sale of our products. In addition, we may not continue to be able to obtain insurance on satisfactory terms or in adequate amounts. A successful claim or claims brought against us in excess of available insurance coverage could subject us to significant liabilities and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Such claims could also harm our reputation and the reputation of our products, adversely affecting our ability to market our products successfully. In addition, defending a product liability lawsuit is expensive and can divert the attention of key employees from operating our business. Product recalls may be issued at our discretion or at the discretion of our suppliers, government agencies and other entities that have regulatory authority for pharmaceutical sales. Any recall of our products could materially adversely affect our business by rendering us unable to sell that product for some time and by adversely affecting our reputation. A recall could also result in product liability claims by individuals and third party payors. In addition, product liability claims could result in an investigation of the safety or efficacy of our products, our manufacturing processes and facilities, or our marketing programs conducted by the FDA, the EMA, or the competent authorities of the EU member states. Such investigations could also potentially lead to a recall of our products or more serious enforcement actions, limitations on the therapeutic indications for which they may be used, or suspension, variation, or withdrawal of approval. Any such regulatory action by the FDA, the EC or the competent authorities of the EU member states could lead to product liability lawsuits as well. JAZZ PHARMACEUTICALS | 2018 Annual Report 57 We use hazardous materials in our manufacturing facilities, and any claims relating to the improper handling, storage, release or disposal of these materials could be time-consuming and expensive. Our operations are subject to complex and increasingly stringent environmental, health and safety laws and regulations in the countries where we operate and, in particular, in Italy and Ireland where we have manufacturing facilities. Environmental and health and safety authorities in Italy and Ireland administer laws governing, among other matters, the emission of pollutants into the air (including the workplace), the discharge of pollutants into bodies of water, the storage, use, handling and disposal of hazardous substances, the exposure of persons to hazardous substances, and the general health, safety and welfare of employees and members of the public. Our manufacturing facilities are involved in the controlled storage, use and disposal of chemicals and solvents. Even if our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by EU laws, we cannot completely eliminate the risk of contamination or injury from hazardous materials. If an accident occurs, an injured party could seek to hold us liable for any damages that result and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all. In certain cases, laws may impose strict liability for pollution of the environment and contamination resulting from spills, disposals or other releases of hazardous substances or waste or any migration of such hazardous substances or waste. Costs, damages and/or fines may result from the presence, investigation and remediation of such contamination at properties currently or formerly owned, leased or operated by us or at off-site locations, including where we have arranged for the disposal of hazardous substances or waste. In addition, we may be subject to third party claims, including for natural resource damages, personal injury and property damage, in connection with such contamination. We may incur significant costs to comply with current or future EU environmental laws. Risks Related to Our Financial Condition and Results We have incurred substantial debt, which could impair our flexibility and access to capital and adversely affect our financial position. As of December 31, 2018, we had total indebtedness of approximately $1.8 billion, which included $651.0 million in outstanding term loan indebtedness under a secured credit agreement that we entered into in June 2015 and subsequently amended in July 2016 and in June 2018, which we refer to as the amended credit agreement, $575.0 million of outstanding indebtedness under our 1.875% exchangeable senior notes due 2021, or the 2021 Notes, which were issued in August 2014, and $575.0 million of outstanding indebtedness under our 1.50% exchangeable senior notes due 2024, or the 2024 Notes, which were issued in August 2017 and which we refer to, together with the 2021 Notes, as the Exchangeable Senior Notes. Our debt may: • • • • • • • limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes; limit our ability to use our cash flow or obtain additional financing for working capital, capital expenditures, acquisitions or other general business purposes; require us to use a substantial portion of our cash flow from operations to make debt service payments; limit our flexibility to plan for, or react to, changes in our business and industry; result in dilution to our existing shareholders in the event exchanges of the Exchangeable Senior Notes are settled in our ordinary shares; place us at a competitive disadvantage compared to our less leveraged competitors; and increase our vulnerability to the impact of adverse economic and industry conditions. Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. If we do not have sufficient funds to meet our debt service obligations, we may be required to refinance or restructure all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can assure you that we would be able to do in a timely manner, or at all. 58 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F Covenants in our amended credit agreement restrict our business and operations in many ways and if we do not effectively manage our covenants, our financial conditions and results of operations could be adversely affected. The amended credit agreement provides for a $667.7 million principal amount term loan due in June 2023 and a $1.6 billion revolving credit facility, with any loans under such revolving credit facility due in June 2023, subject to early mandatory repayments under certain circumstances. The amended credit agreement contains various covenants that, among other things, limit our ability and/or our restricted subsidiaries’ ability to: • • • • incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons; issue redeemable preferred stock; pay dividends or distributions or redeem or repurchase capital stock; prepay, redeem or repurchase certain debt; • make loans, investments, acquisitions (including acquisitions of exclusive licenses) and capital expenditures; • • • • enter into agreements that restrict distributions from our subsidiaries; sell assets and capital stock of our subsidiaries; enter into certain transactions with affiliates; and consolidate or merge with or into, or sell substantially all of our assets to, another person. The amended credit agreement also includes financial covenants that require us to maintain a maximum secured leverage ratio and a minimum interest coverage ratio. Our ability to comply with these financial covenants may be affected by events beyond our control. In addition, the covenants under the amended credit agreement could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions to take advantage of certain business opportunities that may be presented to us. Our failure to comply with any of the covenants could result in a default under the amended credit agreement, which could permit the lenders to declare all or part of any outstanding borrowings to be immediately due and payable, or to refuse to permit additional borrowings under the revolving credit facility. A default under the amended credit agreement could also lead to a default under other debt agreements or obligations, including the indentures governing the Exchangeable Senior Notes. In addition, the holders of the Exchangeable Senior Notes have the ability to require us to repurchase their notes for cash if 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. Moreover, upon exchange of the Exchangeable Senior Notes, unless we elect to deliver only our ordinary shares to settle such exchange, we will be required to make cash payments in respect of the Exchangeable Senior Notes. It is our intent and policy to settle the principal amount of the Exchangeable Senior Notes in cash upon exchange. However, we may not have enough available cash or be able to obtain financing at the time we are required to make any required repurchases of surrendered Exchangeable Senior Notes or to pay cash upon exchanges of the Exchangeable Senior Notes. Our failure to repurchase the Exchangeable Senior Notes at a time when the repurchase is required by the indentures governing the Exchangeable Senior Notes or to pay any cash payable on future exchanges of the Exchangeable Senior Notes as required by the indentures governing the Exchangeable Senior Notes would constitute a default under that indenture. A default under those indentures could also lead to a default under other debt agreements or obligations, including the amended credit agreement. If the repayment of the related indebtedness were to be accelerated, we may not have sufficient funds to repay the related indebtedness, which could have a material adverse effect on our financial condition and our business. In this regard, if we are unable to repay amounts under the amended credit agreement, the lenders under the amended credit agreement could proceed against the collateral granted to them to secure that debt, which would seriously harm our business. We may not be able to generate sufficient cash to service our debt obligations. Our ability to make payments on and to refinance our debt will depend on our future financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of positive cash flows from operating activities sufficient to permit us to pay the principal and interest on our debt. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, seek additional capital or restructure or refinance our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and JAZZ PHARMACEUTICALS | 2018 Annual Report 59 other obligations. The amended credit agreement restricts our ability to dispose of assets, use the proceeds from any disposition of assets and refinance our indebtedness. We may not be able to consummate or obtain proceeds from such dispositions, and any such proceeds may not be adequate to meet any debt service obligations then due. In addition, our borrowings under the amended credit agreement are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease. 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. The scope of our business and operations has grown substantially since 2012 through a series of transactions, including the business combination between Jazz Pharmaceuticals, Inc. and Azur Pharma Public Limited Company, which we refer to as the Azur Merger, and our acquisitions of EUSA Pharma Inc., Gentium S.r.l. and Celator Pharmaceuticals, Inc. To continue to grow our business over the longer term, we will need to commit substantial additional resources to our business and execution of our strategy. Our ongoing capital requirements will depend on many factors, including: • • • • • • • • • the revenues from our commercial products, which may be affected by many factors, including the extent of competition for Xyrem or our other products; the cost of acquiring and/or in-licensing any new products and product candidates; the costs of our commercial operations; the scope, rate of progress, results and costs of our development and clinical activities; the cost and timing of obtaining regulatory approvals and of compliance with laws and regulations; the cost of preparing, filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the cost of investigations, litigation and/or settlements related to regulatory oversight and third party claims; the costs of integration activities related to any future strategic transactions we may engage in; and the costs arising from changes in laws and regulations, including, for example, healthcare reform legislation. Our strategy includes the expansion of our business through acquiring or in-licensing, and developing, additional products and product candidates that we believe are highly differentiated and have significant commercial potential. See the risk factor under the heading “We may not be able to successfully identify and acquire or in-license additional products or product candidates to grow our business, and, even if we are able to do so, we may otherwise fail to realize the anticipated benefits of these acquisitions” in this Part I, Item 1A. We may be unable to expand our business if we do not have sufficient capital or cannot borrow or raise additional capital on attractive terms. Our substantial indebtedness may limit our ability to borrow additional funds for acquisitions or to use our cash flow or obtain additional financing for future acquisitions. In addition, if we use a substantial amount of our funds to acquire or in-license products or product candidates, we may not have sufficient additional funds to conduct all of our operations in the manner we would otherwise choose. We may not be able to access the capital and credit markets on terms that are favorable to us, or at all. During the past several years, domestic and international financial markets have experienced extreme disruption from time to time, including, among other things, high volatility and significant variability in stock prices, which has caused uncertainty with regard to credit availability for many borrowers. We expect to opportunistically seek access to the capital and credit markets to supplement our existing cash balances, cash we expect to generate from operations and funds available under our revolving credit facility to satisfy our needs for working capital, capital expenditures and debt service requirements or to continue to grow our business over the longer term through product acquisition and in-licensing, product development and clinical trials of product candidates, and expansion of our commercial operations. In the event of adverse capital and credit market conditions, including as a result of the UK’s withdrawal from the EU or as a result of tariffs and other trade restrictions potentially contributing to instability in the global financial markets, we may not be able to obtain capital market financing or credit on favorable terms, or at all, which could have a material adverse effect on our business and growth prospects. Changes in our credit ratings issued by nationally recognized credit rating agencies could also adversely affect our cost of financing and have an adverse effect on the market price of our securities. 60 JAZZ PHARMACEUTICALS | 2018 Annual Report We have significant intangible assets and goodwill. Consequently, the future impairment of our intangible assets and goodwill may significantly impact our profitability. Our intangible assets and goodwill are significant. As of December 31, 2018, we had recorded $3.7 billion of intangible assets and goodwill related to our past acquisitions. Intangible assets and goodwill are subject to an impairment analysis whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. For example, in connection with entry into an asset purchase agreement in June 2018 to sell substantially all of the assets held by us related to Prialt® (ziconotide) intrathecal infusion, we recognized an impairment charge of $42.9 million in our consolidated statements of income in 2018, primarily related to the carrying balances of intangible assets. Additionally, goodwill and indefinite-lived assets are subject to an impairment test at least annually. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Our results of operations and financial position in future periods could be negatively impacted should future impairments of intangible assets or goodwill occur. Our financial results have been and may continue to be adversely affected by foreign currency exchange rate fluctuations. We have significant operations in Europe as well as in the U.S., but we report revenues, costs and earnings in U.S. dollars. Our primary currency translation exposure relates to our subsidiaries that have functional currencies denominated in the euro. Exchange rates between the U.S. dollar and the euro have fluctuated and are likely to continue to fluctuate from period to period. Because our financial results are reported in U.S. dollars, we are exposed to foreign currency exchange risk as the functional currency financial statements of non-U.S. subsidiaries are translated to U.S. dollars for reporting purposes. To the extent that revenue and expense transactions are not denominated in the functional currency, we are also subject to the risk of transaction losses. For example, because our Defitelio and Erwinase product sales outside of the U.S. and potential future sales of Vyxeos are or will be primarily denominated in the euro, our sales of those products have been and may continue to be adversely affected by fluctuations in foreign currency exchange rates. In this regard, when the U.S. dollar strengthens against a foreign currency, the relative value of sales made in the foreign currency decreases. Conversely, when the U.S. dollar weakens against a foreign currency, the relative value of such sales increases. Accordingly, increases in the value of the U.S. dollar relative to foreign currencies, primarily the euro, could adversely affect our foreign revenues, perhaps significantly. In addition, as we continue to expand our international operations, we will conduct more transactions in currencies other than the U.S. dollar, which could increase our foreign currency exchange risk. Given the volatility of exchange rates, as well as our expanding operations, there is no guarantee that we will be able to effectively manage currency transaction and/or translation risks. We use foreign exchange forward contracts to manage currency risk primarily related to certain intercompany balances denominated in non-functional currencies. These foreign exchange forward contracts are not designated as hedges. Gains and losses on these derivative instruments are designed to offset gains and losses on the underlying balance sheet exposures. Fluctuations in foreign currency exchange rates could have a material adverse effect on our results of operations and financial condition. K - 0 1 m r o F We may not be able to successfully maintain our tax rates, which could adversely affect our business and financial condition, results of operations and growth prospects. We are incorporated in Ireland and maintain subsidiaries in North America and a number of other foreign jurisdictions. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various jurisdictions where we operate. Our effective tax rate may fluctuate depending on a number of factors, including, but not limited to, the distribution of our profits or losses between the jurisdictions where we operate and differences in interpretation of tax laws. In addition, the tax laws of any jurisdiction in which we operate may change in the future, which could impact our effective tax rate. We are subject to reviews and audits by the U.S. Internal Revenue Services, or IRS, and other taxing authorities from time to time, and the IRS or other taxing authority may challenge our structure, transfer pricing arrangements and tax positions through an audit or lawsuit. Responding to or defending against challenges from taxing authorities could be expensive and consume time and other resources. If we are unsuccessful, we may be required to pay taxes for prior periods, interest, fines or penalties, and may be obligated to pay increased taxes in the future, any of which could require us to reduce our operating expenses, decrease efforts in support of our products or seek to raise additional funds. Any of these actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In December 2015, we received proposed tax assessment notices, and, in October 2018, we received revised tax assessment notices from the French tax authorities for 2012 and 2013 and in December 2018, we received a proposed tax assessment notice for 2015, relating to certain transfer pricing adjustments. The notices propose additional French tax of approximately $43 million for 2012 and 2013 and approximately $4 million for 2015, including interest and penalties through the respective dates of the proposed assessments, translated at the foreign exchange rate at December 31, 2018. We disagree with the proposed assessments and are contesting them vigorously. JAZZ PHARMACEUTICALS | 2018 Annual Report 61 On December 22, 2017, the U.S. Tax Cuts and Jobs Act, or U.S. Tax Act, was signed into law. The U.S. Tax Act made broad and complex changes to the U.S. tax code. The U.S. Department of Treasury has issued limited regulations and other interpretive guidance under the U.S. Tax Act, and is expected to issue additional guidance, the impact of which is uncertain but could change the financial impacts that were recorded at December 31, 2018 or are expected to be recorded in future periods. Furthermore, the impact of this tax reform on certain holders of our ordinary shares could be adverse. Among other things, changes to the rules for determining a foreign corporation’s status as a controlled foreign corporation could have an adverse effect on U.S. persons who are treated as owning (directly or indirectly) at least 10% of the value or voting power of our ordinary shares. Investors should consult their own advisers regarding the potential application of these rules to their investments. The IRS may not agree with the conclusion that we should be treated as a foreign corporation for U.S. federal tax purposes. Although we are incorporated in Ireland, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes pursuant to Section 7874 of the U.S. Internal Revenue Code, or the Code. For U.S. federal tax purposes, a corporation generally is considered a tax resident in the jurisdiction of its organization or incorporation. Because we are an Irish incorporated entity, we would be classified as a foreign corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874 of the Code provides an exception under which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal tax purposes. Because we indirectly acquired all of Jazz Pharmaceuticals, Inc.’s assets through the acquisition of the shares of Jazz Pharmaceuticals, Inc. common stock in the Azur Merger, the IRS could assert that we should be treated as a U.S. corporation for U.S. federal tax purposes under Section 7874. The IRS continues to scrutinize transactions that are potentially subject to Section 7874, and has issued several sets of final and temporary regulations under Section 7874 since 2012. We do not expect these regulations to affect the U.S. tax consequences of the Azur Merger. Nevertheless, new statutory and/or regulatory provisions under Section 7874 of the Code or otherwise could be enacted that adversely affect our status as a foreign corporation for U.S. federal tax purposes, and any such provisions could have prospective or retroactive application to us, our shareholders, Jazz Pharmaceuticals, Inc. and/or the Azur Merger. Our U.S. affiliates’ ability to use their net operating losses to offset potential taxable income and related income taxes that would otherwise be due is limited under Section 7874 of the Code and could be subject to further limitations if we do not generate taxable income in a timely manner or if the “ownership change” provisions of Sections 382 and 383 of the Code result in further annual limitations. Following certain acquisitions of a U.S. corporation by a foreign corporation, Section 7874 of the Code can limit the ability of the acquired U.S. corporation and its U.S. affiliates to utilize U.S. tax attributes such as net operating losses, or NOLs, to offset U.S. taxable income resulting from certain transactions. Based on the limited guidance available, this limitation applies to us. Our U.S. affiliates have a significant amount of NOLs. As a result of Section 7874 of the Code, after the Azur Merger, our U.S. affiliates have not been able and will continue to be unable, for a period of time, to utilize their U.S. tax attributes to offset their U.S. taxable income, if any, resulting from certain taxable transactions. While we expect to be able to fully utilize our U.S. affiliates’ U.S. NOLs prior to their expiration, as a result of this limitation, it may take our U.S. affiliates longer to use their NOLs. Our ability to use these NOLs to offset potential future taxable income and related income taxes that would otherwise be due is also dependent upon our generation of future taxable income before the expiration dates of the NOLs, and we cannot predict with certainty when, or whether, our U.S. affiliates will generate sufficient taxable income to use all of the NOLs. In addition, the use of NOLs to offset potential future taxable income and related income taxes that would otherwise be due is subject to annual limitations under the “ownership change” provisions of Sections 382 and 383 of the Code and similar state provisions, which may result in the expiration of additional NOLs before future utilization. Future changes to the tax laws under which we expect to be treated as a foreign corporation for U.S. federal tax purposes or to other tax laws relating to multinational corporations could adversely affect us. The U.S. Congress, the EU, the Organization for Economic Co-operation and Development, or OECD, and other government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational corporations. One example is the OECD’s initiative in the area of “base erosion and profit shifting,” where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. Some countries are beginning to implement legislation and other guidance to align their international tax rules with the OECD’s recommendation. As a result of the focus on the taxation of multinational corporations, the tax laws in Ireland, the U.S. and other countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could adversely affect us. 62 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F A substantial portion of our indebtedness bears interest at variable interest rates based on USD LIBOR and certain of our financial contracts are also indexed to USD LIBOR. Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial condition and results of operations. In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced that it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee, or ARRC, in the U.S. has proposed that the Secured Overnight Financing Rate, or SOFR, is the rate that represents best practice as the alternative to the U.S. dollar, or USD, LIBOR for use in derivatives and other financial contracts that are currently indexed to USD LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD LIBOR and organizations are currently working on industry-wide and company-specific transition plans as relating to derivatives and cash markets exposed to USD LIBOR. We have certain financial contracts, including the amended credit agreement and our interest rate swaps, that are indexed to USD LIBOR. Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current or future indebtedness. Any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. We are monitoring this activity and evaluating the related risks, and any such effects of the transition away from LIBOR may result in increased expenses, may impair our ability to refinance our indebtedness or hedge our exposure to floating rate instruments, or may result in difficulties, complications or delays in connection with future financing efforts, any of which could adversely affect our financial condition and results of operations. Risks Related to Our Ordinary Shares The market price of our ordinary shares has been volatile and may continue to be volatile in the future, and the value of your investment could decline significantly. The market price for our ordinary shares has fluctuated significantly from time to time, for example, varying between a high of $184.00 on June 20, 2018 and a low of $113.52 on December 24, 2018 during 2018. The market price of our ordinary shares is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market, industry and other factors, including the risk factors described above. The stock market in general, including the market for life sciences companies, has experienced extreme price and trading volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. In particular, negative publicity regarding pricing and price increases by pharmaceutical companies has negatively impacted, and may continue to negatively impact, the market for life sciences companies. These broad market and industry factors have harmed, and in the future may seriously harm, the market price of our ordinary shares, regardless of our operating performance. Our share price may be dependent upon the valuations and recommendations of the analysts who cover our business. If our results do not meet these analysts’ forecasts, the expectations of our investors or the financial guidance we provide to investors in any period, the market price of our ordinary shares could decline. Our ability to meet analysts’ forecasts, investors’ expectations and our financial guidance is substantially dependent on our ability to maintain or increase sales of our marketed products. The risks and uncertainties associated with our ability to maintain or increase sales of our products include those discussed elsewhere in these risk factors. In the past, following periods of volatility in the market or significant price decline, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects. In addition, the market price of our ordinary shares may decline if the effects of our transactions, including the Celator Acquisition and/or potential future acquisitions, on our financial or operating results are not consistent with the expectations of financial analysts or investors. The market price of our ordinary shares could also be affected by possible sales of our ordinary shares by holders of the Exchangeable Senior Notes who may view the Exchangeable Senior Notes as a more attractive means of equity participation in our company and by hedging or arbitrage trading activity involving our ordinary shares by the holders of the Exchangeable Senior Notes. We are subject to Irish law, which differs from the laws in effect in the U.S. and may afford less protection to holders of our securities. It may not be possible to enforce court judgments obtained in the U.S. against us in Ireland based on the civil liability provisions of the U.S. federal or state securities laws. In addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liability provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on those laws. We have been advised that the U.S. currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, JAZZ PHARMACEUTICALS | 2018 Annual Report 63 a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Ireland. As an Irish company, we are governed by the Irish Companies Act 2014, which differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company are generally owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. Accordingly, holders of our securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in a U.S. jurisdiction. Our articles of association, Irish law and the indentures governing the Exchangeable Senior Notes contain provisions that could delay or prevent a takeover of us by a third party. Our articles of association could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our ordinary shares. For example, our articles of association: • • • • impose advance notice requirements for shareholder proposals and nominations of directors to be considered at shareholder meetings; stagger the terms of our board of directors into three classes; require the approval of a supermajority of the voting power of the shares of our share capital entitled to vote generally at a meeting of shareholders to amend our articles of association; and permit our board of directors to issue one or more series of preferred shares with rights and preferences, as our shareholders may determine by ordinary resolution. In addition to our articles of association, several mandatory provisions of Irish law could prevent or delay an acquisition of us. For example, Irish law does not permit shareholders of an Irish public limited company to take action by written consent with less than unanimous consent, and the shareholder approval requirements for certain types of transactions differ from those in the U.S., and in some cases are greater, under Irish law. We are also subject to various provisions of Irish law relating to mandatory bids, voluntary bids, requirements to make a cash offer and minimum price requirements, as well as substantial acquisition rules and rules requiring the disclosure of interests in our shares in certain circumstances. Furthermore, the indentures governing the Exchangeable Senior Notes require us to repurchase the Exchangeable Senior Notes for cash if we undergo certain fundamental changes and, in certain circumstances, to increase the exchange rate for a holder of 2021 Notes or 2024 Notes. A takeover of us may trigger the requirement that we purchase the Exchangeable Senior Notes and/or increase the exchange rate, which could make it more costly for a potential acquiror to engage in a business combination transaction with us. These provisions, whether alone or together, may discourage potential takeover attempts, discourage bids for our ordinary shares at a premium over the market price or adversely affect the market price of, and the voting and other rights of the holders of, our ordinary shares. These provisions, whether alone or together, could also discourage proxy contests and make it more difficult for our shareholders to elect directors other than the candidates nominated by our board. We have never declared or paid dividends on our capital stock and we do not anticipate paying dividends in the foreseeable future. Other than funds we have allocated for the purposes of supporting our share repurchase program, we anticipate that we will retain all earnings, if any, to support our operations and our proprietary drug development programs, acquire or in-license additional products and product candidates, and pursue other opportunities. If we propose to pay dividends in the future, we must do so in accordance with Irish law, which provides that distributions including dividend payments, share repurchases and redemptions be funded from “distributable reserves.” In addition, our ability to pay cash dividends on or repurchase our ordinary shares is restricted under the terms of the amended credit agreement. Any future determination as to the payment of dividends will, subject to Irish legal requirements, be at the sole discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, compliance with the terms of the amended credit agreement and other factors our board of directors deems relevant. Accordingly, holders of our ordinary shares must rely on increases in the trading price of their shares for returns on their investment in the foreseeable future. In addition, in the event that we pay a dividend on our ordinary shares, in certain circumstances, as an Irish tax resident company, some shareholders may be subject to withholding tax, which could adversely affect the price of our ordinary shares. 64 JAZZ PHARMACEUTICALS | 2018 Annual Report A transfer of our ordinary shares may be subject to Irish stamp duty. In certain circumstances, the transfer of shares in an Irish incorporated company will be subject to Irish stamp duty, which is a legal obligation of the buyer. This duty is currently charged at the rate of 1.0% of the price paid or the market value of the shares acquired, if higher. Because our ordinary shares are traded on a recognized stock exchange in the U.S., an exemption from this stamp duty is available in respect of transfers by shareholders who hold our ordinary shares beneficially through brokers which in turn hold those shares through the Depository Trust Company, or DTC, to holders who also hold through DTC. However, a transfer by or to a record holder who holds our ordinary shares directly in his, her or its own name could be subject to this stamp duty. We, in our absolute discretion and insofar as the Irish Companies Act 2014 or any other applicable law permits, may, or may provide that a subsidiary of ours will, pay Irish stamp duty arising on a transfer of our ordinary shares on behalf of the transferee of such ordinary shares. If stamp duty resulting from the transfer of our ordinary shares which would otherwise be payable by the transferee is paid by us or any of our subsidiaries on behalf of the transferee, then in those circumstances, we will, on our behalf or on behalf of our subsidiary (as the case may be), be entitled to (i) seek reimbursement of the stamp duty from the transferee, (ii) set-off the stamp duty against any dividends payable to the transferee of those ordinary shares and (iii) claim a first and permanent lien on the ordinary shares on which stamp duty has been paid by us or our subsidiary for the amount of stamp duty paid. Our lien shall extend to all dividends paid on those ordinary shares. Item 1B. Unresolved Staff Comments There are no material unresolved written comments that were received from the SEC staff 180 days or more before the end of our 2018 fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, as amended. Item 2. Properties Our corporate headquarters are located in Dublin, Ireland, and our U.S. operations are located in Palo Alto, California, Philadelphia, Pennsylvania and Ewing, New Jersey. We lease approximately 45,000 square feet of office space in Dublin, Ireland. This lease expires in December 2036, with an option to terminate in December 2024 with no less than one year’s prior written notice and the payment of a termination fee, and a further option to terminate in December 2031 with no less than one year’s prior written notice. We own approximately 58,000 square foot manufacturing and development facility in Athlone, Ireland, which is primarily used for the manufacture of Xyrem and development-stage products. In Palo Alto, California, we occupy a total of approximately 143,000 square feet of office space, 99,000 square feet of which is under a lease that expires in October 2029, or the Palo Alto Lease, and 44,000 square feet of which is under a lease that expires in August 2019. We have an option to extend the term of the Palo Alto Lease twice for a period of five years each and an option to terminate in October 2027 with no less than one year’s prior written notice and the payment of a termination fee. In September 2017, we entered into an agreement to lease approximately 99,000 additional square feet of office space in Palo Alto, California. We expect to occupy this office space by the end of 2019. This lease has a term of 12 years from commencement, and we have an option to extend the term of the lease twice for a period of five years each. We also have an option to terminate this lease in October 2029 with no less than one year’s prior written notice and the payment of a termination fee. We occupy approximately 46,000 square feet of office space in Philadelphia, Pennsylvania under a lease that expires in April 2029, or the Philadelphia Lease. The Philadelphia Lease also provides for another 14,000 square feet, which we expect to occupy by the end of 2019. In addition, we have offices in Canada, the United Kingdom, Italy, France and elsewhere in Europe. We occupy approximately 26,000 square feet of office space in Oxford, United Kingdom under a lease that expires in December 2027. We own a manufacturing facility in Villa Guardia (Como), Italy, which is primarily used for the manufacture of Defitelio. The manufacturing facility is approximately 37,000 square feet. We also lease approximately 34,000 square feet of office and laboratory space in Villa Guardia (Como), Italy under a lease that expires in December 2023. We believe that our existing properties are in good condition and suitable for the conduct of our business. As we continue to expand our operations, we may need to lease additional or alternative facilities. K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 65 Item 3. Legal Proceedings The information required to be set forth under this Item 3 is incorporated by reference to Note 12, Commitments and Contingencies— Legal Proceedings of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. Item 4. Mine Safety Disclosures. Not applicable. 66 JAZZ PHARMACEUTICALS | 2018 Annual Report PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our ordinary shares trade on The Nasdaq Global Select Market under the trading symbol “JAZZ.” Holders of Ordinary Shares As of February 19, 2019, there were two holders of record of our ordinary shares. Because almost all of our ordinary shares are held by brokers, nominees and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders. Dividends In 2018 and 2017, we did not declare or pay cash dividends on our common equity and we do not currently plan to pay cash dividends in the foreseeable future. Any future determination as to the payment of dividends will, subject to Irish legal requirements, be at the sole discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, compliance with the terms of any current credit agreement and other factors our board of directors deems relevant. Unregistered Sales of Equity Securities Except as previously reported in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission, or SEC, during the year ended December 31, 2018, there were no unregistered sales of equity securities by us during the year ended December 31, 2018. K - 0 1 m r o F Irish Law Matters As we are an Irish incorporated company, the following matters of Irish law are relevant to the holders of our ordinary shares. Irish Restrictions on Import and Export of Capital Except as indicated below, there are no restrictions on non-residents of Ireland dealing in Irish domestic securities, which includes ordinary shares of Irish companies. Dividends and redemption proceeds also continue to be freely transferable to non-resident holders of such securities. The Financial Transfers Act, 1992 gives power to the Minister for Finance of Ireland to restrict financial transfers between Ireland and other countries and persons. Financial transfers are broadly defined and include all transfers that would be movements of capital or payments within the meaning of the treaties governing the member states of the European Union, or EU. The acquisition or disposal of interests in shares issued by an Irish incorporated company and associated payments falls within this definition. In addition, dividends or payments on redemption or purchase of shares and payments on a liquidation of an Irish incorporated company would fall within this definition. At present the Financial Transfers Act, 1992 prohibits financial transfers involving the late Slobodan Milosevic and associated persons, Belarus, certain persons indicted by the International Criminal Tribunal for the former Yugoslavia, the late Osama bin Laden, Al-Qaida, the Taliban of Afghanistan, Democratic Republic of Congo, Democratic People’s Republic of Korea (North Korea), Iran, Iraq, Côte d’Ivoire, Lebanon, Liberia, Zimbabwe, Sudan, Somalia, Republic of Guinea, Republic of Guinea-Bissau, Afghanistan, Egypt, Eritrea, Libya, Syria, Tunisia, certain known terrorists and terrorist groups, countries that harbor certain terrorist groups and Ukraine without the prior permission of the Central Bank of Ireland. Any transfer of, or payment in respect of, a share or interest in a share involving the government of any country that is currently the subject of United Nations sanctions, any person or body controlled by any of the foregoing, or by any person acting on behalf of the foregoing, may be subject to restrictions pursuant to such sanctions as implemented into Irish law Irish Taxes Applicable to U.S. Holders Withholding Tax on Dividends. While we have no current plans to pay dividends, dividends on our ordinary shares would generally be subject to Irish Dividend Withholding Tax, or DWT, at the standard rate of income tax (currently 20%), unless an exemption applies. Dividends on our ordinary shares that are owned by residents of the U.S. and held beneficially through the Depositary Trust Company, or DTC, will not be subject to DWT provided that the address of the beneficial owner of the ordinary shares in the records of the broker is in the U.S. JAZZ PHARMACEUTICALS | 2018 Annual Report 67 Dividends on our ordinary shares that are owned by residents of the U.S. and held directly (outside of DTC) will not be subject to DWT provided that the shareholder has completed the appropriate Irish DWT form and this form remains valid. Such shareholders must provide the appropriate Irish DWT form to our transfer agent at least seven business days before the record date for the first dividend payment to which they are entitled. If any shareholder who is resident in the U.S. receives a dividend subject to DWT, he or she should generally be able to make an application for a refund from the Irish Revenue Commissioners on the prescribed form. While the U.S./Ireland Double Tax Treaty contains provisions regarding withholding, due to the wide scope of the exemptions from DWT available under Irish domestic law, it would generally be unnecessary for a U.S. resident shareholder to rely on the treaty provisions. Income Tax on Dividends. Regardless of the availability of a DWT exemption, a shareholder who is neither resident nor ordinarily resident in Ireland generally has no additional liability to Irish income tax or to the universal social charge on a dividend from us unless that shareholder holds our ordinary shares through a branch or agency in Ireland through which a trade is carried on. Irish Tax on Capital Gains. A shareholder who is neither resident nor ordinarily resident in Ireland and does not hold our ordinary shares in connection with a trade or business carried on by such shareholder in Ireland through a branch or agency should not be subject to Irish tax on capital gains on a disposal of our ordinary shares. Capital Acquisitions Tax. Irish capital acquisitions tax, or CAT, is comprised principally of gift tax and inheritance tax. CAT could apply to a gift or inheritance of our ordinary shares irrespective of the place of residence, ordinary residence or domicile of the parties. This is because our ordinary shares are regarded as property situated in Ireland as our share register must be held in Ireland. The person who receives the gift or inheritance has primary liability for CAT. CAT is levied at a rate of 33% above certain tax-free thresholds. The appropriate tax-free threshold is dependent upon (i) the relationship between the donor and the donee and (ii) the aggregation of the values of previous gifts and inheritances received by the donee from persons within the same category of relationship for CAT purposes. Gifts and inheritances passing between spouses are exempt from CAT. Our shareholders should consult their own tax advisers as to any tax consequences of holding our ordinary shares, including whether CAT is creditable or deductible in computing any domestic tax liabilities. Stamp Duty. Irish stamp duty (if any) may become payable in respect of ordinary share transfers. However, a transfer of our ordinary shares from a seller who holds shares through DTC to a buyer who holds the acquired shares through DTC will not be subject to Irish stamp duty. A transfer of our ordinary shares (i) by a seller who holds ordinary shares outside of DTC to any buyer or (ii) by a seller who holds the ordinary shares through DTC to a buyer who holds the acquired ordinary shares outside of DTC, may be subject to Irish stamp duty (currently at the rate of 1% of the price paid or the market value of the ordinary shares acquired, if greater). The person accountable for payment of stamp duty is the buyer or, in the case of a transfer by way of a gift or for less than market value, all parties to the transfer. A shareholder who holds ordinary shares outside of DTC may transfer those ordinary shares into DTC without giving rise to Irish stamp duty provided that the shareholder would be the beneficial owner of the related book-entry interest in those ordinary shares recorded in the systems of DTC (and in exactly the same proportions) as a result of the transfer and at the time of the transfer into DTC there is no sale of those book-entry interests to a third party being contemplated by the shareholder. Similarly, a shareholder who holds ordinary shares through DTC may transfer those ordinary shares out of DTC without giving rise to Irish stamp duty provided that the shareholder would be the beneficial owner of the ordinary shares (and in exactly the same proportions) as a result of the transfer, and at the time of the transfer out of DTC there is no sale of those ordinary shares to a third party being contemplated by the shareholder. In order for the share registrar to be satisfied as to the application of this Irish stamp duty treatment where relevant, the shareholder must confirm to us that the shareholder would be the beneficial owner of the related book-entry interest in those ordinary shares recorded in the systems of DTC (and in exactly the same proportions) (or vice-versa) as a result of the transfer and there is no agreement being contemplated for the sale of the related book-entry interest or the ordinary shares or an interest in the ordinary shares, as the case may be, by the shareholder to a third party. 68 JAZZ PHARMACEUTICALS | 2018 Annual Report Performance Measurement Comparison (1) The following graph shows the total shareholder return on the last day of each year of an investment of $100 in cash as if made on December 31, 2013 in (i) our ordinary shares; (ii) the Nasdaq Composite Index; and (iii) the Nasdaq Biotechnology Index through December 31, 2018. The shareholder return shown in the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future shareholder returns. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN (2) $200 $150 $100 $50 $0 12/13 12/14 12/15 12/16 12/17 12/18 K - 0 1 m r o F Jazz Pharmaceuticals NASDAQ Composite NASDAQ Biotechnology (1) This section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. (2) Information used in the graph was obtained from Research Data Group, Inc. JAZZ PHARMACEUTICALS | 2018 Annual Report 69 Issuer Purchases of Equity Securities The following table summarizes purchases of our ordinary shares made by or on behalf of us or any of our “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Exchange Act during each fiscal month during the three-month period ended December 31, 2018: Total Number of Shares Purchased (1) Average Price Paid per Share (2) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (4) October 1—October 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . November 1—November 30, 2018 . . . . . . . . . . . . . . . . . . . . December 1—December 31, 2018 . . . . . . . . . . . . . . . . . . . . 123,399 1,780,091 1,127,314 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,030,804 $ $ $ $ 159.86 147.70 145.54 147.39 123,000 1,780,091 1,127,314 3,030,405 $ $ $ 86,074,483 143,189,015 379,137,805 (1) This column includes ordinary shares that we reacquired in satisfaction of the exercise price of employee stock options upon exercise, but does not include ordinary shares that we withheld in order to satisfy minimum tax withholding requirements in connection with the vesting of restricted stock units. (2) Average price paid per share includes brokerage commissions. (3) The ordinary shares reported in this column above were purchased pursuant to our publicly announced share repurchase program. In November 2016, we announced that our board of directors authorized the use of up to $300 million to repurchase our ordinary shares. In November and December 2018, our board of directors increased the existing share repurchase program authorization by $320.0 million and $400.0 million, respectively, thereby increasing the total amount authorized for repurchase to $1.02 billion. This authorization has no expiration date. (4) The dollar amount shown represents, as of the end of each fiscal month, the approximate dollar value of ordinary shares that may yet be purchased under our publicly announced share repurchase program, exclusive of any brokerage commissions. As indicated in footnote (3), our board of directors increased the existing share repurchase program authorization in November and December 2018, and the amounts in this column give effect to those increases in the fiscal month approved. 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 our credit agreement, corporate and regulatory requirements and market conditions, and may be modified, suspended or otherwise discontinued at any time without prior notice. Item 6. Selected Financial Data The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results. We derived the consolidated statements of income data for the years ended December 31, 2018, 2017 and 2016 and the selected consolidated balance sheet data as of December 31, 2018 and 2017 from the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The consolidated statements of income data for the years ended December 31, 2015 and 2014, and the selected consolidated balance sheet data as of December 31, 2016, 2015 and 2014 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. 70 JAZZ PHARMACEUTICALS | 2018 Annual Report Year Ended December 31, 2018 2017 2016(1) 2015 2014(2) (In thousands, except per share amounts) Consolidated Statements of Income Data: Revenues: Product sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,869,473 21,449 Royalties and contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,601,399 17,294 $1,477,261 10,712 $1,316,819 7,984 $1,162,716 10,159 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,890,922 1,618,693 1,487,973 1,324,803 1,172,875 Operating expenses: Cost of product sales (excluding amortization of intangible assets) . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired in-process research and development . . . . . . . . . . . . . . . . . . . 121,544 683,530 226,616 201,498 42,896 — 110,188 544,156 198,442 152,065 — 85,000 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,276,084 1,089,851 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gain (loss) Loss on extinguishment and modification of debt . . . . . . . . . . . . . . . . . . Income before income tax provision (benefit) and equity in loss of investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in loss of investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . 614,838 (77,075) (6,875) (1,425) 529,463 80,162 2,203 447,098 — 528,842 (77,756) (9,969) — 441,117 (47,740) 1,009 487,848 — 105,386 502,892 162,297 101,994 — 23,750 896,319 591,654 (61,942) 3,372 (638) 532,446 135,236 379 396,831 — 102,526 449,119 135,253 98,162 31,523 — 816,583 508,220 (56,917) 1,445 (16,815) 435,933 106,399 — 329,534 (1) Net income attributable to Jazz Pharmaceuticals plc . . . . . . . . . . . . . . . . . . . $ 447,098 $ 487,848 $ 396,831 $ 329,535 Net income attributable to Jazz Pharmaceuticals plc per ordinary share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Weighted-average ordinary shares used in per share calculations—basic . . . . Weighted-average ordinary shares used in per share calculations—diluted . . . 7.45 7.30 $ $ 8.13 7.96 $ $ 6.56 6.41 $ $ 59,976 61,221 60,018 61,317 60,500 61,870 5.38 5.23 61,232 63,036 117,418 406,114 85,181 126,584 39,365 202,626 977,288 195,587 (52,713) 8,683 — 151,557 94,231 — 57,326 (1,061) 58,387 0.98 0.93 59,746 62,614 $ $ $ K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 71 2018 2017 2016(1) 2015 2014(2) As of December 31, (In thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and investments . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, current and non-current (1)(2) . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Jazz Pharmaceuticals plc shareholders’ equity . . . . . . . . . . . . . . . . . $ 824,622 888,518 5,203,491 1,596,412 841,050 2,757,422 $ 601,035 674,330 5,123,672 1,581,038 917,956 2,713,097 $ 425,963 490,663 4,800,227 2,029,625 528,907 1,877,339 $ 988,785 1,031,025 3,332,612 1,188,444 302,686 1,598,646 $ 684,042 799,044 3,308,617 1,313,161 34,704 1,371,144 (1) On May 27, 2016, we entered into a definitive merger agreement with Celator Pharmaceuticals, Inc., or Celator, pursuant to which we made a cash tender offer of $30.25 per share for all of the outstanding shares of Celator’s common stock. On July 12, 2016, we completed the acquisition of Celator, which acquisition we refer to in this report as the Celator Acquisition, under the terms of the merger agreement. Celator became an indirect wholly-owned subsidiary of Jazz Pharmaceuticals plc, and each share of Celator common stock then outstanding (other than shares owned by us or Celator) was converted into the right to receive $30.25, the same price per share offered in the tender offer. The aggregate cash consideration for the Celator Acquisition was $1.5 billion. The results of operations of the acquired Celator business, along with the estimated fair values of the assets acquired and liabilities assumed in the Celator Acquisition, have been included in our consolidated financial statements since the closing of the Celator Acquisition on July 12, 2016. On July 12, 2016, we entered into an amendment to our 2015 credit agreement that provided for a revolving credit facility of $1.25 billion, which replaced our prior revolving credit facility of $750.0 million, and a $750.0 million term loan facility. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. In the third quarter of 2017, we completed a private placement of $575.0 million aggregate principal amount of 1.50% exchangeable senior notes due 2024, or the 2024 Notes, resulting in net proceeds to us, after debt issuance costs, of $559.4 million. We used a portion of the net proceeds from the issuance of the 2024 Notes to repay all then outstanding borrowings under the revolving credit facility. In June 2018, we entered into a second amendment of our 2015 credit agreement, which amended agreement we refer to in this report as our amended credit agreement, which increased our revolving credit facility from $1.25 billion to $1.60 billion, extended the maturity dates of our term loan facility and revolving credit facility from July 12, 2021 to June 7, 2023, and reduced the applicable margin for determining the interest rates on outstanding borrowings under the facilities. 2) On January 23, 2014, pursuant to a tender offer, we became the indirect majority shareholder of Gentium S.r.l., or Gentium, acquiring control of Gentium on that date. In February 2014, we completed a subsequent offering period of the tender offer, resulting in total purchases pursuant to the tender offer of approximately 98% of the fully diluted voting securities of Gentium. As of December 31, 2015, we had acquired the remaining 2% interest in Gentium for cash consideration of $17.9 million, resulting in an aggregate acquisition cost to us of $994.1 million, comprising cash payments of $1.0 billion offset by proceeds from the exercise of Gentium share options of $17.1 million. The results of operations of the acquired Gentium business, along with the estimated fair values of the assets acquired and liabilities assumed in the transaction, have been included in our consolidated financial statements since the completion of the acquisition of Gentium on January 23, 2014, which is referred to in this report as the Gentium Acquisition. In connection with the Gentium Acquisition, on January 23, 2014, we entered into a second amendment to the credit agreement we entered into in June 2012, or the previous credit agreement. We used the proceeds from incremental term loans of $350.0 million and $300.0 million of loans under the revolving credit facility provided for under the previous credit agreement, together with cash on hand, to finance the Gentium Acquisition. In August 2014, we completed a private placement of $575.0 million aggregate principal amount of 1.875% exchangeable senior notes due 2021, or the 2021 Notes, resulting in net proceeds to us, after debt issuance costs, of $558.9 million. We used a portion of the net proceeds from the issuance of the 2021 Notes to repay all then outstanding borrowings under the revolving credit facility provided for under the previous credit agreement. 72 JAZZ PHARMACEUTICALS | 2018 Annual Report Item 7. 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 consolidated financial statements and notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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 impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in Part I, Item 1A in this Annual Report on Form 10-K. 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. Overview Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing life-changing medicines for people with limited or no options. As a leader in sleep medicine and with a growing hematology/oncology portfolio, we have a diverse portfolio of products and product candidates in development. Our lead marketed products are: • • • • Xyrem® (sodium oxybate) oral solution, the only product approved by the U.S. Food and Drug Administration, or FDA, and marketed in the U.S. for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in adult and pediatric patients with narcolepsy; Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia who have developed hypersensitivity to E. coli-derived asparaginase; K - 0 1 m r o F Defitelio® (defibrotide sodium), a product approved in the U.S. for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome, with renal or pulmonary dysfunction following hematopoietic stem cell transplantation, or HSCT, and in Europe (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children undergoing HSCT therapy; and Vyxeos® (daunorubicin and cytarabine) liposome for injection, a product approved in the U.S. and in Europe (where it is marketed as Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion) for the treatment of adults with newly- diagnosed therapy-related acute myeloid leukemia, or t-AML, or acute myeloid leukemia, or AML, with myelodysplasia-related changes, or AML-MRC. We are also seeking approval in the U.S. and Europe for solriamfetol as a treatment to improve wakefulness and reduce EDS in adult patients with narcolepsy or obstructive sleep apnea, or OSA. If we are successful in obtaining FDA approval, we expect to launch the product in the U.S. after scheduling review by the U.S. Drug Enforcement Administration, or DEA, which will need to be completed after approval of our new drug application, or NDA, if any, but before commercial launch. We are developing JZP-258, an oxybate product candidate that contains 90% less sodium than Xyrem, for the treatment of both cataplexy and EDS in narcolepsy as well as for other conditions. Subject to the results of our Phase 3 clinical trial in narcolepsy, we expect to file an NDA for approval of this product by as early as the end of 2019. Our strategy to create shareholder value is focused on: • • Strong financial execution through growth in sales of our current lead marketed products; Building a diversified product portfolio and development pipeline through a combination of our internal research and development efforts and obtaining rights to clinically meaningful and differentiated on- or near-market products and early- to late-stage product candidates through acquisitions, collaborations, licensing arrangements, partnerships and venture investments; and • Maximizing the value of our products and product candidates by continuing to implement our comprehensive global development plans, including through generating additional clinical data and seeking regulatory approval for new indications. Our total net product sales increased by 17% in 2018 compared to 2017, primarily due to an increase in Xyrem net product sales and a full year of net product sales of Vyxeos, which launched in the U.S. in August 2017. We expect total net product sales to increase in 2019 over 2018, primarily due to expected growth in sales of Xyrem and Vyxeos. JAZZ PHARMACEUTICALS | 2018 Annual Report 73 In 2018, in support of our strategy, we continued to expand and advance our research and development pipeline in our sleep and hematology/oncology therapeutic areas, both by conducting activities internally and by leveraging partnerships with third parties. A summary of our ongoing development activities is provided under “Business—Research and Development” in Part I, Item 1 of this Annual Report on Form 10-K. In 2019 and beyond, we expect that our research and development expenses will continue to increase from historical levels, particularly as we prepare for anticipated regulatory submissions and data read-outs from clinical trials, initiate and undertake additional clinical trials and related development work and potentially acquire rights to additional product candidates. 2018 Highlights and Recent Developments Regulatory Approvals • • In August 2018, the European Commission, or EC, granted marketing authorization for Vyxeos for the treatment of adults with newly-diagnosed t-AML or AML-MRC, and shortly thereafter, we commenced a rolling launch of Vyxeos in the European Union, or EU. In October 2018, the FDA approved our supplemental NDA to revise the labeling for Xyrem to include an indication to treat cataplexy or EDS in pediatric narcolepsy patients ages seven and older and granted Xyrem pediatric exclusivity, adding six months to any regulatory or Orange Book patent exclusivity. Regulatory Submissions • • In March 2018, the FDA accepted for filing our NDA seeking marketing approval for solriamfetol for the treatment of EDS associated with OSA or narcolepsy in adult patients; the target action date for the FDA under the Prescription Drug User Fee Act, or PDUFA, for a new molecular entity, originally December 20, 2018, was extended by the FDA to March 20, 2019. In November 2018, we submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, for solriamfetol for the treatment of EDS associated with OSA or narcolepsy in adult patients. Research & Development • • In August 2018, we announced a five-year collaboration with The University of Texas MD Anderson Cancer Center to evaluate potential treatment options for hematologic malignancies, with a near-term focus on Vyxeos, and shortly thereafter, commenced development activities pursuant to this collaboration. During 2018, we commenced and/or advanced several development programs in both sleep and hematology/oncology, including (i) completing patient enrollment in our Phase 3 clinical trial evaluating JZP-258 for the treatment of EDS and cataplexy in narcolepsy, (ii) commencing patient enrollment in our Phase 3 clinical trial evaluating JZP-258 for the treatment of idiopathic hypersomnia and (iii) commencing patient enrollment in our Phase 2 clinical trial evaluating defibrotide for the prevention of acute Graft-versus-Host Disease. Other Significant Developments • • • In April 2018, we reached an agreement in principle with the U.S. Department of Justice, or DOJ, on a proposal for a civil settlement of potential claims by the DOJ with respect to an investigation of our support of 501(c)(3) organizations that provide financial assistance to Medicare patients in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies, which we expect will include entry into a corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. In May 2018, we purchased a rare pediatric disease priority review voucher, or PRV, from Spark Therapeutics, Inc. for $110.0 million. We may use the PRV to obtain priority review by the FDA for one of our future regulatory submissions. In June 2018, we entered into a second amendment to our 2015 credit agreement, referred to as our amended credit agreement in this report. With the second amendment, we increased the amounts available under our revolving credit facility from $1.25 billion to $1.60 billion, extended the maturity dates of our term loan facility and revolving credit facility from July 12, 2021 to June 7, 2023, and reduced the applicable margin for determining the interest rates on outstanding borrowings under the facilities. • With entry into a settlement agreement and related agreements resolving our patent infringement litigation against Amneal Pharmaceuticals LLC in October 2018, we settled all outstanding patent infringement litigation against the nine companies that have filed abbreviated new drug applications, or ANDAs, requesting approval to market generic versions of Xyrem. 74 JAZZ PHARMACEUTICALS | 2018 Annual Report • We announced increases in our share repurchase authorization of $320 million and $400 million in November and December 2018, respectively. During 2018, we repurchased an aggregate of $523.7 million of our ordinary shares at an average price of $148.33 per share. • In January 2019, we entered into a strategic collaboration agreement with Codiak BioSciences, Inc., or Codiak, focused on the research, development and commercialization of exosome therapeutics to treat cancer. Challenges, Risks and Trends Related to Our Business Xyrem. Xyrem is our largest selling product, and our financial results are significantly influenced by sales of Xyrem, which accounted for 75% and 74% of our net product sales for the years ended December 31, 2018 and 2017, respectively. Our future plans assume that sales of Xyrem will increase, but there is no guarantee that we can maintain sales of Xyrem at or near current levels, or that Xyrem sales will continue to grow. We have periodically increased the price of Xyrem, most recently in January 2019, and there is no guarantee that price adjustments we have taken or may take in the future will not negatively affect Xyrem sales volumes and revenues from Xyrem. As discussed above, we have settled patent litigation with all nine companies that have filed ANDAs with the FDA seeking approval to market a generic version of Xyrem. To date, the FDA has approved or tentatively approved three of these ANDAs, and we believe that it is likely that the FDA will approve or tentatively approve additional ANDAs. In connection with the ANDA settlement agreements, we granted four of the filers the right to sell an authorized generic version of Xyrem, or an AG Product, and we granted each of the nine filers a license to launch its own generic sodium oxybate product. The actual timing of the launch of an AG Product or generic sodium oxybate product is uncertain because the launch dates of the AG Products and generic sodium oxybate products under our settlement agreements are subject to acceleration under certain circumstances. In the absence of any circumstances triggering acceleration, the earliest launch of an AG Product would be January 1, 2023. For a further description of the settlement agreements, including a more complete description of potential dates of market entry for an AG Product(s) and generic sodium oxybate product(s) and circumstances that might trigger acceleration of such dates, see the risk factor under the heading “The introduction of a new product in the U.S. market that competes with, or otherwise disrupts the market for, Xyrem would adversely affect sales of Xyrem” in Part I, Item 1A of this Annual Report on Form 10-K. K - 0 1 m r o F In addition to generic and authorized generic versions of Xyrem, we and others may launch products as treatment options in cataplexy and/or EDS in patients with narcolepsy, including other branded sodium oxybate products and other new and existing branded market entrants. For example, Avadel Pharmaceuticals plc is conducting a Phase 3 clinical trial of a once-nightly formula of sodium oxybate which uses its proprietary technology for the treatment of EDS and cataplexy in patients with narcolepsy, and has indicated that it intends to seek approval of its product candidate in the U.S. under a Section 505(b)(2) NDA approval pathway. Other companies may also develop a sodium oxybate or similar product using, for example, an alternative formulation or a different delivery technology and pursue a similar regulatory approval strategy in the future. Non-oxybate products intended for the treatment of EDS or cataplexy in narcolepsy, even if not directly competitive with Xyrem, could have the effect of changing treatment regimens and payor coverage of Xyrem, and indirectly materially and adversely affect sales of Xyrem. Prescribers often prescribe stimulants or wake-promoting agents for treatment of EDS, and anti-depressants for cataplexy, before prescribing or instead of prescribing Xyrem, and payors often require patients to try such medications before they will cover Xyrem. It is possible that additional branded or generic products may be introduced to treat symptoms of narcolepsy that will also be prescribed before or instead of Xyrem, or that payors will require patients to try before they will cover Xyrem. Product candidates currently seeking approval for treatment of symptoms of narcolepsy include our product candidate, solriamfetol, which is seeking an indication to treat EDS associated with narcolepsy and with OSA, and pitolisant, a drug that has already been approved in Europe to treat adult patients with narcolepsy with or without cataplexy. Harmony Biosciences LLC, or Harmony, has exclusive U.S. rights to seek approval of and commercialize pitolisant. Harmony has established an expanded access program for pitolisant, received Breakthrough Therapy and Fast Track designations from the FDA, and, in February 2019, announced that the FDA had accepted for filing with priority review its pitolisant NDA. The receipt of marketing approval and commercialization of an alternative product approved in the U.S. for the treatment of narcolepsy patients could negatively impact our ability to maintain and grow sales of Xyrem, largely due to payor actions taken in response to the disruption of the narcolepsy market. This could have the additional impact of potentially triggering acceleration of market entry of the AG Products or other generic sodium oxybate products under our ANDA litigation settlement agreements. We expect that the approval and launch of any other sodium oxybate or alternative product that treats narcolepsy, or the launch of an AG Product or other generic version of Xyrem, could have a material adverse effect on our sales of and revenues from Xyrem and on our business, financial condition, results of operations and growth prospects. Future Xyrem sales may also be impacted by changes to, or uncertainties around, regulatory restrictions, including changes to our current Xyrem risk evaluation and mitigation strategy, or REMS, which requires, among other things, that Xyrem be distributed through a single pharmacy. We cannot predict whether the FDA will request, seek to require or ultimately require modifications to, or impose JAZZ PHARMACEUTICALS | 2018 Annual Report 75 additional requirements on, the Xyrem REMS, including in connection with the submission of applications for new oxybate products, new oxybate indications or the introduction of authorized generics, or whether the FDA will approve modifications to the Xyrem REMS that we consider warranted in connection with the submission of applications for new oxybate products. We may face pressure to further modify the Xyrem REMS or to license or share intellectual property pertinent to the Xyrem REMS, including proprietary data required for the safe distribution of sodium oxybate, in connection with the FDA’s approval of the generic sodium oxybate REMS or otherwise. Any such modifications to the Xyrem REMS approved, required or rejected by the FDA could make it more difficult or expensive for us to distribute Xyrem, make distribution easier for sodium oxybate competitors, disrupt continuity of care for Xyrem patients and/or negatively affect sales of Xyrem. We also cannot predict the impact of future implementation of a generic sodium oxybate REMS on the Xyrem REMS. Erwinaze/Erwinase. Sales of our second largest product, Erwinaze/Erwinase (which we refer to in this report as Erwinaze unless otherwise indicated or the context otherwise requires), accounted for 9% and 12% of our net product sales for the years ended December 31, 2018 and 2017, respectively. Erwinaze is licensed from and manufactured by a single source, Porton Biopharma Limited, or PBL, a company that is wholly owned by the UK Department of Health and Social Care. Our license and supply agreement with PBL, which includes our license for Erwinaze, expires on December 31, 2020. We and PBL had been engaged in discussions related to entry into a replacement agreement to extend the term of our commercial relationship with respect to Erwinaze past 2020, but we did not reach agreement. Unless we and PBL enter into a new agreement, we will lose our license to Erwinaze after December 31, 2020, other than our right to sell certain Erwinaze inventory for a post-termination sales period of 12 months. In such event, we may not be able to replace the product sales we would lose from Erwinaze, which in 2018 totaled $174.7 million, and our business, financial condition, results of operations and growth prospects would be materially adversely affected. In addition, we cannot predict whether uncertainty related to rights to, and availability of, Erwinaze after 2020 will impact sales of and revenues from this product. A continuing and significant challenge to maintaining sales of Erwinaze and a barrier to increasing sales is PBL’s inability to consistently supply product adequate to meet market demand. All Erwinaze that PBL has been able to supply is currently completely absorbed by demand for the product. In addition, PBL is subject to a January 2017 warning letter issued by the FDA citing significant violations of the FDA’s current Good Manufacturing Practices, or cGMP, as well as an inspection report from the UK Medicines and Healthcare Products Regulatory Agency listing several major findings, including major deficiencies and failures by PBL to comply with cGMP. PBL’s product quality and manufacturing issues have resulted, and continue to result, in disruptions in our ability to supply markets from time to time and have caused, and may in the future cause, us to implement batch-specific, modified product use instructions. We have been experiencing, and continue to experience, supply disruptions globally and expect further supply disruptions during 2019. These supply disruptions will continue to adversely impact our ability to generate sales of and revenues from Erwinaze and our business, financial condition, results of operations and growth prospects could be materially adversely affected. Defitelio/defibrotide. Sales of Defitelio/defibrotide accounted for 8% of our net product sales for the years ended December 31, 2018 and 2017. Our ability to maintain and grow sales and to realize the anticipated benefits from our investment in Defitelio is subject to a number of risks and uncertainties, including continued acceptance by hospital pharmacy and therapeutics committees in the U.S., the continued availability of favorable pricing and adequate coverage and reimbursement, the limited experience of, and need to educate, physicians in recognizing, diagnosing and treating VOD, and the limited size of the population of VOD patients who are indicated for treatment with Defitelio. If sales of Defitelio do not reach the levels we expect, our anticipated revenue from the product will be negatively affected and our business, financial condition, results of operations and growth prospects could be materially adversely affected. Vyxeos. Sales of Vyxeos accounted for 5% and 2% of our total net product sales for the years ended December 31, 2018 and 2017, respectively. We began selling Vyxeos in the U.S. in August 2017 following NDA approval, and the launch is still at an early stage. In August 2018, the EC granted marketing authorization for Vyxeos. We have commenced our rolling launch of Vyxeos in the EU, and we are in the process of making pricing and reimbursement submissions in EU member states. Our ability to realize the anticipated benefits from our investment in Vyxeos is subject to a number of risks and uncertainties, including acceptance by hospital pharmacy and therapeutics committees in the U.S., the EU and other countries, the availability of adequate coverage, pricing and reimbursement approvals, competition from new and existing products and potential competition from products in development, and delays or problems in the supply or manufacture of Vyxeos. If sales of Vyxeos do not reach the levels we expect, our anticipated revenue from the product will be negatively affected, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Solriamfetol. In December 2018, the FDA determined that a submission we made during the course of discussions regarding draft labeling for solriamfetol constituted a major amendment to the NDA we submitted in 2017, resulting in a three-month extension of the PDUFA goal date, from December 20, 2018 to March 20, 2019. In the fourth quarter of 2018, we submitted an MAA to the EMA for solriamfetol. We cannot predict the results of our labeling discussions with the FDA or whether our NDA or MAA will be approved in a timely manner, or at all. 76 JAZZ PHARMACEUTICALS | 2018 Annual Report Even if we obtain approval, our ability to realize the anticipated benefits from our investment in solriamfetol is subject to a number of risks and uncertainties, including, among other things, potential launch delays after any approval, including due to the need for DEA scheduling review which will need to be completed after NDA approval, if any, but before commercial launch; the availability of adequate formulary positions and pricing and adequate coverage and reimbursement by government programs and other third party payors, including the impact of any delays in coverage decisions by payors; restrictions on permitted promotional activities based on limitations on the approved labeling for the product required by the FDA or the EC; market acceptance for an approved solriamfetol product, particularly by OSA physicians; delays or problems in the supply or manufacture of an approved solriamfetol product; and our ability to satisfy post- marketing commitments and requirements, if any, imposed by the FDA in connection with its approval of our NDA and by the EC in connection with its marketing authorization. If we are unable to obtain approval of our solriamfetol NDA and/or our MAA in a timely manner, or at all, if the FDA or EC requires product labeling that negatively impacts patient, physician or payor acceptance of the product, or if sales of an approved solriamfetol product in the U.S. and EU 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 2019 and beyond. Some of these challenges and risks are specific to our business, and others are common to companies in the pharmaceutical industry with development and commercial operations. In this regard, a key aspect of our growth strategy is our continued and growing investment in research and development activities. Our ability to successfully develop product candidates for one or more indications as well as our ability to identify new indications for existing products are subject to a number of risks and uncertainties, such as the difficulty and uncertainty of pharmaceutical product development, including the timing thereof, and the uncertainty of clinical success, such as the risk that results from preclinical studies and/or early clinical trials may not be predictive of results obtained in later and larger clinical trials. In addition, obtaining regulatory approval for product candidates is subject to the inherent uncertainty associated with the regulatory approval process, especially as we continue to increase investment in our product pipeline development projects and undertake planned regulatory submissions for our product candidates. K - 0 1 m r o F We also seek to expand our business through corporate development activities. Our ability to identify and acquire, in-license or develop additional products or product candidates to grow our business are subject to a number of risks and uncertainties, including the risks associated with business combination or product or product candidate acquisition transactions, such as the challenges inherent in the integration of acquired businesses with our historical business, the increase in geographic dispersion among our centers of operation and the risks that we may acquire unanticipated liabilities along with acquired businesses or otherwise fail to realize the anticipated benefits (commercial or otherwise) from such transactions. We are increasingly experiencing pressure from third party payors to agree to discounts, rebates or other restrictive pricing terms for Xyrem. As our business becomes more complex, we may need to enter into rebate agreements in order to ensure that patients continue to have access to Xyrem, and to support the long-term success of our sleep franchise, which might result in lower net revenues for Xyrem. In addition to increasing pricing pressure from, and restrictions on reimbursement imposed by, governmental and private third party payors, due to the attention being paid globally to healthcare cost containment, drug pricing by pharmaceutical companies is currently, and is expected to continue to be, under close scrutiny by both federal and state governments, including with respect to companies that have increased the price of products after acquiring those products from other companies. In addition, REMS programs have increasingly drawn public scrutiny from the U.S. Congress, the Federal Trade Commission and the FDA, with allegations that such programs are used as a means of improperly blocking or delaying competition. If we become the subject of any government investigation with respect to drug pricing or other business practices, including as they relate to the Xyrem REMS or otherwise, we could incur significant expense and could be distracted from operation of our business and execution of our strategy. In 2016 and 2017, we received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of charitable organizations that provide financial assistance to Medicare patients. In April 2018, we reached an agreement in principle with the DOJ on a proposal for a civil settlement of potential claims by the DOJ in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies. We cannot provide assurances that our efforts to reach a final settlement with the DOJ will be successful or, if they are, the timing or final terms of any such settlement. We expect any such settlement will involve entry into a corporate integrity agreement, which will impose significant costs and operational burdens on our business. Moreover, a failure to comply with the terms of a corporate integrity agreement could result in monetary penalties or a reduction or elimination of coverage for our products by federal health care programs such as Medicare and Medicaid and state health care programs. 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 I, Item 1A of this Annual Report on Form 10-K. JAZZ PHARMACEUTICALS | 2018 Annual Report 77 Results of Operations The following table presents revenues and expenses for the years ended December 31, 2018, 2017 and 2016 (in thousands except percentages): 2018 Change 2017 Change 2016 (1) Product sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties and contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of product sales (excluding amortization of intangible assets) . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange loss (gain) Loss on extinguishment and modification of debt . . . . . . . . . . . . . . . . . . . . . . Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in loss of investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,869,473 21,449 121,544 683,530 226,616 201,498 42,896 — 77,075 6,875 1,425 80,162 2,203 17% $1,601,399 17,294 24% 110,188 10% 544,156 26% 198,442 14% 152,065 33% N/A(2) — 85,000 N/A(2) 77,756 (1)% 9,969 (31)% N/A(2) — (47,470) (269)% 1,009 118% 8% $1,477,261 10,712 61% 105,386 5% 502,892 8% 162,297 22% 101,994 49% — N/A(2) 23,750 N/A(2) 61,942 26% (3,372) (396)% 638 N/A(2) 135,236 (135)% 379 166% (1) Our financial results include the financial results of the historical Celator business since the closing of the Celator Acquisition on July 12, 2016. (2) Comparison to prior period is not meaningful. Revenues The following table presents product sales, royalties and contract revenues, and total revenues for the years ended December 31, 2018, 2017 and 2016 (in thousands except percentages): 2018 Change 2017 Change 2016 Xyrem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Erwinaze/Erwinase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defitelio/defibrotide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vyxeos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prialt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other $1,404,866 174,739 149,448 100,835 20,839 18,746 18% $1,186,699 197,340 (11)% 133,650 12% 33,790 198% 27,361 (24)% 22,559 (17)% 7% $1,107,616 200,678 (2)% 108,952 23% — N/A(1) 29,120 (6)% 30,895 (27)% Product sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties and contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869,473 21,449 17% 1,601,399 17,294 24% 8% 1,477,261 10,712 61% Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,890,922 17% $1,618,693 9% $1,487,973 (1) Comparison to prior period is not meaningful. Product Sales, Net Xyrem product sales increased by 18% in 2018 compared to 2017 primarily due to an increase in sales volume and, to a lesser extent, a higher average net selling price. Xyrem product sales volume increased by 9% in 2018 compared to 2017 primarily driven by an increase in the average number of patients on Xyrem. Price increases were instituted in January 2018 and in January and July 2017. Xyrem product sales increased by 7% in 2017 compared to 2016 primarily due to higher average net selling prices, partially offset by higher gross to net deductions. Sales volumes in 2017 were consistent with 2016; sales growth was impacted by payor mix throughout 2017 and by operational changes that delayed some prescription fulfillment in the second half of 2017. Erwinaze/Erwinase product sales decreased in 2018 and 2017 compared to the immediately preceding years primarily due to lower sales volume as a result of limited supply from the manufacturer. Ongoing supply challenges continue to negatively impact our ability to supply the market. We are experiencing supply disruptions globally and expect further supply disruptions during 2019. Defitelio/defibrotide product sales increased in 2018 compared to 2017, primarily due to higher volumes and, to a lesser extent, the positive impact of foreign exchange rates. Defitelio/defibrotide product sales increased in 2017 compared to 2016, primarily due to the impact of a full year of sales in the U.S. in 2017. Vyxeos product sales in 2018 and 2017 were $100.8 million and $33.8 million, respectively, following its launch in the U.S. in August 2017 and rolling launch in the 78 JAZZ PHARMACEUTICALS | 2018 Annual Report EU beginning in August 2018. Prialt product sales decreased in 2018 and 2017 compared to the immediately preceding years primarily due to a decrease in volume. We completed the sale of our rights to Prialt to TerSera Therapeutics LLC, or TerSera in September 2018. Other product sales decreased in 2018 and in 2017 compared to the immediately preceding years, primarily due to a decrease in sales of our psychiatry products due to generic competition. We expect total product sales will increase in 2019 over 2018, primarily due to expected growth in sales of Xyrem and Vyxeos. Royalties and Contract Revenues Royalties and contract revenues increased in 2018 and in 2017 compared to the immediately preceding years, primarily due to higher one-time milestone revenues from out-licensing agreements. We expect royalties and contract revenues to decrease in 2019 compared to 2018 primarily due to lower milestone revenues from out-licensing arrangements. Cost of Product Sales Cost of product sales increased in 2018 and in 2017 compared to the immediately preceding years, primarily due to changes in product mix and increases in net product sales. Gross margins as a percentage of net product sales were 93.5%, 93.1% and 92.9% in 2018, 2017 and 2016, respectively. The increase in the gross margin percentage in 2018 and in 2017 compared to the immediately preceding years was primarily due to changes in product mix. We expect that our gross margin as a percentage of net product sales will not change materially in 2019 compared to 2018. Selling, General and Administrative Expenses Selling, general and administrative expenses increased in 2018 compared to 2017 primarily due to an accrued estimated loss contingency, including related interest, of $58.2 million. In April 2018, we reached an agreement in principle with the DOJ on a proposal for a civil settlement of potential claims by the DOJ in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies. For a further description of this matter, see Note 12, Commitments and Contingencies—Legal Proceedings, of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. Selling, general and administrative expenses in 2018 also included expenses related to the potential commercial launch of solriamfetol in the U.S. and the rolling launch of Vyxeos in the EU, and an increase in compensation-related expenses driven by higher headcount compared to 2017. Selling, general and administrative expenses increased in 2017 compared to 2016, primarily due to an increase in compensation-related expenses, primarily driven by higher headcount, and an increase in other expenses related to the expansion and support of our business, including expenses related to the launch of Vyxeos in the U.S., partially offset by the impact in 2016 of transaction and integration expenses related to the Celator Acquisition of $13.1 million and a one-time contract termination fee of $11.6 million to eliminate a potential future royalty obligation related to Vyxeos. We expect selling, general and administrative expenses in 2019 to increase compared to 2018, primarily due to an increase in compensation-related expenses driven by higher headcount and other expenses related to the expansion and support of our business and an increase in expenses related to the preparation for the potential commercial launch of solriamfetol in the U.S. and the continuation of the commercial launch of Vyxeos in the EU. Research and Development Expenses Research and development expenses consist primarily of costs related to clinical studies and outside services, personnel expenses, milestone payments and other research and development costs. Clinical study and outside services costs relate primarily to services performed by clinical research organizations, materials and supplies, and other third party fees. Personnel expenses relate primarily to salaries, benefits and share-based compensation. Other research and development expenses primarily include overhead allocations consisting of various support and facilities-related costs. We do not track fully-burdened research and development expenses on a project-by-project basis. We manage our research and development expenses by identifying the research and development activities that we anticipate will be performed during a given period and then prioritizing efforts based on our assessment of which development activities are important to our business and have a reasonable probability of success, and by dynamically allocating resources accordingly. We also continually review our development pipeline projects and the status of their development and, as necessary, reallocate resources among our development pipeline projects that we believe will best support the future growth of our business. K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 79 The following table provides a breakout of our research and development expenses by major categories of expense (in thousands): Year Ended December 31, 2018 2017 2016 Clinical studies and outside services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Milestone expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $117,903 71,158 11,000 26,555 $ 93,317 63,941 19,500 21,684 $100,165 47,969 750 13,413 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $226,616 $198,442 $162,297 Research and development expenses increased by $28.2 million in 2018 compared to 2017. Clinical studies and outside services costs increased in 2018 compared to 2017 primarily due to an increase in expenses related to our ongoing preclinical and clinical development programs and support of partner programs, partially offset by lower clinical trial costs following the completion of three Phase 3 clinical trials for solriamfetol. Personnel expenses increased by $7.2 million in 2018 compared to 2017, primarily due to increased headcount in support of our development programs. Milestone expense of $11.0 million in 2018 related to milestone payments following FDA acceptance of our NDA for solriamfetol in March 2018. Research and development expenses increased by $36.1 million in 2017 compared to 2016. Clinical studies and outside services costs decreased in 2017 compared to 2016 primarily due to lower clinical trial costs following the completion of three Phase 3 clinical trials for solriamfetol, partially offset by an increase in expenses related to other clinical development programs and higher costs in respect of regulatory activities. Personnel expenses increased by $16.0 million in 2017 compared to 2016, primarily driven by increased headcount in support of our development programs. Milestone expense in 2017 related to payments made under the license and option agreement with Pfenex, Inc., or Pfenex, which we entered into in July 2016 and amended in December 2017, for worldwide rights to develop and commercialize multiple early-stage hematology product candidates. For 2019 and beyond, we expect that our research and development expenses will continue to increase from historical levels, particularly as we prepare for anticipated regulatory submissions and data read-outs from clinical trials, 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 and regulatory submissions for our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Intangible Asset Amortization Intangible asset amortization increased in 2018 and in 2017 compared to the immediately preceding years, primarily due to the commencement of amortization of the Vyxeos intangible asset upon FDA approval in August 2017. Intangible asset amortization is expected to increase in 2019 compared to 2018 as a result of the reduction in the estimated remaining useful life of the Erwinaze intangible asset due to the receipt of a contract termination notice from PBL in February 2019. Impairment Charges In June 2018, we entered into an asset purchase agreement, or APA, with TerSera, pursuant to which TerSera agreed to purchase substantially all of the assets held by us related to Prialt. In connection with the entry into the APA, which was subsequently amended, we reclassified the Prialt assets to be transferred to TerSera as assets held for sale and recorded these assets at fair value, less estimated sales costs, resulting in the recognition of an impairment charge of $42.9 million in 2018. The transaction closed on September 27, 2018. Acquired In-Process Research and Development In 2017, acquired in-process research and development, or IPR&D, expense was primarily related to an upfront payment of $75.0 million in connection with a collaboration and option agreement with ImmunoGen, Inc., or ImmunoGen to acquire rights to opt into exclusive, worldwide licenses to develop and commercialize two hematology-related antibody-drug conjugate, or ADC programs, as well as an additional program to be designated during the term of the agreement. In 2016, acquired IPR&D expense was related to upfront and option payments. In March 2016, we obtained intellectual property and know-how related to recombinant crisantaspase for $8.8 million. In July 2016, we made upfront and option payments of $15.0 million to Pfenex. 80 JAZZ PHARMACEUTICALS | 2018 Annual Report Interest Expense, Net Interest expense, net decreased by $0.7 million in 2018 compared to 2017, primarily due to higher interest income, partially offset by the interest expense on our 1.50% exchangeable senior notes due 2024, or the 2024 Notes, which were issued in August 2017. Interest expense, net increased by $15.8 million in 2017 compared to 2016, primarily due to the increase in our average debt balance and higher interest rates in 2017. We expect interest expense, net will be lower in 2019 compared to 2018 primarily due to higher interest income. Foreign Exchange Loss (Gain) The foreign exchange loss (gain) is primarily related to the translation of euro-denominated net monetary liabilities, primarily intercompany balances, held by subsidiaries with a U.S. dollar functional currency and related foreign exchange forward contracts not designated as hedging instruments. Loss on Extinguishment and Modification of Debt In 2018, we recorded a loss of $1.4 million in connection with the second amendment of our 2015 credit agreement in June 2018, related to unamortized debt issuance costs and original issue discount associated with extinguished debt and new third party fees associated with modified debt. In 2016, we recorded a loss of $0.6 million in connection with the first amendment of our 2015 credit agreement in July 2016, which was primarily comprised of new third party fees associated with the modified debt. Income Tax Provision (Benefit) Our income tax provision was $80.2 million and $135.2 million in 2018 and 2016, respectively, and our income tax benefit was $47.7 million in 2017. The income tax provision in 2017 included a benefit of $148.8 million relating to the enactment of the U.S. Tax Cuts and Jobs Act, or the U.S. Tax Act. The effective tax rates for 2018, 2017 and 2016 were 15.1%, (10.8)% and 25.4%, respectively. The income tax benefit recognized for 2017 in respect of the enactment of the U.S. Tax Act resulted in a net decrease to our effective tax rate of 33.7%. The effective tax rates for 2018 and 2016 were higher than the Irish statutory rate of 12.5%, primarily due to income taxable at a rate higher than the Irish statutory rate and unrecognized tax benefits, partially offset by the release of reserves related to unrecognized tax benefits upon the expiration of a statute of limitation, originating tax credits and the release of a valuation allowance held primarily against certain foreign net operating losses or NOLs. The effective tax rate for 2017 was lower than the Irish statutory rate of 12.5%, primarily due to the impact of the enactment of the U.S. Tax Act. The increase in the effective tax rate for 2018 compared to 2017 was primarily due to the impact of the enactment of the U.S. Tax Act. Excluding this effect, the effective rate in 2018 would have decreased compared to 2017 primarily due to a decrease in the U.S. corporate income tax rate. The decrease in the effective tax rate in 2017 compared to 2016 was primarily due to the release of a valuation allowance held against certain foreign NOLs and the release of reserves related to unrecognized tax benefits upon the expiration of a statute of limitation, partially offset by a reduction in deductions available in relation to subsidiary equity. Equity in Loss of Investees Equity in loss of investees relates to our share in the net loss of companies in which we have made investments accounted for under K - 0 1 m r o F the equity method of accounting. Liquidity and Capital Resources As of December 31, 2018, we had cash, cash equivalents and investments of $824.6 million, borrowing availability under our revolving credit facility of $1.6 billion and a long-term debt principal balance of $1.8 billion. Our long-term debt included $651.0 million aggregate principal amount term loan, $575.0 million principal amount of the 2021 Notes and $575.0 million principal amount of the 2024 Notes. During 2018, 2017 and 2016, we generated cash flows from operations of $798.9 million, $693.1 million and $592.4 million, respectively, and we expect to continue to generate positive cash flow from operations. We believe that our existing cash, cash equivalents and investments 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 factors set forth in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K under the headings “Risks Related to Xyrem and Our Other Marketed Products” 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.” Our assumptions may prove to be wrong or other factors may adversely affect our business, and as a result we could exhaust or JAZZ PHARMACEUTICALS | 2018 Annual Report 81 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, development, 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 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 2015, our board of directors authorized a share repurchase program pursuant to which we were authorized to repurchase a number of ordinary shares having an aggregate purchase price of up to $300 million, exclusive of any brokerage commissions. In September 2016, we completed repurchases under the November 2015 share repurchase program. In November 2016, our board of directors authorized a new share repurchase program pursuant to which we were authorized to repurchase a number of ordinary shares having an aggregate purchase price of up to $300 million, exclusive of any brokerage commissions. In November and December 2018, our board of directors increased the existing share repurchase program authorization by $320.0 million and $400.0 million, respectively, thereby increasing the total amount authorized to $1.02 billion. Under this program, which has no expiration date, we may repurchase ordinary shares from time to time on the open market. The timing and amount of repurchases will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, restrictions under the amended credit agreement, corporate and regulatory requirements and market conditions. The repurchase program may be modified, suspended or discontinued at any time without prior notice. In 2018, we spent a total of $523.7 million to purchase 3.5 million of our ordinary shares under the share repurchase program at an average total purchase price, including brokerage commissions, of $148.33 per share. In 2017, we spent a total of $98.8 million to repurchase 0.7 million of our ordinary shares at an average total purchase price, including brokerage commissions, of $140.34 per share. All ordinary shares repurchased were canceled. As of December 31, 2018, the remaining amount authorized under the share repurchase program was $379.1 million. The following table shows a summary of our cash flows for the periods indicated (in thousands): Year Ended December 31, 2018 2017 2016 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rates on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 798,904 (394,487) (479,130) (1,700) $ 693,087 (268,950) (409,111) 5,046 $ 592,391 (1,751,155) 540,987 (5,045) Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (76,413) $ 20,072 $ (622,822) Net cash provided by operating activities of $798.9 million in 2018 related to net income of $447.1 million, adjusted for non-cash items of $328.5 million primarily related to intangible asset amortization, share-based compensation, impairment charges, amortization of debt discount and deferred financing costs and deferred income taxes and a net cash inflow of $23.3 million related to changes in operating assets and liabilities. Net cash provided by operating activities of $693.1 million in 2017 related to net income of $487.8 million, adjusted for acquired IPR&D expense totaling $85.0 million and non-cash items of $93.5 million primarily related to intangible asset amortization, share- based compensation, amortization of debt discount and deferred financing costs and deferred income taxes and a net cash inflow of $26.8 million related to changes in operating assets and liabilities. Net cash provided by operating activities of $592.4 million in 2016 related to net income of $396.8 million, adjusted for upfront and option payments totaling $23.8 million in connection with our acquisition of IPR&D assets and non-cash items of $192.7 million primarily related to intangible asset amortization, share-based compensation, amortization of debt discount and deferred financing costs and deferred income taxes. This was partially offset by $20.9 million of net cash outflow related to changes in operating assets and liabilities. Net cash used in investing activities in 2018 primarily related to the net acquisition of investments of $310.9 million, acquisition of intangible assets of $111.1 million related to the purchase of a PRV and purchases of property, plant and equipment of $20.4 million, partially offset by net proceeds of $47.9 million from the sale of our rights to Prialt to TerSera. Net cash used in investing activities in 2017 82 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F primarily related to the net acquisition of investments of $155.0 million, upfront payments for acquired IPR&D of $85.0 million primarily related to a collaboration and option agreement with ImmunoGen and purchases of property, plant and equipment of $29.0 million. Net cash used in investing activities in 2016 primarily related to the Celator Acquisition for $1.5 billion, a $150.0 million milestone payment to Sigma-Tau Pharmaceuticals, Inc. that was triggered by the FDA approval of Defitelio on March 30, 2016, net acquisition of investments of $65.3 million and upfront and option payments of $23.8 million to acquire IPR&D assets. Net cash used in financing activities in 2018 primarily related to repurchase of ordinary shares under our share repurchase program of $523.7 million, repayment of our term loan principal of $25.7 million, payment of employee withholding taxes of $17.9 million related to share-based awards and payment of debt modification costs of $6.4 million, partially offset by proceeds from employee equity incentive and purchase plans of $93.3 million. Net cash used in financing activities in 2017 primarily related to repayment of borrowings under our revolving credit facility of $850.0 million, repurchase of ordinary shares under our share repurchase program of $98.8 million, repayment of our term loan principal of $36.1 million and payment of employee withholding taxes of $18.6 million related to share-based awards, partially offset by net proceeds from issuance of debt of $559.4 million, proceeds from employee equity incentive and purchase plans of $31.8 million and proceeds from a tenant improvement allowance on a build-to-suit lease of $3.2 million. Net cash provided by financing activities in 2016 primarily related to net proceeds from issuance of debt of $994.6 million and proceeds of $24.2 million from employee equity incentive and purchase plans, partially offset by $278.3 million used to repurchase our ordinary shares under our share repurchase program, $150.0 million and $28.3 million repayments of borrowings under our revolving credit facility and term loan principal, respectively, and payment of employee withholding taxes of $21.2 million related to share-based awards. 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 a 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 to provide for a revolving credit facility of $1.25 billion and a $750.0 million term loan facility. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. On June 7, 2018, we entered into the second amendment to the 2015 credit agreement to provide for a revolving credit facility of $1.60 billion, which replaced the existing revolving credit facility of $1.25 billion, and a new $667.7 million term loan facility, which replaced the $750.0 million term loan facility, of which $651.0 million principal amount was outstanding as of December 31, 2018. We refer to the 2015 credit agreement as amended by the first and second amendments as the amended credit agreement in this report. We expect to use the proceeds from future loans under the revolving credit facility, if any, for permitted capital expenditures and acquisitions, to provide for ongoing working capital requirements and for other general corporate purposes. Under the amended credit agreement, the term loan matures on June 7, 2023 and the revolving credit facility terminates, and any loans outstanding thereunder become due and payable, on June 7, 2023. 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 1.375% to 1.750% per annum, based upon our secured leverage ratio, or (b) the prime lending rate, plus an applicable margin ranging from 0.375% to 0.750% 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. As of December 31, 2018, the interest rate on the term loan was 3.90% and the effective interest rate was 3.66%. As of December 31, 2018, we had undrawn amounts under our revolving credit facility totaling $1.60 billion. 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 and the 2024 Notes, together referred to as the Exchangeable Senior Notes as described below) and are secured by substantially all of Jazz Pharmaceuticals plc’s, the borrowers’ and the guarantor subsidiaries’ assets. JAZZ PHARMACEUTICALS | 2018 Annual Report 83 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 other exceptions), (2) net cash proceeds from issuances of debt (other than certain permitted debt), and (3) casualty proceeds and condemnation awards (subject to other exceptions). Principal repayments of the term loan, which are due quarterly, are equal to 5.0% per annum of the principal amount outstanding on June 7, 2018 of $667.7 million, with any remaining balance payable on the maturity date. The amended credit agreement contains financial covenants that require Jazz Pharmaceuticals plc and our restricted subsidiaries to not (a) exceed a maximum secured net leverage ratio or (b) fall below a cash interest coverage ratio. As of December 31, 2018, we were in compliance with these financial covenants. Exchangeable Senior Notes 2024 Notes. In the third quarter of 2017, our wholly owned subsidiary Jazz Investments I Limited, completed a private placement of $575.0 million principal amount of 2024 Notes. We used the net proceeds from this offering to repay $500.0 million in outstanding loans under the revolving credit facility under the amended credit agreement and to pay related fees and expenses. We used the remainder of the net proceeds for general corporate purposes. The 2024 Notes are senior unsecured obligations of Jazz Investments I Limited and are fully and unconditionally guaranteed on a senior unsecured basis by Jazz Pharmaceuticals plc and will rank pari passu in right of payment with the existing 2021 Notes. Interest on the 2024 Notes is payable semi-annually in cash in arrears on February 15 and August 15 of each year, beginning on February 15, 2018, at a rate of 1.50% 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 2024 Notes. The 2024 Notes mature on August 15, 2024, unless earlier exchanged, repurchased or redeemed. The holders of the 2024 Notes have the ability to require us to repurchase all or a portion of their 2024 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, 2024, we may redeem the 2024 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 2024 Notes additional amounts as a result of certain tax-related events. We also may redeem the 2024 Notes on or after August 20, 2021, 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 2024 Notes are exchangeable at an initial exchange rate of 4.5659 ordinary shares per $1,000 principal amount of 2024 Notes, which is equivalent to an initial exchange price of approximately $219.02 per ordinary share. Upon exchange, the 2024 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 2024 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 2024 Notes or upon our issuance of a notice of redemption, we will in certain circumstances increase the exchange rate for holders of the 2024 Notes who elect to exchange their 2024 Notes in connection with that make-whole fundamental change or during the related redemption period. Prior to May 15, 2024, the 2024 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. 2021 Notes. In August 2014, Jazz Investments I Limited completed a private placement of $575.0 million principal amount of the 2021 Notes. The 2021 Notes are 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 84 JAZZ PHARMACEUTICALS | 2018 Annual Report 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 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 December 31, 2018 (in thousands): Contractual Obligations (1) Term loan—principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term loan—interest (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchangeable Senior Notes—principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchangeable Senior Notes—interest (3) . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving credit facility—commitment fee (4) . . . . . . . . . . . . . . . . . . . . . . . Commitment to equity method investees . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase and other obligations (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease obligations (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Facility lease obligations (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments Due by Period Total $ 651,041 87,640 1,150,000 84,094 17,978 22,175 146,364 39,794 189,843 Less than 1 Year $ 33,387 21,719 — 19,406 4,056 7,000 65,075 8,404 9,881 1-3 Years 3-5 Years $ 66,774 40,089 575,000 38,813 8,122 14,000 45,451 12,040 29,382 $550,880 25,832 — 17,250 5,800 1,175 29,168 10,556 31,171 More than 5 years $ — — 575,000 8,625 — — 6,670 8,794 119,409 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,388,929 $168,928 $829,671 $671,832 $718,498 K - 0 1 m r o F (1) This table does not include potential future milestone payments 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. On January 2, 2019, we entered into a strategic collaboration agreement with Codiak for an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize potential therapeutic candidates directed at five targets to be developed using Codiak’s engEx™ precision engineering platform for exosome therapeutics. We made an upfront payment of $56.0 million in January 2019. Codiak is eligible to receive up to $20 million in preclinical development milestone payments across all five programs. Codiak is also eligible to receive milestone payments totaling up to $200 million per target based on investigational new drug application acceptance, clinical and regulatory milestones, including approvals in the U.S., the EU and Japan, and certain sales milestones. Codiak is also eligible to receive tiered royalties on net sales of each approved product. In 2014, we signed a definitive agreement with Aerial BioPharma LLC, or Aerial, under which we acquired worldwide development, manufacturing and commercial rights to solriamfetol (other than in certain jurisdictions in Asia where SK Biopharmaceuticals Co., Ltd, or SK, retains rights). Aerial and SK are currently eligible to receive milestone payments up to an aggregate of $259 million based on development, regulatory and sales milestones and tiered royalties from high single digits to mid-teens based on potential future sales of solriamfetol. In July 2016, we entered into an agreement with Pfenex that granted us worldwide rights to develop and commercialize multiple early-stage hematology product candidates and an option for us to negotiate a license for a recombinant pegaspargase product candidate with Pfenex. This agreement was amended in December 2017. Under the amended agreement, Pfenex received upfront, option and development milestone payments totaling $36 million and may be eligible to receive additional payments of up to $189 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 $85 million. These 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. JAZZ PHARMACEUTICALS | 2018 Annual Report 85 (2) Estimated interest for variable rate debt was calculated based on the interest rates in effect as of December 31, 2018. The interest rate for our term loan borrowing was 3.90% as of December 31, 2018. Interest that is fixed, associated with our interest rate swaps, is calculated based on the fixed interest swap rate as of December 31, 2018. (3) We used the fixed interest rates of 1.875% on the 2021 Notes and 1.50% on the 2024 Notes to estimate interest owed as of December 31, 2018 until the respective final maturity dates of these notes. (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 0.25% and assumed undrawn amounts of $1.6 billion as of December 31, 2018 to estimate commitment fees owed. (5) Consists primarily of non-cancelable commitments to our third party manufacturers and to ImmunoGen under our collaboration and option agreement. (6) Consists primarily of the minimum lease payments for our office buildings and automobile lease payments for our sales force. Operating expenses associated with our leased office buildings are not included in table above. (7) This includes a lease agreement we entered into in January 2015 to lease office space located in Palo Alto, California in a building subsequently constructed by the landlord, which we occupied beginning in October 2017, and a lease agreement we entered into in September 2017 to lease additional office space located in Palo Alto, California in a second building to be constructed by the same landlord, which we expect to occupy by the end of 2019. Not included in the table above are our estimated costs of approximately $21 million associated with the design, development and construction of tenant improvements under the lease agreement entered into in September 2017, which estimate does not include a tenant improvement allowance to be provided by the landlord. 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. Cumulative unremitted earnings of our foreign subsidiaries totaled approximately $1.2 billion at December 31, 2018. In the event of the distribution of those earnings in the form of dividends or otherwise, we may be liable for income taxes, subject to an adjustment, if any, for foreign tax credits and foreign withholding taxes payable to certain foreign tax authorities. As of December 31, 2018, it is not practicable to determine the amount of the income tax liability related to these undistributed earnings due to a variety of factors. 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. As of December 31, 2018, our liability for unrecognized tax benefits amounted to $118.2 million (excluding interest and penalties). 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 Policies and Significant Estimates A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, we believe the following accounting estimates and policies to be critical. Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Product Sales, Net Product sales revenue is recognized when control has transferred to the customer, which occurs at a point in time, which is typically on delivery to the customer or, in the case of products that are subject to consignment agreements, when the customer removes product from our consigned inventory location for shipment directly to a patient. A significant portion of our net product revenues is derived from sales of Xyrem. We sell Xyrem in the U.S. to a single central pharmacy, Express Scripts Specialty Distribution Services, Inc., or Express Scripts. In 2018, sales of Xyrem to Express Scripts accounted for 75% of our net product sales. We recognize revenues from sales of Xyrem within the U.S. when control has transferred to the customer, which occurs when Express Scripts removes product from our consigned inventory location at its facility for shipment directly to a patient. We do not accept returns of Xyrem from Express Scripts. 86 JAZZ PHARMACEUTICALS | 2018 Annual Report Items Deducted from Gross Product Sales. Revenues from sales of products are recorded net of government rebates and rebates under managed care plans, estimated allowances for sales returns, government chargebacks, prompt payment discounts, patient coupon programs, and specialty distributor and wholesaler fees. Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in applicable regulations and guidelines that would impact the amount of the actual rebates, our expectations regarding future utilization rates and channel inventory data. We review the adequacy of our provisions for sales deductions on a quarterly basis. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. Because we derive a significant portion of our revenues from sales of Xyrem in the U.S. to one specialty pharmacy customer, Express Scripts, we have a much higher level of knowledge about each prescription than if we sold the product through the normal pharmaceutical wholesaler channel as we do with most of our other products. The most significant items deducted from gross product sales where we exercise judgment are rebates, sales returns and chargebacks. The following table presents the activity and ending balances for our sales-related accruals and allowances (in thousands): Rebates Payable Sales Returns Reserve Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments/credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,038 129,608 (123,383) Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments/credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments/credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,263 144,596 (135,697) 77,162 160,648 (156,696) $ 6,110 (537) (1,207) 4,366 446 (1,161) 3,651 1,203 (2,344) Chargebacks $ 4,896 40,430 (40,577) 4,749 41,941 (43,027) 3,663 41,387 (44,642) Discounts and Distributor Fees $ 3,724 40,057 (39,582) 4,199 36,642 (36,532) 4,309 42,956 (41,808) Total $ 76,768 209,558 (204,749) 81,577 223,625 (216,417) 88,785 246,194 (245,490) K - 0 1 m r o F Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,114 $ 2,510 $ 408 $ 5,457 $ 89,489 Total items deducted from gross product sales were $246.2 million, $223.6 million and $209.6 million, or 11.6%, 12.3% and 12.4% as a percentage of gross product sales, in 2018, 2017 and 2016, respectively. Included in these amounts are immaterial adjustments related to prior-year sales due to changes in estimates. Such amounts represented less than 1% of net product sales for each of the years ended December 31, 2018, 2017 and 2016. Rebates We are subject to rebates on sales made under governmental and managed-care pricing programs in the U.S. The largest of these rebates is associated with sales covered by Medicaid. We participate in state government-managed Medicaid programs as well as certain other qualifying federal and state government programs under the terms of which discounts and rebates are provided to participating government entities. We offer rebates and discounts to managed health care organizations in the U.S. In estimating our provisions for rebates, we consider relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. We estimate the rebate provision based on historical utilization rates, historical payment experience, new information regarding changes in regulations and guidelines that would impact the amount of the actual rebates, our expectations regarding future utilization rates and channel inventory data obtained from our major U.S. wholesalers in accordance with our inventory management agreements. Estimating these rebates is complex, in part due to the time delay between the date of sale and the actual settlement of the liability. We believe that the methodology we use to estimate rebates on product sales made under governmental and managed-care pricing programs is reasonable and appropriate given current facts and circumstances. However, estimates may vary from actual experience. Rebates were $160.6 million, $144.6 million and $129.6 million, or 7.6%, 7.9% and 7.7% as a percentage of gross product sales, in 2018, 2017 and 2016, respectively. Rebates as a percentage of gross product sales did not change materially in 2018 compared to 2017. We expect that rebates will continue to significantly impact our reported net sales. Rebates as a percentage of gross product sales are expected to decrease in 2019 compared to 2018, primarily due to a decrease in Tricare per unit rebate amounts, partially offset by increased Medicaid utilization for Xyrem. Sales returns For certain products, we allow customers to return product within a specified period before and after the applicable expiration date and issue credits which may be applied against existing or future invoices. We account for sales returns as a reduction in net revenue at JAZZ PHARMACEUTICALS | 2018 Annual Report 87 the time a sale is recognized by establishing an accrual in an amount equal to the estimated value of products expected to be returned. The sales return accrual is estimated principally based on historical experience, the level and estimated shelf life of inventory in the distribution channel, our return policy and expected market events including generic competition. Sales returns represented a charge of $1.2 million and $0.4 million in 2018 and 2017, respectively, and a credit of $0.5 million in 2016, or 0.1%, 0% and 0% as a percentage of gross product sales in 2018, 2017 and 2016, respectively. Sales returns as a percentage of gross product sales did not change materially in 2018 and 2017 compared to the immediately preceding years. Sales returns as a percentage of gross product sales are not expected to change materially in 2019 compared to 2018. Chargebacks We participate in chargeback programs with a number of entities, principally the U.S. Department of Defense, the U.S. Department of Veterans Affairs and other public parties, under which pricing on products below wholesalers’ list prices is provided to participating entities. These entities purchase product through wholesalers at the lower negotiated price and the wholesalers charge back to us the difference between their acquisition cost and the lower negotiated price. We record the difference as allowances against accounts receivable. We determine our estimate of the chargebacks provision primarily based on historical experience on a product and program basis, current contract prices under the chargeback programs and channel inventory data. Chargebacks were $41.4 million, $41.9 million and $40.4 million, or 2.0%, 2.3% and 2.4% as a percentage of gross product sales in 2018, 2017 and 2016, respectively. Chargebacks as a percentage of gross product sales did not change materially in 2018 and 2017 compared to the immediately preceding years. We expect that chargebacks will continue to significantly impact our reported net product sales. Chargebacks as a percentage of gross product sales are not expected to change materially in 2019 compared to 2018. Discounts and distributor fees Discounts and distributor fees comprise prompt payment discounts, patient coupon programs and specialty distributor and wholesaler fees. We offer customers a cash discount on gross product sales as an incentive for prompt payment. We estimate provisions for prompt pay discounts based on contractual sales terms with customers and historical payment experience. To help patients afford our products, we have various programs to assist them, including patient assistance programs, a free product voucher program and co-pay coupon programs for certain products. We estimate provisions for these programs primarily based on expected program utilization, adjusted as necessary to reflect our actual experience on a product and program basis. Specialty distributor and wholesaler fees comprise fees for distribution of our products. We estimate provisions for distributor and wholesaler fees primarily based on sales volumes and contractual terms with our distributors. Discounts and distributor fees were $43.0 million, $36.6 million and $40.1 million, or 2.0%, 2.0% and 2.4% as a percentage of gross product sales in 2018, 2017 and 2016, respectively. Discounts and distributor fees as a percentage of gross product sales in 2018 were in line with 2017. Discounts and distributor fees as a percentage of gross product sales decreased in 2017 compared to 2016 primarily due to decreased distributor fees payable to the partner distributors in international markets. We expect that discounts and distributor fees as a whole will continue to significantly impact our reported net product sales. Discounts and distributor fees as a percentage of gross product sales are not expected to change materially in 2019 compared to 2018. Goodwill and Intangible Assets Goodwill Goodwill represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed. We test goodwill for impairment annually in October and when events or changes in circumstances indicate that the carrying value may not be recoverable. We have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of pharmaceutical products. The annual test for goodwill impairment is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step indicates impairment, then in the second step, the loss is measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. We have determined the fair value of our single reporting unit to be equal to our market capitalization, as determined by our traded share price, plus a control premium. The control premium used was based on a review of such premiums identified in recent acquisitions of companies of similar size and in similar industries. We performed our annual goodwill impairment test in October 2018 and concluded that goodwill was not impaired as the fair value of the reporting unit significantly exceeded its carrying amount, including goodwill. As of December 31, 2018, we had $927.6 million of goodwill primarily resulting from the business combination between Jazz Pharmaceuticals, Inc. and Azur Pharma Public Limited Company, which we refer to as the Azur Merger, on January 18, 2012, our acquisition of EUSA Pharma, Inc., or the EUSA Acquisition, on June 12, 2012, the Gentium Acquisition on January 23, 2014 and the Celator Acquisition on July 12, 2016. 88 JAZZ PHARMACEUTICALS | 2018 Annual Report Intangible Assets In connection with the Azur Merger, the EUSA Acquisition, the Gentium Acquisition and the Celator Acquisition, we acquired a number of intangible assets, including intangible assets related to currently marketed products (developed technology) and intangible assets related to product candidates (IPR&D). When significant identifiable intangible assets are acquired, we engage an independent third party valuation firm to assist in determining the fair values of these assets as of the acquisition date. Discounted cash flow models are typically used in these valuations, which require the use of significant estimates and assumptions, including but not limited to: • • • • estimating the timing of and expected costs to complete the in-process projects; projecting regulatory approvals; estimating future cash flows from product sales resulting from completed products and in-process projects; and developing appropriate discount rates and probability rates by project. We believe the fair values that we assign to the intangible assets acquired are based upon reasonable estimates and assumptions given available facts and circumstances as of the acquisition dates. No assurance can be given, however, that the underlying assumptions used to estimate expected cash flows will transpire as estimated. In addition, we are required to estimate the period of time over which to amortize the intangible assets, which requires significant judgment. Finite-lived intangible assets consist primarily of purchased developed technology and are amortized on a straight-line basis over their estimated useful lives, which range from two to 18 years. The estimated useful lives associated with intangible assets are consistent with the estimated lives of the products and may be modified when circumstances warrant. Intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Estimating future cash flows related to an intangible asset involves estimates and assumptions. If our assumptions are not correct, there could be an impairment loss or, in the case of a change in the estimated useful life of the asset, a change in amortization expense. Intangible assets with finite useful lives also includes the PRV we acquired in 2018 which we can use to obtain priority review by the FDA for one of our future regulatory submissions or may sell or transfer to a third party. The PRV is measured at cost and reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable. At the time we commit to using the PRV to accelerate the review of a drug application, the cost of the PRV will be expensed to the consolidated statement of income. Alternatively, if the PRV is sold, the asset would be derecognized from the consolidated balance sheet. K - 0 1 m r o F IPR&D is not amortized but is tested for impairment annually or when events or circumstances indicate that the fair value may be below the carrying value of the asset. If the carrying value of the assets is not expected to be recovered, the assets are written down to their estimated fair values. As of December 31, 2018, we had $2.6 billion of finite-lived intangible assets and $0.1 billion of IPR&D assets related to the marketed products and the IPR&D projects that we acquired in the EUSA Acquisition, the Gentium Acquisition and the Celator Acquisition. In relation to the sale of our rights to Prialt to TerSera in 2018, we adjusted the carrying value of the assets held for sale to fair value less costs to sell, which resulted in an impairment charge of $42.9 million in our consolidated statements of income in 2018, primarily related to the carrying balances of intangible assets. We did not recognize an impairment charge related to our intangible assets in 2017 and 2016. Please refer to Note 9, Goodwill and Intangible assets, of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further information about our intangible assets and the remaining useful lives of our finite-lived intangible assets as of December 31, 2018. Income Taxes We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amount and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance when it is more-likely-than-not that deferred tax assets will not be realized. JAZZ PHARMACEUTICALS | 2018 Annual Report 89 Our most significant tax jurisdictions are Ireland, the U.S., Italy and France. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on management’s interpretations of jurisdiction-specific tax laws or regulations and the likelihood of settlement related to tax audit issues. Various internal and external factors may have favorable or unfavorable effects on our future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, the impact of accounting for share-based compensation, changes in our international organization, likelihood of settlement, and changes in overall levels of income before taxes. Realization of our deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including cumulative income in recent fiscal years, our forecast of future taxable income exclusive of certain reversing temporary differences and significant risks and uncertainties related to our business. In determining future taxable income, we are responsible for assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of certain temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage our underlying business. We maintain a valuation allowance against certain other deferred tax assets where realizability is not certain. We periodically evaluate the likelihood of the realization of deferred tax assets and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. This determination depends on a variety of factors, some of which are subjective, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, carryforward periods available to us for tax reporting purposes, various income tax strategies and other relevant factors. If we determine that the deferred tax assets are not realizable in a future period, we would record material changes to income tax provision in that period. We have also provided for unrecognized tax benefits that we believe are not more-likely-than-not to be sustained upon examination by tax authorities. The evaluation of unrecognized tax benefits is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate unrecognized tax benefits on a quarterly basis and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for unrecognized tax benefits can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the more-likely- than-not threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax provision (benefit). Share-Based Compensation We have elected to use the Black-Scholes option pricing model to calculate the fair value of share option grants under our equity incentive plans and grants under our employee stock purchase plan, or ESPP, and we are using the straight-line method to allocate compensation cost to reporting periods. The fair value of share options was estimated using the following assumptions: Year Ended December 31, 2018 2017 2016 Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected term (years) Range of risk-free rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% 4.5 35% 4.3 2.2-3.0% 1.6-2.1% 0.8-1.6% — % 39% 4.2 — % — % The two inputs which require the greatest judgment and have a large impact on fair values are volatility and expected term. We rely only on a blend of the historical and implied volatilities of our own ordinary shares to determine expected volatility for share option grants. In addition, we use a single volatility estimate for each share option grant. The weighted-average volatility is determined by calculating the weighted average of volatilities for all share options granted in a given year. The expected term of share option grants represents the weighted-average period the awards are expected to remain outstanding. We estimated the weighted-average expected term based on historical exercise data. 90 JAZZ PHARMACEUTICALS | 2018 Annual Report Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, please see Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. K - 0 1 m r o F Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk. The primary objectives of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and competitive yield. Although our investments are subject to market risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or certain types of investment. Our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, including 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 states, agencies and municipalities in the U.S. Our cash equivalents and investments as of December 31, 2018 consisted of time deposits and money market funds which are not subject to significant interest rate risk. We are exposed to risks associated with changes in interest rates in connection with our term loan borrowings. On June 7, 2018, we entered into the amended credit agreement to provide for a revolving credit facility of $1.60 billion, which replaced the existing revolving credit facility of $1.25 billion, and a new $667.7 million term loan facility, which replaced the $750.0 million term loan facility, of which $651.0 million principal amount was outstanding as of December 31, 2018. There were no borrowings outstanding under the revolving credit facility as of December 31, 2018. 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. These derivative instruments are utilized for risk management purposes, and we do not use these derivatives for speculative trading purposes. 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 100 basis points, interest expense for 2019 would increase or decrease by approximately $4 million, based on the unhedged portion of our outstanding variable rate borrowings. In August 2014, we completed a private placement of $575.0 million aggregate principal amount of the 2021 Notes. In the third quarter of 2017, we completed another private placement of $575.0 million aggregate principal amount of the 2024 Notes. The 2021 Notes and 2024 Notes have fixed annual interest rates of 1.875% and 1.50%, respectively, and we, therefore, do not have economic interest rate exposure on the Exchangeable Senior Notes. However, the fair values of the Exchangeable Senior Notes are exposed to interest rate risk. Generally, the fair values of the Exchangeable Senior Notes will increase as interest rates fall and decrease as interest rates rise. The fair values of the Exchangeable Senior Notes are also affected by volatility in our ordinary share price. As of December 31, 2018, the fair values of the 2021 Notes and the 2024 Notes were estimated to be $558 million and $521 million, respectively. In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee, or ARRC, in the U.S. has proposed that the Secured Overnight Financing Rate, or SOFR, is the rate that represents best practice as the alternative to the U.S. dollar, or USD, LIBOR for use in derivatives and other financial contracts that are currently indexed to USD LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD LIBOR. We have certain financial contracts, including the amended credit agreement and our interest rate swaps, that are indexed to USD LIBOR and are monitoring this activity and evaluating the related risks. Foreign Exchange Risk. We have significant operations in Europe as well as in the U.S. The functional currency of each foreign subsidiary is generally the local currency. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at the average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of our foreign subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency JAZZ PHARMACEUTICALS | 2018 Annual Report 91 translation exposure is related to our subsidiaries that have functional currencies denominated in the euro. A 10% strengthening or weakening in the rates used to translate the results of our foreign subsidiaries that have functional currencies denominated in the euro would have increased or decreased net income for the year ended December 31, 2018 by approximately $13 million. Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported in foreign exchange gain (loss) in the consolidated statements of income. As of December 31, 2018, our primary exposure to transaction risk related to euro net monetary liabilities, including intercompany loans, held by subsidiaries with a U.S. dollar functional currency. We have entered into foreign exchange forward contracts to manage this currency risk. These foreign exchange forward contracts are not designated as hedges; gains and losses on these derivative instruments are designed to offset gains and losses on the underlying balance sheet exposures. As of December 31, 2018, we held foreign exchange forward contracts with notional amounts totaling $271.5 million. The net liability fair value of outstanding foreign exchange forward contracts was $0.3 million as of December 31, 2018. Based on our foreign currency exchange rate exposures as of December 31, 2018, a hypothetical 10% adverse fluctuation in exchange rates would decrease the fair value of our foreign exchange forward contracts by approximately $12 million as of December 31, 2018. The resulting loss on these forward contracts would be offset by a positive impact on the underlying monetary assets and liabilities. Item 8. Financial Statements and Supplementary Data Our consolidated financial statements as listed below are included in this Annual Report on Form 10-K as pages F-1 through F-45. Jazz Pharmaceuticals plc Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page F-1 F-2 F-3 F-4 F-5 F-7 F-9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. 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 Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2018. 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 December 31, 2018, there were 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. 92 JAZZ PHARMACEUTICALS | 2018 Annual Report Management’s Report on Internal Control over Financial Reporting. The following report is provided by management in respect of our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act): 1. 2. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management used the Committee of Sponsoring Organizations of the Treadway Commission Internal Control—Integrated Framework (2013), or the COSO framework, to evaluate the effectiveness of internal control over financial reporting. Management believes that the COSO framework is a suitable framework for its evaluation of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative measurements of our internal control over financial reporting, is sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of our internal control over financial reporting are not omitted and is relevant to an evaluation of internal control over financial reporting. 3. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018 and has concluded that such internal control over financial reporting was effective. There were no material weaknesses in internal control over financial reporting identified by management. 4. KPMG, our independent registered public accounting firm, has audited the consolidated financial statements of Jazz Pharmaceuticals plc as of and for the year ended December 31, 2018, included herein, and has issued an audit report on our internal control over financial reporting, which is included below. K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 93 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Jazz Pharmaceuticals plc: Opinion on Internal Control Over Financial Reporting We have audited Jazz Pharmaceuticals plc’s and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statements schedule at Item 15(a)2 (collectively, the “consolidated financial statements”), and our report dated February 26, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG Dublin, Ireland February 26, 2019 94 JAZZ PHARMACEUTICALS | 2018 Annual Report Item 9B. Other Information Not applicable. PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K and incorporated by reference to our definitive proxy statement for our 2019 annual general meeting of shareholders, or our 2019 Proxy Statement, to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, or Exchange Act. If our 2019 Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, the omitted information will be included in an amendment to this Annual Report on Form 10-K filed not later than the end of such 120-day period. Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is to be included in our 2019 Proxy Statement as follows: • • • • The information relating to our directors and nominees for director is to be included in the section entitled Election of Directors;” “Proposal 1— The information relating to our executive officers is to be included in the section entitled “Executive Officers;” The information relating to our audit committee, audit committee financial expert and procedures by which shareholders may recommend nominees to our board of directors is to be included in the section entitled “Corporate Governance and Board Matters;” and K - 0 1 m r o F The information regarding compliance with Section 16(a) of the Exchange Act is to be included in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference to our 2019 Proxy Statement, provided that if the 2019 Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, the omitted information will be included in an amendment to this Annual Report on Form 10-K filed not later than the end of such 120-day period. Our Code of Conduct applies to all of our employees, directors and officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and those of our subsidiaries. The Code of Conduct is available on our website at www.jazzpharmaceuticals.com under the section entitled “About” under “Corporate Ethics.” We intend to satisfy the disclosure requirements under Item 5.05 of the SEC Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Conduct by posting such information on our website at the website address and location specified above. Item 11. Executive Compensation The information required by this item is to be included in our 2019 Proxy Statement under the sections entitled “Executive Compensation,” “Director Compensation,” “Corporate Governance and Board Matters—Compensation Committee Interlocks and Insider Participation” and “Corporate Governance and Board Matters—Compensation Committee Report” and is incorporated herein by reference, provided that if the 2019 Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, the omitted information will be included in an amendment to this Annual Report on Form 10-K filed not later than the end of such 120-day period. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item with respect to equity compensation plans is to be included in our 2019 Proxy Statement under the section entitled “Equity Compensation Plan Information” and the information required by this item with respect to security ownership of certain beneficial owners and management is to be included in our 2019 Proxy Statement under the section entitled “Security Ownership of Certain Beneficial Owners and Management” and in each case is incorporated herein by reference, provided that if the 2019 Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, the omitted information will be included in an amendment to this Annual Report on Form 10-K filed not later than the end of such 120-day period. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is to be included in our 2019 Proxy Statement under the sections entitled “Certain Relationships and Related Party Transactions” and “Corporate Governance and Board Matters—Independence of the Board of Directors” and is JAZZ PHARMACEUTICALS | 2018 Annual Report 95 incorporated herein by reference, provided that if the 2019 Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, the omitted information will be included in an amendment to this Annual Report on Form 10-K filed not later than the end of such 120-day period. Item 14. Principal Accountant Fees and Services The information required by this item is to be included in our 2019 Proxy Statement under the section entitled “Proposal 2—On a Non-Binding Advisory Basis, Ratify Appointment of Independent Registered Accounting Firm and, On a Binding Basis, Authorize the Board of Directors, Acting Through the Audit Committee, to Determine the Independent Auditors’ Remuneration” and is incorporated herein by reference, provided that if the 2019 Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, the omitted information will be included in an amendment to this Annual Report on Form 10-K filed not later than the end of such 120-day period. PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Index to Financial Statements: See Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. 2. Financial Statement Schedules: The following financial statement schedule of Jazz Pharmaceuticals plc is filed as part of this Annual Report on Form 10-K on page F-45 and should be read in conjunction with the consolidated financial statements of Jazz Pharmaceuticals plc. Schedule II: Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required under the instructions, or the requested information is shown in the consolidated financial statements or related notes thereto. (b) Exhibits—The following exhibits are included herein or incorporated herein by reference: Exhibit Number 2.1 2.2 2.3 2.4 Description of Document Agreement and Plan of Merger and Reorganization, dated as of September 19, 2011, by and among Azur Pharma Limited (now Jazz Pharmaceuticals plc), Jaguar Merger Sub Inc., Jazz Pharmaceuticals, Inc. and Seamus Mulligan, solely in his capacity as the Indemnitors’ Representative (incorporated herein by reference to Exhibit 2.1 in Jazz Pharmaceuticals, Inc.’s Current Report on Form 8-K (File No. 001-33500) filed with the SEC on September 19, 2011). Letter Agreement, dated as of January 17, 2012, by and among Jazz Pharmaceuticals plc, Jaguar Merger Sub Inc., Jazz Pharmaceuticals, Inc. and Seamus Mulligan, solely in his capacity as the Indemnitors’ Representative (incorporated herein by reference to Exhibit 2.2 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on January 18, 2012). Agreement and Plan of Merger, dated as of April 26, 2012, by and among Jazz Pharmaceuticals plc, Jewel Merger Sub Inc., EUSA Pharma Inc., and Essex Woodlands Health Ventures, Inc., Mayflower L.P., and Bryan Morton, in their capacity as the representatives of the equity holders of EUSA Pharma Inc. (incorporated herein by reference to Exhibit 2.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on April 27, 2012). Assignment, dated as of June 11, 2012, by and among Jazz Pharmaceuticals plc and Jazz Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 2.1B in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on June 12, 2012). 96 JAZZ PHARMACEUTICALS | 2018 Annual Report Exhibit Number 2.5 2.6† 2.7† 2.8 2.9 3.1 4.1 4.3A 4.3B 4.4A 4.4B 4.5A 4.5B 10.1 10.2† 10.3† Description of Document Tender Offer Agreement, dated December 19, 2013, by and among Jazz Pharmaceuticals Public Limited Company, Jazz Pharmaceuticals Italy S.r.l. and Gentium S.p.A. (incorporated herein by reference to Exhibit 2.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K/A (File No. 001-33500), as filed with the SEC on December 20, 2013). Asset Purchase Agreement, dated January 13, 2014, by and among Jazz Pharmaceuticals International III Limited, Aerial BioPharma, LLC and Jazz Pharmaceuticals plc (incorporated herein by reference to Exhibit 2.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on January 13, 2014). Assignment Agreement, dated July 1, 2014, by and among Jazz Pharmaceuticals International II Limited, Sigma-Tau Pharmaceuticals, Inc., Jazz Pharmaceuticals plc and Gentium S.p.A. (incorporated herein by reference to Exhibit 2.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on August 5, 2014). Amended and Restated Agreement for the Acquisition of the Topaz Portfolio Business of Jazz Pharmaceuticals plc, dated March 20, 2015, between Jazz Pharmaceuticals plc and Essex Bidco Limited (incorporated herein by reference to Exhibit 2.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on March 23, 2015). Agreement and Plan of Merger, dated as of May 27, 2016, by and among Jazz Pharmaceuticals plc, Plex Merger Sub, Inc., and Celator Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 2.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on May 31, 2016). Amended and Restated Memorandum and Articles of Association of Jazz Pharmaceuticals plc, as amended on August 4, 2016 (incorporated herein by reference to Exhibit 3.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). K - 0 1 m r o F Reference is made to Exhibit 3.1. Investor Rights Agreement, dated July 7, 2009 by and between Jazz Pharmaceuticals, Inc. and the other parties named therein (incorporated herein by reference to Exhibit 10.88 in Jazz Pharmaceuticals, Inc.’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on July 7, 2009). Assignment, Assumption and Amendment Agreement, dated as of January 18, 2012, by and among Jazz Pharmaceuticals, Inc., Jazz Pharmaceuticals plc and the other parties named therein (incorporated herein by reference to Exhibit 4.7B in the Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2011, as filed by Jazz Pharmaceuticals plc on behalf of and as successor to Jazz Pharmaceuticals, Inc. with the SEC on February 28, 2012). Indenture, dated as of August 13, 2014, by and among Jazz Pharmaceuticals plc, Jazz Investments I Limited and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on August 13, 2014). Form of 1.875% Exchangeable Senior Note due 2021 (incorporated herein by reference to Exhibit 4.2 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on August 13, 2014). Indenture, dated as of August 23, 2017, among Jazz Pharmaceuticals Public Limited Company, Jazz Investments I Limited and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on August 23, 2017). Form of 1.50% Exchangeable Senior Note due 2024 (incorporated herein by reference to Exhibit 4.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on August 23, 2017). Settlement Agreement, dated as of April 5, 2017, by and between Jazz Pharmaceuticals, Inc. and Jazz Pharmaceuticals Ireland Limited, and Roxane Laboratories, Inc., West-Ward Pharmaceuticals Corp., Eurohealth (USA), Inc., and Hikma Pharmaceuticals PLC (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2017, as filed with the SEC on August 8, 2017). Supply Agreement, dated as of April 1, 2010, by and between Jazz Pharmaceuticals, Inc. and Siegfried (USA) Inc. (incorporated herein by reference to Exhibit 10.54 in Jazz Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2010, as filed with the SEC on May 6, 2010). Royalty Bearing Licence Agreement and Supply Agreement Re Erwinia-Derived Asparaginase, dated July 22, 2005, between Public Health England (formerly Health Protection Agency) and EUSA Pharma SAS (formerly OPi, S.A.), as amended on each of December 22, 2009, March 23, 2012 and August 8, 2012 (incorporated herein by reference to Exhibit 10.11 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q/A (File No. 001-33500) for the period ended June 30, 2012, as filed with the SEC on August 9, 2012). JAZZ PHARMACEUTICALS | 2018 Annual Report 97 Exhibit Number 10.4 10.5 10.6† 10.7† 10.8A† 10.8B† 10.9A 10.9B 10.9C 10.10A 10.10B Description of Document Novation Agreement relating to Royalty Bearing Licence Agreement and Supply Agreement re Erwinia-Derived Asparaginase, dated as of May 13, 2015, by and among EUSA Pharma SAS, the Secretary of State for Health acting through Public Health England and Porton Biopharma Limited (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2015, as filed with the SEC on August 5, 2015). Contract Variation Agreement by and between Porton Biopharma Limited and Jazz Pharmaceuticals France SAS, dated as of December 20, 2018. Master Manufacturing Services Agreement, dated as of October 1, 2015, by and between Jazz Pharmaceuticals Ireland Limited and Patheon Pharmaceuticals Inc. (incorporated herein by reference to Exhibit 10.5 in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2015, as filed with the SEC on February 23, 2016). Pharmacy Master Services Agreement, dated as of July 1, 2017, by and between Jazz Pharmaceuticals, Inc. and Express Scripts Specialty Distribution Services, Inc. (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2017, as filed with the SEC on August 8, 2017). Clinical and Commercial Manufacturing and Supply Agreement, dated as of December 22, 2010, between Celator Pharmaceuticals, Inc. and Baxter Oncology GmbH (incorporated herein by reference to Exhibit 10.8 in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the year ended December 31, 2017, as filed with the SEC on February 27, 2018). Amendment No. 1 Clinical and Commercial Manufacturing and Supply Agreement, dated as of January 18, 2018, by and between Jazz Pharmaceuticals Ireland Limited and Baxter Oncology GmbH (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2018, as filed with the SEC on May 8, 2018). Credit Agreement, dated as of June 18, 2015, among Jazz Pharmaceuticals plc, Jazz Securities Limited, Jazz Pharmaceuticals, Inc., Jazz Financing I Limited, Jazz Pharmaceuticals Ireland Limited, the lenders party thereto and Bank of America, N.A., as Collateral Agent, Administrative Agent, Swing Line Lender and L/C Issuer (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on June 18, 2015). Amendment No. 1, dated as of July 12, 2016, to Credit Agreement, dated as of June 18, 2015, among Jazz Pharmaceuticals plc, Jazz Securities Limited, Jazz Pharmaceuticals, Inc., Jazz Financing I Limited, Jazz Pharmaceuticals Ireland Limited, the lenders party thereto and Bank of America, N.A., as Collateral Agent, Administrative Agent, Swing Line Lender and L/C Issuer (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). Amendment No. 2, dated as of June 7, 2018, to Credit Agreement, dated as of June 18, 2015 (as previously amended by Amendment No. 1, dated as of July 12, 2016), among Jazz Pharmaceuticals plc, Jazz Securities Designated Activity Company, Jazz Pharmaceuticals, Inc., Jazz Financing I Designated Activity Company, Jazz Pharmaceuticals Ireland Limited, the lenders party thereto and Bank of America, N.A., as Collateral Agent, Administrative Agent, Swing Line Lender and L/C Issuer (incorporated herein by reference to Exhibit 10.4 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2018, as filed with the SEC on August 7, 2018). Commercial Lease, dated as of June 2, 2004, by and between Jazz Pharmaceuticals, Inc. and The Board of Trustees of the Leland Stanford Junior University (incorporated herein by reference to Exhibit 10.52 in Jazz Pharmaceuticals, Inc.’s registration statement on Form S-1, as amended (File No. 333-141164), as filed with the SEC on March 27, 2007). First Amendment of Lease, dated June 1, 2009, by and between Jazz Pharmaceuticals, Inc. and Wheatley-Fields, LLC, successor in interest to The Board of Trustees of the Leland Stanford Junior University (incorporated herein by reference to Exhibit 10.86 in Jazz Pharmaceuticals, Inc.’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on June 4, 2009). 98 JAZZ PHARMACEUTICALS | 2018 Annual Report Exhibit Number 10.10C 10.11 10.12A 10.12B 10.12C 10.13A 10.13B 10.14+ 10.15+ 10.16+ Description of Document Second Amendment of Lease, dated February 28, 2012, by and between Jazz Pharmaceuticals, Inc. and Wheatley-Fields, LLC, successor in interest to The Board of Trustees of the Leland Stanford Junior University (incorporated herein by reference to Exhibit 10.31 in the Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2011, as filed by Jazz Pharmaceuticals plc on behalf of and as successor to Jazz Pharmaceuticals, Inc. with the SEC on February 28, 2012). Lease, dated May 8, 2012, by and between John Ronan and Castle Cove Property Developments Limited and Jazz Pharmaceuticals plc (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2012, as filed with the SEC on August 7, 2012). Commercial Lease, dated as of January 7, 2015, by and between The Board of Trustees of the Leland Stanford Junior University and Jazz Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.10 in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2014, as filed with the SEC on February 24, 2015). First Amendment, dated as of January 29, 2018, to Commercial Lease, dated as of January 7, 2015, by and between The Board of Trustees of the Leland Stanford Junior University and Jazz Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.5 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2018, as filed with the SEC on August 7, 2018). Second Amendment, dated as of July 26, 2018, to Commercial Lease, dated as of January 7, 2015, by and between The Board of Trustees of the Leland Stanford Junior University and Jazz Pharmaceuticals, Inc., as previously amended by the First Amendment to Lease, dated as of January 29, 2018 (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2018, as filed with the SEC on November 6, 2018). K - 0 1 m r o F Commercial Lease, dated as of September 22, 2017, by and between Jazz Pharmaceuticals, Inc. and The Board of Trustees of the Leland Stanford Junior University (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2017, as filed with the SEC on November 7, 2017). First Amendment, dated as of January 29, 2018, to Commercial Lease, dated as of September 22, 2017, by and between The Board of Trustees of the Leland Stanford Junior University and Jazz Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.6 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2018, as filed with the SEC on August 7, 2018). Form of Indemnification Agreement between Jazz Pharmaceuticals plc and its officers and directors (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Current Report on Form 8-K (File No. 001-33500), as filed with the SEC on January 18, 2012). Offer Letter from Jazz Pharmaceuticals, Inc. to Suzanne Sawochka Hooper (incorporated herein by reference to Exhibit 10.19 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2012, as filed with the SEC on May 8, 2012). Offer Letter from Jazz Pharmaceuticals, Inc. to Matthew Young (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2014, as filed with the SEC on May 8, 2014). 10.17A+ Employment Agreement by and between EUSA Pharma Inc. and Iain McGill (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2014, as filed with the SEC on November 4, 2014). 10.17B+ Amendment to Employment Agreement by and between Iain McGill and EUSA Pharma (Europe) Limited (incorporated herein by reference to Exhibit 10.15B in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2014, as filed with the SEC on February 24, 2015). 10.17C+ Amended and Restated Schedule 3 to Employment Agreement by and between Jazz Pharmaceuticals UK Ltd and Iain McGill (incorporated herein by reference to Exhibit 10.5 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). JAZZ PHARMACEUTICALS | 2018 Annual Report 99 Exhibit Number Description of Document 10.17D+ Change in Control Stock Award Acceleration Agreement by and between Jazz Pharmaceuticals plc and Iain McGill (incorporated herein by reference to Exhibit 10.6 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). 10.18+ Offer Letter from Jazz Pharmaceuticals, Inc. to Michael Miller (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2014, as filed with the SEC on November 4, 2014). 10.19A+ Employment Agreement by and between Jazz Pharmaceuticals Ireland Limited and Paul Treacy (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2014, as filed with the SEC on November 4, 2014). 10.19B+ Amendment to Employment Agreement by and between Jazz Pharmaceuticals Ireland Limited and Paul Treacy (incorporated herein by reference to Exhibit 10.17B in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2014, as filed with the SEC on February 24, 2015). 10.19C+ Amended and Restated Schedule 3 to Employment Agreement by and between Jazz Pharmaceuticals Ireland Ltd. and Paul Treacy (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). 10.19D+ Change in Control Stock Award Acceleration Agreement by and between Jazz Pharmaceuticals plc and Paul Treacy (incorporated herein by reference to Exhibit 10.4 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). 10.21+ Offer Letter from Jazz Pharmaceuticals, Inc. to Daniel N. Swisher, Jr. (incorporated herein by reference to Exhibit 10.21 in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the year ended December 31, 2017, as filed with the SEC on February 27, 2018). 10.22A+ Jazz Pharmaceuticals plc 2007 Equity Incentive Plan (incorporated herein by reference to Exhibit 99.3 in Jazz Pharmaceuticals plc’s registration statement on Form S-8 (File No. 333-179075), as filed with the SEC on January 18, 2012). 10.22B+ 10.22C+ 10.22D+ 10.22E+ 10.22F+ 10.22G+ Jazz Pharmaceuticals plc 2007 Equity Incentive Plan Sub-Plan Governing Awards to Participants in the Republic of Ireland (incorporated herein by reference to Exhibit 10.3B in the Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2011, as filed by Jazz Pharmaceuticals plc on behalf of and as successor to Jazz Pharmaceuticals Inc. with the SEC on February 28, 2012). Form of Notice of Grant of Stock Options and Form of Option Agreement (U.S.) under the Jazz Pharmaceuticals plc 2007 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.27C in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Form of Notice of Grant of Stock Options and Form of Option Agreement (Irish) under Jazz Pharmaceuticals plc 2007 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.27D in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement (U.S.) under the Jazz Pharmaceuticals plc 2007 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.27E in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement (Irish) under the Jazz Pharmaceuticals plc 2007 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.27F in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Jazz Pharmaceuticals plc 2007 Equity Incentive Plan—Form of Non-U.S. Option Grant Notice and Form of Non-U.S. Option Agreement (approved July 31, 2013) (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2013, as filed with the SEC on November 5, 2013). 100 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F Exhibit Number 10.22H+ Description of Document Jazz Pharmaceuticals plc 2007 Equity Incentive Plan—Form of Non-U.S. Restricted Stock Unit Award Grant Notice and Form of Non-U.S. Restricted Stock Unit Award Agreement (approved July 31, 2013) (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2013, as filed with the SEC on November 5, 2013). 10.23A+ Jazz Pharmaceuticals plc 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 99.1 in Jazz Pharmaceuticals plc’s registration statement on Form S-8 (File No. 333-179075), as filed with the SEC on January 18, 2012). 10.23B+ 10.23C+ 10.23D+ 10.23E+ 10.23F+ Jazz Pharmaceuticals plc 2011 Equity Incentive Plan Sub-Plan Governing Awards to Participants in the Republic of Ireland (incorporated herein by reference to Exhibit 10.39B in the Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2011, as filed by Jazz Pharmaceuticals plc on behalf of and as successor to Jazz Pharmaceuticals Inc. with the SEC on February 28, 2012). Form of Stock Option Grant Notice and Form of Option Agreement (U.S.) under the Jazz Pharmaceuticals plc 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.7 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2012, as filed with the SEC on August 7, 2012). Form of Stock Option Grant Notice and Form of Option Agreement (Irish) under the Jazz Pharmaceuticals plc 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.8 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2012, as filed with the SEC on August 7, 2012). Form of Non-U.S. Option Grant Notice and Form of Non-U.S. Option Agreement under the Jazz Pharmaceuticals plc 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.28E in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement (U.S.) under the Jazz Pharmaceuticals plc 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.9 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2012, as filed with the SEC on August 7, 2012). 10.23G+ Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement (Irish) under the Jazz Pharmaceuticals plc 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.10 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2012, as filed with the SEC on August 7, 2012). 10.23H+ 10.23I+ 10.23J+ 10.23K+ 10.23L+ Form of Non-U.S. Restricted Stock Unit Grant Notice and Form of Non-U.S. Restricted Stock Unit Agreement under the Jazz Pharmaceuticals plc 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.28H in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Jazz Pharmaceuticals plc 2011 Equity Incentive Plan—Form of U.S. Option Grant Notice and Form of U.S. Option Agreement (approved July 31, 2013) (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2013, as filed with the SEC on November 5, 2013). Jazz Pharmaceuticals plc 2011 Equity Incentive Plan—Form of U.S. Restricted Stock Unit Award Grant Notice and Form of U.S. Restricted Stock Unit Award Agreement (approved July 31, 2013) (incorporated herein by reference to Exhibit 10.4 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2013, as filed with the SEC on November 5, 2013). Jazz Pharmaceuticals plc 2011 Equity Incentive Plan—Form of Non-U.S. Option Grant Notice and Form of Non-U.S. Option Agreement (approved July 31, 2013) (incorporated herein by reference to Exhibit 10.5 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2013, as filed with the SEC on November 5, 2013). Jazz Pharmaceuticals plc 2011 Equity Incentive Plan—Form of Non-U.S. Restricted Stock Unit Award Grant Notice and Form of Non-U.S. Restricted Stock Unit Award Agreement (approved July 31, 2013) (incorporated herein by reference to Exhibit 10.6 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2013, as filed with the SEC on November 5, 2013). JAZZ PHARMACEUTICALS | 2018 Annual Report 101 Exhibit Number Description of Document 10.23M+ Jazz Pharmaceuticals plc 2011 Equity Incentive Plan—Form of Non-U.S. Option Grant Notice and Form of Non-U.S. Option Agreement (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2016, as filed with the SEC on May 10, 2016). 10.23N+ Jazz Pharmaceuticals plc 2011 Equity Incentive Plan—Form of Non-U.S. Restricted Stock Unit Grant Notice and Form of Non-U.S. Restricted Stock Unit Award Agreement (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2016, as filed with the SEC on May 10, 2016). 10.23O+ Amended and Restated 2011 Equity Incentive Plan (approved August 4, 2016) (incorporated herein by reference to Exhibit 10.8 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). 10.23P+ Amended and Restated 2011 Equity Incentive Plan (approved November 3, 2016) (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2016, as filed with the SEC on November 8, 2016). 10.23Q+ Form of U.S. Restricted Stock Unit Award Grant Notice and Form of U.S. Restricted Stock Unit Award Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.6 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2016, as filed with the SEC on November 8, 2016). 10.23R+ 10.23S+ 10.23T+ 10.23U+ 10.24+ 10.24A+ 10.24B+ 10.24C+ Form of U.S. Option Grant Notice and Form of U.S. Option Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.7 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2016, as filed with the SEC on November 8, 2016). Form of Non-U.S. Restricted Stock Unit Award Grant Notice and Form of Non-U.S. Restricted Stock Unit Award Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.8 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2016, as filed with the SEC on November 8, 2016). Form of Non-U.S. Option Grant Notice and Non-U.S. Option Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2018, as filed with the SEC on August 7, 2018). Form of Non-U.S. Restricted Stock Unit Award Grant Notice and Non-U.S. Restricted Stock Unit Award Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2011 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2018, as filed with the SEC on August 7, 2018). Jazz Pharmaceuticals plc Amended and Restated Directors Deferred Compensation Plan (incorporated herein by reference to Exhibit 99.6 in Jazz Pharmaceuticals plc’s registration statement on Form S-8 (File No. 333-179075), as filed with the SEC on January 18, 2012). Jazz Pharmaceuticals plc Amended and Restated 2007 Non-Employee Directors Stock Option Plan (incorporated herein by reference to Exhibit 99.4 in Jazz Pharmaceuticals plc’s registration statement on Form S-8 (File No. 333-179075), as filed with the SEC on January 18, 2012). Form of Non-U.S. Option Grant Notice and Form of Non-U.S. Option Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2007 Non-Employee Directors Stock Option Plan (incorporated herein by reference to Exhibit 10.30B in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Jazz Pharmaceuticals plc Amended and Restated 2007 Non-Employee Directors Stock Option Plan—Form of Non-U.S. Option Grant Notice and Form of Non-U.S. Option Agreement (approved August 1, 2013) (incorporated herein by reference to Exhibit 10.7 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2013, as filed with the SEC on November 5, 2013). 102 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F Exhibit Number Description of Document 10.24D+ Amended and Restated 2007 Non-Employee Directors Stock Award Plan (approved August 4, 2016) (incorporated herein by reference to Exhibit 10.9 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). 10.24E+ Amended and Restated 2007 Non-Employee Directors Stock Award Plan (approved November 3, 2016) (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2016, as filed with the SEC on November 8, 2016). 10.24F+ Form of Non-U.S. Restricted Stock Unit Award Grant Notice and Form of Non-U.S. Restricted Stock Unit Award Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2007 Non-Employee Directors Stock Award Plan (incorporated herein by reference to Exhibit 10.4 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2016, as filed with the SEC on November 8, 2016). 10.24G+ Form of Non-U.S. Option Grant Notice and Form of Non-U.S. Option Agreement under the Jazz Pharmaceuticals plc Amended and Restated Non-Employee Directors 2007 Stock Award Plan (incorporated herein by reference to Exhibit 10.5 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2016, as filed with the SEC on November 8, 2016). 10.24H+ 10.24I+ 10.25A+ 10.25B+ 10.26A+ 10.26B+ Form of Non-U.S. Option Grant Notice and Non-U.S. Option Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2007 Non-Employee Directors Stock Award Plan (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2018, as filed with the SEC on November 6, 2018). Form of Non-U.S. Restricted Stock Unit Award Grant Notice and Non-U.S. Restricted Stock Unit Award Agreement under the Jazz Pharmaceuticals plc Amended and Restated 2007 Non-Employee Directors Stock Award Plan (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended September 30, 2018, as filed with the SEC on November 6, 2018). Jazz Pharmaceuticals plc 2007 Employee Stock Purchase Plan, as amended and restated (incorporated herein by reference to Exhibit 10.31A in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2012, as filed with the SEC on February 26, 2013). Jazz Pharmaceuticals plc 2007 Employee Stock Purchase Plan Sub-Plan Governing Purchase Rights to Participants in the Republic of Ireland (incorporated herein by reference to Exhibit 10.14C in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2012, as filed with the SEC on May 8, 2012 ). Jazz Pharmaceuticals plc Cash Bonus Plan for U.S. Affiliates (approved November 3, 2016) (incorporated herein by reference to Exhibit 10.22B in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2016, as filed with the SEC on February 28, 2017). Jazz Pharmaceuticals Cash Bonus Plan (Ireland and Other Specified Affiliates) (Calendar Year 2018) (incorporated herein by reference to Exhibit 10.26C in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the year ended December 31, 2017, as filed with the SEC on February 27, 2018). 10.26C+ Jazz Pharmaceuticals plc Cash Bonus Plan for U.S. Affiliates (approved October 31, 2018). 10.26D+ Jazz Pharmaceuticals Cash Bonus Plan (Ireland and Other Specified Affiliates) (Calendar Year 2019). 10.27+ 10.28+ Jazz Pharmaceuticals plc Amended and Restated Executive Change in Control and Severance Benefit Plan (approved February 10, 2016) (incorporated herein by reference to Exhibit 10.23 in Jazz Pharmaceuticals plc’s Annual Report on Form 10-K (File No. 001-33500) for the period ended December 31, 2015, as filed with the SEC on February 23, 2016). Jazz Pharmaceuticals plc 2015 Executive Officer Compensation Arrangements (incorporated herein by reference to Exhibit 10.3 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended March 31, 2015, as filed with the SEC on May 7, 2015). 10.29A+ Jazz Pharmaceuticals plc Non-Employee Director Compensation Policy (approved April 30, 2015) (incorporated herein by reference to Exhibit 10.2 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2015, as filed with the SEC on August 5, 2015). JAZZ PHARMACEUTICALS | 2018 Annual Report 103 Exhibit Number Description of Document 10.29B+ Amended and Restated Non-Employee Director Compensation Policy (approved May 5, 2016) (incorporated herein by reference to Exhibit 10.7 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2016, as filed with the SEC on August 9, 2016). 10.29C+ Amended and Restated Non-Employee Director Compensation Policy (approved May 3, 2018) (incorporated herein by reference to Exhibit 10.1 in Jazz Pharmaceuticals plc’s Quarterly Report on Form 10-Q (File No. 001-33500) for the period ended June 30, 2018, as filed with the SEC on August 7, 2018). 21.1 23.1 24.1 31.1 31.2 32.1* Subsidiaries of Jazz Pharmaceuticals plc. Consent of KPMG, Independent Registered Public Accounting Firm. Power of Attorney (included on the signature page hereto). Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Labels Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document + † * Indicates management contract or compensatory plan. Confidential treatment has been granted for portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Item 16. Form 10-K Summary None. 104 JAZZ PHARMACEUTICALS | 2018 Annual Report SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 26, 2019 Jazz Pharmaceuticals public limited company (Registrant) /S/ BRUCE C. COZADD Bruce C. Cozadd Chairman and Chief Executive Officer and Director (Principal Executive Officer) /S/ MATTHEW P. YOUNG Matthew P. Young Executive Vice President and Chief Financial Officer (Principal Financial Officer) /S/ KAREN J. WILSON Karen J. Wilson Senior Vice President, Finance (Principal Accounting Officer) K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report 105 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bruce C. Cozadd, Matthew P. Young, Suzanne Sawochka Hooper and Karen J. Wilson, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below: Signature Title Date /S/ BRUCE C. COZADD Bruce C. Cozadd /S/ MATTHEW P. YOUNG Matthew P. Young /S/ KAREN J. WILSON Karen J. Wilson /S/ PAUL L. BERNS Paul L. Berns Chairman, Chief Executive Officer and Director (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer) Senior Vice President, Finance (Principal Accounting Officer) Director /S/ PATRICK G. ENRIGHT Director Patrick G. Enright /S/ PETER GRAY Peter Gray Director /S/ HEATHER ANN MCSHARRY Director Heather Ann McSharry /S/ SEAMUS C. MULLIGAN Director Seamus C. Mulligan /S/ KENNETH W. O’KEEFE Director Kenneth W. O’Keefe /S/ ANNE O’RIORDAN Anne O’Riordan Director /S/ NORBERT G. RIEDEL, PH.D. Director Norbert G. Riedel, Ph.D. /S/ ELMAR SCHNEE Elmar Schnee Director /S/ CATHERINE A. SOHN, PHARM.D. Director Catherine A. Sohn, Pharm.D. /S/ RICK E WINNINGHAM Director Rick E Winningham 106 JAZZ PHARMACEUTICALS | 2018 Annual Report February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Jazz Pharmaceuticals plc: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Jazz Pharmaceuticals plc and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018 and the related notes and financial statement schedule at Item 15(a)2 (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. K - 0 1 m r o F /s/ KPMG We have served as the Company’s auditor since 2012. Dublin, Ireland February 26, 2019 JAZZ PHARMACEUTICALS | 2018 Annual Report F-1 JAZZ PHARMACEUTICALS PLC CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) Current assets: ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowances of $534 and $4,162 at December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, net Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2018 2017 $ 309,622 515,000 $ 386,035 215,000 263,838 52,956 25,017 67,572 1,234,005 200,358 2,731,334 927,630 57,879 9,589 42,696 224,129 43,245 23,182 76,686 968,277 170,080 2,979,127 947,537 34,559 7,673 16,419 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,203,491 $5,123,672 Current liabilities: LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies (Note 12) Shareholders’ equity: $ 40,602 264,887 33,387 1,197 5,414 345,487 9,581 1,563,025 309,097 218,879 $ 24,368 198,779 40,605 21,577 8,618 293,947 16,115 1,540,433 383,472 176,608 Ordinary shares, nominal value $0.0001 per share; 300,000 shares authorized; 57,504 and 59,898 shares issued and outstanding at December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . Non-voting euro deferred shares, €0.01 par value per share; 4,000 shares authorized, issued and outstanding at both December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital redemption reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 55 472 2,113,630 (197,791) 841,050 55 472 1,935,486 (140,878) 917,956 Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,757,422 2,713,097 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,203,491 $5,123,672 The accompanying notes are an integral part of these consolidated financial statements. F-2 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Year Ended December 31, 2018 2017 2016 Revenues: Product sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties and contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,869,473 21,449 $1,601,399 17,294 $1,477,261 10,712 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,890,922 1,618,693 1,487,973 Operating expenses: Cost of product sales (excluding amortization of intangible assets) . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,544 683,530 226,616 201,498 42,896 — 110,188 544,156 198,442 152,065 — 85,000 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,276,084 1,089,851 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on extinguishment and modification of debt Income before income tax provision (benefit) and equity in loss of investees . . . . . . . . . . . . . . . . Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in loss of investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614,838 (77,075) (6,875) (1,425) 529,463 80,162 2,203 528,842 (77,756) (9,969) — 441,117 (47,740) 1,009 105,386 502,892 162,297 101,994 — 23,750 896,319 591,654 (61,942) 3,372 (638) 532,446 135,236 379 K - 0 1 m r o F Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,098 $ 487,848 $ 396,831 Net income per ordinary share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average ordinary shares used in per share calculations—basic . . . . . . . . . . . . . . Weighted-average ordinary shares used in per share calculations—diluted . . . . . . . . . . . . . $ $ 7.45 7.30 $ $ 8.13 7.96 $ $ 59,976 61,221 60,018 61,317 6.56 6.41 60,500 61,870 The accompanying notes are an integral part of these consolidated financial statements. JAZZ PHARMACEUTICALS | 2018 Annual Report F-3 JAZZ PHARMACEUTICALS PLC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss): Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on hedging activities, net of income tax provision of $289, $212 and $0, Year Ended December 31, 2018 2017 2016 $447,098 $487,848 $396,831 (58,988) 174,973 (49,861) respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,022 1,482 — Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,966) 176,455 (49,861) Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $390,132 $664,303 $346,970 The accompanying notes are an integral part of these consolidated financial statements. F-4 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Ordinary Shares Non-voting Euro Deferred Shares Amount Shares Amount Capital Redemption Reserve Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Equity Balance at December 31, 2015 . . . . . . . . 61,305 $ 6 Cumulative effect adjustment from 4,000 $ 55 $471 $1,562,900 $(267,472) $ 302,686 $1,598,646 adoption of ASU No. 2016-09 . . . . . . . . Issuance of ordinary shares in conjunction with exercise of share options . . . . . . . . Issuance of ordinary shares under employee stock purchase plan . . . . . . . Issuance of ordinary shares in conjunction with vesting of restricted stock units . . . Shares withheld for payment of employee’s withholding tax liability . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . Shares repurchased . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . — — 399 — 70 — 289 — — — — — (2,243) — — — — — Balance at December 31, 2016 . . . . . . . . 59,820 Issuance of Exchangeable Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of ordinary shares in conjunction with exercise of share options . . . . . . . . Issuance of ordinary shares under employee stock purchase plan . . . . . . . Issuance of ordinary shares in conjunction with vesting of restricted stock units . . . Shares withheld for payment of employee’s withholding tax liability . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . Shares repurchased . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . — — 428 — 104 — 250 — — — — — (704) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1 — 16,880 7,294 — (21,234) 99,392 — — — — — — — — — — (49,861) — 107,687 107,687 — — — — — (278,297) — 396,831 16,880 7,294 — (21,234) 99,392 (278,296) (49,861) 396,831 K - 0 1 m r o F 6 4,000 55 472 1,665,232 (317,333) 528,907 1,877,339 — — — — — — — — — — — — — — — — — — — — — — — — — — — 149,767 22,683 9,141 — (18,589) 107,252 — — — — — — — — — — — — — — 176,455 — — — (98,799) — 487,848 149,767 22,683 9,141 — (18,589) 107,252 (98,799) 176,455 487,848 Balance at December 31, 2017 . . . . . . . . 59,898 $ 6 4,000 $ 55 $472 $1,935,486 $(140,878) $ 917,956 $2,713,097 JAZZ PHARMACEUTICALS | 2018 Annual Report F-5 JAZZ PHARMACEUTICALS PLC CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(Continued) (In thousands) Ordinary Shares Non-voting Euro Deferred Shares Amount Shares Amount Capital Redemption Reserve Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Equity $ 6 4,000 $ 55 $472 $1,935,486 $(140,878) $ 917,956 $2,713,097 Balance at December 31, 2017 . . . . . . 59,898 Cumulative effect adjustment from adoption of new accounting standards . . . . . . . . . . . . . . . . . . . . . — — — — Issuance of ordinary shares in conjunction with exercise of share options . . . . . . . . . . . . . . . . . . . . . . . Issuance of ordinary shares under 772 — employee stock purchase plan . . . . . 111 — Issuance of ordinary shares in conjunction with vesting of restricted stock units . . . . . . . . . . . . . . . . . . . . Shares withheld for payment of employee’s withholding tax liability . . Share-based compensation . . . . . . . . . Shares repurchased . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . 253 — — — — — (3,530) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 53 (332) (279) 82,918 10,419 — (17,925) 102,732 — — — — — — — — — (56,966) — — — — — — (523,672) — 447,098 82,918 10,419 — (17,925) 102,732 (523,672) (56,966) 447,098 Balance at December 31, 2018 . . . . . . 57,504 $ 6 4,000 $ 55 $472 $2,113,630 $(197,791) $ 841,050 $2,757,422 The accompanying notes are an integral part of these consolidated financial statements. F-6 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for losses on accounts receivable and inventory . . . . . . . . . . . . . . . . . . . . . . . Loss on extinguishment and modification of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt discount and deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . Other non-cash transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2018 2017 2016 $ 447,098 $ 487,848 $ 396,831 201,498 102,441 42,896 15,233 — 655 (88,815) 4,728 1,425 43,960 4,499 (40,132) (18,512) 6,697 (320) 17,040 71,208 (19,735) (7,497) 14,537 152,065 106,900 — 13,089 85,000 473 (225,591) 2,190 — 30,026 14,321 12,278 (8,667) (26,874) 119 214 (6,578) 16,331 21,009 18,934 101,994 98,771 — 11,786 23,750 47 (41,163) 2,209 638 22,133 (3,741) (25,603) (17,024) (15,700) 267 361 11,989 2,962 (1,315) 23,199 K - 0 1 m r o F Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 798,904 693,087 592,391 Investing activities Acquisition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturity of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired in-process research and development Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,165,915) 855,000 — (20,370) — (111,100) 47,898 (385,000) 230,000 (85,000) (28,950) — — — (132,181) 66,906 (23,750) (9,687) (1,502,443) (150,000) — Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (394,487) (268,950) (1,751,155) Financing activities Net proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from employee equity incentive and purchase plans . . . . . . . . . . . . . . . . . . . . Share repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of employee withholding taxes related to share-based awards . . . . . . . . . . . . . Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of debt modification costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments under revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from tenant improvement allowance on build-to-suit lease . . . . . . . . . . . . . . . . — 93,337 (523,672) (17,925) (25,717) (6,406) — 1,253 559,393 31,824 (98,799) (18,589) (36,094) — (850,000) 3,154 994,647 24,174 (278,296) (21,234) (28,304) — (150,000) — Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (479,130) (409,111) 540,987 Effect of exchange rates on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,700) (76,413) 386,035 5,046 20,072 365,963 (5,045) (622,822) 988,785 Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309,622 $ 386,035 $ 365,963 JAZZ PHARMACEUTICALS | 2018 Annual Report F-7 JAZZ PHARMACEUTICALS PLC CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued) (In thousands) Supplemental disclosure of cash flow information: Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash investing activities: $ 42,706 164,217 $ 44,609 174,124 $ 39,898 160,306 Amounts capitalized in connection with facility lease obligations . . . . . . . . . . . . . . . 27,747 40,970 23,799 Year Ended December 31, 2018 2017 2016 The accompanying notes are an integral part of these consolidated financial statements. F-8 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business Jazz Pharmaceuticals plc is a global biopharmaceutical company dedicated to developing life-changing medicines for people with limited or no options. As a leader in sleep medicine and with a growing hematology/oncology portfolio, we have a diverse portfolio of products and product candidates in development. Our lead marketed products are: • • • • Xyrem® (sodium oxybate) oral solution, the only product approved by the U.S. Food and Drug Administration, or FDA, and marketed in the U.S. for the treatment of both cataplexy and excessive daytime sleepiness, or EDS, in adult and pediatric patients with narcolepsy; Erwinaze® (asparaginase Erwinia chrysanthemi), a treatment approved in the U.S. and in certain markets in Europe (where it is marketed as Erwinase®) for patients with acute lymphoblastic leukemia who have developed hypersensitivity to E. coli-derived asparaginase; Defitelio® (defibrotide sodium), a product approved in the U.S. for the treatment of adult and pediatric patients with hepatic veno-occlusive disease, or VOD, also known as sinusoidal obstruction syndrome, with renal or pulmonary dysfunction following hematopoietic stem cell transplantation, or HSCT, and in Europe (where it is marketed as Defitelio® (defibrotide)) for the treatment of severe VOD in adults and children undergoing HSCT therapy; and K - 0 1 m r o F Vyxeos® (daunorubicin and cytarabine) liposome for injection, a product approved in the U.S. and in Europe (where it is marketed as Vyxeos® 44 mg/100 mg powder for concentrate for solution for infusion) for the treatment of adults with newly- diagnosed therapy-related acute myeloid leukemia or acute myeloid leukemia with myelodysplasia-related changes. We are also seeking approval in the U.S. and Europe for solriamfetol as a treatment to improve wakefulness and reduce EDS in adult patients with narcolepsy or obstructive sleep apnea. We are developing JZP-258, an oxybate product candidate that contains 90% less sodium than Xyrem, for the treatment of both cataplexy and EDS in narcolepsy as well as for other conditions. Our strategy to create shareholder value is focused on: • • Strong financial execution through growth in sales of our current lead marketed products; Building a diversified product portfolio and development pipeline through a combination of our internal research and development efforts and obtaining rights to clinically meaningful and differentiated on- or near-market products and early- to late-stage product candidates through acquisitions, collaborations, licensing arrangements, partnerships and venture investments; and • Maximizing the value of our products and product candidates by continuing to implement our comprehensive global development plans, including through generating additional clinical data and seeking regulatory approval for new indications. Throughout this report, unless otherwise indicated or the context otherwise requires, all references to “Jazz Pharmaceuticals,” “the registrant,” “we,” “us,” and “our” refer to Jazz Pharmaceuticals plc and its consolidated subsidiaries. Throughout this report, all references to “ordinary shares” refer to Jazz Pharmaceuticals plc’s ordinary shares. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and include the accounts of Jazz Pharmaceuticals plc and our subsidiaries and intercompany transactions and balances have been eliminated. Our consolidated financial statements include the results of operations of businesses we have acquired from the date of each acquisition for the applicable reporting periods. JAZZ PHARMACEUTICALS | 2018 Annual Report F-9 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates. Adoption of New Accounting Standards In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09. 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. We adopted ASU No. 2014-09 on January 1, 2018 on a modified retrospective basis and applied the standard to all contracts as of this date. The adoption of ASU No. 2014-09 did not have a material impact on our results of operations and financial position as the timing of revenue recognition for product sales, net, which is our primary revenue stream, did not change. Refer to Note 17, Revenues, for revenue-related disclosures. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” which addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted this standard on January 1, 2018 and adoption did not have a material impact on our consolidated financial statements. 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. We adopted this standard on January 1, 2018 on a modified retrospective basis and adoption did not have a material impact on our consolidated financial statements. 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. We adopted this standard on January 1, 2018. In the second quarter of 2018, we entered into an asset purchase agreement, or APA, with TerSera Therapeutics LLC, or TerSera, whereby TerSera agreed to purchase substantially all of our assets related to the manufacture, marketing and sale of Prialt® (ziconotide) intrathecal infusion. We entered into an amendment to the APA, and the transaction closed on September 27, 2018. We determined that the disposal group did not constitute a business under the new guidance. Refer to Note 3, Business Combination, Asset Acquisitions and Disposition, for further information on the sale of our rights to Prialt. In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in their financial statements. ASU No. 2017-12 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We elected to early adopt this standard on January 1, 2018 on a modified retrospective basis. Adoption of this standard did not have a material impact on our consolidated financial statements. F-10 JAZZ PHARMACEUTICALS | 2018 Annual Report K - 0 1 m r o F JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2018 for the adoption of the above accounting standards was as follows (in thousands): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets: Deferred tax assets, net Liabilities: Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ Equity: Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2017 Transition Adjustments Balance at January 1, 2018 $ 34,559 $ 595 $ 35,154 8,618 16,115 383,472 (1,120) (1,120) 3,114 7,498 14,995 386,586 (140,878) 917,956 53 (332) (140,825) 917,624 Significant Risks and Uncertainties Our financial results are significantly influenced by sales of Xyrem. Our ability to maintain or increase Xyrem product sales is subject to a number of risks and uncertainties, including, without limitation, the introduction of new products in the U.S. market that compete with, or otherwise disrupt the market for, Xyrem in the treatment of cataplexy and/or EDS in narcolepsy; the introduction of a generic version of Xyrem in the U.S. market before the entry dates specified in our settlements with the abbreviated new drug application, or ANDA, filers or on terms that are different from those contemplated by the settlement agreements; increased pricing pressure from, changes in policies by, or restrictions on reimbursement imposed by, third party payors, including pressure to agree to discounts, rebates or other restrictive pricing terms for Xyrem; changes in healthcare laws and policy, including changes in requirements for patient assistance programs, rebates, reimbursement and coverage by federal healthcare programs, and changes resulting from increased scrutiny on pharmaceutical pricing and risk evaluation and mitigation strategy, or REMS, programs by government entities; changes to or uncertainties around our Xyrem REMS, or any failure to comply with our REMS obligations to the satisfaction of the FDA; challenges to our intellectual property around Xyrem, including the possibility of new ANDA or new drug application, or NDA, filers or new post-grant patent review proceedings; operational disruptions at the Xyrem central pharmacy; any supply or manufacturing problems, including any problems with our sole source Xyrem active pharmaceutical ingredient, or API, provider; continued acceptance of Xyrem by physicians and patients, including as a result of negative publicity that surfaces from time to time; and changes to our label, including new safety warnings or changes to our boxed warning, that further restrict how we market and sell Xyrem. In addition to risks related specifically to Xyrem, we are subject to other challenges and risks specific to our business and our ability to execute on our strategy, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations, including, without limitation, risks and uncertainties associated with: effectively commercializing our other products; competition; obtaining and maintaining adequate coverage and reimbursement for our products; increasing scrutiny of pharmaceutical product pricing and resulting changes in healthcare laws and policy; market acceptance; delays or problems in the supply of our products, loss of single source suppliers or failure to comply with manufacturing regulations; regulatory approval and successful launch of our late- stage product candidates; identifying, acquiring or in-licensing additional products or product candidates; pharmaceutical product development and the inherent uncertainty of clinical success; the regulatory approval process; the challenges of protecting and enhancing our intellectual property rights; complying with applicable regulatory requirements; and possible restrictions on our ability and flexibility to pursue certain future opportunities as a result of our substantial outstanding debt obligations. 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. JAZZ PHARMACEUTICALS | 2018 Annual Report F-11 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 December 31, 2018 and 2017, we had foreign exchange forward contracts with notional amounts totaling $271.5 million and $511.4 million, respectively. As of December 31, 2018 and 2017, the outstanding foreign exchange forward contracts had a net liability fair value of $0.3 million and a net asset fair value of $10.5 million, respectively. As of December 31, 2018 and 2017, we had interest rate swap contracts with notional amounts totaling $300.0 million. These outstanding interest rate swap contracts had a net asset fair value of $4.1 million and $1.7 million as of December 31, 2018 and 2017, respectively. The counterparties to these contracts are large multinational commercial banks, and we believe the risk of nonperformance is not significant. We are also subject to credit risk from our accounts receivable related to our product sales. We monitor our exposure within accounts receivable and record a reserve against uncollectible accounts receivable as necessary. We extend credit to pharmaceutical wholesale distributors and specialty pharmaceutical distribution companies, primarily in the U.S., and to other international distributors and hospitals. Customer creditworthiness is monitored and collateral is not required. We monitor deteriorating economic conditions in certain European countries which may result in variability of the timing of cash receipts and an increase in the average length of time that it takes to collect accounts receivable outstanding. Historically, we have not experienced significant credit losses on our accounts receivable. As of December 31, 2018, two customers accounted for 89% of gross accounts receivable, Express Scripts Specialty Distribution Services, Inc. and its affiliates, or Express Scripts, which accounted for 74% of gross accounts receivable, and McKesson Corporation and affiliates, or McKesson, which accounted for 15% of gross accounts receivable. As of December 31, 2017, two customers accounted for 86% of gross accounts receivable, Express Scripts, which accounted for 71% of gross accounts receivable, and McKesson, which accounted for 15% of gross accounts receivable. We depend on single source suppliers for most of our products, product candidates and their active pharmaceutical ingredients, or APIs. With respect to Xyrem, the API is manufactured for us by a single source supplier and the finished product is manufactured both by us in our facility in Athlone, Ireland and by our U.S.-based Xyrem supplier. Business Acquisitions Our consolidated financial statements include the results of operations of an acquired business from the date of acquisition. We account for acquired businesses using the acquisition method of accounting. The acquisition method of accounting for acquired businesses requires, among other things, that assets acquired, liabilities assumed and any noncontrolling interests in the acquired business be recognized at their estimated fair values as of the acquisition date, with limited exceptions, and that the fair value of acquired in-process research and development, or IPR&D, be recorded on the balance sheet. Also, transaction costs are expensed as incurred. Any excess of the acquisition consideration over the assigned values of the net assets acquired is recorded as goodwill. Contingent consideration is included within the acquisition cost and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved and changes in fair value are recognized in earnings. Cash Equivalents and Investments We consider all highly liquid investments, readily convertible to cash, that mature within three months or less from date of purchase to be cash equivalents. Investments consist of time deposits with initial maturities of greater than three months. Collectively, cash equivalents and investments are considered available-for-sale and are recorded at fair value. Unrealized gains and losses, net of tax, are recorded in accumulated other comprehensive loss in shareholders’ equity. We use the specific-identification method for calculating realized gains and losses on securities sold. Realized gains and losses and declines in value judged to be other than temporary on investments are included in interest expense, net in the consolidated statements of income. Derivative Instruments and Hedging Activities We record the fair value of derivative instruments as either assets or liabilities on the consolidated balance sheets. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income (loss), depending on whether a derivative instrument is designated as part of a hedging transaction and, if it is, the type of hedging transaction. For a derivative to qualify F-12 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. Gains or losses on cash flow hedges are reclassified from other comprehensive income (loss) to earnings when the hedged transaction occurs. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting and any related unrealized gain or loss on the derivative instrument is recognized in current earnings. Derivatives that are not designated and do not qualify as hedges are adjusted to fair value through current earnings. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand for a particular product. If our estimate of future demand changes, we consider the impact on the reserve for excess inventory and adjust the reserve as required. Increases in the reserve are recorded as charges in cost of product sales. We capitalize inventory costs associated with our products prior to regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. The determination to capitalize inventory costs is based on various factors, including status and expectations of the regulatory approval process, any known safety or efficacy concerns, potential labeling restrictions, and any other impediments to obtaining regulatory approval. We had no pre-approval inventory on our consolidated balance sheet as of December 31, 2018 or 2017. K - 0 1 m r o F Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows: Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing equipment and machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer software and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 years 5-10 years 3 years 5 years Leasehold improvements and the build-to-suit facility are amortized over the shorter of the noncancelable term of our leases or their economic useful lives. Maintenance and repairs are expensed as incurred. Operating Leases and Financing Obligations We recognize rent expense under operating leases on a straight-line basis over the term of the lease with the difference between the expense and cash payments recorded as deferred rent on the consolidated balance sheets. For certain build-to-suit lease arrangements where we have concluded that we are the “deemed owner” of the building, for accounting purposes only, during the construction period, we are required to record an asset with a corresponding financing obligation for the construction costs incurred by the landlord. The financing obligation is recorded within accrued liabilities and other non-current liabilities in the consolidated balance sheets. We increase the asset and financing obligation as additional building costs are incurred by the landlord during the construction period. Once construction is complete, we evaluate whether the asset qualifies for sale-leaseback accounting treatment. If the lease meets the sale-leaseback criteria, we remove the asset and the related liability from the consolidated balance sheets and treat the lease as either an operating or capital lease based on an assessment of the accounting guidance. If the arrangement does not qualify for sale-leaseback treatment, we reduce the financing obligation over the lease term as payments are made and depreciate the asset over its estimated useful life or lease term, whichever is shorter. Future lease payments associated with build-to-suit leases where we are the deemed owner are allocated between the land and building components. The portion of the lease payments allocated to the land is treated for accounting purposes as operating lease payments, and therefore is recorded as rent expense in the consolidated statements of income. The portion of the lease payments allocated to the building is further bifurcated into a portion allocated to interest expense and a portion allocated to reduce the build-to-suit financing obligation. JAZZ PHARMACEUTICALS | 2018 Annual Report F-13 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Goodwill Goodwill represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed. We have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of pharmaceutical products. The annual test for goodwill impairment is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step indicates impairment, then, in the second step, the loss is measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. We test goodwill for impairment annually in October and when events or changes in circumstances indicate that the carrying value may not be recoverable. Acquired In-Process Research and Development The initial costs of rights to IPR&D projects acquired in an asset acquisition are expensed as IPR&D unless the project has an alternative future use. The fair value of IPR&D projects acquired in a business combination are capitalized and accounted for as indefinite- lived intangible assets until the underlying project receives regulatory approval, at which point the intangible asset will be accounted for as a finite-lived intangible asset, or discontinued, at which point the intangible asset will be written off. Development costs incurred after an acquisition are expensed as incurred. Intangible Assets Intangible assets with finite useful lives consist primarily of purchased developed technology and are amortized on a straight-line basis over their estimated useful lives, which range from two to 18 years. The estimated useful lives associated with finite-lived intangible assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant. Such assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset. Intangible assets with finite useful lives also includes a Priority Review Voucher, or PRV, which we can use to obtain priority review by the FDA for one of our future regulatory submissions or may sell or transfer to a third party. The PRV is measured at cost and reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable. At the time we commit to using the PRV to accelerate the review of a drug application, the cost of the PRV will be expensed to the consolidated statement of income. Alternatively, if the PRV is sold, the asset would be derecognized from the consolidated balance sheet. Revenue Recognition Our revenue comprises product sales, net and royalty and contract revenues. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Prior to recognizing revenue, we make estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Product Sales, Net Product sales revenue is recognized when control has transferred to the customer, which occurs at a point in time, which is typically on delivery to the customer or, in the case of products that are subject to consignment agreements, when the customer removes product from our consigned inventory location for shipment directly to a patient. Reserves for Variable Consideration Revenues from sales of products are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established and which relate to returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government F-14 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) rebates, government chargebacks, coupon programs and rebates under managed care plans. Calculating certain of these reserves involves estimates and judgments and we determine their expected value based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, our expectations regarding future utilization rates for these programs and channel inventory data. These reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We reassess our reserves for variable consideration at each reporting date. Historically, adjustments to estimates for these reserves have not been material. Reserves for returns, specialty distributor fees, wholesaler fees, government rebates, coupon programs and rebates under managed care plans are included within current liabilities in our consolidated balance sheets. Reserves for government chargebacks and prompt payment discounts are shown as a reduction in accounts receivable. K - 0 1 m r o F Royalties and Contract Revenues We enter into out-licensing agreements under which we license certain rights to our products or product candidates to third parties. If a licensing arrangement includes multiple goods or services, we consider whether the license is distinct. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. If the license to our intellectual property is determined not to be distinct, it is combined with other goods or services into a combined performance obligation. We consider whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. We evaluate the measure of progress each reporting date and, if necessary, adjust the measure of performance and related revenue recognition. At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or that of the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is allocated to each performance obligation on a relative stand- alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. For arrangements that include sales-based royalties and milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties and sales-based milestones relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty or sales-based milestone has been allocated has been satisfied (or partially satisfied). Cost of Product Sales Cost of product sales includes manufacturing and distribution costs, the cost of drug substance, royalties due to third parties on product sales, product liability and cargo insurance, FDA user fees, freight, shipping, handling and storage costs and salaries and related costs of employees involved with production. Excluded from cost of product sales shown on the consolidated statements of income is amortization of acquired developed technology of $201.3 million, $149.1 million and $99.0 million in 2018, 2017 and 2016, respectively. Research and Development Research and development expenses consist primarily of costs related to clinical studies and outside services, personnel expenses and other research and development costs, including milestone payments incurred prior to regulatory approval of products. Clinical study and outside services costs relate primarily to services performed by clinical research organizations, clinical studies performed at clinical sites, 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 JAZZ PHARMACEUTICALS | 2018 Annual Report F-15 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) facilities-related costs. Research and development costs are expensed as incurred. For product candidates that have not been approved by the FDA, inventory used in clinical trials is expensed at the time of production and recorded as research and development expense. For products that have been approved by the FDA, inventory used in clinical trials is expensed at the time the inventory is packaged for the trial. Advertising Expenses We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $37.4 million, $36.6 million and $29.5 million in 2018, 2017 and 2016, respectively. Income Taxes We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amount and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. We recognize the benefits of a tax position if it is “more-likely-than-not” of being sustained. A recognized tax benefit is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are included in the income tax provision and classified with the related liability on the consolidated balance sheets. Foreign Currency Our functional and reporting currency is the U.S. dollar. The assets and liabilities of our subsidiaries that have a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date with the results of operations of subsidiaries translated at the average exchange rate for the reporting period. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Transactions in foreign currencies are translated into the functional currency of the relevant subsidiary at the rate of exchange prevailing at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the relevant functional currency at exchange rates prevailing at the balance sheet date or on settlement. Resulting gains and losses are recorded in foreign exchange gain (loss) in our consolidated statements of income. Deferred Financing Costs Deferred financing costs are reported at cost, less accumulated amortization and are presented in the consolidated balance sheets as a direct deduction from the carrying value of the associated debt, with the exception of deferred financing costs associated with revolving- debt arrangements which are presented as assets. The related amortization expense is included in interest expense, net in our consolidated statements of income. Contingencies From time to time, we may become involved in claims and other legal matters arising in the ordinary course of business. We record accruals for loss contingencies to the extent that we conclude that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. Legal fees and other expenses related to litigation are expensed as incurred and included in selling, general and administrative expenses. Share-Based Compensation We account for compensation cost for all share-based awards at fair value on the date of grant. The fair value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method. The estimation of share-based awards that will ultimately vest requires judgment, and, to the extent actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We primarily consider historical experience when estimating expected forfeitures. F-16 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Recent Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for us beginning January 1, 2020 and early adoption is permitted. The new guidance is not expected to have a material impact on our results of operations and financial position. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. The standard is effective for us beginning January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The new guidance is not expected to have a material impact on our results of operations and financial position. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, or ASU No. 2016-02. 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 adoption is permitted. We will adopt ASU No. 2016-02 on a modified retrospective basis at the adoption date of January 1, 2019. The adoption of ASU No. 2016-02 will result in the recognition of right-of-use assets and lease liabilities of approximately $150 million and $170 million, respectively, on the consolidated balance sheet as of January 1, 2019, and the de-recognition of the build-to-suit assets and related financing obligations on the consolidated balance sheet as of December 31, 2018 of $95 million and $110 million, respectively, with the balance impacting retained earnings and deferred rent. The right-of-use assets and lease liabilities primarily relate to real estate leases. We will provide additional lease-related disclosures in the notes to the consolidated financial statements commencing with our consolidated financial statements for the quarter ending March 31, 2019. K - 0 1 m r o F 3. Business Combination, Asset Acquisitions and Disposition Celator Acquisition On May 27, 2016, we entered into a definitive merger agreement with Celator Pharmaceuticals Inc., or Celator, pursuant to which we made a cash tender offer of $30.25 per share for all of the outstanding shares of Celator’s common stock. As of the expiration of the offer period on July 12, 2016, 36,516,173 shares, which represented approximately 81% of Celator’s then outstanding common stock, were properly tendered and not withdrawn in the tender offer. The condition to the tender offer that more than 50% of Celator’s outstanding common stock be validly tendered and not withdrawn prior to the expiration of the tender offer was satisfied. In addition, notices of guaranteed delivery were delivered with respect to 2,016,237 additional shares, representing approximately 4% of Celator’s outstanding common stock as of the expiration of the tender offer. On July 12, 2016, we completed the acquisition of Celator, or the Celator Acquisition, under the terms of the merger agreement, pursuant to which Celator became an indirect wholly owned subsidiary of Jazz Pharmaceuticals plc and each share of Celator common stock then outstanding (other than shares owned by us or Celator) was converted into the right to receive $30.25, the same price per share offered in the tender offer. The aggregate cash consideration for the Celator Acquisition was $1.5 billion. On July 12, 2016, we entered into the amended credit agreement that provides for a revolving credit facility of $1.25 billion, which replaced our prior revolving credit facility of $750.0 million, and a $750.0 million term loan facility. Please see Note 11, Debt, for further information regarding the 2015 credit agreement and the amended credit agreement. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. Celator was an oncology-focused biopharmaceutical company seeking to transform the science of combination therapy and develop products to improve patient outcomes in cancer. The Celator Acquisition broadened our hematology/oncology portfolio with the acquisition of worldwide development and commercialization rights to Vyxeos. In addition, the Celator Acquisition provided us with Celator’s proprietary technology platform, CombiPlex, which enables the rational design and rapid evaluation of optimized combinations of additional anti-cancer drugs. JAZZ PHARMACEUTICALS | 2018 Annual Report F-17 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Celator Acquisition was accounted for as a business combination using the acquisition method under which assets and liabilities of Celator were recorded at their respective estimated fair values as of the closing date of the Celator Acquisition and added to the assets and liabilities of Jazz Pharmaceuticals plc, including an amount for goodwill representing the difference between the acquisition consideration and the estimated fair value of the identifiable net assets. The results of operations of Celator and the estimated fair values of the assets acquired and liabilities assumed have been included in our consolidated financial statements since the closing date of the Celator Acquisition. In 2016, we incurred $10.0 million in acquisition-related costs related to the Celator Acquisition, which primarily consisted of banking, legal, accounting and valuation-related expenses. These expenses were recorded in selling, general and administrative expense in the accompanying consolidated statements of income. We did not recognize any revenues from the acquired Celator business in 2016. The portion of total expenses and net loss associated with the acquired Celator business was not separately identifiable due to the integration with our operations. The fair values of assets acquired and liabilities assumed at the closing date of the Celator Acquisition are summarized below (in thousands): Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability, net, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,137 386 151 767 1,811,250 252,825 43 (19,076) (542,901) (1,002) Total acquisition consideration—cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,528,580 Identifiable intangible assets acquired comprised IPR&D, which represented incomplete research and development projects at Celator related to Vyxeos. Management estimated the fair value of Vyxeos IPR&D to be approximately $1.8 billion. The fair value of acquired IPR&D was determined using the income approach, including the application of probability factors related to the likelihood of success of Vyxeos reaching final development and commercialization. This approach also took into consideration information and certain program-related documents and forecasts prepared by management. The fair value of acquired IPR&D was capitalized as of the closing date of the Celator Acquisition. After receiving FDA approval of our new drug application, or NDA, for Vyxeos in August 2017, we reclassified the IPR&D balance of $1.8 billion from an indefinite-lived intangible asset to an acquired developed technology finite-lived intangible asset. This acquired developed technology asset is being amortized over its estimated useful life of 18 years. The excess of the total acquisition consideration over the fair value amounts assigned to the assets acquired and the liabilities assumed represents the goodwill amount resulting from the Celator Acquisition. We believe that the factors that contributed to goodwill included the Celator workforce, which will complement our clinical experience in hematology/oncology and our expertise in reaching targeted physicians who treat serious medical conditions, and the deferred tax consequences of intangible assets recorded for financial statement purposes. We do not expect any portion of this goodwill to be deductible for tax purposes. Pro Forma Financial Information (Unaudited) The following unaudited supplemental pro forma information presents our combined historical results of operations with pro forma adjustments as if the Celator Acquisition had been completed on January 1, 2015. The primary pro forma adjustments include: • • The exclusion of acquisition-related and integration expenses of $13.6 million in 2016. An increase in interest expense of $13.7 million in 2016 incurred on additional borrowings made to partially fund the Celator Acquisition as if the borrowings had occurred on January 1, 2015. F-18 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The unaudited pro forma results do not assume any operating efficiencies as a result of the consolidation of operations and are as follows (in thousands, except per share data): Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Jazz Pharmaceuticals plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Jazz Pharmaceuticals plc per ordinary share—basic . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Jazz Pharmaceuticals plc per ordinary share—diluted . . . . . . . . . . . . . . . . . . . . . . $1,488,118 $ 386,342 6.39 $ 6.24 $ Year Ended December 31, 2016 Disposition On June 29, 2018, we entered into an APA with TerSera, pursuant to which TerSera agreed to purchase substantially all of our assets related to the manufacture, marketing and sale of Prialt, but excluding accounts receivable, and to assume certain related liabilities as set forth in the APA. We entered into an amendment to the APA, and the transaction closed, on September 27, 2018. The total sales price was $80.0 million, of which we received $50.0 million at closing, and, subject to certain conditions, we are entitled to receive $15.0 million payable on December 31, 2019 and $15.0 million payable on December 31, 2020, or earlier under certain circumstances. The related assets met the assets held for sale criteria and were reclassified to assets held for sale as of June 30, 2018. We adjusted the carrying value of the assets held for sale to fair value less costs to sell, which resulted in an impairment charge of $42.9 million in our consolidated statements of income in 2018, primarily related to the carrying balances of intangible assets. Upon closing, we recognized a loss on disposal of $0.5 million within selling, general and administrative expenses in our consolidated statements of income in 2018. We determined that the disposal of these assets does not qualify for reporting as a discontinued operation since it does not represent a strategic shift that has or will have a major effect on our operations and financial results. K - 0 1 m r o F Collaboration and Option Agreement In August 2017, we entered into a collaboration and option agreement with ImmunoGen, Inc., or ImmunoGen, granting us rights to opt into exclusive, worldwide licenses to develop and commercialize two hematology-related antibody-drug conjugate, or ADC, programs, as well as an additional program to be designated during the term of the agreement. The programs covered under the agreement include IMGN779, a CD33-targeted ADC for the treatment of AML in Phase 1 testing, and IMGN632, a CD123-targeted ADC for hematological malignancies expected to enter clinical testing before the end of 2017. Under the terms of the agreement, ImmunoGen will be responsible for the development of the three ADC programs prior to any potential opt-in by us. Following any opt-in, we would be responsible for any further development as well as for potential regulatory submissions and commercialization. As part of the agreement, we paid ImmunoGen a non-refundable upfront payment of $75.0 million, which was charged to acquired IPR&D expense upon closing of the transaction. Additionally, we will pay ImmunoGen up to $100 million in development funding over seven years to support the three ADC programs. For each program, we may exercise our opt-in right at any time prior to a pivotal study or any time prior to a biologics license application upon payment of an option exercise fee. The option exercise fee depends on the timing of exercise and certain other conditions. For each program to which we elect to opt-in, ImmunoGen would be eligible to receive milestone payments based on receiving regulatory approval of the applicable product, plus tiered royalties as a percentage of commercial sales. After opt-in, we will share with ImmunoGen the costs associated with developing and obtaining regulatory approvals of the applicable product in the U.S. and the European Union, or EU. ImmunoGen has the right to co-commercialize one product (or two products, under certain limited circumstances) with us in the U.S. with U.S. profit-sharing in lieu of our payment of applicable U.S. milestone and royalties to ImmunoGen. License and Option Agreement In July 2016, we entered into an agreement with Pfenex Inc., or Pfenex, that granted us worldwide rights to develop and commercialize multiple early-stage hematology product candidates and an option for us to negotiate a license for a recombinant pegaspargase product candidate. This agreement was amended in December 2017. Under the amended agreement, Pfenex received JAZZ PHARMACEUTICALS | 2018 Annual Report F-19 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) upfront, option and development milestone payments totaling $35.3 million and may be eligible to receive additional payments of up to $189 million based on the achievement of certain development, regulatory and sales milestones. In 2017, we recognized expense of $19.5 million within research and development expenses. In 2016, we recognized expenses of $15.8 million, of which $15.0 million was charged to acquired IPR&D expense upon closing of the transaction and $0.8 million was charged to research and development expenses. Acquisition of Alizé Pharma II S.A.S. In March 2016, we acquired all of the outstanding shares of Alizé Pharma II S.A.S., a privately held biotechnology company, for an upfront payment of $8.8 million. In connection with the acquisition, we obtained intellectual property and know-how related to recombinant crisantaspase. The transaction includes contingent regulatory milestone payments of up to €10 million. The transaction was accounted for as an asset acquisition and the upfront payment was charged to acquired IPR&D expense upon closing of the transaction. 4. Cash and Available-for-Sale Securities Cash and cash equivalents and investments consisted of the following (in thousands): Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortized Cost $215,606 515,000 94,016 Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $824,622 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortized Cost $225,235 235,000 140,800 Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $601,035 December 31, 2018 Gross Unrealized Gains Gross Unrealized Losses $— — — $— $— — — $— Estimated Fair Value $215,606 515,000 94,016 Cash and Cash Equivalents $215,606 — 94,016 Investments $ — 515,000 — $824,622 $309,622 $515,000 December 31, 2017 Gross Unrealized Gains Gross Unrealized Losses $— — — $— $— — — $— Estimated Fair Value $225,235 235,000 140,800 Cash and Cash Equivalents $225,235 20,000 140,800 Investments $ — 215,000 — $601,035 $386,035 $215,000 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 consolidated statements of income. Our investment balances represent time deposits with original maturities of greater than three months and less than one year. F-20 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 5. Fair Value Measurement The following table summarizes, by major security type, our available-for-sale securities and derivative contracts that were measured at fair value on a recurring basis and were categorized using the fair value hierarchy (in thousands): December 31, 2018 December 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Estimated Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Estimated Fair Value Assets: Available-for-sale securities: Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . $ — 94,016 — — $515,000 — 4,070 1,194 $515,000 94,016 4,070 1,194 $ — $235,000 — 2,138 15,495 140,800 — — $235,000 140,800 2,138 15,495 Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $94,016 $520,264 $614,280 $140,800 $252,633 $393,433 K - 0 1 m r o F Liabilities: Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . $ — — Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ $ — $ — $ 1,460 1,460 — $ — 392 5,017 1,460 $ 1,460 $ — $ 5,409 $ $ 392 5,017 5,409 As of December 31, 2018, 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 2018 or in 2017. As of December 31, 2018, the carrying amount of investments measured using the measurement alternative for equity investments without a readily determinable fair value was $4.5 million. The carrying amount, which is recorded within other non-current assets, represents the purchase price paid in 2018. As of December 31, 2018, the estimated fair values of our 1.875% exchangeable senior notes due 2021, or the 2021 Notes, and our 1.50% exchangeable senior notes due 2024, or the 2024 Notes, were approximately $558 million and $521 million, respectively. The fair values of the Exchangeable Senior Notes were estimated using quoted market prices obtained from brokers (Level 2). The estimated fair value of our borrowings under our term loan was approximately equal to its book value based on the borrowing rates currently available for variable rate loans (Level 2). 6. Derivative Instruments and Hedging Activities We are exposed to certain risks arising from operating internationally, including fluctuations in interest rates on our outstanding term loan borrowings and fluctuations in foreign exchange rates primarily related to the translation of euro-denominated net monetary liabilities, including intercompany balances, held by subsidiaries with a U.S. dollar functional currency. We manage these exposures within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes. JAZZ PHARMACEUTICALS | 2018 Annual Report F-21 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) To achieve a desired mix of floating and fixed interest rates on our variable rate debt, we entered into interest rate swap agreements in March 2017 which are effective until July 2021. These agreements hedge contractual term loan interest rates. As of December 31, 2018 and 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. The effective portion of changes in the fair value of derivatives designated as and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The impact on accumulated other comprehensive loss and earnings from derivative instruments that qualified as cash flow hedges was as follows (in thousands): Interest Rate Contracts: Year Ended December 31, 2018 2017 Gain (loss) recognized in accumulated other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (gain) reclassified from accumulated other comprehensive loss to interest expense, net of tax . . . . . . . . . . . $2,274 $ (252) $ (213) $1,695 Assuming no change in LIBOR-based interest rates from market rates as of December 31, 2018, $1.7 million of gains recognized in accumulated other comprehensive loss will be reclassified to earnings over the next 12 months. We enter into foreign exchange forward contracts, with durations of up to 12 months, designed to limit the exposure to fluctuations in foreign exchange rates related to the translation of certain non-U.S. dollar denominated liabilities, including intercompany balances. Hedge accounting is not applied to these derivative instruments as gains and losses on these hedge transactions are designed to offset gains and losses on underlying balance sheet exposures. As of December 31, 2018 and 2017, the notional amount of foreign exchange contracts where hedge accounting was not applied was $271.5 million and $511.4 million, respectively. The foreign exchange gain (loss) in our consolidated statements of income included the following gains and losses associated with foreign exchange contracts not designated as hedging instruments (in thousands): Foreign Exchange Forward Contracts: Year Ended December 31, 2018 2017 Gain (loss) recognized in foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14,648) $17,902 We did not enter into foreign exchange forward contracts in 2016. The cash flow effects of our derivative contracts are included within net cash provided by operating activities in the consolidated statements of cash flows. The following table summarizes the fair value of outstanding derivatives (in thousands): Derivatives designated as hedging instruments: Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivatives not designated as hedging instruments: December 31, 2018 Asset Derivatives Liability Derivatives Balance Sheet Location Fair Value Balance Sheet Location Fair Value Other current assets Other non-current assets $1,929 2,141 Accrued liabilities $ — Foreign exchange forward contracts . . . . . . . . . . . . . . . . . Other current assets 1,194 Accrued liabilities Total fair value of derivative instruments . . . . . . . . . . . . . . . . . . . $5,264 1,460 $1,460 F-22 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 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 $ 2,138 Accrued liabilities $ 392 Derivatives not designated as hedging instruments: Foreign exchange forward contracts . . . . . . . . . . . . . . . . . Other current assets 15,495 Accrued liabilities Total fair value of derivative instruments . . . . . . . . . . . . . . . . . . . $17,633 5,017 $5,409 Although we do not offset derivative assets and liabilities within our consolidated balance sheets, our International Swap and Derivatives Association agreements provide for net settlement of transactions that are due to or from the same counterparty upon early termination of the agreement due to an event of default or other termination event. The following table summarizes the potential effect on our consolidated balance sheets of offsetting our interest rate contracts and foreign exchange forward contracts subject to such provisions (in thousands): Description Gross Amounts of Recognized Assets/Liabilities Gross Amounts Offset in the Consolidated Balance Sheet Derivative assets . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . $ 5,264 $ (1,460) $— $— Description Gross Amounts of Recognized Assets/Liabilities Gross Amounts Offset in the Consolidated Balance Sheet Derivative assets . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . $17,633 $ (5,409) $— $— 7. Inventories Inventories consisted of the following (in thousands): December 31, 2018 Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheet $ 5,264 $ (1,460) Gross Amounts Not Offset in the Consolidated Balance Sheet Derivative Financial Instruments $ (935) 935 $ Cash Collateral Received (Pledged) $— $— Net Amount $ 4,329 $ (525) December 31, 2017 Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheet $17,633 $ (5,409) Gross Amounts Not Offset in the Consolidated Balance Sheet Derivative Financial Instruments $(5,409) $ 5,409 Cash Collateral Received (Pledged) $— $— Net Amount $12,224 $ — Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,774 28,864 21,318 $ 3,542 15,692 24,011 Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,956 $43,245 December 31, 2018 2017 K - 0 1 m r o F JAZZ PHARMACEUTICALS | 2018 Annual Report F-23 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 8. Property, Plant and Equipment Property, plant and equipment consisted of the following (in thousands): December 31, 2018 2017 Build-to-suit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing equipment and machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,067 51,243 46,650 33,273 25,837 19,062 13,679 8,155 $ 51,721 21,738 46,729 28,779 23,586 19,969 12,814 5,947 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,966 (49,608) 211,283 (41,203) Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,358 $170,080 Depreciation and amortization expense (including amortization expense related to a facility lease) on property, plant and equipment amounted to $15.2 million, $13.1 million and $11.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. 9. Goodwill and Intangible Assets The gross carrying amount of goodwill was as follows (in thousands): Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $947,537 (19,907) Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $927,630 The gross carrying amounts and net book values of our intangible assets were as follows (in thousands): December 31, 2018 December 31, 2017 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 . . . . . . . . . Priority review voucher . . . . . . . . . . . . . . . . . Manufacturing contracts . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 — — $3,110,641 $(632,413) $2,478,228 $3,392,832 $(562,473) $2,830,359 — 190 — — (12,256) (2,896) — (12,634) (2,910) 111,101 12,256 2,896 111,101 — — — 12,824 2,910 Total finite-lived intangible assets . . . . . Acquired IPR&D assets . . . . . . . . . . . . . . . . . 3,236,894 142,005 (647,565) — 2,589,329 142,005 3,408,566 148,578 (578,017) — 2,830,549 148,578 Total intangible assets . . . . . . . . . . . . . . . . . . $3,378,899 $(647,565) $2,731,334 $3,557,144 $(578,017) $2,979,127 The decrease in the gross carrying amount of intangible assets as of December 31, 2018 compared to December 31, 2017 reflects the sale of the Prialt acquired developed technology asset to TerSera in September 2018 and the negative impact of foreign currency translation adjustments, which was due to the weakening of the euro against the U.S. dollar, partially offset by our purchase of a rare pediatric disease PRV from Spark Therapeutics, Inc. As we may use the PRV to obtain priority review by the FDA for one of our future regulatory submissions or may sell or transfer the PRV to a third party, we capitalized the acquisition cost, including direct transaction costs, as a finite-lived intangible asset upon closing of the transaction in May 2018. F-24 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The assumptions and estimates used to determine future cash flows and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors, such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines. We reduced the estimated remaining useful life of the Erwinaze intangible asset due to the receipt of a contract termination notice from Porton Biopharma Limited in February 2019. Based on finite-lived intangible assets recorded as of December 31, 2018, and assuming the underlying assets will not be impaired and that we will not change the expected lives of any other assets, future amortization expenses were estimated as follows (in thousands): Year Ending December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Amortization Expense $ 242,953 246,870 198,956 153,105 153,105 1,483,239 K - 0 1 m r o F Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,478,228 10. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2018 2017 Rebates and other sales deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated loss contingency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory-related accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling and marketing accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clinical trial accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales returns reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative instrument liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,495 58,543 58,154 8,753 7,407 6,780 5,904 2,679 2,510 2,333 1,460 23,869 $ 81,368 54,930 — 3,002 7,297 3,189 2,181 8,058 3,651 3,213 5,409 26,481 Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $264,887 $198,779 JAZZ PHARMACEUTICALS | 2018 Annual Report F-25 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 11. Debt The following table summarizes the carrying amount of our indebtedness (in thousands): December 31, 2018 2017 2021 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized discount and debt issuance costs on 2021 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 575,000 (60,910) $ 575,000 (81,627) 2021 Notes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514,090 493,373 2024 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized discount and debt issuance costs on 2024 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 Notes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,000 (138,914) 436,086 646,236 575,000 (158,680) 416,320 671,345 Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,596,412 33,387 1,581,038 40,605 Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,563,025 $1,540,433 Credit Agreement On June 18, 2015, Jazz Pharmaceuticals plc, as guarantor, and certain of our wholly owned subsidiaries, as borrowers, entered into a credit agreement, or 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 credit agreement that we entered into in June 2012, as subsequently amended, which we refer to as 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, we amended the 2015 credit agreement to provide for a revolving credit facility of $1.25 billion and a $750.0 million term loan facility. We used the proceeds of $1.0 billion of loans under the revolving credit facility, together with cash on hand, to fund the Celator Acquisition. Please see Note 3, Business Combination, Asset Acquisitions and Disposition, for additional information regarding the Celator Acquisition. On June 7, 2018, we entered into the second amendment to the 2015 credit agreement to provide for a revolving credit facility of $1.60 billion, which replaced the existing revolving credit facility of $1.25 billion, and a new $667.7 million term loan facility, which replaced the $750.0 million term loan facility, of which $651.0 million principal amount was outstanding as of December 31, 2018. We refer to the 2015 credit agreement as amended by the first and second amendments as the amended credit agreement. We expect to use the proceeds from future loans under the revolving credit facility, if any, for permitted capital expenditures, permitted acquisitions, to provide for ongoing working capital requirements and for other general corporate purposes. Under the amended credit agreement, the term loan matures on June 7, 2023 and the revolving credit facility terminates, and any loans outstanding thereunder become due and payable, on June 7, 2023. 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 1.375% to 1.750% per annum, based upon our secured leverage ratio, or (b) the prime lending rate, plus an applicable margin ranging from 0.375% to 0.750% 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. As of December 31, 2018, the interest rate on the term loan was 3.90% and the effective interest rate was 3.66%. As of December 31, 2018, we had undrawn revolving credit facilities totaling $1.60 billion. F-26 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 Exchangeable Senior 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 other exceptions), (2) net cash proceeds from issuances of debt (other than certain permitted debt), and (3) casualty proceeds and condemnation awards (subject to other exceptions). Principal repayments of the term loan, which are due quarterly, are equal to 5.0% per annum of the principal amount outstanding on June 7, 2018 of $667.7 million, with any remaining balance payable on the maturity date. The amended credit agreement contains financial covenants that require Jazz Pharmaceuticals plc and our restricted subsidiaries to not (a) exceed a maximum secured net leverage ratio or (b) fall below a cash interest coverage ratio. As of December 31, 2018, we were in compliance with these financial covenants. K - 0 1 m r o F In connection with our entry into the amendments to the 2015 credit agreement, we recorded a loss on extinguishment and modification of debt of $1.4 million and $0.6 million in 2018 and 2016, respectively. Exchangeable Senior Notes Due 2024 In the third quarter of 2017, we completed a private placement of $575.0 million principal amount of 2024 Notes. We used the net proceeds from this offering to repay $500.0 million in outstanding loans under the revolving credit facility and to pay related fees and expenses. We used the remainder of the net proceeds for general corporate purposes. Interest on the 2024 Notes is payable semi- annually in cash in arrears on February 15 and August 15 of each year, beginning on February 15, 2018, at a rate of 1.50% 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 2024 Notes. The 2024 Notes mature on August 15, 2024, unless earlier exchanged, repurchased or redeemed. The holders of the 2024 Notes have the ability to require us to repurchase all or a portion of their 2024 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, 2024, we may redeem the 2024 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 2024 Notes additional amounts as a result of certain tax-related events. We also may redeem the 2024 Notes on or after August 20, 2021, 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 2024 Notes are exchangeable at an initial exchange rate of 4.5659 ordinary shares per $1,000 principal amount of 2024 Notes, which is equivalent to an initial exchange price of approximately $219.02 per ordinary share. Upon exchange, the 2024 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 2024 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 2024 Notes or upon our issuance of a notice of redemption, we will in certain circumstances increase the exchange rate for holders of the 2024 Notes who elect to exchange their 2024 Notes in connection with that make-whole fundamental change or during the related redemption period. Prior to May 15, 2024, the 2024 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. In accounting for the issuance of the 2024 Notes, we separated the 2024 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an JAZZ PHARMACEUTICALS | 2018 Annual Report F-27 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) associated exchange feature. The carrying amount of the equity component representing the exchange option was determined by deducting the fair value of the liability component from the face value of the 2024 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount will be amortized to interest expense over the expected life of the 2024 Notes using the effective interest method with an effective interest rate of 6.8% per annum. We have determined the expected life of the 2024 Notes to be equal to the original seven-year term. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. As of December 31, 2018 and 2017, the “if-converted value” did not exceed the principal amount of the 2024 Notes. We allocated the total issuance costs incurred of $15.6 million to the liability and equity components based on their relative values. Issuance costs attributable to the liability component will be amortized to expense over the term of the 2024 Notes, and issuance costs attributable to the equity component were included with the equity component in our shareholders’ equity. As of December 31, 2018 and 2017, the carrying value of the equity component of the 2024 Notes, net of equity issuance costs, was $149.8 million. Exchangeable Senior Notes Due 2021 In August 2014, we completed a private placement of the 2021 Notes. 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 Jazz Pharmaceuticals plc undergoes certain fundamental changes. 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 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. In accounting for the issuance of the 2021 Notes, we separated the 2021 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated exchange feature. The carrying amount of the equity component representing the exchange option was determined by deducting the fair value of the liability component from the face value of the 2021 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount will be amortized to interest expense over the expected life of the 2021 Notes using the effective interest method with an effective interest rate of 6.4% per annum. We have determined the expected life of the 2021 Notes to be equal to the original seven-year term. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. As of December 31, 2018 and 2017, the “if-converted value” did not exceed the principal amount of the 2021 Notes. We allocated the total issuance costs incurred of $16.1 million to the liability and equity components based on their relative values. Issuance costs attributable to the liability component will be amortized to expense over the term of the 2021 Notes, and issuance costs attributable to the equity component were included with the equity component in our shareholders’ equity. F-28 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As of December 31, 2018 and 2017, the carrying value of the equity component of the 2021 Notes, net of equity issuance costs, was $126.9 million. The Exchangeable Senior Notes were issued by Jazz Investments I Limited, or the Issuer, a 100%-owned finance subsidiary of Jazz Pharmaceuticals plc. The Exchangeable Senior Notes are senior unsecured obligations of the Issuer and are fully and unconditionally guaranteed on a senior unsecured basis by Jazz Pharmaceuticals plc. No subsidiary of Jazz Pharmaceuticals plc guaranteed the Exchangeable Senior Notes. Subject to certain local law restrictions on payment of dividends, among other things, and potential negative tax consequences, we are not aware of any significant restrictions on the ability of Jazz Pharmaceuticals plc to obtain funds from the Issuer or Jazz Pharmaceuticals plc’s other subsidiaries by dividend or loan, or any legal or economic restrictions on the ability of the Issuer or Jazz Pharmaceuticals plc’s other subsidiaries to transfer funds to Jazz Pharmaceuticals plc in the form of cash dividends, loans or advances. There is no assurance that in the future such restrictions will not be adopted. For the years ended December 31, 2018, 2017 and 2016, we recognized $56.7 million, $37.8 million and $27.5 million, respectively, in interest expense, net related to the contractual coupon rate and amortization of the debt discount on the Exchangeable Senior Notes. Scheduled maturities with respect to our long-term debt are as follows (in thousands): Year Ending December 31, Scheduled Long-Term Debt Maturities 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,387 33,387 608,387 33,387 517,493 575,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,801,041 K - 0 1 m r o F 12. Commitments and Contingencies Indemnification In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification, including indemnification associated with product liability or infringement of intellectual property rights. Our exposure under these agreements is unknown because it involves future claims that may be made but have not yet been made against us. To date, we have not paid any claims or been required to defend any action related to these indemnification obligations. We have agreed to indemnify our executive officers, directors and certain other employees for losses and costs incurred in connection with certain events or occurrences, including advancing money to cover certain costs, subject to certain limitations. The maximum potential amount of future payments we could be required to make under the indemnification obligations is unlimited; however, we maintain insurance policies that may limit our exposure and may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, we believe the fair value of these indemnification obligations is not significant. Accordingly, we did not recognize any liabilities relating to these obligations as of December 31, 2018 and December 31, 2017. No assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case we may incur substantial liabilities as a result of these indemnification obligations. Lease and Other Commitments Facility Leases. In January 2015, we entered into an agreement to lease office space located in Palo Alto, California in a building subsequently constructed by the landlord. The term of this lease is 12 years from the commencement date as defined in the lease agreement and we have an option to extend the term twice for a period of five years each. We are the deemed owner of the building based on applicable accounting guidance for build-to-suit leases. Accordingly, the landlord’s costs of constructing the building were capitalized on our consolidated balance sheets offset by a corresponding financing obligation. We began to occupy this office space in October 2017. As JAZZ PHARMACEUTICALS | 2018 Annual Report F-29 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of December 31, 2018 and 2017, the total amount of the related financing obligation was $62.5 million and $62.9 million respectively, which is classified within current liabilities and non-current liabilities in our consolidated balance sheets. In September 2017, we entered into an agreement to lease office space located in Palo Alto, California in a second building to be constructed by the same landlord. We expect to occupy this office space by the end of 2019. This lease has a term of 12 years from the commencement date as defined in the lease agreement and we have an option to extend the term of the lease twice for a period of five years each. We are the deemed owner of the building during the construction period based on applicable accounting guidance for build-to-suit leases. As of December 31, 2018, we recorded project construction costs of $47.3 million incurred by the landlord as construction-in-progress in property, plant and equipment, net and a corresponding financing obligation in other non-current liabilities on our consolidated balance sheets. We will increase the asset and financing obligation as additional building costs are incurred by the landlord during the construction period. For the years ended December 31, 2018, 2017 and 2016, we recorded rent expense associated with the ground lease on our facility leases of $4.0 million, $2.4 million and $1.9 million, respectively, in our consolidated statements of income. Future minimum lease payments under our noncancelable facility leases as of December 31, 2018, were as follows (in thousands): Year Ending December 31, Lease Payments 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,881 14,474 14,908 15,355 15,816 119,409 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $189,843 Operating Leases. We have noncancelable operating leases for our office buildings and we are obligated to make payments under noncancelable operating leases for automobiles used by our sales force. Lease expense under our operating leases was as follows (in thousands): Lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,519 $14,982 $11,600 Future minimum lease payments under our noncancelable operating leases as of December 31, 2018, were as follows (in Year Ended December 31, 2018 2017 2016 thousands): Year ending December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease Payments $ 8,404 6,269 5,771 5,388 5,168 8,794 $39,794 In August 2016, we entered into an operating lease agreement for office space in Dublin, Ireland for a term of 20 years, with an option to terminate at the end of eight years with no less than one year’s prior written notice and the payment of a termination fee, and a further option to terminate at the end of 15 years with no less than one year’s prior written notice. We are obligated to make minimum lease payments totaling $16.9 million in connection with this lease. F-30 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Other Commitments. As of December 31, 2018, we had $65.1 million of noncancelable purchase commitments due within one year, primarily related to agreements with third party manufacturers. Legal Proceedings Xyrem ANDA Litigation and Settlements. In December 2012, we received a notice of Paragraph IV Patent Certification, or 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. In January 2013, we filed a lawsuit against Amneal in the federal district court of New Jersey, or 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. Additional patents covering Xyrem were issued after the date of the original lawsuit against Amneal, and lawsuits we brought against Amneal involving those patents were consolidated into a single case in the District Court. In October 2018, we entered into a settlement agreement and related agreements resolving our patent infringement litigation against Amneal in the District Court, and the District Court subsequently approved an order dismissing the litigation. We previously settled lawsuits against the eight other companies that have sent us notices that they had filed ANDAs requesting approval to market a generic version of Xyrem. As a result, the settlement with Amneal represents settlement of all outstanding patent infringement litigation related to Xyrem. It is possible that additional companies may file ANDAs seeking to market a generic version of Xyrem or submit new drug applications referencing Xyrem, which could lead to additional patent litigation or challenges with respect to Xyrem. K - 0 1 m r o F In our settlement with Amneal, we granted Amneal the right to sell a limited volume of an authorized generic version of Xyrem, or AG Product, in the U.S. beginning on July 1, 2023, or earlier under certain circumstances. Such circumstances include events related to acceleration of the launch date of the AG Product of the first Xyrem ANDA filer, West-Ward Pharmaceuticals Corp., or West-Ward, the earlier launch of another party’s AG Product, the launch of another generic sodium oxybate product, or a final decision that all unexpired claims of the Xyrem patents are not infringed, or are invalid and/or unenforceable. The volume of Amneal’s AG Product is limited to an annual amount equal to a low single-digit percentage of Xyrem sales volume during the calendar year preceding the entry date of its AG Product, and Amneal’s right to sell its AG Product ends on December 31, 2025. We also granted Amneal a license under the Xyrem patents to launch its own generic sodium oxybate product under its ANDA on or after December 31, 2025, or earlier under certain circumstances. Such circumstances include events related to launch of a generic sodium oxybate product by West-Ward or another company under its ANDA, or a final decision that all unexpired claims of the Xyrem patents are not infringed, or are invalid and/or unenforceable. If an acceleration event occurs, then Amneal will have the option to elect to market its AG Product until December 31, 2025, but it will not be entitled to market its AG Product and its own generic sodium oxybate product simultaneously. We are entitled to receive a meaningful royalty on net sales of Amneal’s AG Product, as well as payment for the supply of its AG Product and reimbursement for a portion of the services costs associated with distribution of its AG Product through the Xyrem REMS. The specific terms of the settlement agreement are confidential. Other Legal Proceedings. From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition. Other Contingencies In May and October 2016 and in February 2017, we received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of charitable organizations that provide financial assistance to Medicare patients. Other companies have disclosed similar subpoenas and continuing inquiries. We have a comprehensive program intended to ensure our compliance with applicable legal and regulatory requirements for pharmaceutical companies, including guidelines established by the Office of Inspector General of the U.S. Department of Health and Human Services regarding patient assistance programs, and we have been cooperating with the government’s investigation. We have engaged in discussions with the U.S. Department of Justice, or DOJ, about a possible resolution, and in April 2018, we reached an agreement in principle with the DOJ on a proposal for a civil settlement of potential claims by the DOJ in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies. During 2018, we recorded $58.2 million related to this matter, including related interest, within accrued liabilities on our consolidated balance sheet with the related expense included in selling, general and administrative expenses on our consolidated statement of income. We expect any such settlement will JAZZ PHARMACEUTICALS | 2018 Annual Report F-31 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) involve entry into a corporate integrity agreement, which will impose significant costs and operational burdens on our business. Moreover, a failure to comply with the terms of a corporate integrity agreement could result in monetary penalties or a reduction or elimination of coverage for our products by federal health care programs such as Medicare and Medicaid and state health care programs. If we do not reach a final settlement, or if we are unable to successfully negotiate and enter into a corporate integrity agreement, the outcome of this investigation could include an enforcement action against us. If the federal government were to file an enforcement action against us as a result of the investigation and could establish the elements of a violation of relevant laws, we could be subject to damages, fines and penalties, which could be substantial, along with other criminal, civil or administrative sanctions, including exclusion from participation in federal health care programs. We would expect to incur significant costs in connection with any enforcement action, regardless of the outcome. 13. Shareholders’ Equity Share Repurchase Program In November 2015, our board of directors authorized a share repurchase program pursuant to which we were 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 September 2016, we completed repurchases under the November 2015 share repurchase program. In November 2016, our board of directors authorized a new share repurchase program pursuant to which we were authorized to repurchase a number of ordinary shares having an aggregate purchase price of up to $300.0 million, exclusive of any brokerage commissions. In November and December 2018, our board of directors increased the existing share repurchase program authorization by $320.0 million and $400.0 million, respectively, thereby increasing the total amount authorized to $1.02 billion. Under this program, which has no expiration date, we may repurchase ordinary shares from time to time on the open market. The timing and amount of repurchases will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, restrictions under the amended credit agreement, corporate and regulatory requirements and market conditions. The share repurchase program may be modified, suspended or discontinued at any time without prior notice. In 2018, we spent a total of $523.7 million to repurchase 3.5 million of our ordinary shares at an average total purchase price, including brokerage commissions, of $148.33 per share. In 2017, we spent a total of $98.8 million to repurchase 0.7 million of our ordinary shares at an average total purchase price, including brokerage commissions, of $140.34 per share. All ordinary shares repurchased were canceled. As of December 31, 2018, the remaining amount authorized under the share repurchase program was $379.1 million. Authorized But Unissued Ordinary Shares We had reserved the following shares of authorized but unissued ordinary shares (in thousands): 2011 Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amended and Restated 2007 Non-Employee Directors Stock Award Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amended and Restated Directors Deferred Compensation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,729 1,126 453 178 13 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,499 16,026 339 481 178 17 17,041 December 31, 2018 2017 Dividends In 2018 and 2017, we did not declare or pay cash dividends on our common equity. Under Irish law, dividends may only be paid, and share repurchases and redemptions must generally be funded only out of, “distributable reserves.” In addition, the terms of our credit agreement restrict our ability to make certain restricted payments, including dividends and other distributions by us in respect of our ordinary shares, subject to, among other exceptions, (1) a general exception for dividends and restricted payments up to $30 million in the aggregate and (2) an exception that allows for restricted payments, subject to a cap equal to the sum of (i) $100 million plus (ii) so long as our secured leverage ratio (as defined in our credit agreement) does not exceed 3:1 after giving pro forma effect to the restricted payment, a formula-based amount tied to our consolidated net income; provided that such cap applies only if our total leverage ratio (as defined in our credit agreement) exceeds 2:1 after giving pro forma effect to the restricted payment. F-32 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 14. Comprehensive Income (Loss) Comprehensive income (loss) includes net income and all changes in shareholders’ equity during a period, except for those changes resulting from investments by shareholders or distributions to shareholders. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss as of December 31, 2018 and December 31, 2017 were as follows (in thousands): Net Unrealized Gain From Hedging Activities Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of adoption of ASU No. 2017-12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,482 53 Balance at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before reclassifications . . . . . . . . . . . . . . . . . . . . . Amounts reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . . . . Other comprehensive income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,535 2,274 (252) 2,022 Foreign Currency Translation Adjustments $(142,360) — (142,360) (58,988) — (58,988) Total Accumulated Other Comprehensive Loss $(140,878) 53 (140,825) (56,714) (252) (56,966) K - 0 1 m r o F Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,557 $(201,348) $(197,791) In 2018, other comprehensive loss reflects foreign currency translation adjustments, primarily due to the weakening of the euro against the U.S. dollar, and the net unrealized gain on derivatives that qualify as cash flow hedges. 15. Net Income per Ordinary Share Basic net income per ordinary share attributable to Jazz Pharmaceuticals plc is based on the weighted-average number of ordinary shares outstanding. Diluted net income per ordinary share attributable to Jazz Pharmaceuticals plc 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 attributable to Jazz Pharmaceuticals plc were computed as follows (in thousands, except per share amounts): Numerator: Year Ended December 31, 2018 2017 2016 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $447,098 $487,848 $396,831 Denominator: Weighted-average ordinary shares used in per share calculations—basic . . . . . . . . . . . . . . . . . . Dilutive effect of employee equity incentive and purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average ordinary shares used in per share calculations—diluted . . . . . . . . . . . . . . . . . 59,976 1,245 61,221 60,018 1,299 61,317 60,500 1,370 61,870 Net income per ordinary share : Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 7.45 7.30 $ $ 8.13 7.96 $ $ 6.56 6.41 Potentially dilutive ordinary shares from our employee equity incentive and purchase plans, the 2021 Notes and the 2024 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 and the 2024 Notes, which we refer to together as the Exchangeable Senior JAZZ PHARMACEUTICALS | 2018 Annual Report F-33 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Notes. The potential issue of ordinary shares issuable upon exchange of the Exchangeable Senior Notes had no effect on diluted net income per ordinary share because the average price of our ordinary shares in 2018, 2017 and 2016 did not exceed the effective exchange prices per ordinary share of the Exchangeable Senior Notes. The following table represents the weighted-average ordinary shares that were excluded from the computation of diluted net income attributable to Jazz Pharmaceuticals plc per ordinary share for the years presented because including them would have an anti-dilutive effect (in thousands): Exchangeable Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options to purchase ordinary shares and RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ordinary shares under ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2018 5,504 3,101 12 2017 3,805 3,319 14 2016 2,878 3,010 93 16. 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 total long-lived assets by location (in thousands): United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,941 61,290 8,760 3,367 $ 95,570 64,343 8,220 1,947 Total long-lived assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,358 $170,080 December 31, 2018 2017 (1) Long-lived assets consist of property, plant and equipment. 17. Revenues The following table presents a summary of total revenues (in thousands): Year Ended December 31, 2018 2017 2016 Xyrem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Erwinaze/Erwinase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defitelio/defibrotide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vyxeos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prialt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other $1,404,866 174,739 149,448 100,835 20,839 18,746 $1,186,699 197,340 133,650 33,790 27,361 22,559 $1,107,616 200,678 108,952 — 29,120 30,895 Product sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties and contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869,473 21,449 1,601,399 17,294 1,477,261 10,712 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,890,922 $1,618,693 $1,487,973 F-34 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table presents a summary of total revenues attributed to geographic sources (in thousands): United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other $1,727,576 125,911 37,435 $1,463,457 125,624 29,612 $1,355,921 108,301 23,751 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,890,922 $1,618,693 $1,487,973 The following table presents a summary of the percentage of total revenues from customers that represented more than 10% of our total revenues: Year Ended December 31, 2018 2017 2016 Express Scripts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . McKesson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74% 17% 73% 16% 74% 15% Financing and payment Our payment terms vary by the type and location of our customer but payment is generally required in a term ranging from 30 to 45 Year Ended December 31, 2018 2017 2016 K - 0 1 m r o F days. Contract Liabilities—Deferred Revenue The deferred revenue balance as of December 31, 2018 primarily related to deferred upfront fees received from Nippon Shinyaku Co., Ltd., or Nippon Shinyaku, in connection with two license, development and commercialization agreements granting Nippon Shinyaku exclusive rights to develop and commercialize each of Defitelio and Vyxeos in Japan. We recognized contract revenues of $7.5 million in 2018 relating to these upfront payments. The deferred revenue balances are being recognized over an average of four years representing the period we expect to perform our research and developments obligations under each agreement. The following table presents a reconciliation of our beginning and ending balances in contract liabilities from contracts with customers for the year ended December 31, 2018 (in thousands): Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of adoption of ASU 2014-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount recognized within royalties and contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract Liabilities $24,733 (2,240) (7,498) Balance as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,995 18. Share-Based Compensation 2011 Equity Incentive Plan On January 18, 2012, the businesses of Jazz Pharmaceuticals, Inc. and Azur Pharma were combined in a merger transaction, or the Azur Merger. In connection with the Azur Merger, Jazz Pharmaceuticals, Inc.’s board of directors adopted the 2011 Equity Incentive Plan, or the 2011 Plan, in October 2011 and its stockholders approved the 2011 Plan at the special meeting of the stockholders held in December 2011 in connection with the Azur Merger. The 2011 Plan became effective immediately before the consummation of the Azur Merger and was assumed and adopted by us upon the consummation of the Azur Merger. The terms of the 2011 Plan provide for the grant of stock options, stock appreciation rights, restricted stock awards, RSUs, other stock awards, and performance awards that may be settled in cash, shares, or other property. All outstanding grants under the 2011 Plan were granted to employees and vest ratably over service periods of four years and expire no more than 10 years after the date of grant. As of December 31, 2018, a total of 24,424,669 of our JAZZ PHARMACEUTICALS | 2018 Annual Report F-35 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) ordinary shares had been authorized for issuance under the 2011 Plan. In addition, the share reserve under the 2011 Plan will automatically increase on January 1 of each year through January 1, 2022, by the least of (a) 4.5% of the total number of ordinary shares outstanding on December 31 of the preceding calendar year, (b) 5,000,000 shares, or (c) such lesser number of ordinary shares as determined by our board of directors. On January 1, 2019, the share reserve under the 2011 Plan automatically increased by 2,587,659 ordinary shares pursuant to this provision. 2007 Equity Incentive Plan The 2007 Equity Incentive Plan, or the 2007 Plan, which was initially adopted by the Jazz Pharmaceuticals, Inc. board of directors and approved by the Jazz Pharmaceuticals, Inc. stockholders in connection with its initial public offering, was continued and assumed by us upon consummation of the Azur Merger. The 2007 Plan provided for the grant of stock options, restricted stock awards, RSUs, stock appreciation rights, performance stock awards and other forms of equity compensation to employees, including officers, non-employee directors and consultants. Prior to the consummation of the Azur Merger, all of the grants under the 2007 Plan were granted to employees and vest ratably over service periods of three to five years and expire no more than 10 years after the date of grant. Effective as of the closing of the Azur Merger on January 18, 2012, the number of shares reserved for issuance under the 2007 Plan was set to 1,000,000 ordinary shares. The share reserve under the 2007 Plan will not automatically increase. Since the Azur Merger, all of the new grants under the 2007 Plan were granted to non-employee directors, vest ratably over service periods of one to three years and expire no more than 10 years after the date of grant. The 2007 Plan expired in April 2017, and accordingly, no new grants can be awarded under the 2007 Plan. As of December 31, 2018, the number of shares reserved represents issuable shares from options granted but not yet exercised under the 2007 Plan. 2007 Employee Stock Purchase Plan In 2007, Jazz Pharmaceuticals, Inc.’s employees became eligible to participate in the ESPP. The ESPP was amended and restated by Jazz Pharmaceuticals, Inc.’s board of directors in October 2011 and approved by its stockholders in December 2011. The amended and restated ESPP became effective immediately prior to the effective time of the Azur Merger and was assumed by us upon the consummation of the Azur Merger. The amended and restated ESPP allows our eligible employee participants (including employees of any of a parent or subsidiary company if our board of directors designates such company as eligible to participate) to purchase our ordinary shares at a discount of 15% through payroll deductions. The ESPP consists of a fixed offering period of 24 months with four purchase periods within each offering period. The number of shares available for issuance under our ESPP during any six-month purchase period is 175,000 shares. As of December 31, 2018, a total of 3,558,471 of our ordinary shares had been authorized for issuance under the ESPP. The share reserve under the ESPP will automatically increase on January 1 of each year through January 1, 2022, by the least of (a) 1.5% of the total number of ordinary shares outstanding on December 31 of the preceding calendar year, (b) 1,000,000 shares, and (c) such lesser number of ordinary shares as determined by our board of directors or a duly-authorized committee thereof. On January 1, 2019, the share reserve under the ESPP automatically increased by 862,553 ordinary shares pursuant to this provision. Amended and Restated 2007 Non-Employee Directors Stock Award Plan The Amended and Restated 2007 Non-Employee Directors Stock Award Plan, or the 2007 Directors Award Plan, which was initially adopted by the Jazz Pharmaceuticals, Inc. board of directors and approved by the Jazz Pharmaceuticals, Inc. stockholders in connection with its initial public offering, was continued and assumed by us upon the consummation of the Azur Merger. Until October 2011, the 2007 Directors Award Plan provided for the automatic grant of stock options to purchase shares of Jazz Pharmaceuticals, Inc.’s common stock to its non-employee directors initially at the time any individual first became a non-employee director, which vest over three years, and then annually over their period of service on its board of directors, which vest over one year. On October 24, 2011, Jazz Pharmaceuticals, Inc.’s board of directors amended the 2007 Directors Award Plan to eliminate all future initial and annual automatic grants so that future automatic grants would not be made that would be subject to the excise tax imposed by Section 4985 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, in connection with the Azur Merger. Accordingly, all future stock option grants under the 2007 Directors Award Plan will be at the discretion of our board of directors. Since the Azur Merger, all of the new grants under the 2007 Directors Award Plan were granted to non-employee directors and vest ratably over service periods of one to three years and expire no more than 10 years after the date of grant. In addition, the 2007 Directors Award Plan provides the source of shares to fund distributions made prior to August 15, 2010 under the Directors Deferred Compensation Plan described below. In August 2016, our shareholders approved our proposal to expand the types of stock awards that may be granted to our non-employee directors under the 2007 Directors F-36 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Award Plan and eliminate the final automatic share reserve increase under the 2007 Directors Award Plan that was scheduled to occur on January 1, 2017. As of December 31, 2018, a total of 903,938 of our ordinary shares had been authorized for issuance under the 2007 Directors Award Plan. Amended and Restated Directors Deferred Compensation Plan In May 2007, the Jazz Pharmaceuticals, Inc. board of directors adopted the Directors Deferred Compensation Plan, or the Directors Deferred Plan, which was amended in December 2008 and was then amended and restated in August 2010, and which was continued and assumed by us upon consummation of the Azur Merger. The Directors Deferred Plan allows each non-employee director to elect to defer receipt of all or a portion of his or her annual retainer fees to a future date or dates. Amounts deferred under the Directors Deferred Plan are credited as shares of Jazz Pharmaceuticals, Inc.’s common stock (or our ordinary shares following the Azur Merger) to a phantom stock account, the number of which are based on the amount of the retainer fees deferred divided by the market value of Jazz Pharmaceuticals, Inc.’s common stock (or our ordinary shares following the Azur Merger) on the first trading day of the first open window period following the date the retainer fees are deemed earned. On the 10th business day following the day of separation from the board of directors or the occurrence of a change in control, or as soon thereafter as practical once the non-employee director has provided the necessary information for electronic deposit of the deferred shares, each non-employee director will receive (or commence receiving, depending upon whether the director has elected to receive distributions from his or her phantom stock account in a lump sum or in installments over time) a distribution of his or her phantom stock account, in our ordinary shares (i) reserved under the 2007 Directors Option Plan prior to August 15, 2010 and (ii) from a new reserve of 200,000 shares set up under the Directors Deferred Plan on August 15, 2010. Although we continue to maintain the Directors Deferred Plan, since the consummation of the Azur Merger we have not permitted and will not permit non-employee directors to defer any annual retainer fees under the Directors Deferred Plan. We recorded no expense in 2018, 2017 and 2016 related to retainer fees earned and deferred. As of December 31, 2018, 14,499 of our ordinary shares that were unissued related to retainer fees that were deferred under the Directors Deferred Plan. K - 0 1 m r o F Share-Based Compensation The table below shows, for all share option grants, 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 in each of the past three years: Grant date fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Range of risk-free rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2018 2017 2016 $ 47.17 $ 42.72 $ 40.45 35% 4.5 35% 4.3 2.2-3.0% 1.6-2.1% 0.8-1.6% — % 39% 4.2 — % — % We rely on a blend of the historical and implied volatilities of our own ordinary shares to determine expected volatility for share option grants. In addition, we use a single volatility estimate for each share option grant. The weighted-average volatility is determined by calculating the weighted average of volatilities for all share options granted in a given year. The expected term of share option grants represents the weighted-average period the awards are expected to remain outstanding and our estimates were based on historical exercise data. The risk-free interest rate assumption was based on zero coupon U.S. Treasury instruments whose term was consistent with the expected term of our share option grants. The expected dividend yield assumption was based on our history and expectation of dividend payouts. JAZZ PHARMACEUTICALS | 2018 Annual Report F-37 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Share-based compensation expense related to share options, RSUs and grants under our ESPP was as follows (in thousands): Year Ended December 31, 2018 2017 2016 Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,770 19,037 6,634 $ 83,218 17,870 5,812 $ 79,037 15,296 4,438 Total share-based compensation expense, pre-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit from share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,441 (17,230) 106,900 (21,792) 98,771 (30,022) Total share-based compensation expense, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,211 $ 85,108 $ 68,749 We recognized income tax benefits related to share option exercises of $7.7 million, $8.9 million and $8.3 million in 2018, 2017 and 2016, respectively. Share Options The following table summarizes information as of December 31, 2018 and activity during 2018 related to our share option plans: Shares Subject to Outstanding Options (In thousands) Outstanding at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested and expected to vest at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . Exercisable at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,145 1,449 (772) (424) (118) 5,280 5,027 3,070 Weighted- Average Exercise Price $121.06 145.03 107.45 139.36 169.18 127.08 126.32 117.08 Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) 6.8 6.7 5.5 $78,389 78,332 77,725 Aggregate intrinsic value shown in the table above is equal to the difference between the exercise price of the underlying share options and the fair value of our ordinary shares for share options that were in the money. The aggregate intrinsic value changes based on the fair market value of our ordinary shares. The aggregate intrinsic value of share options exercised was $43.4 million, $38.9 million and $36.1 million during 2018, 2017 and 2016, respectively. We issued new ordinary shares upon exercise of share options. As of December 31, 2018, total compensation cost not yet recognized related to unvested share options was $76.1 million, which is expected to be recognized over a weighted-average period of 2.6 years. As of December 31, 2018, total compensation cost not yet recognized related to grants under the ESPP was $6.0 million, which is expected to be recognized over a weighted-average period of 1.2 years. Restricted Stock Units In 2018, we granted RSUs covering an equal number of our ordinary shares to employees with a weighted-average grant date fair value of $146.36. The fair value of RSUs is determined on the date of grant based on the market price of our ordinary shares as of that date. The fair value of the RSUs is recognized as an expense ratably over the vesting period of four years. In 2018, 374,000 RSUs were released with 253,000 ordinary shares issued and 121,000 ordinary shares withheld for tax purposes. The total fair value of shares vested was $55.8 million, $53.2 million and $59.2 million during 2018, 2017 and 2016, respectively. F-38 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As of December 31, 2018, total compensation cost not yet recognized related to unvested RSUs was $94.8 million, which is expected to be recognized over a weighted-average period of 2.5 years. The following table summarizes information as of December 31, 2018 and activity during 2018 related to our RSUs: Outstanding at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19. Employee Benefit Plans Weighted- Average Grant- Date Fair Value $140.46 146.36 145.31 140.10 142.13 Number of RSUs (in thousands) 1,063 606 (374) (193) 1,102 Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) 1.4 $136,614 K - 0 1 m r o F We operate a number of defined contribution retirement plans. The costs of these plans are charged to the consolidated statements of income in the period they are incurred. We recorded expense related to our defined contribution plans of $6.4 million, $5.5 million and $3.4 million in 2018, 2017 and 2016, respectively. In Ireland, we operate a defined contribution plan in which we contribute up to 8% of an employee’s eligible earnings. We recorded expense of $1.2 million, $1.0 million and $0.8 million in 2018, 2017 and 2016, respectively, in connection with the contributions we made under the Irish defined contribution plan. In the U.S., we provide a qualified 401(k) savings plan for our U.S.-based employees. All U.S.-based employees are eligible to participate, provided they meet the requirements of the plan. In 2013, we elected to match certain employee contributions under the 401(k) savings plan. We recorded expense of $4.2 million, $3.7 million and $1.9 million in 2018, 2017 and 2016, respectively. In the United Kingdom, or UK, we operate a defined contribution plan in which we contribute up to 12% of an employee’s eligible earnings. We recorded expense of $0.8 million, $0.7 million and $0.6 million in 2018, 2017 and 2016, respectively, in connection with contributions we made under the UK defined contribution plan. In France, we accrue for a potential liability which is payable if an employee retires. The accrued liability for France was $0.4 million as of December 31, 2018 and $0.3 million as of December 31, 2017. In Italy, we accrue for a potential liability which is payable if an employee leaves employment. The accrued liability for Italy was $0.3 million as of December 31, 2018 and 2017. 20. Restructuring In 2016, we recorded severance costs of $1.5 million for terminated employees in connection with the reorganization of our operations, primarily in France, Italy and the United Kingdom. These one-time termination benefits were recorded over the remaining service period where employees were required to stay through their termination date to receive the benefits and included within cost of product sales and selling, general and administrative expenses in our consolidated statements of income. As of December 31, 2017, we had incurred total termination benefit costs of $3.0 million in connection with these reorganizations. We completed these restructuring activities in 2017. There were no restructuring activities in 2018. The following table summarizes the amounts related to total restructuring through December 31, 2017 (in thousands): Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Termination Benefits $ 1,105 1,516 (2,590) 31 14 (45) Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — JAZZ PHARMACEUTICALS | 2018 Annual Report F-39 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 21. Income Taxes The components of income before the income tax provision (benefit) and equity in loss of investees were as follows (in thousands): Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,666 294,621 64,176 $ 77,476 271,440 92,201 $179,570 312,904 39,972 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $529,463 $441,117 $532,446 Year Ended December 31, 2018 2017 2016 The following table sets forth the details of the income tax provision (benefit) (in thousands): Year Ended December 31, 2018 2017 2016 Current Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,431 95,143 40,403 $ 28,045 135,608 14,198 $ 26,420 140,061 9,918 Total current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,977 177,851 176,399 Deferred, exclusive of other components below Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,408) (41,337) (34,545) (19,709) (27,559) (19,108) (7,776) (9,120) (13,720) Total deferred, exclusive of other components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,290) (66,376) (30,616) Deferred, change in tax rates United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred, change in tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (538) 13 (525) (155,679) (3,536) 109 (10,656) (159,215) (10,547) Total deferred tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,815) (225,591) (41,163) Total income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,162 $ (47,740) $135,236 On December 22, 2017, the U.S. Tax Cuts and Jobs Act, or U.S. Tax Act, was signed into law. The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a modified territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and changing the rules which determine whether a U.S. person is a U.S. shareholder of a controlled foreign corporation, or CFC, for 2017 and onwards. The U.S. Tax Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. federal income tax rate from 35% to 21% under the U.S. Tax Act, we remeasured our ending net deferred tax liabilities as of December 31, 2017 and recognized a $155.1 million income tax benefit in our consolidated statement of income in 2017. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail as of December 31, 2017 to complete the accounting for certain income tax effects of the U.S. Tax Act. As of December 31, 2017 the Company had recorded provisional amounts in accordance with SAB 118 in relation to certain matters before finalizing its analysis during 2018. F-40 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The U.S. Tax Act provided for a one-time transition tax on the mandatory deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017 and also changed the rules which determine whether a U.S. person is a U.S. shareholder of a CFC for 2017 and onwards. In relation to these changes, we recognized a provisional $6.3 million of income tax provision in our consolidated statement of income in 2017, which was composed of state current tax expense and deferred tax expense. We have now finalized our analysis and recorded an adjusting deferred tax benefit of $7.5 million in our consolidated statement of income during the twelve months ended December 31, 2018 in accordance with SAB 118. This adjustment consisted of a benefit of $10.3 million, primarily due to additional analysis of our ability to utilize foreign tax credits generated by the one-time transition tax following the changes to the rules which determine whether a U.S. person is a U.S. shareholder of a CFC, net of an income tax provision of $2.9 million primarily due to additional analysis on the one-time transition tax on deemed repatriated earnings of foreign subsidiaries. We had also recognized the provisional tax impact related to changes to the rules regarding the deductibility of certain executive compensation (including the recognition of a related provisional deferred tax asset of $7.5 million) in our consolidated statement of income in 2017. Following further analysis, we determined that this provisional deferred tax asset related to certain executive compensation is recognizable as of December 31, 2018. While the U.S. Tax Act provides for a territorial tax system, beginning in 2018, it also included two new U.S. tax base erosion provisions, the global intangible low-taxed income, or GILTI, provisions and the base-erosion and anti-abuse tax, or BEAT, provisions. The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The GILTI tax expense recognized in our consolidated statement of income in 2018 was not significant. The Company elects to account for tax expenses associated with the GILTI provisions in the period they are incurred. K - 0 1 m r o F The BEAT provisions in the U.S. Tax Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. We have completed our analysis of the BEAT provisions and determined that the Company is not subject to BEAT in 2018. Our income tax provision (benefit) of $80.2 million, $(47.7) million and $135.2 million in 2018, 2017 and 2016, respectively, related to tax arising on income in Ireland, the U.S. and certain other foreign jurisdictions, certain unrecognized tax benefits and various expenses not deductible for income tax purposes. The income tax benefit in 2017 included a provisional benefit of $148.8 million relating to the impact of the enactment of the U.S Tax Act. The effective tax rates for 2018, 2017 and 2016 were 15.1%, (10.8)% and 25.4%, respectively. The income tax benefit recognized in 2017 in respect of the impact of the enactment of the U.S. Tax Act resulted in a net decrease to our effective tax rate of 33.7%. The effective tax rates for 2018 and 2016 were higher than the Irish statutory rate of 12.5%, primarily due to income taxable at a rate higher than the Irish statutory rate and unrecognized tax benefits, partially offset by the release of reserves related to unrecognized tax benefits from the expiration of a statute of limitation, originating tax credits and the release of a valuation allowance held against certain foreign net operating losses, or NOLs. The effective tax rate for 2017 was lower than the Irish statutory rate of 12.5%, primarily due to the impact of the enactment of the U.S. Tax Act. The increase in the effective tax rate in 2018 compared to 2017 was primarily due to the impact of the enactment of the U.S. Tax Act in 2017. Excluding this effect, the effective tax rate in 2018 would have decreased compared to 2017, primarily due to a decrease in the U.S. corporate income tax rate. The decrease in the effective tax rate in 2017 compared to 2016 was primarily due to the impact of the enactment of the U.S. Tax Act in 2017. Excluding this effect, the decrease in our effective tax rate in 2017 compared to 2016 was primarily due to the release of a valuation allowance held against certain foreign NOLs and the release of reserves related to unrecognized tax benefits upon the expiration of a statute of limitation, partially offset by a reduction in deductions available in relation to subsidiary equity. JAZZ PHARMACEUTICALS | 2018 Annual Report F-41 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The reconciliation between the statutory income tax rate applied to income before the income tax provision (benefit) and equity in loss of investees and our effective income tax rate was as follows: Statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign income tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and other tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of U.S. Tax Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-deductible compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-deductible loss contingency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2018 2017 2016 12.5% 12.5% 12.5% 16.7% 20.3% 11.9% (2.4)% (0.7)% (5.3)% (2.9)% (5.6)% (4.3)% (2.8)% (2.6)% (3.9)% (0.1)% (2.8)% 3.2% (1.4)% (33.7)% — % 1.8% 2.6% 1.2% 2.8% 1.1% 3.3% (2.1)% — % (1.1)% — % — % 0.8% (1.5)% (1.5)% (0.4)% (1.8)% (0.4)% (0.1)% 2.1% — % — % 0.5% 0.4% 0.9% Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1% (10.8)% 25.4% Significant components of our net deferred tax assets/(liabilities) were as follows (in thousands): December 31, 2018 2017 Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect effects of unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,128 156,242 23,469 24,592 57,575 34,349 25,585 51,175 $ 125,966 130,782 23,536 23,128 45,088 29,733 — 63,235 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,115 (61,237) 441,468 (52,144) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: 417,878 389,324 Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (595,746) (73,350) (655,347) (82,890) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (669,096) (738,237) Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(251,218) $(348,913) The net change in valuation allowance was an increase of $9.1 million and $19.2 million in 2018 and 2016, respectively, and a decrease of $1.0 million in 2017. F-42 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table presents the breakdown between deferred tax assets and liabilities (in thousands): Year Ended December 31, 2018 2017 Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,879 (309,097) $ 34,559 (383,472) Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(251,218) $(348,913) As of December 31, 2018, we had NOL carryforwards and tax credit carryforwards for U.S. federal income tax purposes of approximately $324.8 million and $137.3 million, respectively, available to reduce future income subject to income taxes. These NOL carryforwards are inclusive of $53.6 million from the EUSA Acquisition in 2012 and $211.5 million from the Celator Acquisition in 2016. The U.S. federal NOL carryforwards will expire, if not utilized, in the tax years 2019 to 2035, and the U.S. federal tax credits will expire, if not utilized, in the tax years 2019 to 2038. In addition, we had approximately $83.5 million of NOL carryforwards and $12.7 million of tax credit carryforwards as of December 31, 2018 available to reduce future taxable income for U.S. state income tax purposes. The U.S. state NOL carryforwards will expire, if not utilized, in the tax years 2019 to 2034. In addition, as of December 31, 2018, there were NOL carryforwards for income tax purposes of approximately $80.2 million and $51.9 million available to reduce future income subject to income taxes in Luxembourg and the United Kingdom, respectively. The NOLs generated in Luxembourg and the United Kingdom have no expiration date. We also had excess foreign tax credits, as of December 31, 2018, of $8.7 million, which may only be utilized against certain sources of income. The excess foreign tax credits have no expiration date. K - 0 1 m r o F Utilization of certain of our NOL and tax credit carryforwards in the U.S. is subject to an annual limitation due to the ownership change limitations provided by Sections 382 and 383 of the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of certain NOLs and tax credits before future utilization. We currently estimate that we have an annual limitation on the utilization of certain acquired federal NOLs and credits of $445.6 million, before tax effect, for 2019, $27.8 million, before tax effect, for 2020 and a combined total of $283.2 million, before tax effect, for 2021 to 2032. In addition, as a result of the Azur Merger, until 2022 we are subject to certain limitations under the Internal Revenue Code in relation to the utilization of U.S. NOLs to offset U.S. taxable income resulting from certain transactions. Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. Our valuation allowance was $61.2 million and $52.1 million as of December 31, 2018 and 2017, respectively, for certain Irish, U.S. (federal and state) and foreign deferred tax assets which we maintain until sufficient positive evidence exists to support reversal. During 2018, as part of the overall change in valuation allowance, we recognized a net income tax provision of $11.2 million relating primarily to the creation of a valuation allowance of $25.7 million against certain deferred tax assets primarily associated with temporary differences related to foreign subsidiaries, partially offset by the net release of valuation allowances against certain deferred tax assets primarily associated with NOLs and foreign tax credits. The $11.2 million net income tax provision includes a benefit of $10.9 million relating to a change in judgment leading to the reversal of a valuation allowance against certain deferred tax assets, primarily related to NOLs in the United Kingdom and a benefit of $5.9 million relating to the reversal of a valuation allowance upon completing our analysis of our ability to utilize certain foreign tax credits generated by the one-time transition tax in the U.S. Management determined that valuation allowances were no longer needed on these deferred tax assets based on an assessment of the relative impact of all positive and negative evidence that existed at December 31, 2018, including an evaluation of cumulative income in recent years, future sources of taxable income exclusive of reversing temporary differences, and significant risks and uncertainties related to our business. During 2017, as part of the overall change in valuation allowance, we recognized a net income tax benefit of $6.6 million relating to the net release of a valuation allowance against certain deferred tax assets primarily associated with NOLs, partially offset by the creation of a provisional valuation allowance of $5.9 million against certain deferred tax assets primarily associated with excess foreign tax credits generated during the year as a result of the U.S. Tax Act. The $6.6 million net income tax benefit includes a benefit of $9.1 million relating to the utilization of NOL carryforwards against which a valuation allowance was carried. During 2016, as part of the overall change in valuation allowance, we recognized a net income tax provision of $17.9 million relating to the creation of a valuation allowance against certain deferred tax assets primarily associated with NOLs recognized during the year, partially offset by a release of a valuation allowance due to the impact of the reduction of tax rates in certain jurisdictions and utilization of certain deferred tax assets primarily associated with NOLs. We periodically evaluate the likelihood of the realization of deferred tax assets and will adjust such amounts in light of changing facts and circumstances including, but JAZZ PHARMACEUTICALS | 2018 Annual Report F-43 JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of tax audits and the regulatory approval of products currently under development. Realization of substantially all the deferred tax assets is dependent on future book income. Temporary differences related to foreign subsidiaries that are considered indefinitely reinvested totaled approximately $1.2 billion and $1.7 billion as of December 31, 2018 and 2017, respectively. In the event of the distribution of those earnings in the form of dividends, a sale of the subsidiaries, or certain other transactions, we may be liable for income taxes, subject to an adjustment, if any, for foreign tax credits and foreign withholding taxes payable to certain foreign tax authorities. As of December 31, 2018, it was not practicable to determine the amount of the unrecognized deferred tax liability related to these earnings. We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. As a result, we have recorded an unrecognized tax benefit for certain tax benefits which we judge may not be sustained upon examination. A reconciliation of our gross unrecognized tax benefits follows (in thousands): December 31, 2018 2017 2016 Balance at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increases related to current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapse of the applicable statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,162 22,649 7,584 — (18,182) $ 90,910 27,875 1,620 (1,075) (13,168) $66,385 26,873 1,191 (255) (3,284) Balance at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $118,213 $106,162 $90,910 The unrecognized tax benefits were included in other non-current liabilities and deferred tax assets, net, in our consolidated balance sheets. Interest related to our unrecognized tax benefits is recorded in the income tax provision in our consolidated statements of income. As of December 31, 2018 and 2017, our accrued interest and penalties related to unrecognized tax benefits was $6.3 million and $3.6 million, respectively. Included in the balance of unrecognized tax benefits were potential benefits of $78.5 million and $73.5 million at December 31, 2018 and 2017, respectively, that, if recognized, would affect the effective tax rate on income. We file income tax returns in multiple tax jurisdictions, the most significant of which are Ireland and the U.S. (both at the federal level and in various state jurisdictions). For Ireland we are no longer subject to income tax audits by taxing authorities for the years prior to 2013. The U.S. jurisdictions generally have statute of limitations three to four years from the later of the return due date or the date when the return was filed. However, in the U.S. (at the federal level and in most states), carryforward tax attributes that were generated in 2014 and earlier may still be adjusted upon examination by the tax authorities. Certain of our subsidiaries are currently under examination by the French tax authorities for the years ended December 31, 2012, 2013, 2015, 2016 and 2017. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In December 2015, we received proposed tax assessment notices, and, in October 2018, we received revised tax assessment notices from the French tax authorities for 2012 and 2013 and in December 2018, we received a proposed tax assessment notice for 2015, relating to certain transfer pricing adjustments. The notices propose additional French tax of approximately $43 million for 2012 and 2013 and approximately $4 million for 2015, including interest and penalties through the respective dates of the proposed assessments, translated at the foreign exchange rate at December 31, 2018. We disagree with the proposed assessments and are contesting them vigorously. 22. Subsequent Event Collaboration and License Agreement On January 2, 2019, we entered into a strategic collaboration agreement with Codiak BioSciences, Inc., or Codiak, focused on the research, development and commercialization of exosome therapeutics to treat cancer. Codiak granted us an exclusive, worldwide, royalty- bearing license to develop, manufacture and commercialize therapeutic candidates directed at five targets to be developed using Codiak’s engEx™ precision engineering platform for exosome therapeutics. F-44 JAZZ PHARMACEUTICALS | 2018 Annual Report JAZZ PHARMACEUTICALS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Under the terms of the agreement, Codiak is responsible for the execution of preclinical and early clinical development of therapeutic candidates directed at all five targets through Phase 1/2 proof of concept studies. Following the conclusion of the applicable Phase 1/2 study, we will be responsible for future development, potential regulatory submissions and commercialization for each product. Codiak has the option to participate in co-commercialization and cost/profit-sharing in the U.S. and Canada on up to two products. As part of the agreement, we paid Codiak an upfront payment of $56.0 million in January 2019, which will be recorded as acquired IPR&D expense in our consolidated statements of income in 2019. Codiak is eligible to receive up to $20 million in preclinical development milestone payments across all five programs. Codiak is also eligible to receive milestone payments totaling up to $200 million per target based on investigational new drug application acceptance, clinical and regulatory milestones, including approvals in the U.S., the EU and Japan, and certain sales milestones. Codiak is also eligible to receive tiered royalties on net sales of each approved product. 23. Quarterly Financial Data (Unaudited) The following interim financial information presents our 2018 and 2017 results of operations on a quarterly basis (in thousands, except per share amounts): Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per ordinary share, basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per ordinary share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $444,613 406,928 45,991 0.77 0.75 $500,479 461,381 92,321 1.53 1.50 $469,373 438,623 149,316 2.47 2.41 $476,457 440,997 159,470 2.69 2.64 March 31 June 30 September 30 December 31 2018 K - 0 1 m r o F March 31 June 30 September 30 December 31 2017 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per ordinary share, basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per ordinary share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $376,053 348,613 86,511 1.44 1.41 $394,386 360,983 105,604 1.76 1.72 $411,855 376,768 63,526 1.06 1.03 $436,399 404,847 232,207 3.87 3.79 (1) Gross margin is computed by subtracting cost of product sales (excluding amortization of intangible assets) from product sales, net. The interim financial information above includes the following items: • • • • • Estimated loss contingency of $57.0 million in the first quarter of 2018; Impairment charges and disposal costs of $44.0 million in the second quarter of 2018; Upfront and milestone payments of $11.0 million in the first quarter of 2018 and $75.0 million and $26.5 million in the third and fourth quarters of 2017, respectively; Expenses related to certain legal proceedings and restructuring of $6.0 million in the first quarter of 2017; and A net expense of $2.9 million and a net benefit of $10.3 million in the third and fourth quarters of 2018, respectively, and a net benefit of $148.8 million in the fourth quarter of 2017 in respect of the impact of the U.S. Tax Act. JAZZ PHARMACEUTICALS | 2018 Annual Report F-45 Schedule II Valuation and Qualifying Accounts (In thousands) Balance at beginning of period Additions charged to costs and expenses Other Additions Deductions Balance at end of period For the year ended December 31, 2018 Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for sales discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for chargebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset valuation allowance . . . . . . . . . . . . . . . . . . . . . . (1) (1) (1) (2)(3) $ 396 103 3,663 52,144 For the year ended December 31, 2017 Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for sales discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for chargebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset valuation allowance . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2016 Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for sales discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for chargebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset valuation allowance . . . . . . . . . . . . . . . . . . . . . . (1) (1) (1) (2)(3)(4) $ 287 118 4,749 53,184 (1) (1) (1) (2)(3)(4) $ 489 181 3,023 33,949 $ 20 811 41,387 35,500 $ 231 1,087 41,941 7,509 $ 168 1,334 41,991 19,328 $ — — — — $ — — — 5,581 $ — — — 5,544 $ (366) (838) (44,642) (26,407) $ 50 76 408 61,237 $ (122) (1,102) (43,027) (14,130) $ 396 103 3,663 52,144 $ (370) (1,397) (40,265) (5,637) $ 287 118 4,749 53,184 (1) Shown as a reduction of accounts receivable. Charges related to sales discounts and chargebacks are reflected as a reduction of revenue. (2) Additions to the deferred tax asset valuation allowance relate to movements on certain Irish, U.S. (federal and state) and other foreign deferred tax assets where we continue to maintain a valuation allowance until sufficient positive evidence exists to support reversal. (3) Deductions to the deferred tax asset valuation allowance include movements relating to utilization of NOLs and tax credit carryforwards, release in valuation allowance and other movements including adjustments following finalization of tax returns. (4) Other additions to the deferred tax asset valuation allowance relate to currency translation adjustments recorded directly in other comprehensive income and a valuation allowance recognized in 2016 on purchase accounting. F-46 JAZZ PHARMACEUTICALS | 2018 Annual Report Non-GAAP Financial Measures To supplement Jazz Pharmaceuticals’ financial results presented in accordance with U.S. generally accepted accounting principles (GAAP), the company uses certain non-GAAP (also referred to as adjusted or non-GAAP adjusted) financial measures. In particular, the company presents non-GAAP adjusted research and development (R&D) expense and non-GAAP adjusted selling, general and administrative (SG&A) and R&D expense which exclude from reported GAAP R&D expense and GAAP SG&A and R&D expense certain items, as detailed in the reconciliation tables below. The company believes that each of these non-GAAP financial measures provides useful supplementary information to, and facilitates additional analysis by, investors and analysts. In particular, the company believes that each of these non-GAAP financial measures, when considered together with the company’s financial information prepared in accordance with GAAP, can enhance investors’ and analysts’ ability to meaningfully compare the company’s results from period to period and to its forward-looking guidance, and to identify operating trends in the company’s business. In addition, these non-GAAP financial measures are regularly used by investors and analysts to model and track the company’s financial performance. Jazz Pharmaceuticals’ management also regularly uses these non-GAAP financial measures internally to understand, manage and evaluate the company’s business and to make operating decisions. Because these non- GAAP financial measures are important internal measurements for Jazz Pharmaceuticals’ management, the company also believes that these non-GAAP financial measures are useful to investors and analysts since these measures allow for greater transparency with respect to key financial metrics the company uses in assessing its own operating performance and making operating decisions. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures; should be read in conjunction with the company’s consolidated financial statements prepared in accordance with GAAP; have no standardized meaning prescribed by GAAP; and are not prepared under any comprehensive set of accounting rules or principles. In addition, from time to time in the future there may be other items that the company may exclude for purposes of its non-GAAP financial measures; and the company has ceased, and may in the future cease, to exclude items that it has historically excluded for purposes of its non-GAAP financial measures. Likewise, the company may determine to modify the nature of its adjustments to arrive at its non-GAAP financial measures. Because of the non-standardized definitions of non-GAAP financial measures, the non-GAAP financial measures as used by Jazz Pharmaceuticals in this presentation and the accompanying tables have limits in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. Reconciliations of GAAP R&D expense to non-GAAP adjusted R&D expense for the 2017 and 2018 periods and GAAP SG&A and R&D expense to non-GAAP adjusted SG&A and R&D expense for the 2015 to 2018 periods are as follows: In millions (unaudited) GAAP R&D expense1 Share-based compensation expense Upfront and milestone payments Non-GAAP adjusted R&D expense In millions (unaudited) GAAP SG&A and R&D expense1 Share-based compensation expense Loss contingency Upfront and milestone payments Transaction and integration related costs Expenses related to certain legal proceedings and restructuring Disposal costs 2017 2018 $ 198.4 $ 226.6 (17.9) (18.5) (19.0) (11.0) $ 162.1 $ 196.6 2015 $ 584.4 (88.0) -- (25.0) (18.2) (1.1) -- 2016 $ 665.2 (94.3) -- -- (13.6) (6.0) -- 2017 $ 742.6 (101.1) -- (18.5) -- (6.0) -- 2018 $ 910.1 (95.8) (57.0) (11.0) -- -- (1.1) $ 745.3 Non-GAAP adjusted SG&A and R&D expense $ 452.1 $ 551.3 $ 617.0 Note: Amounts may not total due to rounding. 1 2015, 2016, 2017 and 2018 audited. EXECUTIVE COMMITTEE Bruce C. Cozadd Chairman and Chief Executive Officer Robert Iannone, M.D., M.S.C.E. Executive Vice President, Research and Development Heidi Manna Senior Vice President and Chief Human Resources Officer Iain McGill Senior Vice President, Europe and Rest of World Michael P. Miller Executive Vice President, U.S. Commercial Daniel N. Swisher, Jr. President and Chief Operating Officer Paul Treacy Senior Vice President, Technical Operations Matthew P. Young Executive Vice President and Chief Financial Officer COMPANY SECRETARY Aislinn Doody ORDINARY SHARES Jazz Pharmaceuticals plc ordinary shares are traded on the Nasdaq Global Select Market under the symbol “JAZZ” JAZZ PHARMACEUTICALS PLC CORPORATE HEADQUARTERS Fifth Floor, Waterloo Exchange Waterloo Road, Dublin 4, Ireland +353 1 634 7800 +353 1 634 7850 fax www.jazzpharmaceuticals.com ANNUAL GENERAL MEETING The annual general meeting of shareholders will be held at 10:30 a.m. local time on August 1, 2019 at the company’s corporate headquarters located at Fifth Floor, Waterloo Exchange, Waterloo Road, Dublin 4, Ireland INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG, Dublin, Ireland BOARD OF DIRECTORS Paul L. Berns Venture Partner, ARCH and Executive Chair, BlackThorn Therapeutics Bruce C. Cozadd Chairman and Chief Executive Officer, Jazz Pharmaceuticals plc Patrick G. Enright Managing Director, Longitude Capital Peter Gray Chairman, UDG Healthcare plc Heather Ann McSharry Director, CRH plc and Greencore plc Seamus Mulligan Director, Emergent BioSolutions Inc. Kenneth W. O’Keefe Managing Director, Beecken Petty O’Keefe & Company Anne O’Riordan Group Director of Digital, Jardine Matheson Limited Norbert G. Riedel President and Chief Executive Officer, Aptinyx, Inc. Elmar Schnee Chairman, Calliditas Therapeutics AB and Santhera Pharmaceuticals Holding AG Catherine A. Sohn Chairperson, BioEclipse Therapeutics, Inc., and Director, Rubius Therapeutics and Landec Corporation Rick E Winningham Lead Independent Director, Jazz Pharmaceuticals plc Chairman and Chief Executive Officer, Theravance Biopharma, Inc. REGISTRAR AND TRANSFER AGENT Computershare www.computershare.com Ireland +353 1 447 5566 +353 1 447 5571 fax 3100 Lake Drive Citywest Business Campus Dublin 24, Ireland D24 AK82 United States +1 781 575 2879 (outside U.S.) +1 877 373 6374 (inside U.S.) P.O. Box 505000 Louisville, KY 40233-5000 U.S.A. FOR MORE INFORMATION Information about Jazz Pharmaceuticals plc can be found on the Internet at www.jazzpharmaceuticals.com. Inquiries regarding Jazz Pharmaceuticals plc and its activities may be directed to the Investor Relations Department at investorinfo@jazzpharmaceuticals.com or +353 1 634 7892 (Ireland) or + 650 496 2800 (U.S.). Communications concerning shares and transfer requirements, lost certificates or changes of address should be directed to the Transfer Agent. “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This communication contains forward-looking statements, including, but not limited to, statements related to Jazz Pharmaceuticals’ future performance and sustainable long-term growth; the company’s expectations regarding multiple planned clinical and regulatory milestones, including our planned NDA submission for JZP-258 and product launches, including the anticipated launch of Sunosi in the U.S. and potential launch in the EU; the company’s expectation that its investments in R&D efforts will support future products or expanded indications for existing products and potentially provide new therapeutic options to patients and a meaningful return to shareholders; and other statements that are not historical facts. These forward-looking statements are based on the company’s current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward- looking statements as a result of these risks and uncertainties, which include, without limitation, risks and uncertainties associated with: maintaining or increasing sales of and revenue from Xyrem, effectively commercializing the company’s other products and product candidates, including the risk of a potential delay in the commercial launch of Sunosi in the U.S.; the time-consuming and uncertain regulatory approval process, including the risk that the company’s regulatory submissions, including the solriamfetol marketing authorization application in the EU, may not be approved by applicable regulatory authorities in a timely manner or at all; costly and time- consuming pharmaceutical product development and the uncertainty of clinical success, including risks related to failure or delays in initiating or completing clinical trials; protecting and enhancing the company’s intellectual property rights; delays or problems in the supply or manufacture of the company’s products and product candidates; complying with applicable U.S. and non-U.S. regulatory requirements; government investigations and other actions; obtaining and maintaining adequate coverage and reimbursement for the company’s products; identifying and acquiring, in-licensing or developing additional products or product candidates, financing these transactions and successfully integrating acquired businesses; the ability to achieve expected future financial performance and results and the uncertainty of future tax and other provisions and estimates; and other risks and uncertainties affecting the company, including those described from time to time under the caption “Risk Factors” and elsewhere in Jazz Pharmaceuticals plc’s U.S. Securities and Exchange Commission filings and reports (Commission File No. 001-33500), including the company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 and future filings and reports by the company. Other risks and uncertainties of which the company is not currently aware may also affect the company’s forward-looking statements and may cause actual results and timing of events to differ materially from those anticipated. The forward-looking statements herein are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by the company on its website or otherwise. The company undertakes no obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in its expectations or other circumstances that exist after the date as of which the forward-looking statements were made. J a z z P h a r m a c e u t i c a l s p l c P r o x y S t a t e m e n t — 2 0 1 8 A n n u a l R e p o r t Fifth Floor, Waterloo Exchange Waterloo Road, Dublin 4, Ireland +353 1 634 7800 www.jazzpharmaceuticals.com