Commitments and Contingencies

Indemnification

In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification, including indemnification associated with product liability or infringement of intellectual property rights. Our exposure under these agreements is unknown because it involves future claims that may be made but have not yet been made against us. To date, we have not paid any claims or been required to defend any action related to these indemnification obligations.

We have agreed to indemnify our executive officers, directors and certain other employees for losses and costs incurred in connection with certain events or occurrences, including advancing money to cover certain costs, subject to certain limitations. The maximum potential amount of future payments we could be required to make under the indemnification obligations is unlimited; however, we maintain insurance policies that may limit our exposure and may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, we believe the fair value of these indemnification obligations is not significant. Accordingly, we did not recognize any liabilities relating to these obligations as of December 31, 2018 and December 31, 2017. No assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case we may incur substantial liabilities as a result of these indemnification obligations.

Lease and Other Commitments

Facility Leases. In January 2015, we entered into an agreement to lease office space located in Palo Alto, California in a building subsequently constructed by the landlord. The term of this lease is 12 years from the commencement date as defined in the lease agreement and we have an option to extend the term twice for a period of five years each. We are the deemed owner of the building based on applicable accounting guidance for build-to-suit leases. Accordingly, the landlord’s costs of constructing the building were capitalized on our consolidated balance sheets offset by a corresponding financing obligation. We began to occupy this office space in October 2017. As of December 31, 2018 and 2017, the total amount of the related financing obligation was $62.5 million and $62.9 million respectively, which is classified within current liabilities and non-current liabilities in our consolidated balance sheets.

In September 2017, we entered into an agreement to lease office space located in Palo Alto, California in a second building to be constructed by the same landlord. We expect to occupy this office space by the end of 2019. This lease has a term of 12 years from the commencement date as defined in the lease agreement and we have an option to extend the term of the lease twice for a period of five years each. We are the deemed owner of the building during the construction period based on applicable accounting guidance for build-to-suit leases. As of December 31, 2018, we recorded project construction costs of $47.3 million incurred by the landlord as construction-in-progress in property, plant and equipment, net and a corresponding financing obligation in other non-current liabilities on our consolidated balance sheets. We will increase the asset and financing obligation as additional building costs are incurred by the landlord during the construction period.

For the years ended December 31, 2018, 2017 and 2016, we recorded rent expense associated with the ground lease on our facility leases of $4.0 million, $2.4 million and $1.9 million, respectively, in our consolidated statements of income.

Future minimum lease payments under our noncancelable facility leases as of December 31, 2018, were as follows (in thousands):



Year Ending December 31,	Lease Payments
2019	$	9,881
2020	14,474
2021	14,908
2022	15,355
2023	15,816
Thereafter	119,409
Total	$	189,843

Operating Leases. We have noncancelable operating leases for our office buildings and we are obligated to make payments under noncancelable operating leases for automobiles used by our sales force.

Lease expense under our operating leases was as follows (in thousands):



	Year Ended December 31,
	2018		2017		2016
Lease expense	$	11,519	$	14,982	$	11,600

Future minimum lease payments under our noncancelable operating leases as of December 31, 2018, were as follows (in thousands):



Year ending December 31,	Lease Payments
2019	$	8,404
2020	6,269
2021	5,771
2022	5,388
2023	5,168
Thereafter	8,794
Total	$	39,794

In August 2016, we entered into an operating lease agreement for office space in Dublin, Ireland for a term of 20 years, with an option to terminate at the end of eight years with no less than one year’s prior written notice and the payment of a termination fee, and a further option to terminate at the end of 15 years with no less than one year’s prior written notice. We are obligated to make minimum lease payments totaling $16.9 million in connection with this lease.

Other Commitments. As of December 31, 2018, we had $65.1 million of noncancelable purchase commitments due within one year, primarily related to agreements with third party manufacturers.

Legal Proceedings

Xyrem ANDA Litigation and Settlements. In December 2012, we received a notice of Paragraph IV Patent Certification, or Paragraph IV Certification, from Amneal Pharmaceuticals LLC, or Amneal, that it had submitted an ANDA to the FDA requesting approval to market a generic version of Xyrem. In January 2013, we filed a lawsuit against Amneal in the federal district court of New Jersey, or District Court, alleging that our patents covering Xyrem are infringed or will be infringed by Amneal’s ANDA and seeking a permanent injunction to prevent Amneal from introducing a generic version of Xyrem that would infringe these patents. Additional patents covering Xyrem were issued after the date of the original lawsuit against Amneal, and lawsuits we brought against Amneal involving those patents were consolidated into a single case in the District Court.

In October 2018, we entered into a settlement agreement and related agreements resolving our patent infringement litigation against Amneal in the District Court, and the District Court subsequently approved an order dismissing the litigation. We previously settled lawsuits against the eight other companies that have sent us notices that they had filed ANDAs requesting approval to market a generic version of Xyrem. As a result, the settlement with Amneal represents settlement of all outstanding patent infringement litigation related to Xyrem. It is possible that additional companies may file ANDAs seeking to market a generic version of Xyrem or submit new drug applications referencing Xyrem, which could lead to additional patent litigation or challenges with respect to Xyrem.

In our settlement with Amneal, we granted Amneal the right to sell a limited volume of an authorized generic version of Xyrem, or AG Product, in the U.S. beginning on July 1, 2023, or earlier under certain circumstances. Such circumstances include events related to acceleration of the launch date of the AG Product of the first Xyrem ANDA filer, West-Ward Pharmaceuticals Corp., or West-Ward, the earlier launch of another party’s AG Product, the launch of another generic sodium oxybate product, or a final decision that all unexpired claims of the Xyrem patents are not infringed, or are invalid and/or unenforceable. The volume of Amneal’s AG Product is limited to an annual amount equal to a low single-digit percentage of Xyrem sales volume during the calendar year preceding the entry date of its AG Product, and Amneal’s right to sell its AG Product ends on December 31, 2025. We also granted Amneal a license under the Xyrem patents to launch its own generic sodium oxybate product under its ANDA on or after December 31, 2025, or earlier under certain circumstances. Such circumstances include events related to launch of a generic sodium oxybate product by West-Ward or another company under its ANDA, or a final decision that all unexpired claims of the Xyrem patents are not infringed, or are invalid and/or unenforceable. If an acceleration event occurs, then Amneal will have the option to elect to market its AG Product until December 31, 2025, but it will not be entitled to market its AG Product and its own generic sodium oxybate product simultaneously. We are entitled to receive a meaningful royalty on net sales of Amneal’s AG Product, as well as payment for the supply of its AG Product and reimbursement for a portion of the services costs associated with distribution of its AG Product through the Xyrem REMS. The specific terms of the settlement agreement are confidential.

Other Legal Proceedings. From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.

Other Contingencies

In May and October 2016 and in February 2017, we received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of charitable organizations that provide financial assistance to Medicare patients. Other companies have disclosed similar subpoenas and continuing inquiries. We have a comprehensive program intended to ensure our compliance with applicable legal and regulatory requirements for pharmaceutical companies, including guidelines established by the Office of Inspector General of the U.S. Department of Health and Human Services regarding patient assistance programs, and we have been cooperating with the government’s investigation. We have engaged in discussions with the U.S. Department of Justice, or DOJ, about a possible resolution, and in April 2018, we reached an agreement in principle with the DOJ on a proposal for a civil settlement of potential claims by the DOJ in the amount of $57.0 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies. During 2018, we recorded $58.2 million related to this matter, including related interest, within accrued liabilities on our consolidated balance sheet with the related expense included in selling, general and administrative expenses on our consolidated statement of income. We expect any such settlement will involve entry into a corporate integrity agreement, which will impose significant costs and operational burdens on our business. Moreover, a failure to comply with the terms of a corporate integrity agreement could result in monetary penalties or a reduction or elimination of coverage for our products by federal health care programs such as Medicare and Medicaid and state health care programs. If we do not reach a final settlement, or if we are unable to successfully negotiate and enter into a corporate integrity agreement, the outcome of this investigation could include an enforcement action against us. If the federal government were to file an enforcement action against us as a result of the investigation and could establish the elements of a violation of relevant laws, we could be subject to damages, fines and penalties, which could be substantial, along with other criminal, civil or administrative sanctions, including exclusion from participation in federal health care programs. We would expect to incur significant costs in connection with any enforcement action, regardless of the outcome.