Horizon Therapeutics 10Q 2020 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	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 001-35238

HORIZON THERAPEUTICS PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

Ireland		Not Applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Connaught House, 1st Floor 1 Burlington Road, Dublin 4, D04 C5Y6, Ireland		Not Applicable
(Address of principal executive offices)		(Zip Code)

011 353 1 772 2100

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share	HZNP	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant’s ordinary shares, nominal value $0.0001, outstanding as of October 28, 2020: 220,710,086.

HORIZON THERAPEUTICS PLC

INDEX

		Page
		No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2020 and as of December 31, 2019 (Unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	2
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	55
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	103
Item 6.	Exhibits	104
	Signatures	106

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share data)

	As of			As of
	September 30,			December 31,
	2020			2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,725,403		$	1,076,287
Restricted cash		3,573			3,752
Accounts receivable, net		705,898			408,685
Inventories, net		77,104			53,802
Prepaid expenses and other current assets		220,341			143,577
Total current assets		2,732,319			1,686,103
Property and equipment, net		156,287			30,159
Developed technology and other intangible assets, net		1,847,880			1,702,628
Goodwill		413,669			413,669
Deferred tax assets, net		566,605			555,165
Other assets		50,115			48,310
Total assets	$	5,766,875		$	4,436,034
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	38,978		$	21,514
Accrued expenses		421,827			235,234
Accrued trade discounts and rebates		322,798			466,421
Total current liabilities		783,603			723,169
LONG-TERM LIABILITIES:
Exchangeable Senior Notes, net		—			351,533
Long-term debt, net		1,002,846			1,001,308
Deferred tax liabilities, net		97,647			94,247
Other long-term liabilities		85,968			80,328
Total long-term liabilities		1,186,461			1,527,416
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Ordinary shares, $0.0001 nominal value; 600,000,000 shares authorized at September 30, 2020 and December 31, 2019; 220,995,108 and 188,402,040 shares issued at September 30, 2020 and December 31, 2019, respectively, and 220,610,742 and 188,017,674 shares outstanding at September 30, 2020 and December 31, 2019, respectively		22			19
Treasury stock, 384,366 ordinary shares at September 30, 2020 and December 31, 2019		(4,585	)		(4,585	)
Additional paid-in capital		4,208,845			2,797,602
Accumulated other comprehensive loss		(1,028	)		(1,905	)
Accumulated deficit		(406,443	)		(605,682	)
Total shareholders’ equity		3,796,811			2,185,449
Total liabilities and shareholders' equity	$	5,766,875		$	4,436,034

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

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands, except share and per share data)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
Net sales	$	636,427		$	335,466		$	1,455,115		$	936,484
Cost of goods sold		151,475			89,949			370,406			267,254
Gross profit		484,952			245,517			1,084,709			669,230
OPERATING EXPENSES:
Research and development		30,206			24,572			138,483			74,611
Selling, general and administrative		226,164			172,326			696,271			511,720
Loss on sale of assets		—			—			—			10,963
Total operating expenses		256,370			196,898			834,754			597,294
Operating income		228,582			48,619			249,955			71,936
OTHER EXPENSE, NET:
Loss on debt extinguishment		(14,602	)		(41,371	)		(31,856	)		(58,835	)
Interest expense, net		(12,185	)		(20,428	)		(48,100	)		(69,991	)
Foreign exchange (loss) gain		(753	)		(40	)		306			(25	)
Other income (expense), net		717			890			1,791			(193	)
Total other expense, net		(26,823	)		(60,949	)		(77,859	)		(129,044	)
Income (loss) before benefit for income taxes		201,759			(12,330	)		172,096			(57,108	)
Benefit for income taxes		(91,081	)		(30,564	)		(27,143	)		(37,359	)
Net income (loss)	$	292,840		$	18,234		$	199,239		$	(19,749	)
Net income (loss) per ordinary share—basic	$	1.38		$	0.10		$	1.00		$	(0.11	)
Weighted average ordinary shares outstanding—basic		212,320,219			186,470,141			198,413,779			181,949,838
Net income (loss) per ordinary share—diluted	$	1.31		$	0.09		$	0.95		$	(0.11	)
Weighted average ordinary shares outstanding—diluted		223,743,903			194,171,967			208,678,460			181,949,838
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Foreign currency translation adjustments	$	858		$	(809	)	$	877		$	(952	)
Other comprehensive income (loss)		858			(809	)		877			(952	)
Comprehensive income (loss)	$	293,698		$	17,425		$	200,116		$	(20,701	)

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

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share data)

										Additional			Accumulated Other						Total
	Ordinary Shares				Treasury Stock					Paid-in			Comprehensive			Accumulated			Shareholders’
	Shares		Amount		Shares		Amount			Capital			Loss			Deficit			Equity
Balances at December 31, 2019		188,402,040	$	19		384,366	$	(4,585	)	$	2,797,602		$	(1,905	)	$	(605,682	)	$	2,185,449
Issuance of ordinary shares in conjunction with the exercise of stock options and the vesting of restricted stock and performance stock units		2,560,573		—		—		—			7,049			—			—			7,049
Ordinary shares withheld for payment of employees’ withholding tax liability		—		—		—		—			(46,664	)		—			—			(46,664	)
Share-based compensation		—		—		—		—			56,421			—			—			56,421
Currency translation adjustment		—		—		—		—			—			(325	)		—			(325	)
Net loss		—		—		—		—			—			—			(13,591	)		(13,591	)
Balances at March 31, 2020		190,962,613	$	19		384,366	$	(4,585	)	$	2,814,408		$	(2,230	)	$	(619,273	)	$	2,188,339
Issuance of ordinary shares in conjunction with the exercise of stock options and the vesting of restricted stock and performance stock units		1,427,108		—		—		—			18,838			—			—			18,838
Issuance of ordinary shares in conjunction with ESPP program		376,718		—		—		—			7,979			—			—			7,979
Issuance of ordinary shares in conjunction with Exchangeable Senior Notes		7,225,368		1		—		—			205,649			—			—			205,650
Ordinary shares withheld for payment of employees’ withholding tax liability		—		—		—		—			(6,345	)		—			—			(6,345	)
Share-based compensation		—		—		—		—			27,057			—			—			27,057
Currency translation adjustment		—		—		—		—			—			344			—			344
Net loss		—		—		—		—			—			—			(80,010	)		(80,010	)
Balances at June 30, 2020		199,991,807	$	20		384,366	$	(4,585	)	$	3,067,586		$	(1,886	)	$	(699,283	)	$	2,361,852
Issuance of ordinary shares - public offering		13,570,000		1		—		—			919,513			—			—			919,514
Issuance of ordinary shares in conjunction with the exercise of stock options and the vesting of restricted stock and performance stock units		760,255		—		—		—			8,111			—			—			8,111
Issuance of ordinary shares in conjunction with Exchangeable Senior Notes		6,673,046		1		—		—			190,022			—			—			190,023
Ordinary shares withheld for payment of employees’ withholding tax liability		—		—		—		—			(6,743	)		—			—			(6,743	)
Share-based compensation		—		—		—		—			30,356			—			—			30,356
Currency translation adjustment		—		—		—		—			—			858			—			858
Net income		—		—		—		—			—			—			292,840			292,840
Balances at September 30, 2020		220,995,108	$	22		384,366	$	(4,585	)	$	4,208,845		$	(1,028	)	$	(406,443	)	$	3,796,811

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

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)

(UNAUDITED)

(In thousands, except share data)

										Additional			Accumulated Other						Total
	Ordinary Shares				Treasury Stock					Paid-in			Comprehensive			Accumulated			Shareholders’
	Shares		Amount		Shares		Amount			Capital			Loss			Deficit			Equity
Balances at December 31, 2018		169,244,520	$	17		384,366	$	(4,585	)	$	2,374,966		$	(1,523	)	$	(1,178,769	)	$	1,190,106
Cumulative effect adjustments from adoption of ASU No. 2016-02, Leases (Topic 842)		—		—		—		—			—			—			64			64
Issuance of ordinary shares - public offering		14,081,632		1		—		—			326,848			—			—			326,849
Issuance of ordinary shares in conjunction with vesting of restricted stock units and stock option exercises		1,804,196		—		—		—			10,042			—			—			10,042
Ordinary shares withheld for payment of employees’ withholding tax liability		—		—		—		—			(17,171	)		—			—			(17,171	)
Share-based compensation		—		—		—		—			27,548			—			—			27,548
Currency translation adjustment		—		—		—		—			—			(487	)		—			(487	)
Net loss		—		—		—		—			—			—			(32,863	)		(32,863	)
Balances at March 31, 2019		185,130,348	$	18		384,366	$	(4,585	)	$	2,722,233		$	(2,010	)	$	(1,211,568	)	$	1,504,088
Issuance of ordinary shares - public offering		—		—		—		—			(55	)		—			—			(55	)
Issuance of ordinary shares in conjunction with vesting of restricted stock units and stock option exercises		781,026		1		—		—			1,986			—			—			1,987
Ordinary shares withheld for payment of employees’ withholding tax liability		—		—		—		—			(7,203	)		—			—			(7,203	)
Issuance of ordinary shares in conjunction with ESPP program		558,856		—		—		—			5,465			—			—			5,465
Share-based compensation		—		—		—		—			21,367			—			—			21,367
Currency translation adjustment		—		—		—		—			—			344			—			344
Net loss		—		—		—		—			—			—			(5,120	)		(5,120	)
Balances at June 30, 2019		186,470,230	$	19		384,366	$	(4,585	)	$	2,743,793		$	(1,666	)	$	(1,216,688	)	$	1,520,873
Issuance of ordinary shares in conjunction with vesting of restricted stock units and stock option exercises		704,189		—		—		—			4,207			—			—			4,207
Ordinary shares withheld for payment of employees’ withholding tax liability		—		—		—		—			(5,086	)		—			—			(5,086	)
Issuance of ordinary shares in conjunction with ESPP program		376		—		—		—			3			—			—			3
Share-based compensation		—		—		—		—			18,151			—			—			18,151
Currency translation adjustment		—		—		—		—			—			(809	)		—			(809	)
Net income		—		—		—		—			—			—			18,234			18,234
Balances at September 30, 2019		187,174,795	$	19		384,366	$	(4,585	)	$	2,761,068		$	(2,475	)	$	1,198,454		$	1,555,573

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

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	For the Nine Months Ended September 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	199,239		$	(19,749	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		209,906			177,336
Equity-settled share-based compensation		113,834			67,066
Acquired in-process research and development expense		47,517			—
Loss on debt extinguishment		31,856			58,835
Amortization of debt discount and deferred financing costs		12,025			17,069
Loss on sale of assets		—			10,963
Deferred income taxes		(8,041	)		8,302
Foreign exchange and other adjustments		1,084			572
Changes in operating assets and liabilities:
Accounts receivable		(297,392	)		68,162
Inventories		(23,329	)		(8,004	)
Prepaid expenses and other current assets		(83,226	)		(72,055	)
Accounts payable		17,709			(3,338	)
Accrued trade discounts and rebates		(143,551	)		(53,241	)
Accrued expenses		56,830			(10,591	)
Deferred revenues		—			(4,901	)
Other non-current assets and liabilities		11,410			(1,474	)
Net cash provided by operating activities		145,871			234,952
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions		(262,305	)		—
Purchases of property and equipment		(133,399	)		(11,325	)
Payments for long-term investments		(8,937	)		—
Change in escrow deposit for property purchase		6,000			—
Proceeds from sale of assets		—			6,000
Net cash used in investing activities		(398,641	)		(5,325	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of ordinary shares		919,995			326,793
Net proceeds from the issuance of senior notes		—			590,057
Repayment of senior notes		(1,739	)		(814,420	)
Net proceeds from term loans		—			517,378
Repayment of term loans		—			(918,181	)
Contingent consideration proceeds from divestiture		—			3,297
Proceeds from the issuance of ordinary shares in conjunction with ESPP program		7,979			5,468
Proceeds from the issuance of ordinary shares in connection with stock option exercises		33,999			16,236
Payment of employee withholding taxes relating to share-based awards		(59,752	)		(29,460	)
Net cash provided by (used in) financing activities		900,482			(302,832	)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash		1,225			(1,202	)
Net increase (decrease) in cash, cash equivalents and restricted cash		648,937			(74,407	)
Cash, cash equivalents and restricted cash, beginning of the period		1,080,039			962,117
Cash, cash equivalents and restricted cash, end of the period	$	1,728,976		$	887,710

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

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

(In thousands)

	For the Nine Months Ended September 30,
	2020		2019
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	49,275	$	71,867
Cash paid for income taxes, net of refunds received		3,461		9,034
Cash paid for amounts included in the measurement of lease liabilities		5,802		4,525
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Principal amount of Exchangeable Senior Notes converted into ordinary shares	$	398,261	$	—
Milestone payments for TEPEZZA intangible asset included in accrued expenses		121,232		—
Purchases of property and equipment included in accounts payable and accrued expenses		12,126		526

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

HORIZON THERAPEUTICS PLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION AND BUSINESS OVERVIEW

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The December 31, 2019 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.

Unless otherwise indicated or the context otherwise requires, references to “Horizon”, the “Company”, “we”, “us” and “our” refer to Horizon Therapeutics plc and its consolidated subsidiaries.

During the nine months ended September 30, 2020, the Company recorded out of period adjustments that decreased income tax benefit by $3.2 million and increased share-based compensation expense by $1.9 million to correct for expenses that should have been recorded in the year ended December 31, 2019. In addition, the Company recorded an out of period adjustment that increased employee benefit plan expense by $2.3 million to correct for expenses that should have been recorded in the years ended 2017, 2018 and 2019. The Company evaluated the materiality of the adjustments to prior-period financial statements and the current period, and concluded the effect of the adjustments were immaterial to both the current and prior-period financial statements.

Business Overview

Horizon is focused on researching, developing and commercializing medicines that address critical needs for people impacted by rare and rheumatic diseases. The Company’s pipeline is purposeful: it applies scientific expertise and courage to bring clinically meaningful therapies to patients. Horizon believes science and compassion must work together to transform lives. The Company has 2 reportable segments, the orphan segment and the inflammation segment, and its portfolio is currently composed of eleven medicines in the areas of rare diseases, gout, ophthalmology and inflammation.

Effective in the first quarter of 2020, the Company (i) reorganized its commercial operations and moved responsibility for and reporting of RAYOS® to the inflammation segment and (ii) renamed the orphan and rheumatology segment the orphan segment. Net sales generated by TEPEZZA®, which was approved by the U.S. Food and Drug Administration (“FDA”) on January 21, 2020, are reported as part of the renamed orphan segment.

As of September 30, 2020, the Company’s medicine portfolio consisted of the following:

Orphan

TEPEZZA (teprotumumab-trbw), for intravenous infusion

KRYSTEXXA® (pegloticase injection), for intravenous infusion

RAVICTI® (glycerol phenylbutyrate) oral liquid

PROCYSBI® (cysteamine bitartrate) delayed-release capsules and granules, for oral use

ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use

BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use

QUINSAIR™ (levofloxacin) solution for inhalation

Inflammation

PENNSAID® (diclofenac sodium topical solution) 2% w/w (“PENNSAID 2%”), for topical use

DUEXIS® (ibuprofen/famotidine) tablets, for oral use

RAYOS (prednisone) delayed-release tablets, for oral use

VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

From time to time, the Company adopts new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments and became effective for the Company as of January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplification and reduce the cost of accounting for income taxes (“ASU 2019-12”), which is effective for the Company as of January 1, 2021. The Company does not expect the adoption of ASU 2019-12 to have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification (“ASC”)), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (“SEC”) did not, or are not expected to, have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Significant Accounting Policies

The Company's significant accounting policies have not changed from those previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of the change to the accounting policy related to property and equipment due to the purchase of land and buildings as described below.

Property and Equipment

Land is stated at cost. Property and equipment, other than land, are stated at cost less accumulated depreciation. Depreciation is recognized using the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and an accelerated method for income tax reporting purposes. Upon retirement or sale of an asset, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in operations. Repair and maintenance costs are charged to expenses as incurred and improvements are capitalized.

Leasehold improvements are amortized on a straight-line basis over the term of the applicable lease, or the useful life of the assets, whichever is shorter.

Depreciation and amortization periods for the Company’s property and equipment are as follows:

Buildings		40 years
Land improvements		10 years
Machinery and equipment		5 to 7 years
Furniture and fixtures		3 to 5 years
Computer equipment		3 years
Software		3 years
Trade show equipment		3 years

The Company capitalizes software development costs associated with internal use software, including external direct costs of materials and services and payroll costs for employees devoting time to a software project. Costs incurred during the preliminary project stage, as well as costs for maintenance and training, are expensed as incurred.

Software includes internal-use software acquired and modified to meet the Company’s internal requirements. Amortization commences when the software is ready for its intended use.

NOTE 3 – NET INCOME (LOSS) PER SHARE

The following table presents basic and diluted net income (loss) per share for the three and nine months ended September 30, 2020 and 2019 (in thousands, except share and per share data):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Basic net income (loss) per share calculation:
Numerator - net income (loss)	$	292,840	$	18,234	$	199,239	$	(19,749	)
Denominator - weighted average ordinary shares outstanding		212,320,219		186,470,141		198,413,779		181,949,838
Basic net income (loss) per share	$	1.38	$	0.10	$	1.00	$	(0.11	)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Diluted net income (loss) per share calculation:
Numerator - net income (loss)	$	292,840	$	18,234	$	199,239	$	(19,749	)
Denominator - weighted average ordinary shares outstanding		223,743,903		194,171,967		208,678,460		181,949,838
Diluted net income (loss) per share	$	1.31	$	0.09	$	0.95	$	(0.11	)

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised, converted into ordinary shares or resulted in the issuance of ordinary shares that would have shared in the Company’s earnings.

The computation of diluted net income (loss) per share excluded 0.2 million and 3.4 million shares subject to equity awards for the three and nine months ended September 30, 2020, respectively, and 1.5 million and 9.2 million shares (based on the if-converted method) related to the Company’s 2.5% Exchangeable Senior Notes due 2022 (the “Exchangeable Senior Notes”) for the three and nine months ended September 30, 2020, respectively, because their inclusion would have had an anti-dilutive effect on diluted net income (loss) per share.

The computation of diluted net income (loss) per share excluded 0.3 million and 8.8 million shares subject to equity awards for each of the three and nine months ended September 30, 2019, respectively, because their inclusion would have had an anti-dilutive effect on diluted net income (loss) per share.

During the three and nine months ended September 30, 2019, the potentially dilutive impact of the Exchangeable Senior Notes was determined using a method similar to the treasury stock method. Under this method, no numerator or denominator adjustments arose from the principal and interest components of the Exchangeable Senior Notes because the Company had the intent, at that time, and ability to settle the Exchangeable Senior Notes’ principal and interest in cash. Instead, the Company was required to increase the diluted net income (loss) per share denominator by the variable number of shares that would be issued upon conversion if it settled the conversion spread obligation with shares. For diluted net income (loss) per share purposes, the conversion spread obligation was calculated based on whether the average market price of the Company’s ordinary shares over the reporting period was in excess of the exchange price of the Exchangeable Senior Notes. There was no calculated spread added to the denominator for the three and nine months ended September 30, 2019. Beginning in the fourth quarter of 2019, with the ordinary share price significantly above the $28.66 exchange price, the Company decided that it no longer had the intent to settle the notes for cash and, as a result, began to prospectively apply the if-converted method to the Exchangeable Senior Notes when determining the diluted net income (loss) per share. By August 3, 2020, the Exchangeable Senior Notes were fully extinguished through exchanges for ordinary shares or cash redemption. Refer to Note 13 for further detail.

NOTE 4 – ACQUISITIONS, DIVESTITURES AND OTHER ARRANGEMENTS

Acquisition of Curzion Pharmaceuticals, Inc.

On April 1, 2020, the Company acquired Curzion Pharmaceuticals, Inc. (“Curzion”), a privately held development-stage biopharma company, and its development-stage oral selective lysophosphatidic acid 1 receptor (LPAR₁) antagonist, CZN001 (renamed HZN-825).

Under the terms of the acquisition agreement, the Company acquired Curzion for a $45.0 million upfront cash payment with additional payments contingent on the achievement of development and regulatory milestones. Pursuant to ASC 805 (as amended by ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU No. 2017-01”)), the Company accounted for the Curzion acquisition as the purchase of an in-process research and development asset and, pursuant to ASC Topic 730, Research and Development (“ASC 730”), recorded the purchase price as research and development expense during the nine months ended September 30, 2020. HZN-825 was originally discovered and developed by Sanofi-Aventis U.S. LLC (“Sanofi-Aventis U.S.”), which is eligible to receive contingent payments upon the achievement of development and commercialization milestones and royalties based on revenue thresholds. A member of the Company’s board of directors was also a member of the board of directors of, and held a beneficial interest in, Curzion. This related party transaction was conducted in the normal course of business on an arm’s length basis.

Refer to Note 15 for further detail on HZN-825 milestone payments.

Sale of MIGERGOT rights

On June 28, 2019, the Company sold its rights to MIGERGOT to Cosette Pharmaceuticals, Inc., for $6.0 million and total potential contingent consideration payments of $4.0 million (the “MIGERGOT transaction”).

Pursuant to ASU No. 2017-01, the Company accounted for the MIGERGOT transaction as a sale of assets, specifically a sale of intellectual property rights, and a sale of inventory.

The loss on sale of assets recorded to the consolidated statement of comprehensive income (loss) during the year ended December 31, 2019, was determined as follows (in thousands):

Cash proceeds	$	6,000
Less net assets sold:
Developed technology		(16,999	)
Inventory		(236	)
Release of contingent consideration liability	272
Loss on sale of assets	$	(10,963	)

Acquisition of River Vision

On May 8, 2017, the Company acquired 100% of the equity interests in River Vision Development Corp. (“River Vision”) for upfront cash payments totaling approximately $150.3 million, including cash acquired of $6.3 million, with additional potential future milestone and royalty payments contingent on the satisfaction of certain regulatory milestones and sales thresholds. Pursuant to ASU No. 2017-01, the Company accounted for the River Vision acquisition as the purchase of an in-process research and development asset (teprotumumab, now known as TEPEZZA) and, pursuant to ASC 730 recorded the purchase price as research and development expense during the year ended December 31, 2017. Further, the Company recognized approximately $32.4 million of federal net operating losses, $2.2 million of state net operating losses and $9.5 million of federal tax credits. The acquired tax attributes were set up as deferred tax assets which were further netted within the net deferred tax liabilities of the U.S. group, offset by a deferred credit recorded in long-term liabilities.

Under the acquisition agreement for River Vision, the Company agreed to pay up to $325.0 million upon the attainment of various milestones, composed of $100.0 million related to FDA approval and $225.0 million related to net sales thresholds for TEPEZZA. The agreement also includes a royalty payment of 3 percent of the portion of annual worldwide net sales exceeding $300.0 million (if any). The Company made the milestone payment of $100.0 million related to FDA approval during the first quarter of 2020 which is now capitalized as a finite-lived intangible asset representing the developed technology for TEPEZZA.

Additionally, under the Company’s license agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (together referred to as “Roche”), the Company made a milestone payment of CHF5.0 million ($5.2 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.0382), during the first quarter of 2020 which the Company also capitalized as a finite-lived intangible asset representing the developed technology for TEPEZZA.

In April 2020, a subsidiary of the Company entered into an agreement with S.R. One, Limited (“S.R. One”) and an agreement with Lundbeckfond Invest A/S (“Lundbeckfond”) pursuant to which the Company acquired all of S.R. One’s and Lundbeckfond’s beneficial rights to proceeds from certain contingent future TEPEZZA milestone and royalty payments in exchange for a one-time payment of $55.0 million to each of the respective parties. The total payments of $110.0 million were capitalized as a finite-lived intangible asset representing the developed technology for TEPEZZA during the second quarter of 2020.

During the second quarter of 2020, the Company recorded $98.7 million as a finite-lived intangible asset representing the developed technology for TEPEZZA, composed of $67.0 million in relation to the expected future attainment of various net sales milestones payable under the acquisition agreement for River Vision and CHF30.0 million ($31.7 million when converted using a CHF-to-Dollar exchange rate as of the date the intangible asset was recorded of 1.0556) in relation to the expected future attainment of various net sales milestones payable to Roche. During the third quarter of 2020, the Company recorded an additional $22.1 million as a finite-lived intangible asset representing the developed technology for TEPEZZA, composed of CHF20.0 million ($22.1 million when converted using a CHF-to-Dollar exchange rate as of the date the intangible asset was recorded of 1.1066) in relation to the expected future attainment of various net sales milestones payable to Roche. The liabilities relating to these net sales milestones have been recorded in accrued expenses on the condensed consolidated balance sheet as of September 30, 2020 and the timing of the payments is dependent on when the applicable milestone thresholds are attained.

Refer to Note 15 for further detail on TEPEZZA milestone payments.

Other Arrangements

On January 3, 2019, the Company entered into a collaboration agreement with HemoShear Therapeutics, LLC (“HemoShear”), a biotechnology company, to discover novel therapeutic targets for gout. The collaboration provides the Company with an opportunity to address unmet treatment needs for people with gout by evaluating new targets for the control of serum uric acid levels. Under the terms of the agreement, the Company paid HemoShear an upfront cash payment of $2.0 million with additional potential future milestone payments upon commencement of new stages of development, contingent on the Company’s approval at each stage. In June 2019, a $4.0 million progress payment became due, which the Company subsequently paid in July 2019. In June 2020, a $3.0 million progress payment became due, which the Company subsequently paid in July 2020.

NOTE 5 – INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Inventories consist of raw materials, work-in-process and finished goods. The Company has entered into manufacturing and supply agreements for the manufacture of drug substance and finished goods inventories, and the purchase of raw materials and production supplies. The Company’s inventories include the direct purchase cost of materials and supplies and manufacturing overhead costs.

The components of inventories as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Raw materials	$	24,768	$	6,750
Work-in-process		22,398		22,465
Finished goods		29,938		24,587
Inventories, net	$	77,104	$	53,802

NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Advance payments for inventory	$	74,978	$	31,203
Deferred charge for taxes on intra-company profit		50,934		46,388
Prepaid income taxes and income tax receivable		35,076		12,583
Rabbi trust assets		16,526		12,704
Other prepaid expenses and other current assets		42,827		40,699
Prepaid expenses and other current assets	$	220,341	$	143,577

Advance payments for inventory as of September 30, 2020 and December 31, 2019, primarily represented payments made to the contract manufacturer of TEPEZZA drug substance.

NOTE 7 – PROPERTY AND EQUIPMENT

Property and equipment as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020			December 31, 2019
Buildings	$	80,341		$	—
Land		38,076			—
Leasehold improvements		26,300			25,985
Construction in process		26,025			265
Software		15,138			14,890
Machinery and equipment		4,508			5,217
Computer equipment		3,685			3,316
Other		6,262			6,334
		200,335			56,007
Less accumulated depreciation		(44,048	)		(25,848	)
Property and equipment, net	$	156,287		$	30,159

Depreciation expense was $5.2 million and $1.7 million for the three months ended September 30, 2020 and 2019, respectively, and was $19.2 million and $4.6 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in depreciation expense in both periods primarily relates to the reduction in the useful lives of leasehold improvements relating to the Company’s Lake Forest office.

In February 2020, the Company purchased a 3-building campus in Deerfield, Illinois for total consideration and directly attributable transaction costs of $118.5 million. The Deerfield campus totals 70 acres and consists of approximately 650,000 square feet of office space.

Construction in process as of September 30, 2020, primarily represents renovation costs of $25.2 million associated with the Deerfield campus.

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The gross carrying amount of goodwill as of September 30, 2020 and December 31, 2019 was $413.7 million.

Effective in the first quarter of 2020, the Company (i) reorganized its commercial operations and moved responsibility for and reporting of RAYOS to the inflammation segment and (ii) renamed the orphan and rheumatology segment the orphan segment. This resulted in a $3.2 million increase in the Company’s allocation of goodwill to its inflammation segment and a corresponding decrease in the goodwill allocated to the orphan segment in the first quarter of 2020. The Company allocated goodwill to its new reporting units using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the allocation and determined that no impairment existed.

The table below presents goodwill for the Company’s reportable segments as of September 30, 2020 (in thousands):

		Orphan			Inflammation			Total
Goodwill		$	357,498		$	56,171		$	413,669

As of September 30, 2020, there were 0 accumulated goodwill impairment losses.

Intangible Assets

As of September 30, 2020, the Company’s finite-lived intangible assets consisted of developed technology related to ACTIMMUNE, BUPHENYL, KRYSTEXXA, PENNSAID 2%, PROCYSBI, RAVICTI, RAYOS and TEPEZZA as well as customer relationships for ACTIMMUNE. The intangible asset related to VIMOVO developed technology was fully amortized as of December 31, 2019.

In connection with the acquisition of River Vision, the Company capitalized payments of $336.0 million related to TEPEZZA developed technology during the nine months ended September 30, 2020. See Note 4 for further details on the River Vision acquisition.

During the year ended December 31, 2019, in connection with the MIGERGOT transaction, the Company wrote off the remaining net book value of developed technology related to MIGERGOT of $17.0 million. See Note 4 for further details.

Intangible assets as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020							December 31, 2019
	Cost Basis		Accumulated Amortization			Net Book Value		Cost Basis		Accumulated Amortization			Net Book Value
Developed technology	$	3,094,331	$	(1,249,666	)	$	1,844,665	$	2,758,403	$	(1,059,595	)	$	1,698,808
Customer relationships		8,100		(4,885	)		3,215		8,100		(4,280	)		3,820
Total intangible assets	$	3,102,431	$	(1,254,551	)	$	1,847,880	$	2,766,503	$	(1,063,875	)	$	1,702,628

Amortization expense for the three months ended September 30, 2020 and 2019 was $65.4 million and $57.7 million, respectively, and was $190.7 million and $172.8 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, estimated future amortization expense was as follows (in thousands):

2020 (October to December)	$	64,289
2021		249,245
2022		248,072
2023		247,455
2024		246,024
Thereafter		792,795
Total	$	1,847,880

NOTE 9 – ACCRUED EXPENSES

Accrued expenses as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Accrued milestone payments	$	121,232	$	—
Payroll-related expenses		105,987		84,516
Accrued royalties		50,623		19,985
Consulting and professional services		41,205		32,423
Allowances for returns		41,191		45,082
Pricing review liability		14,433		9,831
Accrued interest		6,033		18,709
Accrued other		41,123		24,688
Accrued expenses	$	421,827	$	235,234

As of September 30, 2020, accrued milestone payments represented the expected attainment in 2020 of various TEPEZZA net sales milestones payable under the acquisition agreement for River Vision and license agreement with Roche. Refer to Note 4 for further detail.

NOTE 10 – ACCRUED TRADE DISCOUNTS AND REBATES

Accrued trade discounts and rebates as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Accrued government rebates and chargebacks	$	162,170	$	164,508
Accrued commercial rebates and wholesaler fees		82,908		138,272
Accrued co-pay and other patient assistance		77,720		163,641
Accrued trade discounts and rebates	$	322,798	$	466,421
Invoiced commercial rebates and wholesaler fees, co-pay and other patient assistance costs, and government rebates and chargebacks in accounts payable		5,083		489
Total customer-related accruals and allowances	$	327,881	$	466,910

The following table summarizes changes in the Company’s customer-related accruals and allowances from December 31, 2019 to September 30, 2020 (in thousands):

	Wholesaler Fees			Co-Pay and			Government
	and Commercial			Other Patient			Rebates and
	Rebates			Assistance			Chargebacks			Total
Balance at December 31, 2019	$	138,761		$	163,641		$	164,508		$	466,910
Current provisions relating to sales during the nine months ended September 30, 2020		239,788			665,575			432,755			1,338,118
Adjustments relating to prior-year sales		(16,279	)		(3,059	)		(7,796	)		(27,134	)
Payments relating to sales during the nine months ended September 30, 2020		(158,996	)		(587,936	)		(268,302	)		(1,015,234	)
Payments relating to prior-year sales		(118,302	)		(160,501	)		(155,976	)		(434,779	)
Balance at September 30, 2020	$	84,972		$	77,720		$	165,189		$	327,881

NOTE 11 – SEGMENT AND OTHER INFORMATION

The Company has 2 reportable segments, the orphan segment and the inflammation segment, and the Company reports net sales and segment operating income for each segment.

Effective in the first quarter of 2020, the Company (i) reorganized its commercial operations and moved responsibility for and reporting of RAYOS to the inflammation segment and (ii) renamed the orphan and rheumatology segment the orphan segment. Net sales generated by TEPEZZA, which was approved in the first quarter of 2020, are reported as part of the renamed orphan segment.

The orphan segment includes the medicines TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, ACTIMMUNE, BUPHENYL and QUINSAIR. The inflammation segment includes the medicines PENNSAID 2%, DUEXIS, RAYOS and VIMOVO and previously included MIGERGOT prior to the MIGERGOT transaction.

The Company’s chief operating decision maker (“CODM”) evaluates the financial performance of the Company’s segments based upon segment operating income. Segment operating income is defined as income (loss) before benefit for income taxes adjusted for the items set forth in the reconciliation below. Items below income from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s CODM. Additionally, certain expenses are not allocated to a segment. The Company does not report balance sheet information by segment as no balance sheet by segment is reviewed by the Company’s CODM.

The following table reflects net sales by medicine for the Company’s reportable segments for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
TEPEZZA	$	286,870	$	—	$	476,257	$	—
KRYSTEXXA		108,470		99,576		276,920		231,634
RAVICTI		64,648		59,954		191,386		160,299
PROCYSBI		43,112		40,397		122,812		121,142
ACTIMMUNE		28,312		27,861		83,152		78,883
BUPHENYL		3,229		3,036		8,389		8,173
QUINSAIR		163		211		499		550
Orphan segment net sales	$	534,804	$	231,035	$	1,159,415	$	600,681

PENNSAID 2%		50,314		42,091		126,925		143,751
DUEXIS		27,899		29,889		87,044		89,412
RAYOS		18,132		19,359		50,800		59,067
VIMOVO		5,278		13,092		30,931		41,751
MIGERGOT		—		—		—		1,822
Inflammation segment net sales	$	101,623	$	104,431	$	295,700	$	335,803

Total net sales	$	636,427	$	335,466	$	1,455,115	$	936,484

The table below provides reconciliations of the Company’s segment operating income to the Company’s total income (loss) before benefit for income taxes for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
Segment operating income:
Orphan	$	274,687		$	79,695		$	480,584		$	180,095
Inflammation		55,098			49,766			145,136			161,685
Reconciling items:
Amortization and step-up:
Intangible amortization expense		(65,353	)		(57,662	)		(190,677	)		(172,762	)
Inventory step-up expense		—			—			—			(90	)
Share-based compensation		(30,356	)		(18,151	)		(113,834	)		(67,066	)
Loss on debt extinguishment		(14,602	)		(41,371	)		(31,856	)		(58,835	)
Interest expense, net		(12,185	)		(20,428	)		(48,100	)		(69,991	)
Depreciation		(5,157	)		(1,658	)		(19,229	)		(4,574	)
Foreign exchange (loss) gain		(753	)		(40	)		306			(25	)
Drug substance harmonization costs		(193	)		(80	)		(483	)		(394	)
Acquisition/divestiture-related costs		(144	)		44			(47,416	)		(1,231	)
Upfront, progress and milestone payments related to license and collaboration agreements		—			(3,073	)		(3,000	)		(9,073	)
Fees related to refinancing activities		—			(262	)		(54	)		(1,437	)
Impairment of long-lived asset		—			—			(1,072	)		—
Loss on sale of assets		—			—			—			(10,963	)
Charges relating to discontinuation of Friedreich's ataxia program		—			—			—			(1,221	)
Litigation settlements		—			—			—			(1,000	)
Restructuring and realignment costs		—			—			—			(33	)
Other income (expense), net		717			890			1,791			(193	)
Income (loss) before benefit for income taxes	$	201,759		$	(12,330	)	$	172,096		$	(57,108	)

The following table presents the amount and percentage of gross sales to customers that represented more than 10% of the Company’s gross sales included in its two reportable segments and all other customers as a group for the three and nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

	For the Three Months Ended September 30,
	2020					2019
	Amount		% of Gross			Amount		% of Gross
			Sales					Sales
Customer A	$	360,656		32	%	$	344,516		36	%
Customer B		262,362		24	%		202,410		21	%
Customer C		225,391		20	%		160,486		17	%
Customer D		148,098		13	%		88,256		9	%
Other Customers		118,386		11	%		157,742		17	%
Gross Sales	$	1,114,893		100	%	$	953,410		100	%

	For the Nine Months Ended September 30,
	2020					2019
	Amount		% of Gross			Amount		% of Gross
			Sales					Sales
Customer A	$	921,719		33	%	$	1,056,439		36	%
Customer B		664,215		24	%		513,687		18	%
Customer C		520,080		18	%		497,413		17	%
Customer D		345,563		12	%		249,834		9	%
Other Customers		364,832		13	%		572,527		20	%
Gross Sales	$	2,816,409		100	%	$	2,889,900		100	%

Geographic revenues are determined based on the country in which the Company’s customers are located. The following table presents a summary of net sales attributed to geographic sources for the three and nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

	Three Months Ended September 30, 2020			Three Months Ended September 30, 2019
	Amount		% of Total Net Sales	Amount		% of Total Net Sales
United States	$	632,861	99%	$	333,011	99%
Rest of world		3,566	1%		2,455	1%
Net sales	$	636,427		$	335,466

	Nine Months Ended September 30, 2020			Nine Months Ended September 30, 2019
	Amount		% of Total Net Sales	Amount		% of Total Net Sales
United States	$	1,447,704	99%	$	931,623	99%
Rest of world		7,411	1%		4,861	1%
Net sales	$	1,455,115		$	936,484

NOTE 12 – FAIR VALUE MEASUREMENTS

The following tables and paragraphs set forth the Company’s financial instruments that are measured at fair value on a recurring basis within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The following describes three levels of inputs that may be used to measure fair value:

Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its money market funds. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Other current assets and other long-term liabilities recorded at fair value on a recurring basis are composed of investments held in a rabbi trust and the related deferred liability for deferred compensation arrangements. Quoted prices for this investment, primarily in mutual funds, are available in active markets. Thus, the Company’s investments related to deferred compensation arrangements and the related long-term liability are classified as Level 1 measurements in the fair value hierarchy.

Assets and liabilities measured at fair value on a recurring basis

The following tables set forth the Company’s financial assets and liabilities at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in thousands):

	September 30, 2020
	Level 1			Level 2		Level 3		Total
Assets:
Money market funds	$	1,579,125		$	—	$	—	$	1,579,125
Other current assets		16,064			—		—		16,064
Total assets at fair value	$	1,595,189		$	—	$	—	$	1,595,189
Liabilities:
Other long-term liabilities		(16,064	)		—		—		(16,064	)
Total liabilities at fair value	$	(16,064	)	$	—	$	—	$	(16,064	)

	December 31, 2019
	Level 1			Level 2		Level 3		Total
Assets:
Money market funds	$	1,029,725			—		—	$	1,029,725
Other current assets		12,704			—		—		12,704
Total assets at fair value	$	1,042,429		$	—	$	—	$	1,042,429
Liabilities:
Other long-term liabilities		(12,704	)		—		—		(12,704	)
Total liabilities at fair value	$	(12,704	)	$	—	$	—	$	(12,704	)

NOTE 13 – DEBT AGREEMENTS

The Company’s outstanding debt balances as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020			December 31, 2019
Term Loan Facility due 2026	$	418,026		$	418,026
Senior Notes due 2027		600,000			600,000
Exchangeable Senior Notes due 2022		—			400,000
Total face value		1,018,026			1,418,026
Debt discount		(10,420	)		(59,922	)
Deferred financing fees		(4,760	)		(5,263	)
Long-term debt and Exchangeable Senior Notes, net	$	1,002,846		$	1,352,841

Term Loan Facility and Revolving Credit Facility

On December 18, 2019, Horizon Therapeutics USA, Inc. (formerly known as Horizon Pharma USA, Inc.) (the “Borrower”), a wholly owned subsidiary of the Company, borrowed approximately $418.0 million aggregate principal amount of loans (the “December 2019 Refinancing Loans”) pursuant to an amendment to the credit agreement, dated as of May 7, 2015, by and among the Borrower, the Company and certain of its subsidiaries as guarantors, the lenders party thereto from time to time and Citibank, N.A., as administrative agent and collateral agent, as amended by Amendment No. 1, dated as of October 25, 2016, Amendment No. 2, dated March 29, 2017, Amendment No. 3, dated October 23, 2017, Amendment No. 4, dated October 19, 2018, Amendment No. 5, dated March 11, 2019 and Amendment No. 6, dated May 22, 2019 (the “Term Loan Facility”).

Pursuant to Amendment No. 5, the Borrower received $200.0 million aggregate principal amount of revolving commitments, which was increased to $275.0 million aggregate amount of revolving commitments (the “Incremental Revolving Commitments”) pursuant to an incremental amendment and joinder agreement entered into on August 17, 2020 (the “Incremental Amendment”). The Incremental Revolving Commitments were established pursuant to an incremental facility (the “Revolving Credit Facility”) and includes a $50.0 million letter of credit sub-facility. The Incremental Revolving Commitments will terminate in March 2024. Borrowings under the Revolving Credit Facility are available for general corporate purposes. As of September 30, 2020, the Revolving Credit Facility was undrawn. As used herein, all references to the “Credit Agreement” are references to the original credit agreement, dated as of May 7, 2015, as amended through the Incremental Amendment.

The December 2019 Refinancing Loans were incurred as a separate new class of term loans under the Credit Agreement with substantially the same terms as the previously outstanding senior secured term loans incurred on May 22, 2019 (the “Refinanced Loans”) to effectuate a repricing of the Refinanced Loans. The Borrower used the proceeds of the December 2019 Refinancing Loans to repay the Refinanced Loans, which totaled approximately $418.0 million. The December 2019 Refinancing Loans bear interest at a rate, at the Borrower’s option, equal to the London Inter-Bank Offered Rate (“LIBOR”), plus 2.25% per annum (subject to a 0.00% LIBOR floor) or the adjusted base rate plus 1.25% per annum, with a step-down to LIBOR plus 2.00% per annum or the adjusted base rate plus 1.00% per annum at the time the Company’s leverage ratio is less than or equal to 2.00 to 1.00. The adjusted base rate is defined as the greatest of (a) LIBOR (using one-month interest period) plus 1.00%, (b) the prime rate, (c) the federal funds rate plus 0.50%, and (d) 1.00%.

The loans under the Revolving Credit Facility bear interest, at the Borrower’s option, at a rate equal to either LIBOR plus an applicable margin of 2.25% per annum (subject to a LIBOR floor of 0.00%), or the adjusted base rate plus 1.25% per annum, with a step-down to LIBOR plus 2.00% per annum or the adjusted base rate plus 1.00% per annum at the time the Company’s leverage ratio is less than or equal to 2.00 to 1.00. The Credit Agreement provides for (i) the December 2019 Refinancing Loans, (ii) the Revolving Credit Facility, (iii) one or more uncommitted additional incremental loan facilities subject to the satisfaction of certain financial and other conditions, and (iv) one or more uncommitted refinancing loan facilities with respect to loans thereunder. The Credit Agreement allows for the Company and certain of its subsidiaries to become additional borrowers under incremental or refinancing facilities.

The obligations under the Credit Agreement (including obligations in respect of the December 2019 Refinancing Loans and the Revolving Credit Facility) and any swap obligations and cash management obligations owing to a lender (or an affiliate of a lender) are guaranteed by the Company and each of the Company’s existing and subsequently acquired or formed direct and indirect subsidiaries (other than certain immaterial subsidiaries, subsidiaries whose guarantee would result in material adverse tax consequences and subsidiaries whose guarantee is prohibited by applicable law). The obligations under the Credit Agreement (including obligations in respect of the December 2019 Refinancing Loans and the Revolving Credit Facility) and any related swap and cash management obligations are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of the Borrower and the guarantors, except for certain customary excluded assets, and (ii) all of the capital stock owned by the Borrower and guarantors thereunder (limited, in the case of the stock of certain non-U.S. subsidiaries of the Borrower, to 65% of the capital stock of such subsidiaries). The Borrower and the guarantors under the Credit Agreement are individually and collectively referred to herein as a “Loan Party” and the “Loan Parties,” as applicable.

The Company elected to exercise its reinvestment rights under the mandatory prepayment provisions of the Credit Agreement with respect to the net proceeds from the Company’s sale of its rights to PROCYSBI and QUINSAIR in the Europe, Middle East and Africa regions to Chiesi Farmaceutici S.p.A. To the extent the Company had not applied such net proceeds to permitted acquisitions (including the acquisition of rights to products and products lines) and/or the acquisition of capital assets within 365 days of the receipt thereof (or committed to so apply and then applied within 180 days after the end of such 365-day period), the Company was required to make a mandatory prepayment under the Credit Agreement in an amount equal to the unapplied net proceeds. In June 2018, the Company repaid $23.5 million under the mandatory prepayment provisions of the Credit Agreement.

On March 18, 2019, the Company completed the repayment of $300.0 million of the outstanding principal amount of term loans under the Credit Agreement following the closing of its underwritten public equity offering on March 11, 2019. In July 2019, the Company repaid an additional $100.0 million of term loans under the Credit Agreement following the private placement of the Company’s 5.5% Senior Notes due 2027 (the “2027 Senior Notes”). Following these repayments, the outstanding principal balance of term loans under the Credit Agreement was $418.0 million.

Additionally, the Company elected to exercise its reinvestment rights under the mandatory prepayment provisions of the Credit Agreement with respect to the net proceeds from the Company’s sale of its rights to RAVICTI and AMMONAPS (known as BUPHENYL in the United States) outside of North America and Japan to Medical Need Europe AB, part of the Immedica Group (the “Immedica transaction”). To the extent the Company had not applied such net proceeds to permitted acquisitions (including the acquisition of rights to products and products lines) and/or the acquisition of capital assets within 365 days of the receipt of proceeds from the Immedica transaction (or commit to so apply and then apply within 180 days after the end of such 365-day period), the Company was required to make a mandatory prepayment under the Credit Agreement in an amount equal to the unapplied net proceeds. In March 2019, the Company repaid $35.0 million under the mandatory prepayment provisions of the Credit Agreement which was included in the $300.0 million repayment referred to above.

The Borrower is permitted to make voluntary prepayments of the loans under the Credit Agreement at any time without payment of a premium. The Borrower is required to make mandatory prepayments of loans under the Credit Agreement (without payment of a premium) with (a) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (b) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions), (c) net cash proceeds from issuances of debt (other than certain permitted debt), and (d) 50% of the Company’s excess cash flow (subject to decrease to 25% or 0% if the Company’s first lien leverage ratio is less than 2.25:1 or 1.75:1, respectively). The principal amount of the December 2019 Refinancing Loans are due and payable on May 22, 2026, the final maturity date of the December 2019 Refinancing Loans.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. The Credit Agreement also contains a springing financial maintenance covenant, which requires that the Company maintain a specified leverage ratio at the end of each fiscal quarter. The covenant is tested if both the outstanding loans and letters of credit under the Revolving Credit Facility, subject to certain exceptions, exceed 25% of the total commitments under the Revolving Credit Facility as of the last day of any fiscal quarter. If the Company fails to meet this covenant, the commitments under the Revolving Credit Facility could be terminated and any outstanding borrowings, together with accrued interest, under the Revolving Credit Facility could be declared immediately due and payable.

Other events of default under the Credit Agreement include: (i) the failure by the Borrower to timely make payments due under the Credit Agreement; (ii) material misrepresentations or misstatements in any representation or warranty by any Loan Party when made; (iii) failure by any Loan Party to comply with the covenants under the Credit Agreement and other related agreements; (iv) certain defaults under a specified amount of other indebtedness of the Company or its subsidiaries; (v) insolvency or bankruptcy-related events with respect to the Company or any of its material subsidiaries; (vi) certain undischarged judgments against the Company or any of its restricted subsidiaries; (vii) certain ERISA-related events reasonably expected to have a material adverse effect on the Company and its restricted subsidiaries taken as a whole; (viii) certain security interests or liens under the loan documents ceasing to be, or being asserted by the Company or its restricted subsidiaries not to be, in full force and effect; (ix) any loan document or material provision thereof ceasing to be, or any challenge or assertion by any Loan Party that such loan document or material provision is not, in full force and effect; and (x) the occurrence of a change of control. If one or more events of default occurs and continues beyond any applicable cure period, the administrative agent may, with the consent of the lenders holding a majority of the loans and commitments under the facilities, or will, at the request of such lenders, terminate the commitments of the lenders to make further loans and declare all of the obligations of the Loan Parties under the Credit Agreement to be immediately due and payable.

The interest on the Term Loan Facility is variable and as of September 30, 2020 the interest rate on the Term Loan Facility was 2.19% and the effective interest rate was 2.48%.

As of September 30, 2020, the fair value of the amounts outstanding under the Term Loan Facility was approximately $411.8 million, categorized as a Level 2 instrument, as defined in Note 12.

2027 Senior Notes

On July 16, 2019, Horizon Therapeutics USA, Inc. (formerly known as Horizon Pharma USA, Inc.), the Company’s wholly owned subsidiary (“HTUSA”), completed a private placement of $600.0 million aggregate principal amount of 2027 Senior Notes to several investment banks acting as initial purchasers, who subsequently resold the 2027 Senior Notes to persons reasonably believed to be qualified institutional buyers.

The Company used the net proceeds from the offering of the 2027 Senior Notes, together with approximately $65.0 million in cash on hand, to redeem or prepay $625.0 million of its outstanding debt, consisting of (i) the outstanding $225.0 million principal amount of its 6.625% Senior Notes due 2023, (ii) the outstanding $300.0 million principal amount of its 8.750% Senior Notes due 2024 and (iii) $100.0 million of the outstanding principal amount of senior secured term loans under the Credit Agreement, as well as to pay the related premiums and fees and expenses, excluding accrued interest, associated with such redemption and prepayment.

The 2027 Senior Notes are HTUSA’s general unsecured senior obligations, rank equally in right of payment with all existing and future senior debt of HTUSA and rank senior in right of payment to any existing and future subordinated debt of HTUSA. The 2027 Senior Notes are effectively subordinate to all of the existing and future secured debt of HTUSA to the extent of the value of the collateral securing such debt.

The 2027 Senior Notes are unconditionally guaranteed on a senior basis by the Company and all of the Company’s restricted subsidiaries, other than HTUSA and certain immaterial subsidiaries, that guarantee the Credit Agreement. The guarantees are each guarantor’s senior unsecured obligations and rank equally in right of payment with such guarantor’s existing and future senior debt and senior in right of payment to any existing and future subordinated debt of such guarantor. The guarantees are effectively subordinated to all of the existing and future secured debt of each guarantor, including such guarantor’s guarantee under the Credit Agreement, to the extent of the value of the collateral securing such debt. The guarantees of a guarantor may be released under certain circumstances. The 2027 Senior Notes are structurally subordinated to all of the liabilities of the Company’s subsidiaries that do not guarantee the 2027 Senior Notes.

The 2027 Senior Notes accrue interest at an annual rate of 5.5% payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2020. The 2027 Senior Notes will mature on August 1, 2027, unless earlier exchanged, repurchased or redeemed.

Except as described below, the 2027 Senior Notes may not be redeemed before August 1, 2022. Thereafter, some or all of the 2027 Senior Notes may be redeemed at any time at specified redemption prices, plus accrued and unpaid interest to the redemption date. At any time prior to August 1, 2022, some or all of the 2027 Senior Notes may be redeemed at a price equal to 100% of the aggregate principal amount thereof, plus a make-whole premium and accrued and unpaid interest to the redemption date. Also prior to August 1, 2022, up to 40% of the aggregate principal amount of the 2027 Senior Notes may be redeemed at a redemption price of 105.5% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net proceeds of certain equity offerings. In addition, the 2027 Senior Notes may be redeemed in whole but not in part at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date, if on the next date on which any amount would be payable in respect of the 2027 Senior Notes, HTUSA or any guarantor is or would be required to pay additional amounts as a result of certain tax related events.

If the Company undergoes a change of control, HTUSA will be required to make an offer to purchase all of the 2027 Senior Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest to, but not including, the repurchase date, subject to certain exceptions. If the Company or certain of its subsidiaries engages in certain asset sales, HTUSA will be required under certain circumstances to make an offer to purchase the 2027 Senior Notes at 100% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date.

The indenture governing the 2027 Senior Notes contains covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments, incur additional debt and issue certain preferred stock, incur liens on assets, engage in certain asset sales, merge, consolidate with or merge or sell all or substantially all of their assets, enter into transactions with affiliates, designate subsidiaries as unrestricted subsidiaries, and allow to exist certain restrictions on the ability of restricted subsidiaries to pay dividends or make other payments to the Company. Certain of the covenants will be suspended during any period in which the 2027 Senior Notes receive investment grade ratings. The indenture governing the 2027 Senior Notes also includes customary events of default.

As of September 30, 2020, the interest rate on the 2027 Senior Notes was 5.50% and the effective interest rate was 5.76%.

As of September 30, 2020, the fair value of the 2027 Senior Notes was approximately $636.0 million, categorized as a Level 2 instrument, as defined in Note 12.

Exchangeable Senior Notes

On March 13, 2015, Horizon Therapeutics Investment Limited (formerly known as Horizon Pharma Investment Limited) (“Horizon Investment”), a wholly owned subsidiary of the Company, completed a private placement of $400.0 million aggregate principal amount of Exchangeable Senior Notes to certain investment banks acting as initial purchasers who subsequently resold the Exchangeable Senior Notes to qualified institutional buyers as defined in Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the offering of the Exchangeable Senior Notes were approximately $387.2 million, after deducting the initial purchasers’ discount and offering expenses payable by Horizon Investment.

The Exchangeable Senior Notes were fully and unconditionally guaranteed, on a senior unsecured basis, by the Company (the “Guarantee”). The Exchangeable Senior Notes and the Guarantee were Horizon Investment’s and the Company’s senior unsecured obligations. The Exchangeable Senior Notes accrued interest at an annual rate of 2.5% payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2015. The Exchangeable Senior Notes were scheduled to mature on March 15, 2022. The exchange rate was 34.8979 ordinary shares of the Company per $1,000 principal amount of the Exchangeable Senior Notes (equivalent to an initial exchange price of approximately $28.66 per ordinary share).

The Company recorded the Exchangeable Senior Notes under the guidance in ASC Topic 470-20, Debt with Conversion and Other Options, and separated them into a liability component and equity component. The initial carrying amount of the liability component of $268.9 million was determined by measuring the fair value of a similar liability that does not have an associated equity component. The initial carrying amount of the equity component of $119.1 million represented by the embedded conversion option was determined by deducting the fair value of the liability component of $268.9 million from the initial proceeds of $387.2 million ascribed to the convertible debt instrument as a whole. The initial debt discount of $131.1 million was charged to interest expense over the life of the Exchangeable Senior Notes using the effective interest rate method.

On June 3, 2020, Horizon Investment issued a notice of redemption (the “Redemption Notice”) for all of the outstanding Exchangeable Senior Notes. From June 3, 2020 through July 30, 2020, the Company issued an aggregate of 13,898,414 of its ordinary shares to noteholders as a result of exchanges of $398.3 million in aggregate principal amount of Exchangeable Senior Notes following the issuance of the Redemption Notice.

On August 3, 2020, the Company redeemed the remaining $1.7 million in aggregate principal amount of Exchangeable Senior Notes and made aggregate cash payments to the holders of such Exchangeable Senior Notes of $1.8 million, including accrued interest. During the three and nine months ended September 30, 2020, the Company recorded a loss on debt extinguishment of $14.6 million and $31.9 million, respectively, related to the Exchangeable Senior Notes.

NOTE 14 – LEASE OBLIGATIONS

The Company has the following office space lease agreements in place for real properties:

Location	Approximate Square Feet		Lease Expiry Date
Dublin, Ireland		18,900	November 4, 2029
Lake Forest, Illinois		160,000	March 31, 2031
Novato, California		61,000	August 31, 2021
South San Francisco, California		20,000	January 31, 2030
Chicago, Illinois		9,200	December 31, 2028
Mannheim, Germany		4,800	December 31, 2022
Other		8,800	March 31, 2021 to September 15, 2022

The above table does not include details of an agreement for lease entered into on October 14, 2019, relating to approximately 63,000 square feet of office space under construction in Dublin, Ireland. Lease commencement will begin when construction of the offices is completed by the lessor and the Company has access to begin the construction of leasehold improvements. The Company expects to incur leasehold improvement costs during 2020 and 2021 in order to prepare the building for occupancy.

In February 2020, the Company purchased a 3-building campus in Deerfield, Illinois. The Company expects to move its Lake Forest office employees to the Deerfield campus in the first quarter of 2021 and market its Lake Forest office for sub-lease. As of September 30, 2020, the right-of-use lease asset relating to the Lake Forest lease was $17.2 million. If the expected rent payments received from sub-leasing the Lake Forest office are lower than the rent payments that the Company will continue to pay on its lease, the Company may record an impairment charge relating to the right-of-use lease asset upon vacating the Lake Forest office. Refer to Note 7 for further detail on the purchase of the Deerfield campus.

As of September 30, 2020 and December 31, 2019, the Company had right-of-use lease assets included in other assets of $36.3 million and $39.8 million, respectively; current lease liabilities included in accrued expenses of $4.5 million and $4.4 million, respectively; and non-current lease liabilities included in other long-term liabilities of $43.7 million and $46.5 million, respectively, in its condensed consolidated balance sheets. During the nine months ended September 30, 2020, the Company recorded an impairment charge of $1.1 million related to the Novato, California office lease, which was obtained through an acquisition in a prior year. This charge was reported within selling, general and administrative expenses in the condensed consolidated statement of comprehensive income (loss).

The Company recognizes rent expense on a monthly basis over the lease term based on a straight-line method. Rent expense was $1.8 million and $1.6 million for the three months ended September 30, 2020 and 2019, respectively, and $5.2 million and $4.6 million for the nine months ended September 30, 2020 and 2019, respectively.

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the Company’s condensed consolidated balance sheet as of September 30, 2020 (in thousands):

2020 (October to December)	$	2,024
2021		7,242
2022		6,066
2023		5,919
2024		6,537
Thereafter		39,845
Total lease payments		67,633
Imputed interest		(19,435	)
Total operating lease liabilities	$	48,198

The weighted-average discount rate and remaining lease term for operating leases as of September 30, 2020 was 7.09% and 9.96 years, respectively.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Purchase Commitments

Under the Company’s supply agreement with AGC Biologics A/S (formerly known as CMC Biologics A/S) (“AGC Biologics”), the Company has agreed to purchase certain minimum annual order quantities of TEPEZZA drug substance. In addition, the Company must provide AGC Biologics with rolling forecasts of TEPEZZA drug substance requirements, with a portion of the forecast being a firm and binding order. Under the Company’s supply agreement with Catalent Indiana, LLC (“Catalent”), the Company must provide Catalent with rolling forecasts of TEPEZZA drug product requirements, with a portion of the forecast being a firm and binding order. At September 30, 2020, the Company had total purchase commitments, including the minimum annual order quantities and binding firm orders, with AGC Biologics for TEPEZZA drug substance of €130.7 million ($153.2 million converted at an exchange rate as of September 30, 2020 of 1.1722), to be delivered through September 2022. In addition, the Company had binding purchase commitments with Catalent for TEPEZZA drug product of $15.8 million, to be delivered through September 2021.

Under an agreement with Boehringer Ingelheim Biopharmaceuticals GmbH (“Boehringer Ingelheim Biopharmaceuticals”), Boehringer Ingelheim Biopharmaceuticals is required to manufacture and supply ACTIMMUNE and IMUKIN to the Company. Following the Company’s sale of the rights to IMUKIN in all territories outside of the United States, Canada and Japan to Clinigen Group plc (“Clinigen”), purchases of IMUKIN inventory are being resold to Clinigen. The Company is required to purchase minimum quantities of finished medicine during the term of the agreement, which term extends to at least June 30, 2024. As of September 30, 2020, the minimum purchase commitment to Boehringer Ingelheim Biopharmaceuticals was $15.8 million (converted using a Dollar-to-Euro exchange rate of 1.1722 as of September 30, 2020) through June 2024.

Under the Company’s agreement with Bio-Technology General (Israel) Ltd (“BTG Israel”), the Company has agreed to purchase certain minimum annual order quantities and is obligated to purchase at least 80 percent of its annual world-wide bulk product requirements for KRYSTEXXA from BTG Israel. The term of the agreement runs until December 31, 2030, and will automatically renew for successive three-year periods unless earlier terminated by either party upon three years’ prior written notice. The agreement may be terminated earlier by either party in the event of a force majeure, liquidation, dissolution, bankruptcy or insolvency of the other party, uncured material breach by the other party or after January 1, 2024, upon three years’ prior written notice. Under the agreement, if the manufacture of the bulk product is moved out of Israel, the Company may be required to obtain the approval of the Israel Innovation Authority (formerly known as Israeli Office of the Chief Scientist) (“IIA”) because certain KRYSTEXXA intellectual property was initially developed with a grant funded by the IIA. The Company issues eighteen-month forecasts of the volume of KRYSTEXXA that the Company expects to order. The first nine months of the forecast are considered binding firm orders. At September 30, 2020, the Company had a total purchase commitment, including the minimum annual order quantities and binding firm orders with BTG Israel, for KRYSTEXXA of $36.0 million, to be delivered through December 2026. Additionally, there were other purchase orders relating to the manufacture of KRYSTEXXA of $0.8 million outstanding at September 30, 2020.

Excluding the above, additional purchase orders and other commitments relating to the manufacture of RAVICTI, BUPHENYL, PROCYSBI, PENNSAID 2%, DUEXIS, RAYOS and QUINSAIR of $12.2 million were outstanding at September 30, 2020.

Contingencies

The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. In addition, the Company from time to time has billing disputes with vendors in which amounts invoiced are not in accordance with the terms of their contracts.

In November 2015, the Company received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents and information related to its patient assistance programs and other aspects of its marketing and commercialization activities. The Company is unable to predict how long this investigation will continue or its outcome, but it anticipates that it may continue to incur significant costs in connection with the investigation, regardless of the outcome. The Company may also become subject to similar investigations by other governmental agencies. The investigation by the U.S. Attorney’s Office and any additional investigations of the Company’s patient assistance programs and sales and marketing activities may result in damages, fines, penalties or other administrative sanctions against the Company.

On March 5, 2019, the Company received a civil investigative demand (“CID”) from the United States Department of Justice (“DOJ”) pursuant to the Federal False Claims Act regarding assertions that certain of the Company’s payments to pharmacy benefit managers (“PBMs”) were potentially in violation of the Anti-Kickback Statute. The CID requests certain documents and information related to the Company’s payments to PBMs, pricing and the Company’s patient assistance program regarding DUEXIS, VIMOVO and PENNSAID 2%. The Company is cooperating with the investigation. While the Company believes that its payments and programs are compliant with the Anti-Kickback Statute, no assurance can be given as to the timing or outcome of the DOJ’s investigation, or that it will not result in a material adverse effect on the Company’s business.

Other Agreements

On April 1, 2020, the Company acquired Curzion for an upfront cash payment of $45.0 million with additional payments of up to $15.0 million contingent on the achievement of certain development and regulatory milestones. Under separate agreements, the Company is also required to make contingent payments upon the achievement of certain development and regulatory milestones and certain net sales thresholds. These separate agreements also include mid to high-single-digit royalty payments based on the portion of annual worldwide net sales.

The aggregate potential milestone payments of $225.0 million are payable based on certain TEPEZZA worldwide net sales thresholds being achieved as noted in the following table:


TEPEZZA Worldwide Net Sales Threshold	Milestone Payment
>$250 million	$50 million
>$375 million	$75 million
>$500 million	$100 million

The agreement also includes a royalty payment of 3 percent of the portion of annual worldwide net sales exceeding $300.0 million (if any).

S.R. One and Lundbeckfond, as two of the former River Vision stockholders, both held rights to receive approximately 35.66% of any future TEPEZZA payments. As a result of the Company’s agreements with S.R. One and Lundbeckfond in April 2020, the Company’s remaining net obligations to make TEPEZZA payments for sales milestones and royalties to the former stockholders of River Vision was reduced by approximately 70.25%, after including payments to a third party.

Under the Company’s license agreement with Roche, the Company is required to pay Roche up to CHF103.0 million ($111.8 million when converted using a CHF-to-Dollar exchange rate at September 30, 2020 of 1.0859) upon the attainment of various development, regulatory and sales milestones for TEPEZZA. During the years ended December 31, 2019 and 2017, CHF3.0 million ($3.0 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.0023) and CHF2.0 million ($2.0 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.0169), respectively, was paid in relation to these milestones. The Company made a milestone payment of CHF5.0 million ($5.2 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.0382) during the first quarter of 2020. The agreement with Roche also includes tiered royalties on annual worldwide net sales between 9 and 12 percent.

As of September 30, 2020, the Company recorded a liability of $121.2 million in accrued expenses representing net sales milestones for TEPEZZA. During the second quarter of 2020, the Company recorded $67.0 million in relation to the expected attainment in 2020 of various net sales milestones payable under the acquisition agreement for River Vision and CHF30.0 million ($32.6 million when converted using a CHF-to-Dollar exchange rate as of September 30, 2020 of 1.0859) in relation to the expected attainment in 2020 of various net sales milestones payable to Roche. During the third quarter of 2020, the Company recorded an additional CHF20.0 million ($21.7 million when converted using a CHF-to-Dollar exchange rate as of September 30, 2020 of 1.0859) in relation to the expected attainment in 2020 of various net sales milestones payable to Roche. The timing of the payments is dependent on when the applicable milestone thresholds are attained. The Company expects to pay these applicable milestones during the first quarter of 2021. In addition, the Company recorded $120.8 million as a finite lived intangible asset representing the developed technology for TEPEZZA on the condensed consolidated balance sheet as of September 30, 2020 and the net foreign exchange loss of $0.4 million relating to remeasurement of the liability was recorded in the condensed consolidated statement of comprehensive income (loss) in the three months ended September 30, 2020.

Under the Company’s license agreement with Lundquist Institute (formerly known as Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center) (“Lundquist”), the Company is required to pay Lundquist a royalty payment of less than 1 percent of TEPEZZA net sales.

Under the Company’s license agreement with Boehringer Ingelheim Biopharmaceuticals, the Company is required to pay Boehringer Ingelheim Biopharmaceuticals milestone payments totaling less than $2.0 million.

During the third quarter of 2020, the Company committed to invest as a strategic limited partner in two venture capital funds: Forbion Growth Opportunities Fund I C.V. (the “Forbion Fund”) and Aisling Capital V, L.P. (the “Aisling Fund”). The Company is committed to investing an aggregate $34.6 million in the two funds, comprising of a $20.0 million commitment to the Aisling Fund and a €13.0 million ($15.2 million when converted using a EUR-to-Dollar exchange rate at September 30, 2020 of 1.1722) commitment to the Forbion Fund, over each fund’s respective investment periods. As of September 30, 2020, the Company had invested $8.1 million in relation to the Aisling Fund and €0.7 million in relation to the Forbion Fund ($0.9 million when converted using a EUR-to-Dollar exchange rate at the date of investment of 1.1937). Additionally, in October 2020, the Company committed to investing an aggregate $15.0 million as a strategic limited partner in a third venture capital fund, RiverVest Venture Fund V, L.P., over the fund’s investment period.

Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. The Company may record charges in the future as a result of these indemnification obligations.

In accordance with its memorandum and articles of association, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. Additionally, the Company has entered into, and intends to continue to enter into, separate indemnification agreements with its directors and executive officers. These agreements, among other things, require the Company to indemnify its directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of the Company’s directors or executive officers, or any of the Company’s subsidiaries or any other company or enterprise to which the person provides services at the Company’s request. The Company also has a director and officer insurance policy that enables it to recover a portion of any amounts paid for current and future potential claims. All of the Company’s officers and directors have also entered into separate indemnification agreements with HTUSA.

NOTE 16 - LEGAL PROCEEDINGS

PENNSAID 2%

On November 13, 2014, the Company received a Paragraph IV Patent Certification from Watson Laboratories, Inc., now known as Actavis Laboratories UT, Inc. (“Actavis UT”), advising that Actavis UT had filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of PENNSAID 2%. On December 23, 2014, June 30, 2015, August 11, 2015 and September 17, 2015, the Company filed four separate suits against Actavis UT and Actavis plc (collectively “Actavis”), in the United States District Court for the District of New Jersey, with each of the suits seeking an injunction to prevent approval of the ANDA. The lawsuits alleged that Actavis has infringed nine of the Company’s patents covering PENNSAID 2% by filing an ANDA seeking approval from the FDA to market a generic version of PENNSAID 2% prior to the expiration of certain of the Company’s patents listed in the FDA’s Orange Book (the “Orange Book”). These 4 suits were consolidated into a single suit. On October 27, 2015 and on February 5, 2016, the Company filed 2 additional suits against Actavis, in the United States District Court for the District of New Jersey, for patent infringement of 3 additional Company patents covering PENNSAID 2%.

On August 17, 2016, the District Court issued a Markman opinion holding certain of the asserted claims of seven of the Company’s patents covering PENNSAID 2% invalid as indefinite. On March 16, 2017, the Court granted Actavis’ motion for summary judgment of non-infringement of the asserted claims of three of the Company’s patents covering PENNSAID 2%. In view of the Markman and summary judgment decisions, a bench trial was held from March 21, 2017 through March 30, 2017, regarding a claim of one of the Company’s patents covering PENNSAID 2%. On May 14, 2017, the Court issued its opinion upholding the validity of the claim of the patent, which Actavis had previously admitted its proposed generic diclofenac sodium topical solution product would infringe. Actavis filed its Notice of Appeal on June 16, 2017. The Company also filed its Notice of Appeal of the District Court’s rulings on certain claims of the Company’s patents covering PENNSAID 2%. On October 10, 2019, the Federal Circuit Court of Appeals affirmed the District Court’s judgment of validity of U.S Patent No. 9,066,913 (the “‘913 patent”), and its finding that the Actavis generic product would infringe the ‘913 patent. The Federal Circuit also affirmed the District Court’s summary judgment finding that certain patents are invalid for indefiniteness and would not be infringed. On July 29, 2020, the Company filed a Petition for Certiorari to the United States Supreme Court seeking review of the Federal Circuit’s ruling invalidating certain patents. The petition is currently pending consideration.

On August 18, 2016, the Company filed suit in the United States District Court for the District of New Jersey against Actavis for patent infringement of four of the Company’s newly issued patents covering PENNSAID 2%. All four of such patents are listed in the Orange Book. This litigation is currently stayed by agreement of the parties.

DUEXIS

On May 29, 2018, the Company received notice from Alkem Laboratories, Inc. (“Alkem”) that it had filed an ANDA with the FDA seeking approval of a generic version of DUEXIS. The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering DUEXIS are invalid and/or will not be infringed by Alkem’s manufacture, use or sale of the medicine for which the ANDA was submitted. The Company filed suit in the United States District Court of Delaware against Alkem on July 9, 2018, seeking an injunction to prevent the approval of Alkem’s ANDA and/or to prevent Alkem from selling a generic version of DUEXIS. The litigation went to trial on September 14, 2020, and the parties are awaiting the District Court’s judgment.

On September 26, 2018, the Company received notice from Teva Pharmaceuticals USA, Inc. (“Teva USA”) that it had filed an ANDA with the FDA seeking approval of a generic version of DUEXIS. The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering DUEXIS are invalid and/or will not be infringed by Teva USA’s manufacture, use or sale of the medicine for which the ANDA was submitted. The Company filed suit in the United States District Court of New Jersey against Teva USA on July 2, 2020, seeking to prevent Teva USA from selling a generic version of DUEXIS.

VIMOVO

On February 18, 2020, the FDA granted final approval for Dr. Reddy’s Laboratories Inc. and Dr. Reddy’s Laboratories Ltd. (collectively, “Dr. Reddy’s”) generic version of VIMOVO. On February 27, 2020, Dr. Reddy’s launched its generic version of VIMOVO in the United States, and the Company now faces generic competition with respect to VIMOVO. The Company continues to assert claims of infringement against Dr. Reddy’s based on U.S. Patent No. 8,858,996 and U.S. Patent No. 9,161,920 in the District Court for the District of New Jersey. Settlements were reached with four other generic companies: (i) Teva Pharmaceuticals Industries Limited (formerly known as Actavis Laboratories FL, Inc., which itself was formerly known as Watson Laboratories, Inc. – Florida) and Actavis Pharma, Inc., (ii) Lupin Limited (“Lupin”) and Lupin Pharmaceuticals, Inc., (iii) Mylan Pharmaceuticals Inc., Mylan Laboratories Limited, and Mylan Inc. (collectively, “Mylan”), and (iv) Ajanta Pharma Ltd. and Ajanta Pharma USA Inc. Under the settlement agreements, the license entry date was August 1, 2024; however, the entry date under all four licenses was accelerated and the licenses became effective upon Dr. Reddy’s launch of its generic version of VIMOVO on February 27, 2020.

On November 19, 2018, the District Court granted Dr. Reddy’s and Mylan’s summary judgment ruling that U.S Patent Numbers 9,220,698 and 9,393,208 are invalid, and on January 21, 2019, it entered final judgment against the ‘698 and ‘208 patents and U.S. Patent Number 8,945,621. On February 21, 2019, the Company appealed the adverse judgments on the ‘208 and ‘698 patents to the Federal Circuit Court of Appeals. This appeal remains pending before the Federal Circuit.

On December 4, 2017, Mylan filed a Petition for inter partes review (“IPR”) against the ‘208 patent. The Patent Trial and Appeals Board (“PTAB”) instituted an IPR proceeding on Mylan’s Petition on June 14, 2018. On July 2, 2018, Dr. Reddy’s filed a motion seeking to join Mylan’s ‘208 IPR. On April 1, 2019, the PTAB granted Dr. Reddy’s request to join the Mylan ‘208 IPR. On September 6, 2019, the PTAB issued a Final Written Decision invalidating the ‘208 patent on the basis of obviousness. On November 18, 2019, the Company filed an appeal with the Federal Circuit Court of Appeals to review the PTAB’s ruling invalidating the ‘208 patent. On April 17, 2020, the Federal Circuit vacated the PTAB’s decision and remanded the case to the PTAB for proceedings consistent with the Federal Circuit’s decision in Arthrex, Inc. v. Smith & Nephew, Inc.

On July 22, 2020, the Company received notice from Anchen Pharmaceuticals, Inc. (“Anchen”) that it had filed an ANDA with the FDA seeking approval of a generic version of VIMOVO. The ANDA previously contained a Paragraph III Patent Certification, and the notice advised that Anchen has now made a Paragraph IV Patent Certification alleging that the patents covering VIMOVO are invalid and/or will not be infringed by Anchen’s manufacture, use or sale of the medicine for which the ANDA was submitted.

PROCYSBI

On June 27, 2020, the Company received notice from Lupin that it had filed an ANDA with the FDA seeking approval of a generic version of PROCYSBI. The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering PROCYSBI are invalid and/or will not be infringed by Lupin’s manufacture, use or sale of the medicine for which the ANDA was submitted. The Company filed suit in the United States District Court of New Jersey against Lupin on August 11, 2020, seeking to prevent Lupin from selling a generic version of PROCYSBI.

NOTE 17– EQUITY OFFERING

During the three months ended September 30, 2020, the Company issued 13.6 million ordinary shares in connection with the closing of its underwritten public equity offering on August 11, 2020. The Company received net proceeds of approximately $919.8 million after deducting underwriting discounts and other offering expenses payable by the Company in connection with such offering.

NOTE 18 – SHARE-BASED AND LONG-TERM INCENTIVE PLANS

The Company’s equity incentive plans at September 30, 2020 included its 2011 Equity Incentive Plan, as amended, 2014 Employee Share Purchase Plan, as amended (“2014 ESPP”), Amended and Restated 2014 Equity Incentive Plan (“2014 EIP”), 2014 Non-Employee Equity Plan, as amended (“2014 Non-Employee Plan”), 2020 Employee Share Purchase Plan (“2020 ESPP”) and 2020 Equity Incentive Plan (“2020 EIP”).

On February 19, 2020, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) adopted, subject to shareholder approval, the 2020 EIP, as successor to and continuation of the 2014 EIP, including increasing the number of ordinary shares available for the grant of equity awards to the Company’s employees by an additional 6,900,000 shares. On April 30, 2020, the shareholders of the Company approved the 2020 EIP.

On February 19, 2020, the Compensation Committee adopted, subject to shareholder approval, the 2020 ESPP, as successor to and continuation of the 2014 ESPP, including increasing the number of ordinary shares available for issuance to the Company’s employees pursuant to the exercise of purchase rights by an additional 2,500,000 shares. On April 30, 2020, the shareholders of the Company approved the 2020 ESPP.

As of September 30, 2020, an aggregate of 3,360,057 ordinary shares were authorized and available for future issuance under the 2020 ESPP, an aggregate of 12,435,109 ordinary shares were authorized and available for future grants under the 2020 EIP and an aggregate of 574,193 ordinary shares were authorized and available for future grants under the 2014 Non-Employee Plan.

Stock Options

The following table summarizes stock option activity during the nine months ended September 30, 2020:

	Options			Weighted Average Exercise Price		Weighted Average Contractual Term Remaining (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2019		9,564,202		$	19.85		5.43	$	156,270
Exercised		(2,159,733	)		15.73		—		—
Forfeited		(61,278	)		16.10		—		—
Expired		(26,020	)		22.87		—		—
Outstanding as of September 30, 2020		7,317,171			21.09		4.84		414,067
Exercisable as of September 30, 2020		7,110,608		$	21.11		4.77	$	402,269

Stock options typically have a contractual term of ten years from grant date.

Restricted Stock Units

The following table summarizes restricted stock unit activity for the nine months ended September 30, 2020:

	Number of Units			Weighted Average Grant-Date Fair Value Per Unit
Outstanding as of December 31, 2019		6,541,224		$	18.77
Granted		2,598,930			36.55
Vested		(2,735,510	)		18.07
Forfeited		(388,440	)		25.12
Outstanding as of September 30, 2020		6,016,204		$	26.13

The grant-date fair value of restricted stock units is the closing price of the Company’s ordinary shares on the date of grant.

Performance Stock Unit Awards

The following table summarizes performance stock unit awards (“PSUs”) activity for the nine months ended September 30, 2020:

	Number of Units			Weighted Average Grant-Date Fair Value Per Unit		Average Illiquidity Discount			Recorded Weighted Average Fair Value Per Unit
Outstanding as of December 31, 2019		3,558,900
Granted		587,802		$	42.38		8.1	%	$	38.94
Forfeited		(219,254	)		25.59		(1.4)	%		25.94
Vested		(1,399,127	)		20.84		0.0	%		20.84
Performance Based Adjustment (1)		89,941			20.24		0.0	%		20.24
Outstanding as of September 30, 2020		2,618,262

(1)

Represents adjustment based on the net sales performance criteria meeting 119.2% of target as of December 31, 2019 for the 2019 PSUs (as defined below).

On January 4, 2019, the Company awarded PSUs to key executive participants (“2019 PSUs”). The 2019 PSUs utilize two performance metrics, a short-term component tied to business performance and a long-term component tied to relative compounded annual shareholder rate of return (“TSR”), as follows:

•

30% of the granted 2019 PSUs that may vest (such portion of the PSU award, the “2019 Relative TSR PSUs”) are determined by reference to the level of the Company’s relative TSR over the three-year period ending December 31, 2021, as measured against the TSR of each company included in the Nasdaq Biotechnology Index (“NBI”) during such three-year period. Generally, in order to earn any portion of the 2019 Relative TSR PSUs, the participant must also remain in continuous service with the Company through the earlier of January 1, 2022 or the date immediately prior to a change in control. If a change in control occurs prior to December 31, 2021, the level of the Company’s relative TSR will be measured through the date of the change in control.

•

70% of the granted 2019 PSUs that may vest (such portion of the PSU award, the “2019 Net Sales PSUs”), are determined by reference to the Company’s net sales performance for its rare disease business unit (formerly named the orphan business unit) and KRYSTEXXA. The rare disease business unit and KRYSTEXXA are part of the orphan segment. During the year ended December 31, 2019, the net sales performance criteria was met at 119.2% of target. Accordingly, one-third of the net sales PSUs portion have vested and the remaining two-thirds will vest in equal installments in January 2021 and January 2022, subject to the participant’s continued service with the Company through the applicable vesting dates.

On January 3, 2020, the Company awarded PSUs to key executive participants (“2020 PSUs”). The 2020 PSUs utilize two performance metrics, a short-term component tied to business performance and a long-term component tied to relative compounded annual TSR, as follows:

•

30% of the granted 2020 PSUs that may vest (such portion of the PSU award, the “2020 Relative TSR PSUs”) are determined by reference to the level of the Company’s relative TSR over the three-year period ending December 31, 2022, as measured against the TSR of each company included in the NBI during such three-year period. Generally, in order to earn any portion of the 2020 Relative TSR PSUs, the participant must also remain in continuous service with the Company through the earlier of January 1, 2023 or the date immediately prior to a change in control. If a change in control occurs prior to December 31, 2022, the level of the Company’s relative TSR will be measured through the date of the change in control.

•

70% of the 2020 PSUs that may vest (such portion of the PSU award, the “2020 Net Sales PSUs”) are determined by reference to the Company’s net sales for certain components of its orphan segment.

As a result of the continued impact of the COVID-19 pandemic on certain aspects of the Company’s business, the performance goals associated with certain of the Company’s performance-based equity awards no longer reflected the Company’s expectations, causing the awards to lose their incentive to employees. Accordingly, on July 28, 2020 the Compensation Committee approved a modification to 57% of the 2020 Net Sales PSUs awarded on January 3, 2020 that were to vest based on KRYSTEXXA 2020 net sales. Those 2020 Net Sales PSUs related to KRYSTEXXA may now be earned based on net sales of KRYSTEXXA achieved by the end of a modified 18-month performance period ending July 1, 2021 instead of a 12-month performance period ending December 31, 2020. As a result, the first one-third of any 2020 PSUs earned will vest on July 1, 2021 and the vesting of the remaining two-thirds is unchanged and will vest one-third each on January 5, 2022 and on January 5, 2023. There were twelve participants impacted by the modification. The total compensation cost resulting from the modification is approximately $12.0 million and will be recognized over the remaining requisite service period.

All PSUs outstanding at September 30, 2020 may vest in a range of between 0% and 200%, with the exception of the modified KRYSTEXXA 2020 Net Sales PSUs which are now capped at 150%, based on the performance metrics described above. The Company accounts for the 2019 PSUs and 2020 PSUs as equity-settled awards in accordance with ASC 718. Because the value of the 2019 Relative TSR PSUs and 2020 Relative TSR PSUs are dependent upon the attainment of a level of TSR, it requires the impact of the market condition to be considered when estimating the fair value of the 2019 Relative TSR PSUs and 2020 Relative TSR PSUs. As a result, the Monte Carlo model is applied and the most significant valuation assumptions used related to the 2020 PSUs during the nine months ended September 30, 2020, include:

Valuation date stock price	$	36.10
Expected volatility		47.3	%
Risk free rate		1.5	%

The value of the 2020 Net Sales PSUs is calculated at the end of each quarter based on the expected payout percentage based on estimated full-period performance against targets, and the Company adjusts the expense quarterly.

On January 4, 2019, the Company awarded a company-wide grant of PSUs (the “TEPEZZA PSUs”). Vesting of the TEPEZZA PSUs was contingent upon receiving shareholder approval of amendments to the 2014 EIP, which approval was received on May 2, 2019. The TEPEZZA PSUs were generally eligible to vest contingent upon receiving approval of the TEPEZZA biologics license application from the FDA no later than September 30, 2020 and the employee’s continued service with the Company. In January 2020, the Company received TEPEZZA approval from the FDA and the Company started recognizing the expense related to the TEPEZZA PSUs on that date. As of September 30, 2020, there were 704,262 TEPEZZA PSUs outstanding. For members of the executive committee, one-third of the TEPEZZA PSUs vested on the FDA approval date and one-third will vest on each of the first two anniversaries of the FDA approval date, subject to the employee’s continued service through the applicable vesting dates. For all other participants, one-half of the TEPEZZA PSUs vested on the FDA approval date and one-half will vest on the one-year anniversary of the FDA approval date, subject to the employee’s continued service through the vesting date.

Share-Based Compensation Expense

The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019 (in thousands):

	For the Nine Months Ended September 30,
	2020		2019
Share-based compensation expense
Cost of goods sold	$	5,543	$	2,892
Research and development		11,381		6,931
Selling, general and administrative		96,910		57,243
Total share-based compensation expense	$	113,834	$	67,066

During the nine months ended September 30, 2020 and 2019, the Company recognized $24.4 million and $5.9 million of tax benefit, respectively, related to share-based compensation resulting primarily from the fair value of equity awards at the time of the exercise of stock options and vesting of restricted stock units and PSUs. As of September 30, 2020, the Company estimates that pre-tax unrecognized compensation expense of $158.7 million for all unvested share-based awards, including stock options, restricted stock units and PSUs, will be recognized through the second quarter of 2023. The Company expects to satisfy the exercise of stock options and future distribution of shares for restricted stock units and PSUs by issuing new ordinary shares which have been reserved under the 2020 EIP.

Cash Incentive Program

On January 5, 2018, the Compensation Committee approved a performance cash incentive program for the Company’s executive leadership team, including its executive officers (the “Cash Incentive Program”). Participants receiving awards under the Cash Incentive Program are eligible to earn a cash bonus based upon the achievement of specified Company goals, which both performance criteria were met on or before December 31, 2018. The Company determined that the cash bonus award under the Cash Incentive Program is to be paid out at the maximum 150% target level of $14.1 million. The first and second installments were paid in January 2019 and January 2020, respectively, and the remaining installment will vest and become payable in January 2021, subject to the participant’s continued services with the Company through such vesting date, the date of any earlier change in control, or a termination due to death or disability.

The Company accounted for the Cash Incentive Program as a deferred compensation plan under ASC 710 and is recognizing the payout expense using straight-line recognition through the end of the 36-month vesting period. During the three and nine months ended September 30, 2020, the Company recorded an expense of $0.9 million and $2.8 million, respectively, to the condensed consolidated statement of comprehensive income (loss) related to the Cash Incentive Program.

NOTE 19 – INCOME TAXES

The Company accounts for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by valuation allowances when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are recorded at the currently enacted rates which will be in effect at the time when the temporary differences are expected to reverse in the country where the underlying assets and liabilities are located. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the period in which the change is enacted.

The following table presents the benefit for income taxes for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
Income (loss) before benefit for income taxes	$	201,759		$	(12,330	)	$	172,096		$	(57,108	)
Benefit for income taxes		(91,081	)		(30,564	)		(27,143	)		(37,359	)
Net income (loss)	$	292,840		$	18,234		$	199,239		$	(19,749	)

During the three and nine months ended September 30, 2020, the Company recorded a benefit for income taxes of $91.1 million and $27.1 million, respectively. During the three and nine months ended September 30, 2019, the Company recorded a benefit for income taxes of $30.6 million and $37.4 million, respectively.

The increase in benefit for income taxes recorded during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions, the recognition of a deferred tax asset resulting from an intra-company transfer of intellectual property from a U.S. subsidiary to an Irish subsidiary and an increase in the tax benefits recognized on share-based compensation. These increases in benefit were partially offset by tax expense recognized on U.S. taxable income generated from the intra-company transfer of intellectual property.

The decrease in benefit for income taxes recorded during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions, tax expense recognized on U.S. taxable income generated from an intra-company transfer of intellectual property from a U.S. subsidiary to an Irish subsidiary and a $15.2 million provision recorded following the publication, on April 8, 2020, by the U.S. Department of the Treasury, of Final Regulations for Section 267A (commonly referred to as the “Anti-Hybrid Rules”). The Final Regulations for Section 267A permanently disallow for U.S. tax purposes certain interest expense accrued to a foreign related party during the year ended December 31, 2019. As a result, the Company recorded a write off of a deferred tax asset related to this interest expense during the nine months ended September 30, 2020 and recognized a corresponding tax provision of $15.2 million. These decreases in benefit are partially offset by the recognition of a deferred tax asset in the Irish subsidiary resulting from the intra-company transfer of intellectual property and an increase in the tax benefits recognized on share-based compensation.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our strategy and other aspects of our future operations, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our medicines, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this report and in our other filings with the Securities and Exchange Commission, or SEC. We do not assume any obligation to update any forward-looking statements.

Unless otherwise indicated or the context otherwise requires, references to “Horizon”, “we”, “us” and “our” refer to Horizon Therapeutics plc and its consolidated subsidiaries.

OUR BUSINESS

We are focused on researching, developing and commercializing medicines that address critical needs for people impacted by rare and rheumatic diseases. Our pipeline is purposeful: we apply scientific expertise and courage to bring clinically meaningful therapies to patients. We believe science and compassion must work together to transform lives.

On January 21, 2020, the U.S. Food and Drug Administration, or FDA, approved TEPEZZA® (teprotumumab-trbw), for the treatment of thyroid eye disease, or TED, a serious, progressive and vision-threatening rare autoimmune condition.

We have two reportable segments, (i) the orphan segment (previously the orphan and rheumatology segment), our strategic growth business, and (ii) the inflammation segment, and we report net sales and segment operating income for each segment. Effective in the first quarter of 2020, we (i) reorganized our commercial operations and moved responsibility for and reporting of RAYOS^® to the inflammation segment and (ii) renamed the orphan and rheumatology segment the orphan segment. Net sales generated by TEPEZZA, which was approved in the first quarter of 2020, are reported as part of the renamed orphan segment.

As of September 30, 2020, our medicine portfolio consisted of the following:

Orphan

TEPEZZA (teprotumumab-trbw), for intravenous infusion

KRYSTEXXA® (pegloticase injection), for intravenous infusion

RAVICTI® (glycerol phenylbutyrate) oral liquid

PROCYSBI® (cysteamine bitartrate) delayed-release capsules and granules, for oral use

ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use

BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use

QUINSAIR™ (levofloxacin) solution for inhalation

Inflammation

PENNSAID® (diclofenac sodium topical solution) 2% w/w or PENNSAID 2%, for topical use

DUEXIS® (ibuprofen/famotidine) tablets, for oral use

RAYOS (prednisone) delayed-release tablets, for oral use

VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use

Acquisitions and Divestitures

Since January 1, 2019, we completed the following acquisitions and divestitures:

•

On April 1, 2020, we acquired Curzion Pharmaceuticals, Inc., or Curzion, a privately held development-stage biopharma company, and its development-stage oral selective lysophosphatidic acid 1 receptor (LPAR₁) antagonist, CZN001 (renamed HZN-825), for an upfront cash payment of $45.0 million with additional payments contingent on the achievement of development and regulatory milestones.

•

On June 28, 2019, we sold our rights to MIGERGOT to Cosette Pharmaceuticals, Inc., for an upfront payment and potential additional contingent consideration payments.

•

Effective January 1, 2019, we amended our license and supply agreements with Jagotec AG and Skyepharma AG, which are affiliates of Vectura Group plc, or Vectura. Under these amendments, our rights to LODOTRA® in Europe have been transferred to Vectura.

Impact of COVID-19

On March 11, 2020, the World Health Organization made the assessment that a novel strain of coronavirus, which causes the COVID-19 disease, can be characterized as a pandemic. The President of the United States declared the COVID-19 pandemic a national emergency and many states and municipalities in the Unites States took aggressive actions to reduce the spread of the disease, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing “shelter-in-place” orders which direct individuals to shelter at their places of residence (subject to limited exceptions). Similarly, the Irish government has limited gatherings of people and encouraged employees to work from their homes, and may implement more aggressive policies in the future. In addition, in mid-March 2020 we implemented work-from-home policies for all employees and moved to a “virtual” model with respect to our physician, patient and partner support activities. As certain U.S. states have started to reduce restrictions, we are seeing physicians’ offices beginning to reopen, which reopening varies on a state-by-state basis. As a result, our sales representatives in some areas have transitioned to being back out in the field and are working on ways to re-engage patients and physicians. However, as COVID-19 cases have increased in certain areas, certain U.S. states have started to reimplement restrictions and we have seen some physician offices re-establish limits on in-person visits. While our financial results during the nine months ended September 30, 2020 were strong and we continue to have a significant amount of available liquidity, we anticipate the COVID-19 pandemic to have a negative impact on net sales during the remaining quarter of 2020.

Economic and health conditions in the United States and across most of the world are continuing to change rapidly because of the COVID-19 pandemic. Although COVID-19 is a global issue that is altering business and consumer activity, the pharmaceutical industry is considered a critical and essential industry in the United States and many other countries and, therefore, we do not currently expect any significant extended shut downs of suppliers or distribution channels. We believe we have sufficient inventory of raw materials and finished goods for all of our medicines. We expect patients to be able to continue to receive their medicines from their current pharmacies, alternative pharmacies or, if necessary, by direct shipment from our third-party providers that have such capability.

In regard to our orphan segment, the launch of our new infused medicine for TED, TEPEZZA, has significantly exceeded our expectations. In early 2019, we initiated our pre-launch disease awareness, market development and market access efforts with the multi-functional field-based teams beginning to engage with key stakeholders in July of 2019. These pre-launch efforts, the severity and acute nature of TED, and a highly motivated patient population have generated significant demand for the medicine. While we anticipate a much higher number of new patients in 2020 than our prior estimates, the impact from COVID-19 has slowed the generation of patient enrollment forms for TEPEZZA, which drive new patient starts. KRYSTEXXA is an infused medicine for uncontrolled gout and was also achieving rapid growth prior to the COVID-19 pandemic. While the vast majority of patients on therapy have maintained therapy, due to shelter-in-place guidelines and patients voluntarily delaying visits to healthcare providers and infusion centers, many new patients have delayed infusions. Patient visits to physicians have substantially declined, which has resulted in a reduction of new patients. We expect patient demand to begin to return with the return of healthcare activity, although we cannot predict when healthcare activities will return to normal levels due to the continued uncertainty with respect to the COVID-19 pandemic. Our other rare disease medicines, RAVICTI, PROCYSBI and ACTIMMUNE, treat serious, chronic diseases with serious consequences if left untreated. It is therefore critical for patients to maintain therapy. Patient motivation to continue treatment is high, and therefore we expect these three medicines to be relatively stable, with less impact from COVID-19 compared to our other medicines.

In regard to the inflammation segment, we are experiencing reduced demand given the absence of in-person engagement by our sales representatives with healthcare providers and reduced levels of non-essential patient visits to physicians. This impact has been somewhat mitigated by the virtual engagement efforts of our sales representatives, as well as the use of telemedicine by many physicians, which allows them to continue to see patients and prescribe medicines. In addition, with our HorizonCares program, most patients do not need to physically visit a pharmacy to obtain a prescription because the vast majority of these medicines are delivered to a patient’s home through mail or local courier, depending on the participating pharmacy.

In addition, our clinical trials may be affected by COVID-19. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward COVID-19. Current or potential patients in our ongoing or planned clinical trials may also choose to not enroll, not participate in follow-up clinical visits or drop out of the trial as a precaution against contracting COVID-19. Further, some patients may not be able or willing to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Some clinical sites in the United States have slowed or stopped further enrollment of new patients in clinical trials, denied access to site monitors or otherwise curtailed certain operations. Similarly, our ability to recruit and retain principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may be adversely impacted. These events could delay our clinical trials, increase the cost of completing our clinical trials and negatively impact the integrity, reliability or robustness of the data from our clinical trials.

We are continuing to actively monitor the possible impacts from the COVID-19 pandemic and may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of patients. There is significant uncertainty about the duration and potential impact of the COVID-19 pandemic. This means that our results could change at any time and the contemplated impact of the COVID-19 pandemic on our business results and outlook represents our estimate based on the information available as of today’s date.

Strategy

Horizon today is a leading, high-growth biopharma company focused on rare diseases, delivering innovative therapies to patients and generating value for our shareholders. Our strategy is to expand our development-stage pipeline for sustainable growth and maximize the benefit and value of our key growth drivers TEPEZZA and KRYSTEXXA, both rare disease medicines. We believe our strategy allows more patients to benefit from our on-market medicines and the medicines we develop as part of our pipeline. Our vision is to build healthier communities, urgently and responsibly, which we believe generates value for our many stakeholders, including our shareholders.

Orphan

As of September 30, 2020, our orphan segment consisted of our medicines TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, ACTIMMUNE, BUPHENYL and QUINSAIR.

TEPEZZA is the first and only FDA-approved medicine for the treatment of TED, a serious, progressive and vision-threatening rare autoimmune condition. TEPEZZA was launched commercially in the United States shortly after receiving FDA approval for the treatment of TED on January 21, 2020. The FDA approval was obtained well in advance of the TEPEZZA Prescription Drug User Fee Act action date of March 8, 2020, after an accelerated review of the medicine and its statistically significant Phase 3 data. We believe TEPEZZA represents a significant driver of potential future growth for Horizon.

Our comprehensive post-launch commercial strategy for TEPEZZA aims to enable more TED patients to benefit from TEPEZZA. We are doing this by: (i) driving continued TEPEZZA uptake in the treatment of acute and chronic TED through continued promotion of TEPEZZA to treating physicians; (ii) continuing to develop the TED market by increasing physician awareness of the disease severity, the urgency to diagnose and treat, as well as the benefits of treatment with TEPEZZA; (iii) driving accelerated disease identification and time to treatment through our digital, broadcast and television marketing campaigns; (iv) enhancing the patient journey with our high-touch, patient-centric model as well as support for the patient and site-of-care referral processes; and (v) expanding access for TED patients.

Our first-quarter 2020 launch followed significant market-preparation initiatives in TEPEZZA in 2019 to drive awareness about TED in the medical and patient community and establish a potential pathway for treatment. Our pre-launch market preparation initiatives have proven effective in driving the highly successful launch of TEPEZZA, which has significantly exceeded expectations. To drive the continued strong growth and adoption of TEPEZZA, we are investing in significant expansion efforts in multiple areas: our U.S. infrastructure, which we expect to double in size to approximately 200 employees; our marketing initiatives, our long-term supply capacity and development efforts in pursuing expansion outside the United States.

Our clinical strategy for TEPEZZA is to maximize the value of the medicine for patients. In July 2020, we announced new topline results from our OPTIC-X open-label clinical trial, an extension trial of OPTIC, which was the TEPEZZA Phase 3 pivotal confirmatory clinical trial, as well as data from the OPTIC 48-week off-treatment follow-up period. OPTIC-X results demonstrated that 89 percent of patients who received placebo during OPTIC and then entered OPTIC-X and received TEPEZZA achieved the primary endpoint of 2 mm or more reduction in proptosis at Week 24. These patients had TED diagnoses for an average of one year compared with an average of six months for patients in OPTIC. The results of the OPTIC 48-week off-treatment follow-up period demonstrated that the majority of TEPEZZA patients who were proptosis responders at Week 24 of OPTIC maintained their proptosis response at Week 72, nearly a year off treatment. Of the small number of TEPEZZA patients who relapsed during the OPTIC follow-up period, the majority experienced improvements in proptosis with an additional course of TEPEZZA in OPTIC-X. The OPTIC-X and OPTIC 48-week follow-up period data underscore the long-term durability of TEPEZZA, the potential for retreatment and the efficacy of TEPEZZA in patients with longer duration of TED.

Additionally, in 2020, we announced three new TEPEZZA development programs. We plan to initiate a randomized, placebo-controlled trial of TEPEZZA in patients with chronic TED by year-end 2020 to support the broad indication received upon FDA approval. We have initiated a pharmacokinetic trial to explore subcutaneous dosing of TEPEZZA, which is currently administered by infusion. The objective of the trial is to inform the potential for additional administration options for TEPEZZA, which could provide greater flexibility for patients and physicians. We expect to initiate an exploratory trial by year-end 2020 for TEPEZZA in the treatment of diffuse cutaneous systemic sclerosis, or dcSSc, as part of our evaluation of additional indications for TEPEZZA. dcSSc is a rare, autoimmune rheumatic fibrotic disease with no FDA-approved therapies and of the highest mortality rates among rheumatic diseases. Scientific literature suggests that the mechanism of action of TEPEZZA could have an impact on fibrotic processes such as those that are relevant to dcSSc.

Furthering our objective to drive greater awareness about TED and the TEPEZZA medical community, several TED and TEPEZZA-related sessions will take place at the November 2020 virtual American Academy of Ophthalmology 2020 annual meeting, including additional details on OPTIC 48-week off-treatment durability of response as well as OPTIC-X treatment results. The virtual American Society of Ophthalmic Plastic and Reconstructive Surgery Fall Scientific Symposium, also in November 2020, will include a presentation on the recent case report published in the American Journal of Ophthalmology on the treatment of a patient with chronic TED. Additionally, case reports of improvement of dysthyroid optic neuropathy after treatment with TEPEZZA will be presented at both meetings.

Our other key growth driver is KRYSTEXXA, the only approved biologic indicated for the treatment of uncontrolled gout, or gout that is refractory (unresponsive) to conventional therapies. We are focused on optimizing and maximizing the benefit the medicine offers for patients as well as maximizing its peak U.S. net sales potential, which we are doing through: (i) our patient-centric commercialization efforts; (ii) investing in the clinical evaluation of the use of immunomodulation with KRYSTEXXA; and (iii) investing in education, patient and physician outreach that demonstrates the benefits KRYSTEXXA offers in treating uncontrolled gout.

We are driving growth for KRYSTEXXA in three ways: (i) by supporting the continued adoption of the use of KRYSTEXXA with immunomodulators to increase the complete response rate of KRYSTEXXA; (ii) by increasing new and existing accounts; and (iii) by accelerating uptake by nephrologists.

Our immunomodulation strategy includes (i) investing in research with our MIRROR immunomodulation clinical program; (ii) supporting additional research in immunomodulation and (iii) driving awareness in the medical community about immunomodulation as an option to increase the complete rate of response, duration of therapy and safety profile of KRYSTEXXA so that more patients with uncontrolled gout can benefit from the medicine.

Loss of response is a phenomenon not uncommon with biologics. Immunomodulation therapy has frequently been used with biologics in disease states such as rheumatoid arthritis or inflammatory bowel disease to increase the response rate, and as such it is a common practice in the rheumatology community, given the biologic medicines many rheumatologists use. The body of evidence supporting the immunomodulation approach for KRYSTEXXA is growing. Results of several trials and case series using KRYSTEXXA with immunomodulators have demonstrated response rates ranging between 70 and 100 percent, significantly higher than the 42 percent response rate achieved in the KRYSTEXXA Phase 3 clinical program, which evaluated the use of KRYSTEXXA alone.

Data from the RECIPE trial, an investigator-initiated study partially supported by Horizon, were recently announced in conjunction with a presentation to be made at the 2020 American College of Rheumatology annual meeting in November 2020. RECIPE was the first randomized controlled trial, or RCT, to evaluate the effect of co-administration of KRYSTEXXA with an immunomodulator to increase the complete response rate. The primary endpoint of the trial was the proportion of patients with serum uric acid less than or equal to 6 mg/dL at 12 weeks. Of patients who received KRYSTEXXA co-administered with the immunomodulator mycophenolate mofetil, or MMF, 86 percent achieved this outcome, compared to 40 percent of placebo patients on KRYSTEXXA alone (p-value 0.01). Furthermore, after 12 weeks off MMF therapy but continuing on KRYSTEXXA therapy, 68 percent of immunomodulation patients achieved a sustained response, compared to 30 percent of placebo patients. The combination was well tolerated with no new safety signals. The RECIPE trial data further support our KRYSTEXXA immunomodulation strategy.

We are currently evaluating the efficacy and safety of the concomitant use of KRYSTEXXA with the immunomodulator methotrexate in our MIRROR placebo-controlled RCT. Methotrexate is the immunomodulation agent most used by rheumatologists. Initiated in June 2019, MIRROR RCT completed enrollment of 145 patients in August 2020 and is the largest randomized controlled trial to evaluate immunomodulation with KRYSTEXXA. The MIRROR RCT is designed to enable the potential submission of results to the FDA to update the medicine’s prescribing information. The MIRROR RCT was preceded by our MIRROR open-label trial, completed in 2019, which demonstrated a 79 percent complete response rate for patients using KRYSTEXXA with methotrexate. While our immunomodulation clinical program focuses on methotrexate, our immunomodulation strategy for KRYSTEXXA provides flexibility for physicians in the choice of immunomodulation agent and dose to use with their patients.

In addition to our immunomodulation program, we are investing in additional programs to maximize the value of KRYSTEXXA. In October 2019, we initiated the PROTECT open-label trial to evaluate the use of KRYSTEXXA in adult uncontrolled gout patients who have undergone a kidney transplant, a population that was not originally studied in the KRYSTEXXA pivotal trials. Managing uncontrolled gout is one of the most common and significant unmet needs of kidney transplant patients. We have achieved more than 75 percent enrollment in the PROTECT trial and expect to complete enrollment by the end of 2020. Interim data from the PROTECT trial were presented in October 2020 at the virtual American Society of Nephrology (ASN) Kidney Week. The data presented are encouraging with respect to the ability of KRYSTEXXA to treat uncontrolled gout in this very sensitive transplant population without compromising kidney function. Also, in October 2020, we announced enrollment of the first patient in an open-label trial we are conducting to evaluate the impact of administering KRYSTEXXA over a significantly shorter infusion duration. A shorter infusion duration could meaningfully impact the experience and convenience for patients, physicians and sites of care who use KRYSTEXXA, which is currently administered over a two-hour or longer timeframe.

As part of our overall strategy to expand our development-stage pipeline for sustainable growth, in April 2020 we acquired Curzion and its lysophosphatidic acid 1 receptor (LPAR₁) antagonist candidate, now known as HZN-825, which has demonstrated early clinical signals of benefit in dcSSC. We expect to begin a Phase 2b pivotal trial to evaluate HZN-825 in the treatment of dcSSc in the first half of 2021. On November 2, 2020, as part of our strategy to further explore the potential fibrosis-mediating benefits of LPAR1 antagonism, we announced plans for a development program for HZN-825 in interstitial lung disease, or ILD. The most common ILD is idiopathic pulmonary fibrosis, or IPF, a rare progressive lung disease with a median survival period of less than five years. We anticipate initiating the first trial in an ILD, a Phase 2b trial in the IPF indication, in mid-2021.

Our strategy for RAVICTI, our medicine for the treatment of urea cycle disorders, is to drive growth through increased awareness and diagnosis of urea cycle disorders; to drive conversion to RAVICTI from older-generation nitrogen scavengers, such as generic forms of sodium phenylbutyrate based on the medicine’s differentiated benefits; to position RAVICTI as the first line of therapy; and to increase compliance rates.

Our strategy for PROCYSBI, our medicine for the treatment of nephropathic cystinosis, is to drive conversion of patients from older-generation immediate-release capsules of cysteamine bitartrate; to increase the use of the medicine by diagnosed but untreated patients; to identify previously undiagnosed patients who are suitable for treatment; to position PROCYSBI as a first line of therapy; and to increase compliance rates.

In February 2020, the FDA approved PROCYSBI Delayed-Release Oral Granules in Packets for adults and children one year of age and older living with nephropathic cystinosis. The PROCYSBI Delayed-Release Oral Granules in Packets product is the same as the currently available PROCYSBI capsules product except in respect of the packaging format. This dosage form, which became commercially available in April 2020, provides another administration option for patients in addition to the PROCYSBI capsules.

Our strategy for ACTIMMUNE, our medicine for the treatment of chronic granulomatous disease, includes increasing awareness and diagnosis of chronic granulomatous disease and increasing compliance rates.

Inflammation

As of September 30, 2020, our inflammation segment consisted of our medicines PENNSAID 2%, DUEXIS, RAYOS and VIMOVO. Our strategy for our inflammation segment medicines is to educate physicians about these clinically differentiated medicines and the benefits they offer. Patients are able to fill prescriptions for these medicines through pharmacies participating in our HorizonCares patient assistance program, as well as other pharmacies. We offer discount-card and other programs to patients under which the patient receives a discount on his or her prescription. In certain circumstances when a patient’s prescription is rejected by a managed care vendor, we will pay for the full cost of the prescription. In addition, we have entered into business arrangements with pharmacy benefit managers, or PBMs, and other payers to secure formulary status and reimbursement of our inflammation segment medicines. The business arrangements with the PBMs generally require us to pay administrative fees and rebates to the PBMs and other payers for qualifying prescriptions. Effective in the first quarter of 2020, we reorganized our commercial operations and moved responsibility for and reporting of RAYOS to the inflammation segment.

On February 18, 2020, the FDA granted final approval for Dr. Reddy’s Laboratories Inc. and Dr. Reddy’s Laboratories Ltd., or collectively Dr. Reddy’s, generic version of VIMOVO. On February 27, 2020, Dr. Reddy’s launched its generic version of VIMOVO in the United States, and we now face generic competition with respect to VIMOVO, which has negatively impacted net sales of VIMOVO in 2020. Patent litigation against Dr. Reddy’s for infringement continues with respect to certain patents in the New Jersey District Court. We have repositioned our promotional efforts previously directed to VIMOVO to our other inflammation segment medicines and expect that our VIMOVO net sales will continue to decrease in future periods.

We market all of our medicines in the United States through our field sales forces, which numbered approximately 445 representatives as of September 30, 2020.

RESULTS OF OPERATIONS

Comparison of Three Months Ended September 30, 2020 and 2019

Consolidated Results

The table below should be referenced in connection with a review of the following discussion of our results of operations for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

	For the Three Months Ended September 30,
	2020			2019			Change
	(in thousands)
Net sales	$	636,427		$	335,466		$	300,961
Cost of goods sold		151,475			89,949			61,526
Gross profit		484,952			245,517			239,435
Operating expenses:
Research and development		30,206			24,572			5,634
Selling, general and administrative		226,164			172,326			53,838
Total operating expenses		256,370			196,898			59,472
Operating income		228,582			48,619			179,963
Other expense, net:
Loss on debt extinguishment		(14,602	)		(41,371	)		26,769
Interest expense, net		(12,185	)		(20,428	)		8,243
Foreign exchange loss		(753	)		(40	)		(713	)
Other income, net		717			890			(173	)
Total other expense, net		(26,823	)		(60,949	)		34,126
Income (loss) before benefit for income taxes		201,759			(12,330	)		214,089
Benefit for income taxes		(91,081	)		(30,564	)		(60,517	)
Net income	$	292,840		$	18,234		$	274,606

Net sales. Net sales increased $300.9 million, or 89.7%, to $636.4 million during the three months ended September 30, 2020, from $335.5 million during the three months ended September 30, 2019. The increase in net sales during the three months ended September 30, 2020 was primarily due to an increase in net sales in our orphan segment of $303.8 million, primarily due to post-launch sales of TEPEZZA of $286.9 million.

The following table reflects net sales by medicine for the three months ended September 30, 2020 and 2019 (in thousands, except percentages):

	Three Months Ended September 30,				Change			Change
	2020		2019		$			%
TEPEZZA	$	286,870	$	—	$	286,870		100		%
KRYSTEXXA		108,470		99,576		8,894			9	%
RAVICTI		64,648		59,954		4,694			8	%
PROCYSBI		43,112		40,397		2,715			7	%
ACTIMMUNE		28,312		27,861		451			2	%
BUPHENYL		3,229		3,036		193			6	%
QUINSAIR		163		211		(48	)		(23	)%
Orphan segment net sales	$	534,804	$	231,035	$	303,769			131	%

PENNSAID 2%		50,314		42,091		8,223			20	%
DUEXIS		27,899		29,889		(1,990	)		(7	)%
RAYOS		18,132		19,359		(1,227	)		(6	)%
VIMOVO		5,278		13,092		(7,814	)		(60	)%
Inflammation segment net sales	$	101,623	$	104,431	$	(2,808	)		(3	)%

Total net sales	$	636,427	$	335,466	$	300,961			90	%

Orphan Segment

TEPEZZA. On January 21, 2020, the FDA approved TEPEZZA for the treatment of TED. Net sales generated for TEPEZZA during the three months ended September 30, 2020 were $286.9 million.

KRYSTEXXA. Net sales increased $8.9 million, or 9%, to $108.5 million during the three months ended September 30, 2020 from $99.6 million during the three months ended September 30, 2019. Net sales increased by approximately $7.7 million due to higher net pricing and $1.2 million due to volume growth. As a result of the COVID-19 pandemic, KRYSTEXXA net sales were negatively impacted during the three months ended September 30, 2020, due to reduced willingness of patients to visit physician offices and infusion centers.

RAVICTI. Net sales increased $4.7 million, or 8%, to $64.7 million during the three months ended September 30, 2020, from $60.0 million during the three months ended September 30, 2019. Net sales increased by approximately $4.1 million due to volume growth and $0.6 million due to higher net pricing.

PROCYSBI. Net sales increased $2.7 million, or 7%, to $43.1 million during the three months ended September 30, 2020, from $40.4 million during the three months ended September 30, 2019. Net sales increased by approximately $3.6 million due to higher net pricing, partially offset by a decrease of approximately $0.9 million resulting from lower sales volume.

ACTIMMUNE. Net sales increased $0.4 million, or 2%, to $28.3 million during the three months ended September 30, 2020, from $27.9 million during the three months ended September 30, 2019. Net sales increased by approximately $2.4 million due to higher net pricing, partially offset by a decrease of approximately $2.0 million resulting from lower sales volume.

Inflammation Segment

As a result of the COVID-19 pandemic, sales volumes for our inflammation medicines have been negatively impacted due to reduced demand given the absence of in-person engagement by our sales representatives with health care providers and reduced levels of non-essential patient visits to physicians.

PENNSAID 2%. Net sales increased $8.2 million, or 20%, to $50.3 million during the three months ended September 30, 2020, from $42.1 million during the three months ended September 30, 2019. Net sales increased by approximately $17.8 million due to higher net pricing primarily due to lower utilization of our patient assistance programs, partially offset by a decrease of approximately $9.6 million resulting from lower sales volume.

DUEXIS. Net sales decreased $2.0 million, or 7%, to $27.9 million during the three months ended September 30, 2020, from $29.9 million during the three months ended September 30, 2019. Net sales decreased by approximately $4.8 million resulting from lower sales volume, partially offset by an increase of approximately $2.8 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs.

RAYOS. Net sales decreased $1.3 million, or 6%, to $18.1 million during the three months ended September 30, 2020, from $19.4 million during the three months ended September 30, 2019. Net sales decreased by approximately $3.7 million due to lower sales volume, partially offset by an increase of $2.4 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs.

VIMOVO. Net sales decreased $7.8 million, or 60%, to $5.3 million during the three months ended September 30, 2020, from $13.1 million during the three months ended September 30, 2019. Net sales decreased by approximately $11.1 million due to lower sales volume, partially offset by an increase of $2.4 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs and an increase of $0.9 million related to authorized generic VIMOVO sales in the third quarter of 2020.

The table below reconciles our gross to net sales for the three months ended September 30, 2020 and 2019 (in millions, except percentages):

	Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
	Amount			% of Gross Sales			Amount			% of Gross Sales
Gross sales	$	1,114.9			100.0	%	$	953.4			100.0	%
Adjustments to gross sales:
Medicine returns		(6.7	)		(0.6	)%		(9.1	)		(1.0	)%
Prompt pay discounts		(13.1	)		(1.2	)%		(17.4	)		(1.8	)%
Commercial rebates and wholesaler fees		(85.9	)		(7.7	)%		(112.6	)		(11.8	)%
Government rebates and chargebacks		(150.7	)		(13.5	)%		(132.6	)		(13.9	)%
Co-pay and other patient assistance		(222.1	)		(19.9	)%		(346.2	)		(36.3	)%
Total adjustments		(478.5	)		(42.9	)%		(617.9	)		(64.8	)%
Net sales	$	636.4			57.1	%	$	335.5			35.2	%

During the three months ended September 30, 2020, commercial rebates and wholesaler fees, as a percentage of gross sales, decreased to 7.7% from 11.8% during the three months ended September 30, 2019, primarily as a result of an increased proportion of orphan segment medicines sold and the impact of generic competition on VIMOVO sales.

During the three months ended September 30, 2020, co-pay and other patient assistance costs, as a percentage of gross sales, decreased to 19.9% from 36.3% during the three months ended September 30, 2019, primarily due to lower utilization of our patient assistance programs and the impact of generic competition on VIMOVO sales.

Cost of Goods Sold. Cost of goods sold increased $61.5 million to $151.5 million during the three months ended September 30, 2020, from $90.0 million during the three months ended September 30, 2019. The increase in cost of goods sold during the three months ended September 30, 2020 compared to three months ended September 30, 2019, was primarily due to a $30.8 million increase in royalty expense and a $7.7 million increase in amortization expense. These increases are mainly related to royalties payable on net sales of TEPEZZA, which was launched in the first quarter of 2020, and the amortization of the TEPEZZA developed technology intangible asset, which commenced in the first quarter of 2020. As a percentage of net sales, cost of goods sold was 23.8% during the three months ended September 30, 2020, compared to 26.8% during the three months ended September 30, 2019. The decrease in cost of goods sold as a percentage of net sales was primarily due to a change in the mix of medicines sold.

Research and Development Expenses. Research and development expenses increased $5.6 million to $30.2 million during the three months ended September 30, 2020, from $24.6 million during the three months ended September 30, 2019. The increase was primarily attributable to a $6.4 million increase in clinical trial and manufacturing development costs and $2.4 million increase in employee-related costs, partially offset by a milestone payment of $3.0 million to Roche related to the TEPEZZA BLA submission to the FDA that was incurred during the third quarter of 2019.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $53.8 million to $226.1 million during the three months ended September 30, 2020, from $172.3 million during the three months ended September 30, 2019. The increase was primarily attributable to an increase of $25.4 million in employee costs and an increase of $16.5 million related to marketing program costs. These increases were mainly due to the launch of TEPEZZA.

Loss on Debt Extinguishment. During the three months ended September 30, 2020, we recorded a loss on debt extinguishment of $14.6 million in the condensed consolidated statements of comprehensive income (loss), which reflects the partial exchange of our 2.5% Exchangeable Senior Notes due 2022, or the Exchangeable Senior Notes. As of September 30, 2020, $400.0 million in aggregate principal amount of Exchangeable Senior Notes had been exchanged for ordinary shares and cash payments. See Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further detail.

During the three months ended September 30, 2019, we recorded a loss on debt extinguishment of $41.4 million in the condensed consolidated statements of comprehensive income (loss), which reflected the early redemption premiums and the write-off of the deferred financing fees and debt discount fees related to the prepayment of $525.0 million of our 2023 Senior Notes, and our 8.750% Senior Notes due 2024, or the 2024 Senior Notes, and the write-off of the deferred financing fees and debt discount fees related to the $100.0 million term loan repayment.

Interest Expense, Net. Interest expense, net, decreased $8.2 million to $12.2 million during the three months ended September 30, 2020, from $20.4 million during the three months ended September 30, 2019. The decrease was primarily due to a decrease in interest expense of $12.3 million, primarily related to the decrease in the principal amount of our term loans in July 2019, redemption of our remaining 6.625% Senior Notes due 2023, or the 2023 Senior Notes, in August 2019, redemption of our 2024 Senior Notes, in August 2019 and the exchange of our Exchangeable Senior Notes, partially offset by a decrease in interest income of $4.1 million.

Benefit for Income Taxes. During the three months ended September 30, 2020, we recorded a benefit for income taxes of $91.1 million and a benefit for income taxes of $30.6 million during the three months ended September 30, 2019. The increase in benefit for income taxes recorded during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions, the recognition of a deferred tax asset resulting from an intra-company transfer of intellectual property from a U.S. subsidiary to an Irish subsidiary and an increase in the tax benefits recognized on share-based compensation. These increases in benefit were partially offset by tax expense recognized on U.S. taxable income generated from the intra-company transfer of intellectual property.

Information by Segment

See Note 11, Segment and Other Information, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of our segment operating income to our total income (loss) before benefit for income taxes for the three months ended September 30, 2020 and 2019.

Orphan Segment

The following table reflects our orphan segment net sales and segment operating income for the three months ended September 30, 2020 and 2019 (in thousands, except percentages).

	For the Three Months Ended September 30,
	2020		2019		Change		% Change
Net sales	$	534,804	$	231,035	$	303,769		131	%
Segment operating income		274,687		79,695		194,992		245	%

The increase in orphan segment net sales during the three months ended September 30, 2020 is described in the Consolidated Results section above.

Segment operating income. Orphan segment operating income increased $195.0 million to $274.7 million during the three months ended September 30, 2020, from $79.7 million during the three months ended September 30, 2019. The increase was primarily attributable to an increase in net sales of $303.8 million, primarily due to post-launch sales of TEPEZZA as described above, partially offset by an increase in selling, general and administrative expenses of $44.1 million primarily due to increased costs relating to the launch of TEPEZZA and an increase of $32.0 million in royalty expense, primarily related to royalties payable on net sales of TEPEZZA.

Inflammation Segment

The following table reflects our inflammation segment net sales and segment operating income for the three months ended September 30, 2020 and 2019 (in thousands, except percentages).

	For the Three Months Ended September 30,
	2020		2019		Change			% Change
Net sales	$	101,623	$	104,431	$	(2,808	)		(3	%)
Segment operating income		55,098		49,766		5,332			11	%

The decrease in inflammation segment net sales during the three months ended September 30, 2020 is described in the Consolidated Results section above.

Segment operating income. Inflammation segment operating income increased $5.3 million to $55.1 million during the three months ended September 30, 2020, from $49.8 million during the three months ended September 30, 2019. The increase was primarily attributable to a decrease in sales and marketing costs of $5.9 million.

RESULTS OF OPERATIONS

Comparison of Nine Months Ended September 30, 2020 and 2019

Consolidated Results

The table below should be referenced in connection with a review of the following discussion of our results of operations for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

	For the Nine Months Ended September 30,
	2020			2019			Change
	(in thousands)
Net sales	$	1,455,115		$	936,484		$	518,631
Cost of goods sold		370,406			267,254			103,152
Gross profit		1,084,709			669,230			415,479
Operating expenses:
Research and development		138,483			74,611			63,872
Selling, general and administrative		696,271			511,720			184,551
Loss on sale of assets		—			10,963			(10,963	)
Total operating expenses		834,754			597,294			237,460
Operating income		249,955			71,936			178,019
Other expense, net:
Interest expense, net		(48,100	)		(69,991	)		21,891
Loss on debt extinguishment		(31,856	)		(58,835	)		26,979
Foreign exchange gain (loss)		306			(25	)		331
Other income (expense), net		1,791			(193	)		1,984
Total other expense, net		(77,859	)		(129,044	)		51,185
Income (loss) before benefit for income taxes		172,096			(57,108	)		229,204
Benefit for income taxes		(27,143	)		(37,359	)		10,216
Net income (loss)	$	199,239		$	(19,749	)	$	218,988

Net sales. Net sales increased $518.6 million, or 55.4%, to $1,455.1 million during the nine months ended September 30, 2020, from $936.5 million during the nine months ended September 30, 2019. The increase in net sales during the nine months ended September 30, 2020 was primarily due to an increase in net sales in our orphan segment of $558.7 million primarily due to post-launch sales of TEPEZZA of $476.3 million and higher net sales of KRYSTEXXA and RAVICTI when compared to the nine months ended September 30, 2019, partially offset by a decrease in net sales in our inflammation segment of $40.1 million.

The following table reflects net sales by medicine for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

	Nine Months Ended September 30,				Change			Change
	2020		2019		$			%
TEPEZZA	$	476,257	$	—	$	476,257		100		%
KRYSTEXXA		276,920		231,634		45,286			20	%
RAVICTI		191,386		160,299		31,087			19	%
PROCYSBI		122,812		121,142		1,670			1	%
ACTIMMUNE		83,152		78,883		4,269			5	%
BUPHENYL		8,389		8,173		216			3	%
QUINSAIR		499		550		(51	)		(9	)%
Orphan segment net sales	$	1,159,415	$	600,681	$	558,734			93	%

PENNSAID 2%		126,925		143,751		(16,826	)		(12	)%
DUEXIS		87,044		89,412		(2,368	)		(3	)%
RAYOS		50,800		59,067		(8,267	)		(14	)%
VIMOVO		30,931		41,751		(10,820	)		(26	)%
MIGERGOT		—		1,822		(1,822	)	(100		)%
Inflammation segment net sales	$	295,700	$	335,803	$	(40,103	)		(12	)%

Total net sales	$	1,455,115	$	936,484	$	518,631			55	%

Orphan Segment

TEPEZZA. On January 21, 2020, the FDA approved TEPEZZA for the treatment of TED. Net sales generated for TEPEZZA during the nine months ended September 30, 2020 were $476.3 million.

KRYSTEXXA. Net sales increased $45.3 million, or 20%, to $276.9 million during the nine months ended September 30, 2020 from $231.6 million during the nine months ended September 30, 2019. Net sales increased by approximately $27.5 million due to volume growth and $17.8 million due to higher net pricing. As a result of the COVID-19 pandemic, KRYSTEXXA net sales were negatively impacted during the nine months ended September 30, 2020, due to reduced willingness of patients to visit physician offices and infusion centers.

RAVICTI. Net sales increased $31.1 million, or 19%, to $191.4 million during the nine months ended September 30, 2020, from $160.3 million during the nine months ended September 30, 2019. Net sales increased by approximately $17.7 million due to higher net pricing and an increase of approximately $13.4 million due to higher sales volume.

PROCYSBI. Net sales increased $1.7 million, or 1%, to $122.8 million during the nine months ended September 30, 2020, from $121.1 million during the nine months ended September 30, 2019. Net sales increased by approximately $3.2 million due to higher net pricing, partially offset by a decrease of approximately $1.5 million due to lower sales volume.

ACTIMMUNE. Net sales increased $4.3 million, or 5%, to $83.2 million during the nine months ended September 30, 2020, from $78.9 million during the nine months ended September 30, 2019. Net sales increased by approximately $6.7 million due to higher net pricing, partially offset by a decrease of approximately $2.4 million resulting from lower sales volume.

Inflammation Segment

PENNSAID 2%. Net sales decreased $16.9 million, or 12%, to $126.9 million during the nine months ended September 30, 2020, from $143.8 million during the nine months ended September 30, 2019. Net sales decreased by approximately $45.2 million due to lower sales volume, partially offset by an increase of approximately $28.3 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs.

DUEXIS. Net sales decreased $2.4 million, or 3%, to $87.0 million during the nine months ended September 30, 2020, from $89.4 million during the nine months ended September 30, 2019. Net sales decreased by approximately $23.5 million resulting from lower sales volume, partially offset by an increase of $21.1 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs.

RAYOS. Net sales decreased $8.3 million, or 14%, to $50.8 million during the nine months ended September 30, 2020, from $59.1 million during the nine months ended September 30, 2019. Net sales decreased by approximately $19.2 million due to lower sales volume, partially offset by an increase of $10.9 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs.

VIMOVO. Net sales decreased $10.9 million, or 26%, to $30.9 million during the nine months ended September 30, 2020, from $41.8 million during the nine months ended September 30, 2019. Net sales decreased by approximately $32.9 million due to lower sales volume, partially offset by an increase of $18.7 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs and an increase of $3.3 million related to authorized generic VIMOVO sales during the nine months ended September 30, 2020.

MIGERGOT. On June 28, 2019, we sold our rights to MIGERGOT.

The table below reconciles our gross to net sales for the nine months ended September 30, 2020 and 2019 (in millions, except percentages):

	Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
	Amount			% of Gross Sales			Amount			% of Gross Sales
Gross sales	$	2,816.4			100.0	%	$	2,889.9			100.0	%
Adjustments to gross sales:
Medicine returns		(11.6	)		(0.4	)%		(19.9	)		(0.7	)%
Prompt pay discounts		(38.7	)		(1.4	)%		(53.0	)		(1.8	)%
Commercial rebates and wholesaler fees		(223.5	)		(7.9	)%		(342.6	)		(11.9	)%
Government rebates and chargebacks		(424.9	)		(15.1	)%		(366.7	)		(12.7	)%
Co-pay and other patient assistance		(662.6	)		(23.5	)%		(1,171.2	)		(40.5	)%
Total adjustments		(1,361.3	)		(48.3	)%		(1,953.4	)		(67.6	)%
Net sales	$	1,455.1			51.7	%	$	936.5			32.4	%

During the nine months ended September 30, 2020, commercial rebates and wholesaler fees, as a percentage of gross sales, decreased to 7.9% from 11.9% during the nine months ended September 30, 2019, primarily as a result of an increased proportion of orphan segment medicines sold and the impact of generic competition on VIMOVO sales.

During the nine months ended September 30, 2020, government rebates and chargebacks, as a percentage of gross sales, increased to 15.1% from 12.7% during the nine months ended September 30, 2019, primarily as a result of an increased proportion of orphan segment medicines sold. Government rebates and chargebacks as a percentage of gross sales are typically higher for medicines in the orphan segment compared to medicines in the inflammation segment.

During the nine months ended September 30, 2020, co-pay and other patient assistance costs, as a percentage of gross sales, decreased to 23.5% from 40.5% during the nine months ended September 30, 2019, primarily due to lower utilization of our patient assistance programs and the impact of generic competition on VIMOVO sales.

Cost of Goods Sold. Cost of goods sold increased $103.1 million to $370.4 million during the nine months ended September 30, 2020, from $267.3 million during the nine months ended September 30, 2019. The increase in cost of goods sold during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, was primarily due to a $50.2 million increase in royalty expense and a $17.9 million increase in amortization expense. These increases are mainly related to royalties payable on net sales of TEPEZZA, which was launched in the first quarter of 2020, and the amortization of the TEPEZZA developed technology intangible asset, which commenced in the first quarter of 2020. As a percentage of net sales, cost of goods sold was 25.4% during the nine months ended September 30, 2020, compared to 29.0% during the nine months ended September 30, 2019. The decrease in cost of goods sold as a percentage of net sales was primarily due to a change in the mix of medicines sold.

Research and Development Expenses. Research and development expenses increased $63.9 million to $138.5 million during the nine months ended September 30, 2020, from $74.6 million during the nine months ended September 30, 2019. The increase was primarily attributable to the $45.0 million acquisition of Curzion during the nine months ended September 30, 2020. Pursuant to ASC 805 (as amended by ASU No. 2017-01), we accounted for the Curzion acquisition as the purchase of an in-process research and development asset and, pursuant to ASC 730, recorded the purchase price as a research and development expense during the nine months ended September 30, 2020. Additionally. clinical trial and manufacturing development costs increased $16.6 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $184.6 million to $696.3 million during the nine months ended September 30, 2020, from $511.7 million during the nine months ended September 30, 2019. The increase was primarily attributable to an increase of $104.2 million in employee costs and an increase of $39.6 million related to marketing program costs. These increases are mainly due to the launch of TEPEZZA.

Loss on Sale of Assets. During the nine months ended September 30, 2019, we sold our rights to MIGERGOT for cash proceeds of $6.0 million, and we recorded a loss of $11.0 million on the sale.

Interest Expense, Net. Interest expense, net, decreased $21.9 million to $48.1 million during the nine months ended September 30, 2020, from $70.0 million during the nine months ended September 30, 2019. The decrease was primarily due to a decrease in interest expense of $33.5 million, primarily related to the decrease in the principal amount of our term loans in March 2019 and July 2019, redemption of our 2023 Senior Notes in May 2019 and in August 2019, redemption of our 2024 Senior Notes in August 2019 and the exchange of our Exchangeable Senior Notes, partially offset by a decrease in interest income of $11.6 million.

Loss on Debt Extinguishment. During the nine months ended September 30, 2020, we recorded a loss on debt extinguishment of $31.9 million in the condensed consolidated statements of comprehensive income (loss), which reflects the exchange of our Exchangeable Senior Notes. As of September 30, 2020, $400.0 million in aggregate principal amount of Exchangeable Senior Notes were fully extinguished and exchanged for ordinary shares or cash. See Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further detail.

During the nine months ended September 30, 2019, we recorded a loss on debt extinguishment of $58.8 million in the condensed consolidated statements of comprehensive income (loss), which reflected the early redemption premiums and the write-off of the deferred financing fees and debt discount fees related to the prepayment of $775.0 million of our 2023 Senior Notes and 2024 Senior Notes and the write-off of the deferred financing fees and debt discount fees related to the $400.0 million of term loan repayments.

Benefit for Income Taxes. During the nine months ended September 30, 2020, we recorded a benefit for income taxes of $27.1 million and a benefit for income taxes of $37.4 million during the nine months ended September 30, 2019. The decrease in benefit for income taxes recorded during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions, tax expense recognized on U.S. taxable income generated from an intra-company transfer of intellectual property from a U.S. subsidiary to an Irish subsidiary and a $15.2 million provision recorded following the publication, on April 8, 2020, by the U.S. Department of the Treasury, of Final Regulations for Section 267A, or commonly referred to as the Anti-Hybrid Rules. The Final Regulations for Section 267A permanently disallow for U.S. tax purposes certain interest expense accrued to a foreign related party during the year ended December 31, 2019. As a result, we recorded a write off of a deferred tax asset related to this interest expense during the nine months ended September 30, 2020 and recognized a corresponding tax provision of $15.2 million. These decreases in benefit are partially offset by the recognition of a deferred tax asset in the Irish subsidiary resulting from the intra-company transfer of intellectual property and an increase in the tax benefits recognized on share-based compensation.

Information by Segment

Orphan Segment

The following table reflects our orphan segment net sales and segment operating income for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages).

	For the Nine Months Ended September 30,
	2020		2019		Change		% Change
Net sales	$	1,159,415	$	600,681	$	558,734		93	%
Segment operating income		480,584		180,095		300,489		167	%

The increase in orphan segment net sales during the nine months ended September 30, 2020 is described in the Consolidated Results section above.

Segment operating income. Orphan segment operating income increased $300.5 million to $480.6 million during the nine months ended September 30, 2020, from $180.1 million during the nine months ended September 30, 2019. The increase was primarily attributable to an increase in net sales of $558.7 million primarily due to post-launch sales of TEPEZZA as described above, partially offset by an increase in selling, general and administrative expenses of $146.7 million primarily due to increased costs relating to the launch of TEPEZZA and an increase of $55.2 million in royalty expense, primarily related to royalties payable on net sales of TEPEZZA.

Inflammation Segment

The following table reflects our inflammation segment net sales and segment operating income for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages).

	For the Nine Months Ended September 30,
	2020		2019		Change			% Change
Net sales	$	295,700	$	335,803	$	(40,103	)		(12	%)
Segment operating income		145,136		161,685		(16,549	)		(10	%)

The decrease in inflammation segment net sales during the nine months ended September 30, 2020 is described in the Consolidated Results section above.

Segment operating income. Inflammation segment operating income decreased $16.6 million to $145.1 million during the nine months ended September 30, 2020, from $161.7 million during the nine months ended September 30, 2019. The decrease was primarily attributable to a decrease in net sales of $40.1 million as described above, partially offset by a decrease in sales and marketing costs of $20.5 million.

NON-GAAP FINANCIAL MEASURES

EBITDA, or earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share are used and provided by us as non-GAAP financial measures. These non-GAAP financial measures are intended to provide additional information on our performance, operations and profitability. Adjustments to our GAAP figures as well as EBITDA exclude acquisition/divestiture-related costs, upfront, progress and milestone payments related to license and collaboration agreements, drug substance harmonization costs, fees related to refinancing activities, restructuring and realignment costs, litigation settlements and charges related to discontinuation of the Friedreich’s ataxia program, as well as non-cash items such as share-based compensation, inventory step-up expense, depreciation and amortization, non-cash interest expense, long-lived assets impairment charges, loss on debt extinguishments, loss on sale of assets and other non-cash adjustments. Certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred. We maintain an established non-GAAP cost policy that guides the determination of what costs will be excluded in non-GAAP measures. We believe that these non-GAAP financial measures, when considered together with the GAAP figures, can enhance an overall understanding of our financial and operating performance. The non-GAAP financial measures are included with the intent of providing investors with a more complete understanding of our historical financial results and trends and to facilitate comparisons between periods. In addition, these non-GAAP financial measures are among the indicators our management uses for planning and forecasting purposes and measuring our performance. For example, adjusted EBITDA is used by us as one measure of management performance under certain incentive compensation arrangements. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies.

Reconciliations of reported GAAP net income (loss) to EBITDA, adjusted EBITDA and non-GAAP net income, and the related per share amounts, were as follows (in thousands, except share and per share amounts):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
GAAP net income (loss)	$	292,840		$	18,234		$	199,239		$	(19,749	)
Depreciation ⁽¹⁾		5,157			1,658			19,229			4,574
Amortization and step-up:
Intangible amortization expense ⁽²⁾		65,353			57,662			190,677			172,762
Inventory step-up expense		—			—			—			90
Interest expense, net (including amortization of debt discount and deferred financing costs)		12,185			20,428			48,100			69,991
Benefit for income taxes		(91,081	)		(30,564	)		(27,143	)		(37,359	)
EBITDA		284,454			67,418			430,102			190,309
Other non-GAAP adjustments:
Share-based compensation ⁽³⁾		30,356			18,151			113,834			67,066
Loss on debt extinguishment ⁽⁴⁾		14,602			41,371			31,856			58,835
Acquisition/divestiture-related costs ⁽⁵⁾		199			67			47,296			2,613
Drug substance harmonization costs ⁽⁶⁾		193			80			483			394
Upfront, progress and milestones payments related to license and collaboration agreements ⁽⁷⁾		—			3,073			3,000			9,073
Impairment of long-lived assets ⁽⁸⁾		—			—			1,072			—
Fees related to refinancing activities ⁽⁹⁾		—			262			54			1,437
Loss on sale of assets⁽¹⁰⁾		—			—			—			10,963
Charges related to discontinuation of Friedreich’s ataxia program ⁽¹¹⁾		—			—			—			1,221
Litigation settlements ⁽¹²⁾		—			—			—			1,000
Restructuring and realignment costs⁽¹³⁾		—			—			—			33
Total of other non-GAAP adjustments		45,350			63,004			197,595			152,635
Adjusted EBITDA	$	329,804		$	130,422		$	627,697		$	342,944

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
GAAP net income (loss)	$	292,840		$	18,234		$	199,239		$	(19,749	)
Non-GAAP adjustments:
Depreciation ⁽¹⁾		5,157			1,658			19,229			4,574
Amortization and step-up:
Intangible amortization expense ⁽²⁾		65,353			57,662			190,677			172,762
Amortization of debt discount and deferred financing costs ⁽¹⁴⁾		1,208			5,447			12,025			17,069
Inventory step-up expense		—			—			—			90
Share-based compensation ⁽³⁾		30,356			18,151			113,834			67,066
Loss on debt extinguishment ⁽⁴⁾		14,602			41,371			31,856			58,835
Acquisition/divestiture-related costs ⁽⁵⁾		199			67			47,296			2,613
Drug substance harmonization costs ⁽⁶⁾		193			80			483			394
Upfront, progress and milestones payments related to license and collaboration agreements⁽⁷⁾		—			3,073			3,000			9,073
Impairment of long-lived assets ⁽⁸⁾		—			—			1,072			—
Fees related to refinancing activities ⁽⁹⁾		—			262			54			1,437
Loss on sale of assets ⁽¹⁰⁾		—			—			—			10,963
Charges related to discontinuation of Friedreich’s ataxia program ⁽¹¹⁾		—			—			—			1,221
Litigation settlements ⁽¹²⁾		—			—			—			1,000
Restructuring and realignment costs ⁽¹³⁾		—			—			—			33
Total of pre-tax non-GAAP adjustments		117,068			127,771			419,526			347,130
Income tax effect of pre-tax non-GAAP adjustments ⁽¹⁵⁾		(23,063	)		(21,919	)		(80,122	)		(52,291	)
Other non-GAAP income tax adjustments ⁽¹⁶⁾		5,331			—			20,541			(1,452	)
Total non-GAAP adjustments		99,336			105,852			359,945			293,387
Non-GAAP Net Income	$	392,176		$	124,086		$	559,184		$	273,638

Non-GAAP Earnings Per Share:
Weighted average ordinary shares – Basic		212,320,219			186,470,141			198,413,779			181,949,838

Non-GAAP Earnings Per Share – Basic
GAAP income (loss) per share – Basic	$	1.38		$	0.10		$	1.00		$	(0.11	)
Non-GAAP adjustments		0.47			0.57			1.82			1.61
Non-GAAP earnings per share – Basic	$	1.85		$	0.67		$	2.82		$	1.50

Non-GAAP Net Income	$	392,176		$	124,086		$	559,184		$	273,638
Effect of assumed exchange of Exchangeable Senior Notes, net of tax		223			—			3,789			—
Numerator - non-GAAP Net Income	$	392,399		$	124,086		$	562,973		$	273,638

Weighted average ordinary shares – Diluted
Weighted average ordinary shares – Basic		212,320,219			186,470,141			198,413,779			181,949,838
Ordinary share equivalents		12,959,618			7,701,826			19,431,212			7,747,931
Denominator - weighted average ordinary shares – Diluted		225,279,837			194,171,967			217,844,991			189,697,769

Non-GAAP Earnings Per Share – Diluted
GAAP income (loss) per share – Diluted	$	1.31		$	0.09		$	0.95		$	(0.11	)
Non-GAAP adjustments		0.43			0.55			1.63			1.61
Diluted earnings per share effect of ordinary share equivalents		—			—			—			(0.06	)
Non-GAAP earnings per share – Diluted	$	1.74		$	0.64		$	2.58		$	1.44

(1)

Represents depreciation expense related to our property, equipment, software and leasehold improvements.

(2)

Intangible amortization expenses are associated with our intellectual property rights, developed technology and customer relationships related to TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, ACTIMMUNE, BUPHENYL, PENNSAID 2%, RAYOS, VIMOVO and MIGERGOT.

(3)

Represents share-based compensation expense associated with our stock option, restricted stock unit and performance stock unit grants to our employees and non-employee directors, and our employee share purchase plan.

(4)

During the nine months ended September 30, 2020, we recorded a loss on debt extinguishment of $31.9 million in the condensed consolidated statements of comprehensive income (loss), which reflects the extinguishment of our Exchangeable Senior Notes.

(5)

Represents expenses, including legal and consulting fees, incurred in connection with our acquisitions and divestitures. Costs recovered from subleases of acquired facilities and reimbursed expenses incurred under transition arrangements for divestitures are also reflected in this line item. In addition, the nine months ended September 30, 2020 amounts include the Curzion acquisition payment of $45.0 million, which was recorded as a research and development expense.

(6)

During the year ended December 31, 2016, we entered into a definitive agreement to acquire certain rights to interferon gamma-1b, marketed as IMUKIN in an estimated thirty countries primarily in Europe and the Middle East, or the IMUKIN purchase agreement. We already owned the rights to interferon gamma-1b marketed as ACTIMMUNE in the United States, Canada and Japan. In connection with the IMUKIN purchase agreement, we also committed to pay our contract manufacturer certain amounts related to the harmonization of the manufacturing processes for ACTIMMUNE and IMUKIN drug substance, or the harmonization program. At the time we entered into the IMUKIN purchase agreement and the harmonization program commitment was made, we had anticipated achieving certain benefits should the Phase 3 clinical trial evaluating ACTIMMUNE for the treatment of Friedreich’s ataxia be successful. If the study had been successful and if U.S. marketing approval had subsequently been obtained, we had forecasted significant increases in demand for the medicine and the harmonization program would have resulted in significant benefits to us. Following our discontinuation of the FA program, we determined that certain assets, including an upfront payment related to the IMUKIN purchase agreement, were impaired, and the costs under the harmonization program would no longer have benefit to us and should be expensed as incurred.

(7)

During the nine months ended September 30, 2020, we recognized a $3.0 million progress payment in relation to the collaboration agreement with HemoShear Therapeutics, LLC, or HemoShear, which was paid in July 2020.

During the nine months ended September 30, 2019, we recorded an upfront, progress and milestone payments related to license and collaboration agreements of $9.1 million which was composed of a $3.0 million milestone payment to Roche relating to the TEPEZZA BLA submission to the FDA during the third quarter of 2019, an upfront cash payment of $2.0 million and a progress payment of $4.0 million in relation to the collaboration agreement with HemoShear.

(8)

During the nine months ended September 30, 2020, we recorded an impairment charge of $1.1 million related to the Novato, California office lease, which was obtained through an acquisition.

(9)

Represents arrangement and other fees relating to our refinancing activities.

(10)

During the nine months ended September 30, 2019, we recorded a loss of $11.0 million on the sale of our rights to MIGERGOT.

(11)

Represents expenses incurred relating to discontinuation of the Friedreich’s ataxia program and a reduction to previous charges recorded.

(12)

We recorded $1.0 million of expense during the nine months ended September 30, 2019 for litigation settlements.

(13)

Represents expenses, including severance costs and consulting fees, related to restructuring and realignment activities.

(14)

Represents amortization of debt discount and deferred financing costs associated with our debt.

(15)

Income tax adjustments on pre-tax non-GAAP adjustments represent the estimated income tax impact of each pre-tax non-GAAP adjustment based on the statutory income tax rate of the applicable jurisdictions for each non-GAAP adjustment.

(16)

During the nine months ended September 30, 2020, following the publication of the Anti-Hybrid Rules on April 8, 2020, we recorded a write off of a deferred tax asset related to certain interest expense accrued to a foreign related party during the year ended December 31, 2019 and recognized a corresponding one-time tax provision, resulting in a non-GAAP tax adjustment of $15.2 million. We also recognized a U.S. federal tax liability on U.S. taxable income generated from an intra-company transfer of intellectual property from a U.S. subsidiary to an Irish subsidiary, which was partially offset by the recognition of a deferred tax asset in the Irish subsidiary, resulting in a non-GAAP tax adjustment of $5.3 million.

During the nine months ended September 30, 2019, we released a reserve that was originally established and treated as a non-GAAP adjustment related to an uncertain tax position in connection with an acquisition resulting in a non-GAAP tax adjustment of $1.5 million.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

We have incurred losses on a GAAP basis in most fiscal years since our inception in June 2005 and, as of September 30, 2020, we had an accumulated deficit of $406.4 million. We expect that our sales and marketing expenses will continue to increase as a result of the commercialization of our medicines, including as a result of the commercial launch of TEPEZZA, but we believe these cost increases will be more than offset by higher net sales and gross profits in future periods. Additionally, we expect that our research and development costs will increase as we acquire or develop more development-stage medicine candidates and advance our candidates through the clinical development and regulatory approval processes.

Following the highly successful launch of TEPEZZA, which has significantly exceeded expectations, we are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA. As of September 30, 2020, we had total purchase commitments, including the minimum annual order quantities and binding firm orders, with AGC Biologics A/S (formerly known as CMC Biologics A/S) for TEPEZZA drug substance of €130.7 million ($153.2 million converted at an exchange rate as of September 30, 2020 of 1.1722), to be delivered through September 2022. In addition, we had binding purchase commitments with Catalent Indiana, LLC for TEPEZZA drug product of $15.8 million, to be delivered through September 2021. We expect to enter into additional purchase commitments in connection with our efforts to expand production capacity in order to meet this anticipated increase in demand.

During the third quarter of 2020, our accounts receivables increased significantly from $543.8 million as of June 30, 2020, to $705.9 million as of September 30, 2020. This increase was primarily due to both the growth in and the timing of receipts for TEPEZZA sales. During the initial launch period, the payment terms for TEPEZZA were extended. On October 1, 2020, the permanent J-code for TEPEZZA was implemented and the payment terms for TEPEZZA have started to decline. We expect that cash inflows from TEPEZZA sales will increase significantly in the fourth quarter of 2020.

On August 11, 2020, we closed an underwritten public equity offering of 13.6 million ordinary shares at a price to the public of $71.0 per share, resulting in net proceeds of approximately $919.8 million after deducting underwriting discounts and other offering expenses payable by us. This included the exercise in full by the underwriters of their option to purchase up to 1.8 million additional ordinary shares.

On June 3, 2020, we issued a notice of redemption, or the Redemption Notice, for all our outstanding Exchangeable Senior Notes. From June 3, 2020 through July 30, 2020, we issued an aggregate of 13,898,414 of our ordinary shares to noteholders as a result of exchanges of $398.3 million in aggregate principal amount of Exchangeable Senior Notes following the issuance of the Redemption Notice. On August 3, 2020, we redeemed the remaining $1.7 million in aggregate principal amount of Exchangeable Senior Notes and made aggregate cash payments to the holders of such Exchangeable Senior Notes of $1.8 million, including accrued interest. During the three and nine months ended September 30, 2020, we recorded a loss on debt extinguishment of $14.6 million and $31.9 million, respectively.

As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any additional debt or equity financing more difficult, more costly or more dilutive.

In February 2020, we purchased a three-building campus in Deerfield, Illinois, for total consideration and directly attributable transaction costs of $118.5 million. The Deerfield campus totals 70 acres and consists of approximately 650,000 square feet of office space. We expect to move to the Deerfield campus in the first quarter of 2021 and market our Lake Forest office for sub-lease. We expect to make significant capital expenditures during the fourth quarter of 2020 and the first quarter of 2021 in order to prepare the Deerfield campus for occupancy. In addition, if we are unable to sub-lease our existing Lake Forest office at rental rates similar to the rates under our existing lease or at all, we would be obligated to continue paying substantial rental payments through the end of the lease term in 2031.

In July 2020, we committed to invest as a strategic limited partner in two venture capital funds: Forbion Growth Opportunities Fund I C.V., or the Forbion Fund, and Aisling Capital V, LP, or the Aisling Fund. We committed to investing an aggregate $34.6 million in the two funds, comprising of a $20.0 million commitment to the Aisling Fund and a €13.0 million ($15.2 million when converted using a EUR-to-Dollar exchange rate at September 30, 2020 of 1.1722) commitment to the Forbion Fund, over each fund’s respective investment periods. As of September 30, 2020, we paid $8.1 million in relation to the Aisling Fund and €0.7 million in relation to the Forbion Fund ($0.9 million when converted using a EUR-to-Dollar exchange rate at the date of payment of 1.1937). Additionally, in October 2020, we committed to investing an aggregate $15.0 million as a strategic limited partner in a third venture capital fund, RiverVest Venture Fund V, L.P., over the fund’s investment period.

We have financed our operations to date through equity financings, debt financings and the issuance of convertible notes, along with cash flows from operations during the last several years. As of September 30, 2020, we had $1,725.4 million in cash and cash equivalents and total debt with a book value of $1,002.8 million and principal value of $1,018.0 million. We believe our existing cash and cash equivalents and our expected cash flows from our operations will be sufficient to fund our business needs for at least the next twelve months from the issuance of the financial statements in this Quarterly Report on Form 10-Q. We do not have any financial covenants or non-financial covenants that we expect to be affected by the economic disruptions and negative effects of the COVID-19 pandemic on the financial environment.

We have a significant amount of debt outstanding on a consolidated basis. For a description of our debt agreements, see Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q. This substantial level of debt could have important consequences to our business, including, but not limited to: making it more difficult for us to satisfy our obligations; requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund acquisitions, capital expenditures, and future business opportunities; limiting our ability to obtain additional financing, including borrowing additional funds; increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions; limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and placing us at a disadvantage as compared to our competitors, to the extent that they are not as highly leveraged. We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness.

In addition, the indenture governing our 5.5% Senior Notes due 2027 and our Credit Agreement impose various covenants that limit our ability and/or our restricted subsidiaries’ ability to, among other things, pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments, incur additional debt and issue certain preferred stock, incur liens on assets, engage in certain asset sales or merger transactions, enter into transactions with affiliates, designate subsidiaries as unrestricted subsidiaries; and allow to exist certain restrictions on the ability of restricted subsidiaries to pay dividends or make other payments to us.

Sources and Uses of Cash

The following table provides a summary of our cash position as of and cash flows for the nine months ended September 30, 2020 and 2019 (in thousands):

	As of and for the Nine Months Ended September 30,
	2020			2019
Cash, cash equivalents and restricted cash	$	1,728,976		$	887,710
Cash provided by (used in):
Operating activities		145,871			234,952
Investing activities		(398,641	)		(5,325	)
Financing activities		900,482			(302,832	)

Operating Cash Flows

During the nine months ended September 30, 2020, net cash provided by operating activities of $145.9 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to patient assistance costs for our inflammation segment medicines and government rebates for our orphan segment medicines, payments related to selling, general and administrative expenses and research and development expenses.

During the nine months ended September 30, 2019, net cash provided by operating activities of $234.9 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to patient assistance costs and commercial rebates for our inflammation segment medicines, and payments related to selling, general and administrative expenses and research and development expenses.

Investing Cash Flows

During the nine months ended September 30, 2020, net cash used in investing activities of $398.6 million was primarily attributable to payments for acquisitions of $262.3 million which consisted of $215.2 million of milestone payments associated with the acquisition of River Vision Development Corp., or River Vision, and our agreements with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc, or together referred to as Roche, with S.R. One and with Lundbeckfond and $45.0 million due to the acquisition of Curzion in the second quarter of 2020. Additionally, $112.5 million was paid in the first quarter of 2020 in relation to the purchase of a three-building campus in Deerfield, Illinois.

During the nine months ended September 30, 2019, net cash used in investing activities of $5.3 million was primarily attributable to the purchases of property and equipment of $11.3 million, partially offset by proceeds from the MIGERGOT transaction of $6.0 million.

Financing Cash Flows

During the nine months ended September 30, 2020, net cash provided by financing activities of $900.5 million was primarily attributable to the issuance of 13.6 million ordinary shares in connection with our underwritten public equity offering in August 2020. We received net proceeds of approximately $919.8 million after deducting underwriting discounts and other offering expenses payable by us in connection with such offering.

During the nine months ended September 30, 2019, net cash used in financing activities of $302.8 million was primarily attributable to the repayment of $400.0 million of the outstanding principal amount of term loans under our Credit Agreement, the repayment of the outstanding principal amount of our 2023 Senior Notes and 2024 Senior Notes of $775.0 million and related early redemption premiums of $39.5 million, partially offset by net proceeds from the issuance of our 2027 Senior Notes of $590.1 million and net proceeds from the issuance of ordinary shares of $326.8 million.

Financial Condition as of September 30, 2020 compared to December 31, 2019

Accounts receivable, net. Accounts receivable, net, increased $297.2 million, from $408.7 million as of December 31, 2019 to $705.9 million as of September 30, 2020. The increase was primarily due to both the growth in sales and the timing of receipts of accounts receivable for TEPEZZA sales. During the initial launch period, the payment terms for TEPEZZA were extended. On October 1, 2020, the permanent J-code for TEPEZZA was implemented and the payment terms for TEPEZZA have started to decline.

Inventories, net. Inventories, net, increased $23.3 million, from $53.8 million as of December 31, 2019 to $77.1 million as of September 30, 2020. The increase was primarily related to the increases of TEPEZZA inventory held.

Prepaid expenses and other current assets. Prepaid expenses and other current assets increased $76.7 million, from $143.6 million as of December 31, 2019 to $220.3 million as of September 30, 2020. The increase was primarily due to an increase in advance payments for TEPEZZA inventory of $43.8 million and an increase in prepaid income taxes and income taxes receivable of $22.5 million.

Property and equipment, net. Property and equipment, net, increased $126.2 million, from $30.1 million as of December 31, 2019 to $156.3 million as of September 30, 2020. In February 2020, we purchased a three-building campus in Deerfield, Illinois, for total consideration and directly attributable transaction costs of $118.5 million.

Developed technology and other intangible assets, net. Developed technology and other intangible assets, net, increased $145.2 million, from $1,702.6 million as of December 31, 2019 to $1,847.8 million as of September 30, 2020. During the nine months ended September 30, 2020, in connection with the acquisition of River Vision and our agreements with Roche, S.R. One and Lundbeckfond, we capitalized $336.0 million of developed technology related to TEPEZZA. This was partially offset by amortization of developed technology of $190.7 million during the nine months ended September 30, 2020.

Accounts payable. Accounts payable increased $17.5 million, from $21.5 million as of December 31, 2019 to $39.0 million as of September 30, 2020. This increase was primarily due to the timing of invoices received.

Accrued expenses. Accrued expenses increased $186.6 million, from $235.2 million as of December 31, 2019 to $421.8 million as of September 30, 2020. As of September 30, 2020, we recorded a liability of $121.2 million in accrued expenses representing net sales milestones for TEPEZZA, composed of $67.0 million in relation to the expected attainment in 2020 of various net sales milestones payable under the acquisition agreement for River Vision and CHF50.0 million ($54.2 million when converted using a CHF-to-Dollar exchange rate as of September 30, 2020 of 1.0859) in relation to the expected attainment in 2020 of various net sales milestones payable to Roche. Additionally, accrued royalties increased by $30.6 million and payroll-related accrued expenses increased by $21.5 million.

Accrued trade discounts and rebates. Accrued trade discounts and rebates decreased $143.6 million, from $466.4 million as of December 31, 2019 to $322.8 million as of September 30, 2020. This was primarily due to a decrease of $85.9 million in accrued co-pay and other patient assistance costs primarily due to lower utilization of our patient assistance programs, the impact of generic competition on VIMOVO sales and the timing of payments, a $55.4 million decrease in accrued commercial rebates and wholesaler fees primarily due to the timing of payments and the impact of generic competition on VIMOVO sales and a $2.3 million decrease in accrued government rebates and chargebacks.

Exchangeable Senior Notes. On June 3, 2020, we issued the Redemption Notice for all of our outstanding Exchangeable Senior Notes with a redemption date of August 3, 2020. As of September 30, 2020, all $400.0 million in aggregate principal amount of Exchangeable Senior Notes had been exchanged or redeemed. See Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further detail.

Contractual Obligations

During the nine months ended September 30, 2020, there were no material changes outside of the ordinary course of business to our contractual obligations as previously disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except for our entry into the following commitments described below.

On April 1, 2020, we acquired Curzion for a $45.0 million upfront cash payment and are obligated to make additional payments contingent on the achievement of development and regulatory milestones. The $45.0 million was recorded as a research and development expense in the second quarter of 2020.

In April 2020, we entered into an agreement with S.R. One and an agreement with Lundbeckfond pursuant to which we acquired all of S.R. One’s and Lundbeckfond’s beneficial rights to proceeds from certain contingent future TEPEZZA milestone and royalty payments in exchange for a one-time payment of $55.0 million to each of the respective parties. The total payments of $110.0 million were recorded as TEPEZZA developed technology intangible assets in the second quarter of 2020. As a result of our agreements with S.R. One and Lundbeckfond in April 2020, our remaining net obligations to make TEPEZZA payments to the former stockholders of River Vision was reduced by approximately 70.25%, after including payments to a third party.

In July 2020, we committed to invest as a strategic limited partner in two venture capital funds: Forbion Growth Opportunities Fund I C.V., or the Forbion Fund, and the Aisling Capital V, LP, or the Aisling Fund. We committed to investing an aggregate $34.6 million in the two funds, comprising of a $20.0 million commitment to the Aisling Fund and a €13.0 million ($15.2 million when converted using a EUR-to-Dollar exchange rate at September 30, 2020 of 1.1722) commitment to the Forbion Fund, over each fund’s respective investment periods. As of September 30, 2020, we paid $8.1 million in relation to the Aisling Fund and €0.7 million in relation to the Forbion Fund ($0.9 million when converted using a EUR-to-Dollar exchange rate at the date of payment of 1.1937). Additionally, in October 2020, we committed to investing an aggregate $15.0 million as a strategic limited partner in a third venture capital fund, RiverVest Venture Fund V, L.P., over the fund’s investment period.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Certain of these policies are considered critical as these most significantly impact a company’s financial condition and results of operations and require the 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. Actual results may vary from these estimates. A summary of our significant accounting policies is included in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2019.

During the nine months ended September 30, 2020, there were no significant changes in our application of our critical accounting policies.

OFF-BALANCE SHEET ARRANGEMENTS

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities, other than the indemnification agreements discussed in Note 15, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as interest rates and foreign exchange fluctuations. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk. We are subject to interest rate fluctuation exposure through our borrowings under our Credit Agreement and our investment in money market accounts which bear a variable interest rate. Term loans under our Credit Agreement bear interest, at our option, at a rate equal to the London Inter-Bank Offered Rate, or LIBOR, plus 2.25% per annum (subject to a 0.00% LIBOR floor), or the adjusted base rate plus 1.25% per annum with a step-down to LIBOR plus 2.00% per annum or the adjusted base rate plus 1.00% per annum at the time our leverage ratio is less than or equal to 2.00 to 1.00. The adjusted base rate is defined as the greatest of (a) LIBOR (using one-month interest period) plus 1.00%, (b) the prime rate, (c) the federal funds rate plus 0.50%, and (d) 1.00%. The loans under our incremental revolving credit facility, or Revolving Credit Facility, bear interest, at our option, at a rate equal to either LIBOR plus an applicable margin of 2.25% per annum (subject to a LIBOR floor of 0.00%), or the adjusted base rate plus 1.25% per annum with a step-down to LIBOR plus 2.00% per annum or the adjusted base rate plus 1.00% per annum at the time our leverage ratio is less than or equal to 2.00 to 1.00. Our approximately $418.0 million of senior secured term loans under the Credit Agreement is based on LIBOR. As of September 30, 2020, the Revolving Credit Facility was undrawn. The one-month LIBOR rate as of October 13, 2020, which was the most recent date the interest rate on the term loan was fixed, was 0.19%, and as a result, the interest rate on our borrowings is currently 2.19% per annum. Because the United Kingdom Financial Conduct Authority, which regulates LIBOR, intends to phase out the use of LIBOR by the end of 2021, future borrowings under our Credit Agreement could be subject to reference rates other than LIBOR.

An increase in the LIBOR of 100 basis points above the current LIBOR rate would increase our interest expense related to the Credit Agreement by $4.18 million per year.

The goals of our investment policy are to preserve capital, fulfill liquidity needs and maintain fiduciary control of cash. To achieve our goal of maximizing income without assuming significant market risk, we maintain our excess cash and cash equivalents in money market funds. Because of the short-term maturities of our cash equivalents, we do not believe that a decrease in interest rates would have any material negative impact on the fair value of our cash equivalents.

Foreign Currency Risk. Our purchase costs of TEPEZZA drug substance and ACTIMMUNE inventory are principally denominated in Euros and are subject to foreign currency risk. In addition, we are obligated to pay certain milestones and a royalty on sales of TEPEZZA to Roche in Swiss Francs, which obligations are subject to foreign currency risk. We have contracts relating to RAVICTI, QUINSAIR and PROCYSBI for sales in Canada which sales are subject to foreign currency risk. We also incur certain operating expenses in currencies other than the U.S. dollar in relation to our Irish operations and foreign subsidiaries. Therefore, we are subject to volatility in cash flows due to fluctuations in foreign currency exchange rates, particularly changes in the Euro, the Swiss Franc and the Canadian dollar.

Inflation Risk. We do not believe that inflation has had a material impact on our business or results of operations during the periods for which the condensed consolidated financial statements are presented in this report.

Credit Risk. Historically, our accounts receivable balances have been highly concentrated with a select number of customers, consisting primarily of large wholesale pharmaceutical distributors who, in turn, sell the medicines to pharmacies, hospitals and other customers. As of September 30, 2020 and December 31, 2019, our top four customers accounted for approximately 94% and 84%, respectively, of our total outstanding accounts receivable balances.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As required by paragraph (b) of Rules 13a-15 and 15d-15 promulgated under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020, the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting. During the quarter ended September 30, 2020, there have been no material changes to our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of our legal proceedings, see Note 16, Legal Proceedings, of the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q.

ITEM 1A: RISK FACTORS

You should consider carefully the risks described below, together with all of the other information included in this report, and in our other filings with the Securities and Exchange Commission, or SEC, before deciding whether to invest in or continue to hold our ordinary shares. The risks described below are all material risks currently known, expected or reasonably foreseeable by us. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be seriously harmed. This could cause the trading price of our ordinary shares to decline, resulting in a loss of all or part of your investment.

The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC.

Risks Related to Our Business and Industry

The COVID-19 global pandemic has and may continue to adversely impact our business, including the commercialization of our medicines, our supply chain, our clinical trials, our liquidity and access to capital markets and our business development activities.*

On March 11, 2020, the World Health Organization made the assessment that a novel strain of coronavirus, which causes the COVID-19 disease, can be characterized as a pandemic. The President of the United States declared the COVID-19 pandemic a national emergency and many states and municipalities in the Unites States took aggressive actions to reduce the spread of the disease, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing “shelter-in-place” orders which direct individuals to shelter at their places of residence (subject to limited exceptions). Similarly, the Irish government has limited gatherings of people and encouraged employees to work from their homes, and may implement more aggressive policies in the future. In addition, in mid-March 2020 we implemented work-from-home policies for all employees and moved to a “virtual” model with respect to our physician, patient and partner support activities. As certain U.S. states have started to reduce restrictions, we are seeing physician offices beginning to reopen, which reopening varies on a state-by-state basis. As a result, our sales representatives in some areas have transitioned to being back out in the field and are working on ways to re-engage patients and physicians. However, as COVID-19 cases have increased in certain areas, certain U.S. states have started to reimplement restrictions and we have seen some physician offices re-establish limits on in-person visits. Restrictions in response to COVID-19 may continue to fluctuate in U.S. states and other geographies and we cannot guarantee that additional U.S. states that have previously reduced restrictions will not reimplement them or that other states will reduce restrictions in the near-term. The effects of government actions and our policies and those of third parties to reduce the spread of COVID-19 may negatively impact productivity and our ability to market and sell our medicines, cause disruptions to our supply chain and ongoing and future clinical trials and impair our ability to execute our business development strategy. These and other disruptions in our operations and the global economy could negatively impact our business, operating results and financial condition.

The commercialization of our medicines has been adversely impacted by COVID-19 and actions taken to slow its spread. For example, patients have postponed visits to healthcare provider facilities, certain healthcare providers have temporarily closed their offices or are restricting patient visits, healthcare provider employees may become generally unavailable and there could be disruptions in the operations of payors, distributors, logistics providers and other third parties that are necessary for our medicines to be prescribed, reimbursed and administered to patients. We also cannot predict how effective our virtual patient, physician and partner support initiatives will be with respect to marketing and supporting the administration and reimbursement of our medicines, or when we will be able to resume other in-person sales and marketing activities.

Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities upon which we rely, or the availability or cost of materials, which could disrupt the supply chain for our medicines. In particular, some of our suppliers of certain materials used in the production of our medicines are located in regions that have been subject to COVID-19-related actions and policies that limit the conduct of normal business operations. To the extent our suppliers and service providers are unable to comply with their obligations under our agreements with them or they are otherwise unable to deliver or are delayed in delivering goods and services to us due to COVID-19, our ability to continue meeting commercial demand for our medicines in the United States or advancing development of our medicine candidates may become impaired. At this time, we consider our inventories on hand to be sufficient to meet our commercial requirements.

The spread of COVID-19 and actions taken to reduce its spread may also materially affect us economically. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any additional debt or equity financing more difficult, more costly or more dilutive. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, there could be a significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and financial position or our business development activities.

COVID-19 continues to rapidly evolve. The extent to which COVID-19 may impact the commercialization of our medicines, our supply chain, our clinical trials, our access to capital and our business development activities, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the pandemic, the duration of the pandemic and the efforts by governments and business to contain it, business closures or business disruptions and the impact on the economy and capital markets.

Our ability to generate revenues from our medicines is subject to attaining significant market acceptance among physicians, patients and healthcare payers.*

Our current medicines, and other medicines or medicine candidates that we may develop or acquire, may not attain market acceptance among physicians, patients, healthcare payers or the medical community. Some of our medicines, in particular TEPEZZA, have not been on the market for an extended period of time, which subjects us to numerous risks as we attempt to increase our market share. We believe that the degree of market acceptance and our ability to generate revenues from our medicines will depend on a number of factors, including:

•

timing of market introduction of our medicines as well as competitive medicines;

•

efficacy and safety of our medicines;

•

continued projected growth of the markets in which our medicines compete;

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the extent to which physicians diagnose and treat the conditions that our medicines are approved to treat;

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prevalence and severity of any side effects;

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if and when we are able to obtain regulatory approvals for additional indications for our medicines;

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acceptance by patients, physicians and applicable specialists;

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availability of, and ability to maintain, coverage and adequate reimbursement and pricing from government and other third-party payers;

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potential or perceived advantages or disadvantages of our medicines over alternative treatments, including cost of treatment and relative convenience and ease of administration;

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strength of sales, marketing and distribution support;

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the price of our medicines, both in absolute terms and relative to alternative treatments;

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impact of past and limitation of future medicine price increases;

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our ability to maintain a continuous supply of our medicines for commercial sale;

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the effect of current and future healthcare laws;

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the extent and duration of the COVID-19 pandemic, including the extent to which physicians and patients delay visits or writing or filling prescriptions for our medicines, the extent to which operations of healthcare facilities, including infusion centers, are reduced and the length of time and the extent to which our sales force must continue operating in a virtual model;

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the performance of third-party distribution partners, over which we have limited control; and

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medicine labeling or medicine insert requirements of the U.S. Food and Drug Administration, or FDA, or other regulatory authorities.

With respect to TEPEZZA, sales will depend on market acceptance and adoption by physicians and healthcare payers, as well as the ability and willingness of physicians who do not have in-house infusion capability to refer patients to infusion sites of care. With respect to KRYSTEXXA, our ability to grow sales will be affected by the success of our sales, marketing and clinical strategies, which are intended to expand the patient population and usage of KRYSTEXXA. This includes our marketing efforts in nephrology and our studies designed to improve the response rate to KRYSTEXXA, to evaluate a shorter infusion time, and to evaluate the use of KRYSTEXXA in kidney transplant patients. With respect to RAVICTI, which is approved to treat a very limited patient population, our ability to grow sales will depend in large part on our ability to transition urea cycle disorder, or UCD, patients from BUPHENYL or generic equivalents, which are comparatively much less expensive, to RAVICTI and to encourage patients and physicians to continue RAVICTI therapy once initiated. With respect to PROCYSBI, which is also approved to treat a very limited patient population, our ability to grow sales will depend in large part on our ability to transition patients from the first-generation immediate-release cysteamine therapy to PROCYSBI, to identify additional patients with nephropathic cystinosis and to encourage patients and physicians to continue therapy once initiated. With respect to ACTIMMUNE, while it is the only FDA-approved treatment for chronic granulomatous disease, or CGD, and severe, malignant osteopetrosis, or SMO, they are very rare conditions and, as a result, our ability to grow ACTIMMUNE sales will depend on our ability to identify additional patients with such conditions and encourage patients and physicians to continue treatment once initiated. With respect to each of PENNSAID 2% w/w, or PENNSAID 2%, RAYOS and DUEXIS, their higher cost compared to the generic or branded forms of their active ingredients alone may limit adoption by physicians, patients and healthcare payers. With respect to DUEXIS, studies indicate that physicians do not commonly co-prescribe gastrointestinal, or GI, protective agents to high-risk patients taking nonsteroidal anti-inflammatory drugs, or NSAIDs. We believe this is due in part to a lack of awareness among physicians prescribing NSAIDs regarding the risk of NSAID-induced upper GI ulcers, in addition to the inconvenience of prescribing two separate medications and patient compliance issues associated with multiple prescriptions. If physicians remain unaware of, or do not otherwise believe in, the benefits of combining GI protective agents with NSAIDs, our market opportunity for DUEXIS will be limited. Some physicians may also be reluctant to prescribe DUEXIS due to the inability to vary the dose of ibuprofen and naproxen, respectively, or if they believe treatment with NSAIDs or GI protective agents other than those contained in DUEXIS, including those of its competitors, would be more effective for their patients. If our current medicines or any other medicine that we may seek approval for, or acquire, fail to attain market acceptance, we may not be able to generate significant revenue to sustain profitability, which would have a material adverse effect on our business, results of operations, financial condition and prospects (including, possibly, the value of our ordinary shares).

The COVID-19 pandemic and actions taken to slow its spread has had and will continue to have a negative impact on sales of our medicines. For example, in March 2020 we transitioned our sales force to a virtual model such that they no longer had in-person interactions with healthcare professionals and while we have been working on ways to re-engage patients and physicians as certain U.S. states have started to reduce restrictions, the virtual model is still being used. While we have attempted to maintain the effectiveness of our sales and marketing efforts in the virtual model, it may not be as effective as in-person interactions in terms of conveying key information about our medicines or aiding physicians and their staff in prescribing and helping their patients obtain appropriate reimbursement for our medicines. Many physicians, in particular in primary care practices that prescribe our inflammation segment medicines, have reduced their operations in light of COVID-19, including delaying patient visits and writing new prescriptions, and this has negatively impacted sales in our inflammation segment. Similarly, many patients have deferred non-essential visits to healthcare providers, which has had a negative impact on prescriptions being written and filled. For example, due to reduced willingness of patients to visit physician offices and infusion centers, sales of KRYSTEXXA have been negatively impacted, and we expect this impact to continue in future quarters until healthcare activities and patient visits return to normal levels. It is also possible that a prolonged period of “shelter-in-place” orders and social distancing behaviors and the associated reduction of physician office visits could force various healthcare practices to permanently close or to consolidate with larger practices or healthcare groups, which could cause us to lose previously-established physician relationships. We cannot predict how long the COVID-19 pandemic will continue to negatively impact sales of our medicines and we expect that even after government-mandated restrictions are lifted, our sales force activities, healthcare provider operations and patients’ willingness to visit healthcare facilities will continue to be limited.

Our future prospects are highly dependent on our ability to successfully formulate and execute commercialization strategies for each of our medicines. Failure to do so would adversely impact our financial condition and prospects.*

A substantial majority of our resources are focused on the commercialization of our current medicines. Our ability to generate significant medicine revenues and to achieve commercial success in the near-term will initially depend almost entirely on our ability to successfully commercialize these medicines in the United States.

With respect to our rare disease medicines, TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI and ACTIMMUNE, our commercialization strategy includes efforts to increase awareness of the rare conditions that each medicine is designed to treat, enhancing efforts to identify target patients and in certain cases pursue opportunities for label expansion and more effective use through clinical trials. Our comprehensive post-launch commercial strategy for TEPEZZA aims to enable more thyroid eye disease, or TED, patients to benefit from TEPEZZA. We are doing this by: (i) driving continued TEPEZZA uptake in the treatment of acute and chronic TED through continued promotion of TEPEZZA to treating physicians; (ii) continuing to develop the TED market by increasing physician awareness of the disease severity, the urgency to diagnose and treat, as well as the benefits of treatment with TEPEZZA; (iii) driving accelerated disease identification and time to treatment through our digital, broadcast and television marketing campaigns; (iv) enhancing the patient journey with our high-touch, patient-centric model as well as support for the patient and site-of-care referral processes; and (v) expanding access for TED patients. Our strategy with respect to KRYSTEXXA includes existing rheumatology account growth, new rheumatology account growth and accelerating nephrology growth, as well as development efforts to enhance response rates through combination treatment with methotrexate and to shorten the infusion time. With respect to RAVICTI and PROCYSBI, our strategy includes accelerating the transition of patients from first-generation therapies, increasing the diagnosis of the associated rare conditions through patient and physician outreach; and increasing compliance rates. Our strategy with respect to ACTIMMUNE, our medicine for the treatment of chronic granulomatous disease, includes increasing awareness and diagnosis of chronic granulomatous disease and increasing compliance rates.

We are focusing a significant portion of our commercial activities and resources on TEPEZZA, and we believe our ability to grow our long-term revenues, and a significant portion of the value of our company, relates to our ability to successfully commercialize TEPEZZA in the United States. As a newly-launched medicine for a disease that had no previously-approved treatments, successful commercialization of TEPEZZA is subject to many risks. There are numerous examples of unsuccessful product launches and failures to meet high expectations of market potential, including by pharmaceutical companies with more experience and resources than us. While we have established our commercial team and U.S. sales force, we will need to further train and develop the team in order to successfully commercialize TEPEZZA. There are many factors that could cause the launch and commercialization of TEPEZZA to be unsuccessful, including a number of factors that are outside our control. Because no medicine has previously been approved by the FDA for the treatment of TED, it is especially difficult to estimate TEPEZZA’s market potential or the time it will take to increase patient and physician awareness of TED and change current treatment paradigms. For example, shortly after the launch of TEPEZZA, we transitioned our sales force to a virtual model in light of the COVID-19 pandemic, which, combined with physicians generally reducing their own availability, has made it more challenging to execute on our strategy to educate physicians about TEPEZZA and the treatment of TED. In addition, some physicians that are potential prescribers of TEPEZZA do not have the necessary infusion capabilities to administer the medicine and may not otherwise be able or willing to refer their patients to third-party infusion centers, which may discourage them from treating their patients with TEPEZZA. The commercial success of TEPEZZA depends on the extent to which patients and physicians accept and adopt TEPEZZA as a treatment for TED. For example, if the patient population suffering from TED is smaller than we estimate, if it proves difficult to identify TED patients or educate physicians as to the availability and potential benefits of TEPEZZA, or if physicians are unwilling to prescribe or patients are unwilling to take TEPEZZA, the commercial potential of TEPEZZA will be limited. We also have limited information regarding how physicians, patients and payers will respond to the pricing of TEPEZZA. Physicians may not prescribe TEPEZZA and patients may be unwilling to use TEPEZZA if coverage is not provided or reimbursement is inadequate to cover a significant portion of the cost. Thus, significant uncertainty remains regarding the commercial potential of TEPEZZA. If the launch or commercialization of TEPEZZA is unsuccessful or perceived as disappointing, the price of our ordinary shares could decline significantly and long-term success of the medicine and our company could be harmed.

With respect to our inflammation segment medicines, PENNSAID 2% and DUEXIS, our strategy has included entering into rebate agreements with pharmacy benefit managers, or PBMs, for certain of our inflammation segment medicines where we believe the rebates and costs justify expanded formulary access for patients and ensuring patient assistance to these drugs when prescribed through our HorizonCares program. However, we cannot guarantee that we will be able to secure additional rebate agreements on commercially reasonable terms, that expected volume growth will sufficiently offset the rebates and fees paid to PBMs or that our existing agreements with PBMs will have the intended impact on formulary access. In addition, as the terms of our existing agreements with PBMs expire, we may not be able to renew the agreements on commercially favorable terms, or at all. For each of our inflammation segment medicines, we expect that our commercial success will depend on our sales and marketing efforts in the United States, reimbursement decisions by commercial payers, the expense we incur through our patient assistance program for fully bought down contracts and the rebates we pay to PBMs, as well as the impact of numerous efforts at federal, state and local levels to further reduce reimbursement and net pricing of inflammation segment medicines.

Our strategy for RAYOS in the United States is to focus on the rheumatology indications approved for RAYOS, including our collaboration with the Alliance for Lupus Research, to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus, or SLE, patients.

If any of our commercial strategies are unsuccessful or we fail to successfully modify our strategies over time due to changing market conditions, our ability to increase market share for our medicines, grow revenues and to sustain profitability will be harmed.

We are dependent on wholesale distributors for distribution of our products in the United States and, accordingly, our results of operations could be adversely affected if they encounter financial difficulties*

In 2020, four wholesale distributors accounted for substantially all of our sales in the United States. If one of our significant wholesale distributors encounters financial or other difficulties, such distributor may decrease the amount of business that it does with us, and we may be unable to collect all the amounts that the distributor owes on a timely basis or at all, which could negatively impact our business and results of operations.

In order to increase adoption and sales of our medicines, we will need to continue developing our commercial organization as well as recruit and retain qualified sales representatives.*

Part of our strategy is to continue to build a biopharma company to successfully execute the commercialization of our medicines in the U.S. market, and in selected markets outside the United States where we have commercial rights. We may not be able to successfully commercialize our medicines in the United States or in any other territories where we have commercial rights. In order to commercialize any approved medicines, we must continue to build our sales, marketing, distribution, managerial and other non-technical capabilities. As of September 30, 2020, we had approximately 445 sales representatives in the field, consisting of approximately 200 orphan sales representatives (including approximately 50 TEPEZZA sales representatives) and 245 inflammation sales representatives. We currently have limited resources compared to some of our competitors, and the continued development of our own commercial organization to market our medicines and any additional medicines we may acquire will be expensive and time-consuming. We also cannot be certain that we will be able to continue to successfully develop this capability.

As we continue to add medicines through development efforts and acquisition transactions, the members of our sales force may have limited experience promoting certain of our medicines. To the extent we employ an acquired entity’s sales forces to promote acquired medicines, we may not be successful in continuing to retain these employees and we otherwise will have limited experience marketing these medicines under our commercial organization. In addition, none of the members of our sales force have promoted TEPEZZA or any other medicine for the treatment of TED prior to the launch of TEPEZZA. We are required to expend significant time and resources to train our sales force to be credible and able to educate physicians on the benefits of prescribing and pharmacists dispensing our medicines. In addition, we must train our sales force to ensure that a consistent and appropriate message about our medicines is being delivered to our potential customers. Our sales representatives may also experience challenges promoting multiple medicines when we call on physicians and their office staff. We have experienced, and may continue to experience, turnover of the sales representatives that we hired or will hire, requiring us to train new sales representatives. If we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate physicians about the benefits of our medicines and their proper administration and label indication, as well as our patient assistance programs, our efforts to successfully commercialize our medicines could be put in jeopardy, which could have a material adverse effect on our financial condition, share price and operations. For example, we have had to train our sales force to operate in a virtual environment due to the COVID-19 pandemic and are continuing to learn and implement new strategies and techniques to promote our medicines without the benefit of in-person interactions with healthcare providers and their staff. We may not be successful in finding effective ways to promote our medicines remotely or our competitors may be more successful than we are at adapting to virtual marketing.

As a result of the evolving role of various constituents in the prescription decision making process, we focus on hiring sales representatives for our inflammation segment medicines with successful business to business experience. For example, we have faced challenges due to pharmacists switching a patient’s intended prescription from DUEXIS to a generic or over-the-counter brand of their active ingredients, despite such substitution being off-label in the case of DUEXIS. We have faced similar challenges for PENNSAID 2% and RAYOS with respect to generic brands. While we believe the profile of our representatives is suited for this environment, we cannot be certain that our representatives will be able to successfully protect our market for PENNSAID 2%, DUEXIS and RAYOS or that we will be able to continue attracting and retaining sales representatives with our desired profile and skills. We will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain commercial personnel. To the extent we rely on additional third parties to commercialize any approved medicines, we may receive less revenue than if we commercialized these medicines ourselves. In addition, we may have little or no control over the sales efforts of any third parties involved in our commercialization efforts. In the event we are unable to successfully develop and maintain our own commercial organization or collaborate with a third-party sales and marketing organization, we may not be able to commercialize our medicines and medicine candidates and execute on our business plan.

Coverage and reimbursement may not be available, or reimbursement may be available at only limited levels, for our

medicines, which could make it difficult for us to sell our medicines profitably or to successfully execute planned medicine price increases.*

Market acceptance and sales of our medicines will depend in large part on global coverage and reimbursement policies and may be affected by future healthcare reform measures, both in the United States and other key international markets. Successful commercialization of our medicines will depend in part on the availability of governmental and third-party payer reimbursement for the cost of our medicines. Government health administration authorities, private health insurers and other organizations generally provide reimbursement for healthcare. In particular, in the United States, private health insurers and other third-party payers often provide reimbursement for medicines and services based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments. In the United States, the European Union, or EU, and other significant or potentially significant markets for our medicines and medicine candidates, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medicines and services, particularly for new and innovative medicines and therapies, which has resulted in lower average selling prices. Further, the increased scrutiny of prescription drug pricing practices and emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the EU will put additional pressure on medicine pricing, reimbursement and usage, which may adversely affect our medicine sales and results of operations. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general. These pressures may create negative reactions to any medicine price increases, or limit the amount by which we may be able to increase our medicine prices, which may adversely affect our medicine sales and results of operations.

We expect to experience pricing pressures in connection with the sale of our medicines due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals relating to outcomes and quality. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization and increased the types of entities eligible for the federal 340B drug discount program. As concerns continue to grow over the need for tighter oversight, there remains the possibility that the Health Resources and Services Administration or another agency under the U.S. Department of Health and Human Services, or HHS, will propose a similar regulation or that Congress will explore changes to the 340B program through legislation. For example, a bill was introduced in 2018 that would require hospitals to report their low-income utilization of the program. Further, the CMS issued a final rule in 2018 that implemented civil monetary penalties for manufacturers who exceeded the ceiling price methodology for a covered outpatient drug when selling to a 340B covered entity. Pursuant to the final rule, after January 1, 2019, manufacturers must calculate 340B program ceiling prices on a quarterly basis. Moreover, manufacturers could be subject to a $5,000 penalty for each instance where they knowingly and intentionally overcharge a covered entity under the 340B program. With respect to KRYSTEXXA, the “additional rebate” methodology of the 340B pricing rules, as applied to the historical pricing of KRYSTEXXA both before and after we acquired the medicine, have resulted in a 340B ceiling price of one penny. A material portion of KRYSTEXXA prescriptions (normally in the range of 15 percent to 20 percent) are written by healthcare providers that are eligible for 340B drug pricing and therefore the reduction in 340B pricing to a penny has negatively impacted our net sales of KRYSTEXXA. The CMS had also finalized a proposal in calendar years 2018, 2019 and 2020 that would revise the Medicare hospital outpatient prospective payment system by creating a new, significantly reduced reimbursement methodology for drugs purchased under the 340B program for Medicare patients at hospital and other settings. That policy is currently the subject of on-going litigation.

Patients are unlikely to use our medicines unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our medicines. Third-party payers may limit coverage to specific medicines on an approved list, also known as a formulary, which might not include all of the FDA-approved medicines for a particular indication. Moreover, a third-party payer’s decision to provide coverage for a medicine does not imply that an adequate reimbursement rate will be approved. Additionally, one third-party payer’s decision to cover a particular medicine does not ensure that other payers will also provide coverage for the medicine, or will provide coverage at an adequate reimbursement rate. Even though we have contracts with some PBMs in the United States, that does not guarantee that they will perform in accordance with the contracts, nor does that preclude them from taking adverse actions against us, which could materially adversely affect our operating results. In addition, the existence of such PBM contracts does not guarantee coverage by such PBM’s contracted health plans or adequate reimbursement to their respective providers for our medicines. For example, some PBMs have placed some of our medicines on their exclusion lists from time to time, which has resulted in a loss of coverage for patients whose healthcare plans have adopted these PBM lists. Additional healthcare plan formularies may also exclude our medicines from coverage due to the actions of certain PBMs, future price increases we may implement, our use of the HorizonCares program or other free medicine programs whereby we assist qualified patients with certain out-of-pocket expenditures for our medicine, including donations to patient assistance programs offered by charitable foundations, or any other co-pay programs, or other reasons. If our strategies to mitigate formulary exclusions are not effective, these events may reduce the likelihood that physicians prescribe our medicines and increase the likelihood that prescriptions for our medicines are not filled.

In light of such policies and the uncertainty surrounding proposed regulations and changes in the coverage and reimbursement policies of governments and third-party payers, we cannot be sure that coverage and reimbursement will be available for any of our medicines in any additional markets or for any other medicine candidates that we may develop. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our medicines. If coverage and reimbursement are not available or are available only at limited levels, we may not be able to successfully commercialize our medicines.

There may be additional pressure by payers, healthcare providers, state governments, federal regulators and Congress, to use generic drugs that contain the active ingredients found in our medicines or any other medicine candidates that we may develop or acquire. If we fail to successfully secure and maintain coverage and adequate reimbursement for our medicines or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our medicines and expected revenue and profitability which would have a material adverse effect on our business, results of operations, financial condition and prospects.

We may also experience pressure from payers as well as state and federal government authorities concerning certain promotional approaches that we may implement such as our HorizonCares program or any other co-pay programs. Certain state and federal enforcement authorities and members of Congress have initiated inquiries about co-pay assistance programs. Some state legislatures have implemented or have been considering implementing laws to restrict or ban co-pay coupons for branded drugs. For example, legislation was signed into law in California that would limit the use of co-pay coupons in cases where a lower cost generic drug is available and if individual ingredients in combination therapies are available over the counter at a lower cost. It is possible that similar legislation could be proposed and enacted in additional states. Additionally, numerous organizations, including pharmaceutical manufacturers, have been subject to ongoing litigation, enforcement actions and settlements related to their patient assistance programs and support. If we are unsuccessful with our HorizonCares program or any other co-pay programs, or we alternatively are unable to secure expanded formulary access through additional arrangements with PBMs or other payers, we would be at a competitive disadvantage in terms of pricing versus preferred branded and generic competitors. We may also experience financial pressure in the future which would make it difficult to support investment levels in areas such as managed care contract rebates, HorizonCares and other access tools.

Our medicines are subject to extensive regulation, and we may not obtain additional regulatory approvals for our medicines.

The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, marketing and distribution and other possible activities relating to our medicines and our medicine candidates are, and will be, subject to extensive regulation by the FDA and other regulatory agencies. Failure to comply with FDA and other applicable regulatory requirements may, either before or after medicine approval, subject us to administrative or judicially imposed sanctions.

To market any drugs or biologics outside of the United States, we and current or future collaborators must comply with numerous and varying regulatory and compliance related requirements of other countries. Approval procedures vary among countries and can involve additional medicine testing and additional administrative review periods, including obtaining reimbursement and pricing approval in select markets. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional, presently unanticipated, risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.

Applications for regulatory approval, including a marketing authorization application, or MAA, for marketing new drugs in Europe, must be supported by extensive clinical and pre-clinical data, as well as extensive information regarding chemistry, manufacturing and controls, or CMC, to demonstrate the safety and effectiveness of the applicable medicine candidate. The number and types of pre-clinical studies and clinical trials that will be required for regulatory approval varies depending on the medicine candidate, the disease or the condition that the medicine candidate is designed to target and the regulations applicable to any particular medicine candidate. Despite the time and expense associated with pre-clinical and clinical studies, failure can occur at any stage, and we could encounter problems that cause us to repeat or perform additional pre-clinical studies, CMC studies or clinical trials. Regulatory authorities could delay, limit or deny approval of a medicine candidate for many reasons, including because they:

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may not deem a medicine candidate to be adequately safe and effective;

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may not find the data from pre-clinical studies, CMC studies and clinical trials to be sufficient to support a claim of safety and efficacy;

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may interpret data from pre-clinical studies, CMC studies and clinical trials significantly differently than we do;

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may not approve the manufacturing processes or facilities associated with our medicine candidates;

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may conclude that we have not sufficiently demonstrated long-term stability of the formulation for which we are seeking marketing approval;

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may change approval policies (including with respect to our medicine candidates’ class of drugs) or adopt new regulations; or

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may not accept a submission due to, among other reasons, the content or formatting of the submission.

Even if we believe that data collected from our pre-clinical studies, CMC studies and clinical trials of our medicine candidates are promising and that our information and procedures regarding CMC are sufficient, our data may not be sufficient to support marketing approval by regulatory authorities, or regulatory interpretation of these data and procedures may be unfavorable. Even if approved, medicine candidates may not be approved for all indications requested and such approval may be subject to limitations on the indicated uses for which the medicine may be marketed, restricted distribution methods or other limitations. Our business and reputation may be harmed by any failure or significant delay in obtaining regulatory approval for the sale of any of our medicine candidates. We cannot predict when or whether regulatory approval will be obtained for any medicine candidate we develop.

The ultimate approval and commercial marketing of any of our medicines in additional indications or geographies is subject to substantial uncertainty. Failure to gain additional regulatory approvals would limit the potential revenues and value of our medicines and could cause our share price to decline.

We may be subject to penalties and litigation and large incremental expenses if we fail to comply with regulatory requirements or experience problems with our medicines.

Even after we achieve regulatory approvals, we are subject to ongoing obligations and continued regulatory review with respect to many operational aspects including our manufacturing processes, labeling, packaging, distribution, storage, adverse event monitoring and reporting, dispensation, advertising, promotion and recordkeeping. These requirements include submissions of safety and other post-marketing information and reports, ongoing maintenance of medicine registration and continued compliance with current good manufacturing practices, or cGMPs, good clinical practices, or GCPs, good pharmacovigilance practice, good distribution practices and good laboratory practices, or GLPs. If we, our medicines or medicine candidates, or the third-party manufacturing facilities for our medicines or medicine candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

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impose injunctions or restrictions on the marketing, manufacturing or distribution of a medicine, suspend or withdraw medicine approvals, revoke necessary licenses or suspend medicine reimbursement;

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issue warning letters, show cause notices or untitled letters describing alleged violations, which may be publicly available;

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suspend any ongoing clinical trials or delay or prevent the initiation of clinical trials;

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delay or refuse to approve pending applications or supplements to approved applications we have filed;

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refuse to permit drugs or precursor or intermediary chemicals to be imported or exported to or from the United States;

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suspend or impose restrictions or additional requirements on operations, including costly new manufacturing quality or pharmacovigilance requirements;

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seize or detain medicines or require us to initiate a medicine recall; and/or

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commence criminal investigations and prosecutions.

Moreover, existing regulatory approvals and any future regulatory approvals that we obtain will be subject to limitations on the approved indicated uses and patient populations for which our medicines may be marketed, the conditions of approval, requirements for potentially costly, post-market testing and requirements for surveillance to monitor the safety and efficacy of the medicines. Physicians nevertheless may prescribe our medicines to their patients in a manner that is inconsistent with the approved label or that is off-label. Positive clinical trial results in any of our medicine development programs increase the risk that approved pharmaceutical forms of the same active pharmaceutical ingredients, or APIs, may be used off-label in those indications. If we are found to have improperly promoted off-label uses of approved medicines, we may be subject to significant sanctions, civil and criminal fines and injunctions prohibiting us from engaging in specified promotional conduct.

In addition, engaging in improper promotion of our medicines for off-label uses in the United States can subject us to false claims litigation under federal and state statutes. These false claims statutes in the United States include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims or causing to present such false or fraudulent claims for payment by a federal program such as Medicare or Medicaid. Growth in false claims litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay civil money penalties, settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations and be excluded from Medicare, Medicaid and other federal and state healthcare programs.

The regulations, policies or guidance of regulatory agencies may change and new or additional statutes or government regulations may be enacted that could prevent or delay regulatory approval of our medicine candidates or further restrict or regulate post-approval activities. For example, in January 2014, the FDA released draft guidance on how drug companies can fulfill their regulatory requirements for post-marketing submission of interactive promotional media, and though the guidance provided insight into how the FDA views a company’s responsibility for certain types of social media promotion, there remains a substantial amount of uncertainty regarding internet and social media promotion of regulated medical products. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from pending or future legislation or administrative action, either in the United States or abroad. If we are unable to achieve and maintain regulatory compliance, we will not be permitted to market our drugs, which would materially adversely affect our business, results of operations and financial condition.

We have rights to medicines in certain jurisdictions but have no control over third parties that have rights to commercialize those medicines in other jurisdictions, which could adversely affect our commercialization of these medicines.*

Following our sale of the rights to RAVICTI outside of North America and Japan to Medical Need Europe AB, part of the Immedica Group, or Immedica, in December 2018, Immedica has marketing and distribution rights to RAVICTI in those regions. Following our sale of the rights to PROCYSBI in the Europe, Middle East and Africa, or EMEA, regions to Chiesi Farmaceutici S.p.A., or Chiesi, in June 2017, or the Chiesi divestiture, Chiesi has marketing and distribution rights to PROCYSBI in the EMEA regions. Nuvo Pharmaceuticals Inc. (formerly known as Nuvo Research Inc.), or Nuvo, has retained its rights to PENNSAID 2% in territories outside of the United States. In March 2017, Nuvo announced that it had entered into an exclusive license agreement with Sayre Therapeutics PVT Ltd. to distribute, market and sell PENNSAID 2% in India, Sri Lanka, Bangladesh and Nepal, and in December 2017 Nuvo announced that it had entered into a license and distribution agreement with Gebro Pharma AG for the exclusive right to register, distribute, market and sell PENNSAID 2% in Switzerland and Liechtenstein. We have little or no control over Immedica’s activities with respect to RAVICTI outside of North America and Japan, over Chiesi’s activities with respect to PROCYSBI in the EMEA, or over Nuvo’s or its existing and future commercial partners’ activities with respect to PENNSAID 2% outside of the United States even though those activities could impact our ability to successfully commercialize these medicines. For example, Immedica or its assignees, Chiesi or its assignees or Nuvo or its assignees can make statements or use promotional materials with respect to RAVICTI, PROCYSBI or PENNSAID 2% , respectively, outside of the United States that are inconsistent with our positioning of the medicines in the United States, and could sell RAVICTI, PROCYSBI or PENNSAID 2%, respectively, in foreign countries at prices that are dramatically lower than the prices we charge in the United States. These activities and decisions, while occurring outside of the United States, could harm our commercialization strategy in the United States. In addition, medicine recalls or safety issues with these medicines outside the United States, even if not related to the commercial medicine we sell in the United States, could result in serious damage to the brand in the United States and impair our ability to successfully market them. We also rely on Immedica, Chiesi and Nuvo, or their assignees to provide us with timely and accurate safety information regarding the use of these medicines outside of the United States, as we have or will have limited access to this information ourselves.

We rely on third parties to manufacture commercial supplies of all of our medicines, and we currently intend to rely on third parties to manufacture commercial supplies of any other approved medicines. The commercialization of any of our medicines could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of medicine or fail to do so at acceptable quality levels or prices or fail to maintain or achieve satisfactory regulatory compliance.*

The facilities used by our third-party manufacturers to manufacture our medicines and medicine candidates must be approved by the applicable regulatory authorities. We do not control the manufacturing processes of third-party manufacturers and are currently completely dependent on our third-party manufacturing partners.

We rely on AGC Biologics A/S (formerly known as CMC Biologics A/S), or AGC Biologics, as our exclusive manufacturer of the TEPEZZA drug substance and Catalent Indiana, LLC, or Catalent, for TEPEZZA drug product. Following the highly successful launch of TEPEZZA, which has significantly exceeded expectations, we are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA. If AGC Biologics failed to supply TEPEZZA drug substance or Catalent failed to supply TEPEZZA drug product or either manufacturer was otherwise unable to meet our volume requirements due to unexpected market demand for TEPEZZA, it may lead to TEPEZZA supply constraints. We rely on NOF Corporation, or NOF, as our exclusive supplier of the PEGylation agent that is a critical raw material in the manufacture of KRYSTEXXA. If NOF failed to supply such PEGylation agent, it may lead to KRYSTEXXA supply constraints. A key excipient used in PENNSAID 2% as a penetration enhancer is dimethyl sulfoxide, or DMSO. We and Nuvo, our exclusive supplier of PENNSAID 2%, rely on a sole proprietary form of DMSO for which we maintain a substantial safety stock. However, should this supply become inadequate, damaged, destroyed or unusable, we and Nuvo may not be able to qualify a second source. We rely on an exclusive supply agreement with Boehringer Ingelheim Biopharmaceuticals GmbH, or Boehringer Ingelheim Biopharmaceuticals, for manufacturing and supply of ACTIMMUNE. ACTIMMUNE is manufactured by starting with cells from working cell bank samples which are derived from a master cell bank. We and Boehringer Ingelheim Biopharmaceuticals separately store multiple vials of the master cell bank. In the event of catastrophic loss at our or Boehringer Ingelheim Biopharmaceuticals’ storage facility, it is possible that we could lose multiple cell banks and have the manufacturing capacity of ACTIMMUNE severely impacted by the need to substitute or replace the cell banks.

If any of our third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, or pass regulatory inspection, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. For example, BASF Corporation, or BASF, our manufacturer of one of the APIs in DUEXIS, ibuprofen in a direct compression blend called DC85, previously notified us that it was not able to supply DC85 due to a technical issue at its manufacturing facility in Bishop, Texas during 2018. BASF has since resolved the technical issue and its manufacturing facility has returned to full operation. BASF is continuing to supply DC85 to us and we consider our DUEXIS inventory on hand to be sufficient to meet current and future commercial requirements. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our medicines or if they withdraw any such approval in the future, or if our suppliers or third-party manufacturers decide they no longer want to supply our primary active ingredients or manufacture our medicines, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our medicines. To the extent any third-party manufacturers that we engage with respect to our medicines are different from those currently being used for commercial supply in the United States, the FDA will need to approve the facilities of those third-party manufacturers used in the manufacture of our medicines prior to our sale of any medicine using these facilities.

Although we have entered into supply agreements for the manufacture and packaging of our medicines, our manufacturers may not perform as agreed or may terminate their agreements with us. We currently rely on single source suppliers for certain of our medicines. If our manufacturers terminate their agreements with us, we may have to qualify new back-up manufacturers. We rely on safety stock to mitigate the risk of our current suppliers electing to cease producing bulk drug product or ceasing to do so at acceptable prices and quality. However, we can provide no assurance that such safety stocks would be sufficient to avoid supply shortfalls in the event we have to identify and qualify new contract manufacturers.

The manufacture of medicines requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of medicines often encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production costs and yields, quality control, including stability of the medicine, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if microbial, viral or other contaminations are discovered in the medicines or in the manufacturing facilities in which our medicines are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure that issues relating to the manufacture of any of our medicines will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to commercialize our medicines or provide any medicine candidates to patients in clinical trials would be jeopardized.

Any delay or interruption in our ability to meet commercial demand for our medicines will result in the loss of potential revenues and could adversely affect our ability to gain market acceptance for these medicines. In addition, any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.

Failures or difficulties faced at any level of our supply chain, including any disruption caused by the COVID-19 pandemic, could materially adversely affect our business and delay or impede the development and commercialization of any of our medicines or medicine candidates and could have a material adverse effect on our business, results of operations, financial condition and prospects.

We face significant competition from other biotechnology and pharmaceutical companies, including those marketing generic medicines and our operating results will suffer if we fail to compete effectively.*

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States and international markets, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff, experienced marketing and manufacturing organizations and well-established sales forces. Additional consolidations in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors and we will have to find new ways to compete and may have to potentially merge with or acquire other businesses to stay competitive. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or in-licensing on an exclusive basis, medicines that are more effective and/or less costly than our medicines.

Although TEPEZZA does not face direct competition, other therapies, such as corticosteroids, have been used on an off-label basis to alleviate some of the symptoms of TED. While these therapies have not proved effective in treating the underlying disease, and carry with them significant side effects, their off-label use could reduce or delay treatment in the addressable patient population for TEPEZZA. Immunovant Inc. is also conducting Phase 2 clinical studies of a medicine candidate for the treatment of active TED, also referred to as Graves’ ophthalmopathy. While KRYSTEXXA faces limited direct competition, a number of competitors have medicines in clinical trials, including Selecta Biosciences Inc., or Selecta, which has recently initiated a Phase 3 trial of a medicine candidate for the treatment of chronic refractory gout. In September 2020, Selecta announced topline clinical data that did not meet the primary endpoint or demonstrate statistical superiority for their Phase 2 trial that compares their candidate, which includes an immunomodulator, to KRYSTEXXA alone. In July 2020, Selecta and Swedish Orphan Biovitrum AB, or Sobi, entered into a strategic licensing agreement under which Sobi will assume responsibility for certain development, regulatory, and commercial activities for this candidate. RAVICTI could face competition from a few medicine candidates that are in early-stage development, including a gene-therapy candidate by Ultragenyx Pharmaceutical Inc., a generic taste-masked formulation option of BUPHENYL by ACER Therapeutics Inc., and an enzyme replacement for a specific UCD subtype (ARG) by Aeglea Bio Therapeutics Inc. PROCYSBI faces competition from Cystagon (immediate-release cysteamine bitartrate capsules) for the treatment of cystinosis and Cystaran (cysteamine ophthalmic solution) for treatment of corneal crystal accumulation in patients with cystinosis. Additionally, we are also aware that AVROBIO, Inc. has an early-stage gene therapy candidate in development for the treatment of cystinosis. PENNSAID 2% faces competition from generic versions of diclofenac sodium topical solutions that are priced significantly less than the price we charge for PENNSAID 2%. The generic version of Voltaren Gel is the market leader in the topical NSAID category. Legislation enacted in most states in the United States allows, or in some instances mandates, that a pharmacist dispense an available generic equivalent when filling a prescription for a branded medicine, in the absence of specific instructions from the prescribing physician. DUEXIS faces competition from other NSAIDs, including Celebrex®, marketed by Pfizer Inc., and celecoxib, a generic form of the medicine marketed by other pharmaceutical companies. DUEXIS also faces significant competition from the separate use of NSAIDs for pain relief and GI protective medications to reduce the risk of NSAID-induced upper GI ulcers. Both NSAIDs and GI protective medications are available in generic form and may be less expensive to use separately than DUEXIS, despite such substitution being off-label in the case of DUEXIS. Because pharmacists often have economic and other incentives to prescribe lower-cost generics, if physicians prescribe PENNSAID 2% or DUEXIS, those prescriptions may not result in sales. If physicians do not complete prescriptions through our HorizonCares program or otherwise provide prescribing instructions prohibiting generic diclofenac sodium topical solutions as a substitute for PENNSAID 2%, the substitution of generic ibuprofen and famotidine separately as a substitution for DUEXIS, sales of PENNSAID 2% and DUEXIS may suffer despite any success we may have in promoting PENNSAID 2% or DUEXIS to physicians. In addition, other medicine candidates that contain ibuprofen and famotidine in combination or naproxen and esomeprazole in combination, while not currently known or FDA approved, may be developed and compete with DUEXIS in the future.

We have also entered into settlement and license agreements that may allow certain of our competitors to sell generic versions of certain of our medicines in the United States, subject to the terms of such agreements. We granted (i) a non-exclusive license (that is only royalty-bearing in some circumstances) to manufacture and commercialize a generic version of DUEXIS in the United States after January 1, 2023, (ii) non-exclusive licenses to manufacture and commercialize generic versions of PENNSAID 2% in the United States after October 17, 2027, (iii) a non-exclusive license to manufacture and commercialize a generic version of RAYOS tablets in the United States after December 23, 2022, and (iv) non-exclusive licenses to manufacture and commercialize generic versions of RAVICTI in the United States after July 1, 2025, or earlier under certain circumstances.

Patent litigation is currently pending in the United States District Court for the District of New Jersey against Actavis Laboratories UT, Inc., formerly known as Watson Laboratories, Inc., Actavis, Inc. and Actavis plc, or collectively Actavis, who intend to market a generic version of PENNSAID 2% prior to the expiration of certain of our patents listed in the FDA’s Orange Book, or the Orange Book. These cases arise from Paragraph IV Patent Certification notice letters from Actavis advising it had filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking approval to market a generic version of PENNSAID 2% before the expiration of the patents-in-suit.

On February 27, 2020, following a judgment in federal court invalidating certain patents covering VIMOVO, Dr. Reddy’s launched a generic version of VIMOVO in the United States. While patent litigation against Dr. Reddy’s for infringement continues on additional patents in the New Jersey District Court, we now face generic competition for VIMOVO, which has negatively impacted net sales of VIMOVO in 2020. As a result, we have repositioned our promotional efforts previously directed to VIMOVO to the other inflammation segment medicines and expect that our VIMOVO net sales will continue to decrease in future periods.

Patent litigation is currently pending in the United States District Court for the District of Delaware and the United States District Court of New Jersey against Alkem Laboratories, Inc., or Alkem, and Teva Pharmaceuticals USA, Inc., or Teva USA, respectively, who each intend to market a generic version of DUEXIS prior to the expiration of certain of our patents listed in the Orange Book. These cases arise from Paragraph IV Patent Certification notice letters from Alkem and Teva USA advising they had filed an ANDA with the FDA seeking approval to market a generic version of DUEXIS before the expiration of the patents-in-suit.

On June 27, 2020, we received notice from Lupin Limited, or Lupin, that it had filed an ANDA with the FDA seeking approval of a generic version of PROCYSBI. The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering PROCYSBI are invalid and/or will not be infringed by Lupin’s manufacture, use or sale of a generic version of PROCYSBI. Patent litigation is currently pending in the United States District Court of New Jersey against Lupin seeking to prevent Lupin from selling its generic version of PROCYSBI before the expiration of the patents-in-suit.

If we are unsuccessful in any of the PENNSAID 2% cases, DUEXIS cases or PROCYSBI case, we will likely face generic competition with respect to PENNSAID 2%, DUEXIS, and/or PROCYSBI and sales of PENNSAID 2%, DUEXIS, and/or PROCYSBI will be substantially harmed.

ACTIMMUNE is the only medicine currently approved by the FDA specifically for the treatment of CGD and SMO. While there are additional or alternative approaches used to treat patients with CGD and SMO, there are currently no medicines on the market that compete directly with ACTIMMUNE. A widely accepted protocol to treat CGD in the United States is the use of concomitant “triple prophylactic therapy” comprising ACTIMMUNE, an oral antibiotic agent and an oral antifungal agent. However, the FDA-approved labeling for ACTIMMUNE does not discuss this “triple prophylactic therapy,” and physicians may choose to prescribe one or both of the other modalities in the absence of ACTIMMUNE. Because of the immediate and life-threatening nature of SMO, the preferred treatment option for SMO is often to have the patient undergo a bone marrow transplant which, if successful, will likely obviate the need for further use of ACTIMMUNE in that patient. Likewise, the use of bone marrow transplants in the treatment of patients with CGD is becoming more prevalent, which could have a material adverse effect on sales of ACTIMMUNE and its profitability. We are aware of a number of research programs investigating the potential of gene therapy as a possible cure for CGD. Additionally, other companies may be pursuing the development of medicines and treatments that target the same diseases and conditions which ACTIMMUNE is currently approved to treat. As a result, it is possible that our competitors may develop new medicines that manage CGD or SMO more effectively, cost less or possibly even cure CGD or SMO. In addition, U.S. healthcare legislation passed in March 2010 authorized the FDA to approve biological products, known as biosimilars, that are similar to or interchangeable with previously approved biological products, like ACTIMMUNE, based upon potentially abbreviated data packages. Biosimilars are likely to be sold at substantially lower prices than branded medicines because the biosimilar manufacturer would not have to recoup the research and development and marketing costs associated with the branded medicine. Though we are not currently aware of any biosimilar under development, the development and commercialization of any competing medicines or the discovery of any new alternative treatment for CGD or SMO could have a material adverse effect on sales of ACTIMMUNE and its profitability.

BUPHENYL’s composition of matter patent protection and orphan drug exclusivity have expired. Because BUPHENYL has no regulatory exclusivity or listed patents, there is nothing to prevent a competitor from submitting an ANDA for a generic version of BUPHENYL and receiving FDA approval. Generic versions of BUPHENYL to date have been priced at a discount relative to RAVICTI, and physicians, patients, or payers may decide that this less expensive alternative is preferable to RAVICTI. If this occurs, sales of RAVICTI could be materially reduced, but we would nevertheless be required to make royalty payments to Bausch Health Companies Inc. (formerly Ucyclyd Pharma, Inc.), or Bausch, and another external party, at the same royalty rates. While Bausch and its affiliates are generally contractually prohibited from developing or commercializing new medicines, anywhere in the world, for the treatment of UCD or hepatic encephalopathy, or HE, which are chemically similar to RAVICTI, they may still develop and commercialize medicines that compete with RAVICTI. For example, medicines approved for indications other than UCD and HE may still compete with RAVICTI if physicians prescribe such medicines off-label for UCD or HE. We are also aware that Recordati S.p.A (formerly known as Orphan Europe SARL), or Recordati, is conducting clinical trials of carglumic acid to assess the efficacy for acute hyperammonemia in some of the UCD enzyme deficiencies for which RAVICTI is approved for chronic treatment. Carglumic acid is approved for maintenance therapy for chronic hyperammonemia and to treat hyperammonemic crises in N-acetylglutamate synthase deficiency, a rare UCD subtype, and is sold under the name Carbaglu. If the results of this trial are successful and Recordati is able to complete development and obtain approval of Carbaglu to treat additional UCD enzyme deficiencies, RAVICTI may face additional competition from this compound.

The availability and price of our competitors’ medicines could limit the demand, and the price we are able to charge, for our medicines. We will not successfully execute on our business objectives if the market acceptance of our medicines is inhibited by price competition, if physicians are reluctant to switch from existing medicines to our medicines, or if physicians switch to other new medicines or choose to reserve our medicines for use in limited patient populations.

In addition, established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to acquire novel compounds that could make our medicines obsolete. Our ability to compete successfully with these companies and other potential competitors will depend largely on our ability to leverage our experience in clinical, regulatory and commercial development to:

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develop and acquire medicines that are superior to other medicines in the market;

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attract qualified clinical, regulatory, and sales and marketing personnel;

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obtain patent and/or other proprietary protection for our medicines and technologies;

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obtain required regulatory approvals; and

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successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new medicine candidates.

If we are unable to maintain or realize the benefits of orphan drug exclusivity, we may face increased competition with respect to certain of our medicines.

Under the Orphan Drug Act of 1983, the FDA may designate a medicine as an orphan drug if it is a drug intended to treat a rare disease or condition affecting fewer than 200,000 people in the United States. A company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years from the date of its approval. PROCYSBI has been granted orphan drug exclusivity by the FDA, which we expect will provide orphan drug marketing exclusivity in the United States until December 2020, with exclusivity for PROCYSBI extending to 2022 for patients ages one to six years. In addition, TEPEZZA has been granted orphan drug exclusivity for treatment of active (dynamic) phase Graves’ ophthalmopathy, which we expect will provide orphan drug marketing exclusivity in the United States until January 2027. However, despite orphan drug exclusivity, the FDA can still approve another drug containing the same active ingredient and used for the same orphan indication if it determines that a subsequent drug is safer, more effective or makes a major contribution to patient care, and orphan exclusivity can be lost if the orphan drug manufacturer is unable to ensure that a sufficient quantity of the orphan drug is available to meet the needs of patients with the rare disease or condition. Orphan drug exclusivity may also be lost if the FDA later determines that the initial request for designation was materially defective. In addition, orphan drug exclusivity does not prevent the FDA from approving competing drugs for the same or similar indication containing a different active ingredient. If orphan drug exclusivity is lost and we were unable to successfully enforce any remaining patents covering the applicable medicine, we could be subject to generic competition and revenues from the medicine could decrease materially. In addition, if a subsequent drug is approved for marketing for the same or a similar indication as our medicines despite orphan drug exclusivity, we may face increased competition and lose market share with respect to these medicines.

If we cannot successfully implement our patient assistance programs or increase formulary access and reimbursement for our medicines in the face of increasing pressure to reduce the price of medications, the adoption of our medicines by physicians, patients and payers may decline.*

There continues to be immense pressure from healthcare payers, PBMs and others to use less expensive or generic medicines or over-the-counter brands instead of certain branded medicines. For example, some PBMs have placed certain of our medicines on their exclusion lists from time to time, which has resulted in a loss of coverage for patients whose healthcare plans have adopted these PBM lists. Additional healthcare plans, including those that contract with these PBMs but use different formularies, may also choose to exclude our medicines from their formularies or restrict coverage to situations where a generic or over-the-counter medicine has been tried first. Many payers and PBMs also require patients to make co-payments for branded medicines, including many of our medicines, in order to incentivize the use of generic or other lower-priced alternatives instead. Legislation enacted in most states in the United States allows, or in some instances mandates, that a pharmacist dispenses an available generic equivalent when filling a prescription for a branded medicine, in the absence of specific instructions from the prescribing physician. Because our medicines (other than BUPHENYL and VIMOVO) do not currently have FDA-approved generic equivalents in the United States, we do not believe our medicines should be subject to mandatory generic substitution laws. We understand that some pharmacies may attempt to obtain physician authorization to switch prescriptions for DUEXIS to prescriptions for multiple generic medicines with similar APIs to ensure payment for the medicine if the physician’s prescription for the branded medicine is not immediately covered by the payer, despite such substitution being off-label in the case of DUEXIS. If these limitations in coverage and other incentives result in patients refusing to fill prescriptions or being dissatisfied with the out-of-pocket costs of their medications, or if pharmacies otherwise seek and receive physician authorization to switch prescriptions, not only would we lose sales on prescriptions that are ultimately not filled, but physicians may be dissuaded from writing prescriptions for our medicines in the first place in order to avoid potential patient non-compliance or dissatisfaction over medication costs, or to avoid spending the time and effort of responding to pharmacy requests to switch prescriptions.

Part of our commercial strategy to increase adoption and access to our medicines in the face of these incentives to use generic alternatives is to offer physicians the opportunity to have eligible patients fill prescriptions through independent pharmacies participating in our HorizonCares patient assistance program, including shipment of prescriptions to patients. We also have contracted with a third-party prescription clearinghouse that offers physicians a single point of contact for processing prescriptions through these independent pharmacies, reducing physician administrative costs, increasing the fill rates for prescriptions and enabling physicians to monitor refill activity. Through HorizonCares, financial assistance may be available to reduce eligible patients’ out-of-pocket costs for prescriptions filled. Because of this assistance, eligible patients’ out-of-pocket cost for our medicines when dispensed through HorizonCares may be significantly lower than such costs when our medicines are dispensed outside of the HorizonCares program. However, to the extent physicians do not direct prescriptions currently filled through traditional pharmacies, including those associated with or controlled by PBMs, to pharmacies participating in our HorizonCares program, we may experience a significant decline in PENNSAID 2% and DUEXIS prescriptions. Our ability to increase utilization of our patient assistance programs will depend on physician and patient awareness and comfort with the programs, and we do not control whether physicians will ultimately use our patient assistance programs to prescribe our medicines or whether patients will agree to receive our medicines through our HorizonCares program. In addition, the HorizonCares program is not available to federal health care program (such as Medicare and Medicaid) beneficiaries. We have also contracted with certain PBMs and other payers to secure formulary status and reimbursement for certain of our inflammation segment medicines, which generally require us to pay administrative fees and rebates to the PBMs and other payers for qualifying prescriptions. While we have business relationships with two of the largest PBMs, Express Scripts, Inc., or Express Scripts, and CVS Caremark, as well as rebate agreements with other PBMs, and we believe these agreements will secure formulary status for certain of our medicines, we cannot guarantee that we will be able to agree to terms with other PBMs and other payers, or that such terms will be commercially reasonable to us. Despite our agreements with PBMs, the extent of formulary status and reimbursement will ultimately depend to a large extent upon individual healthcare plan formulary decisions. If healthcare plans that contract with PBMs with which we have agreements do not adopt formulary changes recommended by the PBMs with respect to our medicines, we may not realize the expected access and reimbursement benefits from these agreements. In addition, we generally pay higher rebates for prescriptions covered under plans that adopt a PBM-chosen formulary than for plans that adopt custom formularies. Consequently, the success of our PBM contracting strategy will depend not only on our ability to expand formulary adoption among healthcare plans, but also upon the relative mix of healthcare plans that have PBM-chosen formularies versus custom formularies. If we are unable to realize the expected benefits of our contractual arrangements with the PBMs we may continue to experience reductions in net sales from our inflammation segment medicines and/or reductions in net pricing for our inflammation segment medicines due to increasing patient assistance costs. If we are unable to increase adoption of HorizonCares for filling prescriptions of our medicines and to secure formulary status and reimbursement through arrangements with PBMs and other payers, particularly with healthcare plans that use custom formularies, our ability to achieve net sales growth for our inflammation segment medicines would be impaired.

There has been negative publicity and inquiries from Congress and enforcement authorities regarding the use of specialty pharmacies and drug pricing. Our patient assistance programs are not involved in the prescribing of medicines and are solely to assist in ensuring that when a physician determines one of our medicines offers a potential clinical benefit to their patients and they prescribe one for an eligible patient, financial assistance may be available to reduce the patient’s out-of-pocket costs. In addition, all pharmacies that fill prescriptions for our medicines are fully independent, including those that participate in HorizonCares. We do not own or possess any option to purchase an ownership stake in any pharmacy that distributes our medicines, and our relationship with each pharmacy is non-exclusive and arm’s length. All of our sales are processed through pharmacies independent of us. Despite this, the negative publicity and interest from Congress and enforcement authorities regarding specialty pharmacies may result in physicians being less willing to participate in our patient assistance programs and thereby limit our ability to increase patient assistance and adoption of our medicines.

We may also encounter difficulty in forming and maintaining relationships with pharmacies that participate in our patient assistance programs. We currently depend on a limited number of pharmacies participating in HorizonCares to fulfill patient prescriptions under the HorizonCares program. If these HorizonCares participating pharmacies are unable to process and fulfill the volume of patient prescriptions directed to them under the HorizonCares program, our ability to maintain or increase prescriptions for our medicines will be impaired. The commercialization of our medicines and our operating results could be affected should any of the HorizonCares participating pharmacies choose not to continue participation in our HorizonCares program or by any adverse events at any of those HorizonCares participating pharmacies. For example, pharmacies that dispense our medicines could lose contracts that they currently maintain with managed care organizations, or MCOs, including PBMs. Pharmacies often enter into agreements with MCOs. They may be required to abide by certain terms and conditions to maintain access to MCO networks, including terms and conditions that could limit their ability to participate in patient assistance programs like ours. Failure to comply with the terms of their agreements with MCOs could result in a variety of penalties, including termination of their agreement, which could negatively impact the ability of those pharmacies to dispense our medicines and collect reimbursement from MCOs for such medicines.

The HorizonCares program may implicate certain federal and state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, healthcare kickbacks, tortious interference with patient contracts and statutory or common law fraud. We have a comprehensive compliance program in place to address adherence with various laws and regulations relating to the selling, marketing and manufacturing of our medicines, as well as certain third-party relationships, including pharmacies. Specifically, with respect to pharmacies, the compliance program utilizes a variety of methods and tools to monitor and audit pharmacies, including those that participate in the HorizonCares program, to confirm their activities, adjudication and practices are consistent with our compliance policies and guidance. Despite our compliance efforts, to the extent the HorizonCares program is found to be inconsistent with applicable laws or the pharmacies that participate in our patient assistance programs do not comply with applicable laws, we may be required to restructure or discontinue such programs, terminate our relationship with certain pharmacies, or be subject to other significant penalties. In November 2015, we received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents and information related to our patient assistance programs and other aspects of our marketing and commercialization activities. We are unable to predict how long this investigation will continue or its outcome, but we have incurred and anticipate that we may continue to incur significant costs in connection with the investigation, regardless of the outcome. We may also become subject to similar investigations by other governmental agencies or Congress. The investigation by the U.S. Attorney’s Office and any additional investigations of our patient assistance programs and sales and marketing activities may result in significant damages, fines, penalties, exclusion, additional reporting requirements and/or oversight or other administrative sanctions against us.

If the cost of maintaining our patient assistance programs increases relative to our sales revenues, we could be forced to reduce the amount of patient financial assistance that we offer or otherwise scale back or eliminate such programs, which could in turn have a negative impact on physicians’ willingness to prescribe and patients’ willingness to fill prescriptions of our medicines. While we believe that our arrangements with PBMs will result in broader inclusion of certain of our inflammation segment medicines on healthcare plan formularies, and therefore increase payer reimbursement and lower our cost of providing patient assistance programs, these arrangements generally require us to pay administrative and rebate payments to the PBMs and/or other payers and their effectiveness will ultimately depend to a large extent upon individual healthcare plan formulary decisions that are beyond the control of the PBMs. If our arrangements with PBMs and other payers do not result in increased prescriptions and reductions in our costs to provide our patient assistance programs that are sufficient to offset the administrative fees and rebate payments to the PBMs and/or other payers, our financial results may continue to be harmed.

If we are unable to successfully implement our commercial plans and facilitate adoption by patients and physicians of any approved medicines through our sales, marketing and commercialization efforts, then we will not be able to generate sustainable revenues from medicine sales which will have a material adverse effect on our business and prospects.

Our business operations may subject us to numerous commercial disputes, claims and/or lawsuits and such litigation may be costly and time-consuming and could materially and adversely impact our financial position and results of operations.*

Operating in the pharmaceutical industry, particularly the commercialization of medicines, involves numerous commercial relationships, complex contractual arrangements, uncertain intellectual property rights, potential product liability and other aspects that create heightened risks of disputes, claims and lawsuits. In particular, we may face claims related to the safety of our medicines, intellectual property matters, employment matters, tax matters, commercial disputes, competition, sales and marketing practices, environmental matters, personal injury, insurance coverage and acquisition or divestiture-related matters. Any commercial dispute, claim or lawsuit may divert management’s attention away from our business, we may incur significant expenses in addressing or defending any commercial dispute, claim or lawsuit, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and financial results.

We are currently in litigation with multiple generic drug manufacturers regarding intellectual property infringement. For example, we are currently involved in Hatch Waxman litigation with generic drug manufacturers related to DUEXIS, PENNSAID 2%, VIMOVO, and PROCYSBI.

Similarly, from time to time we are involved in disputes with distributors, PBMs and licensing partners regarding our rights and performance of obligations under contractual arrangements. For example, we were previously in litigation with Express Scripts related to alleged breach of contract claims.

Litigation related to these disputes may be costly and time-consuming and could materially and adversely impact our financial position and results of operations if resolved against us.

A variety of risks associated with operating our business internationally could adversely affect our business.

In addition to our U.S. operations, we have operations in Ireland, Bermuda, the Grand Duchy of Luxembourg, or Luxembourg, Switzerland, Germany and in Canada. We face risks associated with our international operations, including possible unfavorable political, tax and labor conditions, which could harm our business. We are subject to numerous risks associated with international business activities, including:

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compliance with Irish laws and the maintenance of our Irish tax residency with respect to our overall corporate structure and administrative operations, including the need to generally hold meetings of our board of directors and make decisions in Ireland, which may make certain corporate actions more cumbersome, costly and time-consuming;

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difficulties in staffing and managing foreign operations;

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foreign government taxes, regulations and permit requirements;

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U.S. and foreign government tariffs, trade restrictions, price and exchange controls and other regulatory requirements;

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anti-corruption laws, including the Foreign Corrupt Practices Act, or the FCPA;

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economic weakness, including inflation, natural disasters, war, events of terrorism or political instability in particular foreign countries;

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fluctuations in currency exchange rates, which could result in increased operating expenses and reduced revenues, and other obligations related to doing business in another country;

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compliance with tax, employment, immigration and labor laws, regulations and restrictions for employees living or traveling abroad;

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workforce uncertainty in countries where labor unrest is more common than in the United States;

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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;

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changes in diplomatic and trade relationships; and

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challenges in enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States.

Our business activities outside of the United States are subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate. The FCPA and similar anti-corruption laws generally prohibit offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to non-U.S. government officials in order to improperly influence any act or decision, secure any other 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. As described above, our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments. Additionally, in many other countries, the health care providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, any dealings with these prescribers and purchasers may be subject to regulation under the FCPA. Recently the SEC and the U.S. Department of Justice, or 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 are engaged in ongoing efforts that are 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 manufacturers 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 subject to tax audits around the world, and such jurisdictions may assess additional income tax against us. Although we believe our tax positions are reasonable, the final determination of tax audits could be materially different from our recorded income tax provisions and accruals. The ultimate results of an audit could have a material adverse effect on our operating results or cash flows in the period or periods for which that determination is made and could result in increases to our overall tax expense in subsequent periods.

These and other risks associated with our international operations may materially adversely affect our business, financial condition and results of operations.

If we fail to develop or acquire other medicine candidates or medicines, our business and prospects would be limited.

A key element of our strategy is to develop or acquire and commercialize a portfolio of other medicines or medicine candidates in addition to our current medicines, through business or medicine acquisitions. Because we do not engage in proprietary drug discovery, the success of this strategy depends in large part upon the combination of our regulatory, development and commercial capabilities and expertise and our ability to identify, select and acquire approved or clinically enabled medicine candidates for therapeutic indications that complement or augment our current medicines, or that otherwise fit into our development or strategic plans on terms that are acceptable to us. Identifying, selecting and acquiring promising medicines or medicine candidates requires substantial technical, financial and human resources expertise. Efforts to do so may not result in the actual acquisition or license of a particular medicine or medicine candidate, potentially resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. If we are unable to identify, select and acquire suitable medicines or medicine candidates from third parties or acquire businesses at valuations and on other terms acceptable to us, or if we are unable to raise capital required to acquire businesses or new medicines, our business and prospects will be limited.

Moreover, any medicine candidate we acquire may require additional, time-consuming development or regulatory efforts prior to commercial sale or prior to expansion into other indications, including pre-clinical studies if applicable, and extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All medicine candidates are prone to the risk of failure that is inherent in pharmaceutical medicine development, including the possibility that the medicine candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure that any such medicines that are approved will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace or be more effective or desired than other commercially available alternatives.

In addition, if we fail to successfully commercialize and further develop our medicines, there is a greater likelihood that we will fail to successfully develop a pipeline of other medicine candidates to follow our existing medicines or be able to acquire other medicines to expand our existing portfolio, and our business and prospects would be harmed.

We have experienced growth and expanded the size of our organization substantially in connection with our acquisition transactions, and we may experience difficulties in managing this growth as well as potential additional growth in connection with future medicine, development program or company acquisitions.*

As of December 31, 2013, we employed approximately 300 full-time employees as a consolidated entity. As of September 30, 2020, we employed approximately 1,275 full-time employees, including approximately 445 sales representatives, representing a substantial change to the size of our organization. We have also experienced, and may continue to experience, turnover of the sales representatives that we hired or will hire in connection with the commercialization of our medicines, requiring us to hire and train new sales representatives. Our management, personnel, systems and facilities currently in place may not be adequate to support anticipated growth, and we may not be able to retain or recruit qualified personnel in the future due to competition for personnel among pharmaceutical businesses.

As our commercialization plans and strategies continue to develop, we will need to continue to recruit and train sales and marketing personnel. Our ability to manage any future growth effectively may require us to, among other things:

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continue to manage and expand the sales and marketing efforts for our existing medicines;

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enhance our operational, financial and management controls, reporting systems and procedures;

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expand our international resources;

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successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees;

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establish and increase our access to commercial supplies of our medicines and medicine candidates;

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expand our facilities and equipment; and

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manage our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors, collaborators, distributors and other third parties.

Our acquisitions have resulted in many changes, including significant changes in the corporate business and legal entity structure, the integration of other companies and their personnel with us, and changes in systems. We may encounter unexpected difficulties or incur unexpected costs, including:

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difficulties in achieving growth prospects from combining third-party businesses with our business;

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difficulties in the integration of operations and systems;

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difficulties in the assimilation of employees and corporate cultures;

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challenges in preparing financial statements and reporting timely results at both a statutory level for multiple entities and jurisdictions and at a consolidated level for public reporting;

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challenges in keeping existing physician prescribers and patients and increasing adoption of acquired medicines;

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difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the combination;

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potential unknown liabilities, adverse consequences and unforeseen increased expenses associated with the transaction; and

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challenges in attracting and retaining key personnel.

If any of these factors impair our ability to continue to integrate our operations with those of any companies or businesses we acquire, we may not be able to realize the business opportunities, growth prospects and anticipated tax synergies from combining the businesses. In addition, we may be required to spend additional time or money on integration that otherwise would be spent on the development and expansion of our business.

We may not be successful in growing our commercial operations outside the United States, and could encounter other challenges in growing our commercial presence, including due to risks associated with political and economic instability, operating under different legal requirements and tax complexities. If we are unable to manage our commercial growth outside of the United States, our opportunities to expand sales in other countries will be limited or we may experience greater costs with respect to our ex-U.S. commercial operations.

We have also broadened our acquisition strategy to include development-stage assets or programs, which entails additional risk to us. For example, if we are unable to identify programs that ultimately result in approved medicines, we may spend material amounts of our capital and other resources evaluating, acquiring and developing medicines that ultimately do not provide a return on our investment. We have less experience evaluating development-stage assets and may be at a disadvantage compared to other entities pursuing similar opportunities. Regardless, development-stage programs generally have a high rate of failure and we cannot guarantee that any such programs will ultimately be successful. While we have significantly enhanced our research and development function in recent years, we may need to enhance our clinical development and regulatory functions to properly evaluate and develop earlier-stage opportunities, which may include recruiting personnel that are knowledgeable in therapeutic areas we have not yet pursued. If we are unable to acquire promising

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Horizon Therapeutics (HZNP) 10-Q2020 Q3 Quarterly report

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