NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE
THREE MONTHS
ENDED
MARCH 31, 2016
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited
Condensed Consolidated Financial Statements
of
Endo International plc
and its subsidiaries have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying
Condensed Consolidated Financial Statements
of Endo International plc and its subsidiaries, which are unaudited, include all normal and recurring adjustments necessary to a fair statement of the Company’s financial position as of
March 31, 2016
and the results of our operations and our cash flows for the periods presented. Operating results for the
three months
ended
March 31, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
. The year-end
Condensed Consolidated Balance Sheets
data as of
December 31, 2015
was derived from the audited financial statements.
Unless otherwise indicated or required by the context, references throughout to “Endo”, the “Company”, “we”, “our” or “us” refer to financial information and transactions of Endo International plc and its subsidiaries.
Endo International plc is an Ireland-domiciled, global specialty pharmaceutical company focused on branded and generic pharmaceuticals. Our goal is to be the premier partner to healthcare professionals and payment providers, delivering an innovative suite of branded and generic drugs to meet patients’ needs.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) No. 2014-09,
“Revenue from Contracts with Customers”
(ASU 2014-09). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. In August 2015, the FASB issued ASU No. 2015-14, “
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”
, which deferred the effective date of ASU 2014-09 by one year, but permits entities to adopt one year earlier if they choose (i.e., the original effective date). As such, ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2017 and the Company currently plans to adopt it on January 1, 2018. In addition, during March and April 2016, the FASB issued ASU No. 2016-08
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)”
and ASU No. 2016-10
“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”,
respectively
,
which clarified the guidance on reporting revenue as a principal versus agent, identifying performance obligations and accounting for intellectual property licenses. The Company is currently evaluating the impact of this standard on the Company’s consolidated results of operations and financial position including possible transition alternatives.
In July 2015, the FASB issued ASU No. 2015-11, “
Simplifying the Measurement of Inventory”
(ASU 2015-11). ASU 2015-11 states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively and early application is permitted. The Company is currently evaluating the impact of ASU 2015-11 on the Company’s consolidated results of operations and financial position.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
” (ASU 2016-02). ASU 2016-02 establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-02 on the Company’s consolidated results of operations and financial position.
In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09
“Improvements to Employee Share-Based Payment Accounting”
(ASU 2016-09). ASU 2016-09 will change how companies account for certain aspects of share-based payments
to employees including: (a) require all income tax effects of awards to be recognized in the income statement, rather than in additional paid in capital, when the awards vest or are settled, (b) eliminates the requirement that excess tax benefits be realized before companies can recognize them, (c) require companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, (d) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation, (e) require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows and (f) elect whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period but all of ASU 2016-09 must be adopted in the same period. The Company is currently evaluating the impact of ASU 2016-09 on the Company’s consolidated results of operations and financial position.
NOTE 3. DISCONTINUED OPERATIONS AND HELD FOR SALE
American Medical Systems
On
February 24, 2015
, the Board of Directors approved a plan to sell the Company’s American Medical Systems Holdings, Inc. (AMS) business, which comprised the entirety of our former
Devices
segment. The AMS business was comprised of the Men’s Health and Prostate Health business as well as the Women’s Health business (referred to herein as Astora). On August 3, 2015, the Company sold the Men’s Health and Prostate Health business to Boston Scientific Corporation (Boston Scientific) for
$1.65 billion
, with
$1.60 billion
paid upfront in cash and
$50.0 million
in cash contingent on Boston Scientific achieving certain product revenue milestones in the Men’s Health and Prostate Health business in 2016. In addition, Boston Scientific paid
$60.0 million
in exchange for
60,000
shares of American Medical Systems Holdings, Inc. Series B Non-Voting Preferred Stock (Series B Senior Preferred Stock) sold by our subsidiary Endo Pharmaceuticals Inc. (EPI). On
December 11, 2015
, the Company redeemed all
60,000
shares of the Series B Senior Preferred Stock from Boston Scientific for
$61.6 million
, including accrued and unpaid dividends.
In addition to selling the Men’s Health and Prostate Health business in 2015, as of December 31, 2015 and continuing into 2016, the Company was actively pursuing a sale of the Astora business with the Company in active negotiations with multiple potential buyers. The majority of the remaining assets and liabilities of the AMS business, which were related to the Astora business, were classified as held for sale in the
Consolidated Balance Sheet
as of
December 31, 2015
in the Company’s Form 10-K filed with the SEC on February 29, 2016. Certain of AMS’s assets and liabilities, primarily with respect to its product liability accrual related to vaginal mesh cases, the related Qualified Settlement Funds and certain intangible and fixed assets, were not classified as held for sale based on management’s expectation that these assets and liabilities would remain with the Company.
On February 24, 2016, the Company’s Board of Directors resolved to wind down the Company’s Astora business as it did not align with the Company’s strategic direction and to reduce the additional exposure to mesh-related product liability. The Company conducted a wind down process to transition physicians to alternative products during the first quarter of 2016. The Company ceased business operations for Astora on March 31, 2016 and exited its AMS business. As a result, as of
March 31, 2016
, the remaining assets and liabilities of the AMS business, which were related to the Astora business, were no longer classified as held for sale in the
Condensed Consolidated Balance Sheets
. In accordance with applicable accounting guidance, the Company also reclassified the Astora assets and liabilities previously presented as held for sale as of December 31, 2015 to held and used on its
Condensed Consolidated Balance Sheets
.
The operating results of the AMS business are reported as
Discontinued operations, net of tax
in the
Condensed Consolidated Statements of Operations
for all periods presented.
The following table provides the operating results of the Discontinued operations of AMS, net of tax for the
three months
ended
March 31
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Revenue
|
$
|
28,851
|
|
|
$
|
118,665
|
|
Litigation related and other contingencies, net
|
$
|
2,450
|
|
|
$
|
5,200
|
|
Asset impairment charges
|
$
|
21,179
|
|
|
$
|
222,753
|
|
Loss from discontinued operations before income taxes
|
$
|
(68,832
|
)
|
|
$
|
(229,858
|
)
|
Income tax benefit
|
$
|
(23,724
|
)
|
|
$
|
(3,648
|
)
|
Discontinued operations, net of tax
|
$
|
(45,108
|
)
|
|
$
|
(226,210
|
)
|
As a result of the Astora wind down initiative announced in the first quarter of 2016, the Company incurred asset impairment charges of
$21.2 million
. See below for discussion of our material wind down initiatives.
The following table provides the
Depreciation and amortization
and
Purchases of property, plant and equipment
of AMS for the
three months
ended
March 31
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Cash flows from discontinued operating activities:
|
|
|
|
Net loss
|
$
|
(45,108
|
)
|
|
$
|
(226,210
|
)
|
Depreciation and amortization
|
$
|
—
|
|
|
$
|
11,555
|
|
Net cash used in discontinued investing activities:
|
|
|
|
Purchases of property, plant and equipment
|
$
|
(138
|
)
|
|
$
|
(934
|
)
|
Astora Restructuring
The wind down process includes a restructuring initiative implemented during the three months ended March 31, 2016, which includes the reduction of the Astora workforce consisting of approximately
250
employees. Under this restructuring initiative, separation costs are expensed over the requisite service period, if any, while retention is being expensed ratably over the respective retention period.
As a result of the Astora restructuring initiative, the Company incurred expenses of $
60.7 million
during the
three
months ended
March 31, 2016
, consisting of
employee separation, retention and other benefit-related costs
, asset impairment charges, contract termination charges and other general restructuring costs. There were
no
restructuring expenses related to this initiative during the
three
months ended
March 31, 2015
. The Company anticipates there will be additional pre-tax restructuring expenses of
$12.8 million
related to
employee separation, retention and other benefit-related costs
, contract termination charges, and other restructuring costs and the majority of these actions are expected to be completed by September 30, 2016, with substantially all cash payments made by the end of 2016. These restructuring costs are included in Discontinued operations in the
Condensed Consolidated Statements of Operations
.
A summary of expenses related to the Astora restructuring initiative is included below for the
three
months ended
March 31, 2016
(in thousands):
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Employee separation, retention and other benefit-related costs
|
$
|
16,149
|
|
Asset impairment charges
|
21,179
|
|
Contract termination charges
|
10,224
|
|
Other wind down costs
|
13,121
|
|
Total
|
$
|
60,673
|
|
The liability related to the Astora restructuring initiative totaled
$39.0 million
as of
March 31, 2016
and is included in
Accrued expenses
in the
Condensed Consolidated Balance Sheets
. Changes to this accrual during the
three
months ended
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation, Retention and Other Benefit-Related Costs
|
|
Contract Termination Charges
|
|
Other Restructuring Costs
|
|
Total
|
Liability balance as of January 1, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expenses
|
16,149
|
|
|
10,224
|
|
|
13,121
|
|
|
39,494
|
|
Cash distributions
|
—
|
|
|
—
|
|
|
(445
|
)
|
|
(445
|
)
|
Liability balance as of March 31, 2016
|
$
|
16,149
|
|
|
$
|
10,224
|
|
|
$
|
12,676
|
|
|
$
|
39,049
|
|
Other
During the three months ended
March 31, 2016
, the Company divested a component of its international business that was not individually material.
NOTE 4. RESTRUCTURING
U.S. Generic Pharmaceuticals
Restructuring
2015 U.S Generic Pharmaceuticals Restructuring
In connection with the acquisition of Par Pharmaceutical Holdings, Inc. (Par) on
September 25, 2015
, we implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included realigning the Company’s
U.S. Generic Pharmaceuticals
segment sales, sales support, management activities and staffing, which resulted in separation benefits to certain
U.S. Generic Pharmaceuticals
employees. The cost reduction initiatives included a reduction in headcount of approximately
6%
of the
U.S. Generic Pharmaceuticals
workforces. Under this restructuring initiative (the 2015
U.S. Generic Pharmaceuticals
restructuring initiative), separation costs are expensed over the requisite service period, if any, while retention is being expensed ratably over the respective retention period.
As a result of the 2015
U.S. Generic Pharmaceuticals
restructuring initiative, the Company incurred restructuring expenses of
$3.5 million
during the
three
months ended
March 31, 2016
, consisting of
employee separation, retention and other benefit-related costs
. There were
no
restructuring expenses related to this initiative during the
three
months ended
March 31, 2015
. The Company anticipates there will be additional pre-tax restructuring expenses of
$1.6 million
related to
employee separation, retention and other benefit-related costs
and these actions are expected to be completed by October 31, 2016, with substantially all cash payments made by the end of 2016. In addition, the Company anticipates there will be additional pre-tax restructuring expenses of
$9.8 million
related to accelerated depreciation on certain assets. These restructuring costs are allocated to the
U.S. Generic Pharmaceuticals
segment, and are primarily included in
Selling, general and administrative
costs and expenses in the
Condensed Consolidated Statements of Operations
.
The liability related to the 2015
U.S. Generic Pharmaceuticals
restructuring initiative totaled
$17.3 million
and
$17.9 million
at
March 31, 2016
and
December 31, 2015
, respectively. At
March 31, 2016
, this liability is included in
Accrued expenses
in the
Condensed Consolidated Balance Sheets
. Changes to this accrual during the
three
months ended
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
Total
|
Liability balance as of January 1, 2016
|
$
|
17,914
|
|
Expenses
|
3,464
|
|
Cash distributions
|
(4,056
|
)
|
Liability balance as of March 31, 2016
|
$
|
17,322
|
|
2016 U.S Generic Pharmaceuticals Restructuring
As part of the ongoing
U.S. Generic Pharmaceuticals
integration efforts, in May 2016 we announced a restructuring initiative to optimize our product portfolio and rationalize our manufacturing sites to expand product margins (the 2016
U.S. Generic Pharmaceuticals
restructuring initiative). These measures include certain cost savings initiatives, including a reduction in headcount and the closing of the Charlotte, North Carolina manufacturing facility.
As a result of the 2016
U.S. Generic Pharmaceuticals
restructuring initiative, the Company expects to incur total restructuring-related expenses of approximately
$200 million
, consisting of asset impairment charges, charges to increase excess inventory reserves,
employee separation, retention and other benefit-related costs
and certain other charges. The Company anticipates these actions will be
completed by September 2017, with substantially all cash payments made by the end of 2017. Under this restructuring initiative, separation costs will be expensed ratably over the requisite service period, if any. As a result of the 2016
U.S. Generic Pharmaceuticals
restructuring initiative, the Company incurred pretax charges of
$127.2 million
during the
three
months ended
March 31, 2016
, consisting of certain intangible asset impairment charges of
$100.3 million
and charges to increase excess inventory reserves of
$26.9 million
. These charges are included in the
U.S. Generic Pharmaceuticals
segment, and are included in Asset impairment charges and Cost of revenues, respectively, in the
Condensed Consolidated Statements of Operations
.
Auxilium Restructuring
In connection with the acquisition of Auxilium Pharmaceuticals, Inc. (Auxilium) on
January 29, 2015
, the Company implemented cost-rationalization and integration initiatives to capture operating synergies and generate cost savings across the Company. These measures included realigning our sales, sales support, management activities and staffing, which included separation benefits to former Auxilium employees, in addition to the closing of duplicative facilities. The cost reduction initiatives included a reduction in headcount of approximately
40%
of the former Auxilium workforce. For former Auxilium employees that agreed to continue employment with the Company for a merger transition period, the separation costs payable upon completion of their retention period was expensed over their respective retention period. The Company does not anticipate there will be additional material pre-tax restructuring expenses related to this initiative. The Company anticipates that substantially all
employee separation, retention and other benefit-related costs
cash payments relating to this initiative will be made by the end of 2016. The remainder of the cash payments will be made over the remaining lease term of Auxilium’s former corporate headquarters in Chesterbrook, Pennsylvania. These restructuring costs are included in the
U.S. Branded Pharmaceuticals
segment, and are primarily included in
Selling, general and administrative
costs and expenses in the
Condensed Consolidated Statements of Operations
.
The liability related to the Auxilium restructuring initiative totaled
$8.7 million
and
$12.3 million
at
March 31, 2016
and
December 31, 2015
, respectively, and is included in
Accrued expenses
and Other liabilities in the
Condensed Consolidated Balance Sheets
. Changes to this accrual during the
three
months ended
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation, Retention and Other Benefit-Related Costs
|
|
Other Restructuring Costs
|
|
Total
|
Liability balance as of January 1, 2016
|
$
|
5,353
|
|
|
$
|
6,910
|
|
|
$
|
12,263
|
|
Cash distributions
|
(3,222
|
)
|
|
(377
|
)
|
|
(3,599
|
)
|
Liability balance as of March 31, 2016
|
$
|
2,131
|
|
|
$
|
6,533
|
|
|
$
|
8,664
|
|
NOTE 5. ACQUISITIONS
For each of the acquisitions described below, except for Auxilium, the estimated fair values of the net assets acquired are provisional as of
March 31, 2016
and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements. Accordingly, the measurement of the assets acquired and liabilities assumed may change upon finalization of the Company’s valuations and completion of the purchase price allocations, all of which are expected to occur no later than one year from the respective acquisition dates.
Auxilium Pharmaceuticals, Inc.
On
January 29, 2015
(the Auxilium Acquisition Date), the Company acquired all of the outstanding shares of common stock of Auxilium, a fully integrated specialty biopharmaceutical company emerging as a leader in the men’s healthcare sector with a strategically focused product portfolio and pipeline in orthopedics, dermatology and other therapeutic areas, in a transaction valued at
$2.6 billion
. The Company believed that Auxilium would be highly complementary to its branded pharmaceuticals business with significant opportunities to leverage Auxilium’s leading presence in men’s health, as well as the Company’s R&D capabilities and financial resources to accelerate the growth of Auxilium’s XIAFLEX
®
and its other products.
The operating results of Auxilium are included in the accompanying
Condensed Consolidated Statements of Operations
for the
three
months ended
March 31, 2016
and the operating results from the acquisition date of
January 29, 2015
are included in the accompanying
Condensed Consolidated Statements of Operations
for the
three
months ended
March 31, 2015
.
The Company recognized
no
acquisition-related transaction costs associated with the Auxilium acquisition during the
three
months ended
March 31, 2016
. The Company recognized acquisition-related transaction costs associated with the Auxilium acquisition during the
three
months ended
March 31, 2015
totaling
$19.4 million
. These costs, which related primarily to bank fees, legal and accounting services, and fees for other professional services, are included in
Acquisition-related and integration items
in the accompanying
Condensed Consolidated Statements of Operations
.
The amounts of Auxilium Revenue and
Net loss attributable to Endo International plc
included in the Company’s
Condensed Consolidated Statements of Operations
from and including
January 29, 2015
to
March 31, 2015
are as follows (in thousands, except per share data):
|
|
|
|
|
Revenue
|
$
|
66,796
|
|
Net loss attributable to Endo International plc
|
$
|
(50,907
|
)
|
Basic net loss per share
|
$
|
(0.30
|
)
|
Diluted net loss per share
|
$
|
(0.29
|
)
|
The following supplemental unaudited pro forma information presents the financial results as if the acquisition of Auxilium had occurred on
January 1, 2015
for the
three
months ended
March 31, 2015
. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on
January 1, 2015
, nor are they indicative of any future results.
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
Unaudited pro forma consolidated results (in thousands, except per share data):
|
|
Revenue
|
$
|
737,703
|
|
Net loss attributable to Endo International plc
|
$
|
(82,582
|
)
|
Basic net loss per share
|
$
|
(0.49
|
)
|
Diluted net loss per share
|
$
|
(0.47
|
)
|
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Auxilium to reflect factually supportable adjustments that give effect to events that are directly attributable to the Auxilium acquisition assuming the Auxilium acquisition had occurred on
January 1, 2015
. These adjustments mainly include adjustments to interest expense and additional intangible amortization. The adjustments to interest expense, net of tax, related to borrowings to finance the acquisition increased the expense by
$1.1 million
for the
three months
ended
March 31, 2015
. In addition, the adjustments include additional intangible amortization, net of tax, which would have been charged assuming the Company’s estimated fair value of the intangible assets. An adjustment to the amortization expense for the
three months
ended
March 31, 2015
increased the expense by
$6.9 million
.
Acquisition of Par Pharmaceutical Holdings, Inc.
On
September 25, 2015
(Par Acquisition Date), the Company acquired Par, a specialty pharmaceutical company that develops, licenses, manufactures, markets and distributes innovative and cost-effective pharmaceuticals with a focus on high-barrier-to-entry products that are difficult to formulate, for total consideration of
$8.14 billion
, including the assumption of Par debt. The consideration included the Company’s
18,069,899
ordinary shares valued at
$1.33 billion
.
The operating results of Par are included in the accompanying
Condensed Consolidated Statements of Operations
for the
three
months ended
March 31, 2016
. There are no results included in the accompanying
Condensed Consolidated Statements of Operations
for the
three
months ended
March 31, 2015
.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the Par Acquisition Date, including measurement period adjustments since the fair values presented in the Company’s Form 10-K for the year ended
December 31, 2015
filed with the SEC on February 29, 2016, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2015
|
|
Measurement period adjustments
|
|
September 25, 2015
(As adjusted)
|
Cash and cash equivalents
|
$
|
215,612
|
|
|
$
|
—
|
|
|
$
|
215,612
|
|
Accounts and other receivables
|
530,664
|
|
|
(13,500
|
)
|
|
517,164
|
|
Inventories
|
330,406
|
|
|
(1,849
|
)
|
|
328,557
|
|
Prepaid expenses and other current assets
|
31,124
|
|
|
—
|
|
|
31,124
|
|
Deferred income tax assets, current
|
14,652
|
|
|
660
|
|
|
15,312
|
|
Property, plant and equipment
|
256,293
|
|
|
4,744
|
|
|
261,037
|
|
Intangible assets
|
3,627,000
|
|
|
(154,500
|
)
|
|
3,472,500
|
|
Other assets
|
8,477
|
|
|
—
|
|
|
8,477
|
|
Total identifiable assets
|
$
|
5,014,228
|
|
|
$
|
(164,445
|
)
|
|
$
|
4,849,783
|
|
Accounts payable and accrued expenses
|
$
|
551,614
|
|
|
$
|
(13,500
|
)
|
|
$
|
538,114
|
|
Deferred income tax liabilities
|
1,093,779
|
|
|
(53,515
|
)
|
|
1,040,264
|
|
Other liabilities
|
16,057
|
|
|
—
|
|
|
16,057
|
|
Total liabilities assumed
|
$
|
1,661,450
|
|
|
$
|
(67,015
|
)
|
|
$
|
1,594,435
|
|
Net identifiable assets acquired
|
$
|
3,352,778
|
|
|
$
|
(97,430
|
)
|
|
$
|
3,255,348
|
|
Goodwill
|
4,782,876
|
|
|
97,430
|
|
|
4,880,306
|
|
Net assets acquired
|
$
|
8,135,654
|
|
|
$
|
—
|
|
|
$
|
8,135,654
|
|
The estimated fair value of the Par assets acquired and liabilities assumed are provisional as of
March 31, 2016
and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements, particularly with respect to property, plant and equipment, intangible assets, inventory, accrued expenses, deferred income taxes and income taxes payable. Accordingly, the measurement of the Par assets acquired and liabilities assumed may change significantly upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date. During the three months ended
March 31, 2016
, the Company recorded a reduction of
$3.8 million
of expense,
$3.1 million
related to the amortization of intangible assets and
$0.7 million
related to the amortization of inventory step-up, as a result of the measurement period adjustments recorded above.
The valuation of the intangible assets acquired and related amortization periods are as follows:
|
|
|
|
|
|
|
|
Valuation (in millions)
|
|
Amortization period (in years)
|
Developed Technology:
|
|
|
|
Vasostrict
TM
|
$
|
556.0
|
|
|
8
|
Aplisol
®
|
312.4
|
|
|
11
|
Developed - Other - Non-Partnered (Generic Non-Injectable)
|
230.4
|
|
|
7
|
Developed - Other - Partnered (Combined)
|
164.4
|
|
|
7
|
Nascobal
®
|
118.3
|
|
|
9
|
Developed - Other - Non-Partnered (Generic Injectable)
|
116.4
|
|
|
10
|
Other
|
517.9
|
|
|
9
|
Total
|
$
|
2,015.8
|
|
|
|
In Process Research & Development (IPR&D):
|
|
|
|
IPR&D 2019 Launch
|
$
|
401.0
|
|
|
n/a
|
IPR&D 2018 Launch
|
283.8
|
|
|
n/a
|
Ezetimibe
|
147.6
|
|
|
n/a
|
IPR&D 2016 Launch
|
133.3
|
|
|
n/a
|
Ephedrine Sulphate
|
128.6
|
|
|
n/a
|
Neostigmine vial
|
118.6
|
|
|
n/a
|
Other
|
243.8
|
|
|
n/a
|
Total
|
$
|
1,456.7
|
|
|
n/a
|
Total other intangible assets
|
$
|
3,472.5
|
|
|
n/a
|
The preliminary fair values of the developed technology and IPR&D assets were estimated using a discounted present value income approach. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates ranging from
9%
to
10.5%
, which were considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions.
The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing pharmaceutical businesses, the assembled workforce of Par and other factors. Approximately
$34.2 million
of goodwill is expected to be deductible for income tax purposes.
Deferred tax assets and liabilities are related primarily to the difference between the book basis and tax basis of identifiable intangible assets and inventory step-up.
The following supplemental unaudited pro forma information presents the financial results as if the acquisition of Par had occurred on
January 1, 2015
for the
three months
ended
March 31, 2015
. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on
January 1, 2015
, nor are they indicative of any future results.
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
Unaudited pro forma consolidated results (in thousands, except per share data):
|
|
Revenue
|
$
|
1,073,372
|
|
Net loss attributable to Endo International plc
|
$
|
(100,462
|
)
|
Basic net loss per share
|
$
|
(0.59
|
)
|
Diluted net loss per share
|
$
|
(0.57
|
)
|
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Par to reflect factually supportable adjustments that give effect to events that are directly attributable to the Par acquisition assuming the Par acquisition had occurred on
January 1, 2015
. These adjustments mainly include adjustments to interest expense and additional intangible amortization. The adjustments to interest expense, net of tax, related to borrowings to finance the acquisition increased
the expense by
$6.8 million
for the
three months
ended
March 31, 2015
. In addition, the adjustments include additional intangible amortization, net of tax, that would have been charged assuming the Company’s estimated fair value of the intangible assets. An adjustment to the amortization expense for the
three months
ended
March 31, 2015
increased the expense by
$38.3 million
.
Aspen Holdings
On
October 1, 2015
, the Company acquired a broad portfolio of branded and generic injectable and established products focused on pain, anti-infectives, cardiovascular and other specialty therapeutic areas from a subsidiary of Aspen Holdings, a leading publicly-traded South African company that supplies branded and generic products in more than
150
countries, and from GlaxoSmithKline plc (GSK) for total consideration of approximately
$135.6 million
. The transaction expanded the Company’s presence in South Africa.
The fair values of the net identifiable assets acquired totaled
$128.7 million
, resulting in goodwill of
$6.9 million
, which was assigned to our
International Pharmaceuticals
segment. The amount of net identifiable assets acquired in connection with the Aspen Holdings acquisition includes
$118.4 million
of intangible assets to be amortized over an average life of approximately
19 years
, and inventory of
$10.3 million
.
The operating results of Aspen Holdings are included in the accompanying
Condensed Consolidated Statements of Operations
for the
three
months ended
March 31, 2016
. There are no results included in the accompanying
Condensed Consolidated Statements of Operations
for the
three
months ended
March 31, 2015
. The
Condensed Consolidated Balance Sheets
as of
March 31, 2016
and
December 31, 2015
reflect the acquisition of Aspen Holdings, effective
October 1, 2015
.
Pro forma results of operations have not been presented because the effect of the Aspen Holdings acquisition was not material.
NOTE 6. SEGMENT RESULTS
The reportable business segments in which the Company operates are: (1)
U.S. Branded Pharmaceuticals
, (2)
U.S. Generic Pharmaceuticals
and (3)
International Pharmaceuticals
. These segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s
adjusted income (loss) from continuing operations before income tax
, which we define as
loss from continuing operations before income tax
before
certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs, earn-out payments or adjustments, changes in the fair value of contingent consideration and bridge financing costs; cost reduction and integration-related initiatives such as separation benefits, retention payments, other exit costs and certain costs associated with integrating an acquired company’s operations; excess costs that will be eliminated pursuant to integration plans; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; certain non-cash interest expense; litigation-related and other contingent matters; gains or losses from early termination of debt activities; foreign currency gains or losses on intercompany financing arrangements; and certain other items that the Company believes do not reflect its core operating performance
.
Certain of the corporate general and administrative expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated”. The Company’s consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segments less these unallocated corporate costs.
U.S. Branded Pharmaceuticals
Our
U.S. Branded Pharmaceuticals
segment includes a variety of branded prescription products related to treating and managing pain as well as our urology and men’s health, endocrinology and orthopedic products. The marketed products that are included in this segment include Lidoderm
®
, OPANA
®
ER, Voltaren
®
Gel, Percocet
®
, BELBUCA™, Aveed
®
, Supprelin
®
LA, and XIAFLEX
®
, among others.
U.S. Generic Pharmaceuticals
Our
U.S. Generic Pharmaceuticals
segment consists of a differentiated product portfolio including high barrier-to-entry products, first-to-file or first-to-market opportunities, which are difficult to formulate, difficult to manufacture or face complex legal and regulatory challenges. The product offerings of this segment include products in the pain management, urology, CNS disorders, immunosuppression, oncology, women’s health and cardiovascular disease markets, among others.
International Pharmaceuticals
Our
International Pharmaceuticals
segment includes a variety of specialty pharmaceutical products for the Canadian, Mexican, South African and world markets. Paladin, based in Canada, has a portfolio of products serving growing therapeutic areas, including
ADHD, pain, women’s health and oncology. Somar, based in Mexico, develops, manufactures and markets high-quality generic, branded generic and over-the-counter products across key market segments including dermatology and anti-infectives. Litha, based in South Africa, is a diversified healthcare group providing services, products and solutions to public and private hospitals, pharmacies, general and specialist practitioners, as well as government healthcare programs.
The following represents selected information for the Company’s reportable segments for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net revenues to external customers:
|
|
|
|
U.S. Branded Pharmaceuticals
|
$
|
308,813
|
|
|
$
|
284,507
|
|
U.S. Generic Pharmaceuticals
|
583,390
|
|
|
356,962
|
|
International Pharmaceuticals (1)
|
71,336
|
|
|
72,659
|
|
Total net revenues to external customers
|
$
|
963,539
|
|
|
$
|
714,128
|
|
|
|
|
|
Adjusted income from continuing operations before income tax:
|
|
|
|
U.S. Branded Pharmaceuticals
|
$
|
168,781
|
|
|
$
|
158,794
|
|
U.S. Generic Pharmaceuticals
|
$
|
211,768
|
|
|
$
|
183,457
|
|
International Pharmaceuticals
|
$
|
21,754
|
|
|
$
|
16,567
|
|
__________
|
|
(1)
|
Revenues generated by our
International Pharmaceuticals
segment are primarily attributable to Canada, Mexico and South Africa.
|
In
2015
, we realigned certain costs between our
International Pharmaceuticals
segment,
U.S. Branded Pharmaceuticals
segment and corporate unallocated costs based on how our chief operating decision maker currently reviews segment performance. As a result of this realignment, certain expenses included in our consolidated
adjusted income (loss) from continuing operations before income tax
for the
three months
ended
March 31, 2015
have been reclassified among our various segments to conform to current period presentation. The net impact of these reclassification adjustments increased U.S. Branded Pharmaceuticals segment and corporate unallocated costs by
$0.6 million
and
$7.6 million
, respectively, with an offsetting
$8.2 million
decrease to
International Pharmaceuticals
segment costs.
There were no material revenues from external customers attributed to an individual country outside of the United States during the
three months
ended
March 31, 2016
, or
2015
.
The table below provides reconciliations of our
segment adjusted income from continuing operations before income tax
to our consolidated
loss from continuing operations before income tax
, which is determined in accordance with U.S. GAAP, for the
three months
ended
March 31
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Total segment adjusted income from continuing operations before income tax:
|
$
|
402,303
|
|
|
$
|
358,818
|
|
Corporate unallocated costs (1)
|
(153,073
|
)
|
|
(111,068
|
)
|
Upfront and milestone payments to partners
|
(1,417
|
)
|
|
(2,667
|
)
|
Asset impairment charges (2)
|
(129,625
|
)
|
|
(7,000
|
)
|
Acquisition-related and integration items (3)
|
(12,554
|
)
|
|
(34,640
|
)
|
Separation benefits and other cost reduction initiatives (4)
|
(38,456
|
)
|
|
(41,807
|
)
|
Amortization of intangible assets
|
(211,669
|
)
|
|
(95,269
|
)
|
Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans
|
(68,476
|
)
|
|
(39,916
|
)
|
Non-cash interest expense related to the 1.75% Convertible Senior Subordinated Notes
|
—
|
|
|
(1,379
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
(980
|
)
|
Impact of Voltaren
®
Gel generic competition
|
7,750
|
|
|
—
|
|
Certain litigation-related charges, net (5)
|
(5,200
|
)
|
|
(13,000
|
)
|
Costs associated with unused financing commitments
|
—
|
|
|
(11,810
|
)
|
Acceleration of Auxilium employee equity awards at closing
|
—
|
|
|
(37,603
|
)
|
Foreign currency impact related to the remeasurement of intercompany debt instruments
|
(1,255
|
)
|
|
21,090
|
|
Other, net
|
4,194
|
|
|
854
|
|
Total consolidated loss from continuing operations before income tax
|
$
|
(207,478
|
)
|
|
$
|
(16,377
|
)
|
__________
|
|
(1)
|
Corporate unallocated costs include certain corporate overhead costs, interest expense, net, and certain other income and expenses.
|
|
|
(2)
|
Asset impairment charges primarily related to charges to write down intangible assets as further described in
Note 9. Goodwill and Other Intangibles
.
|
|
|
(3)
|
Acquisition-related and integration-items include costs directly associated with previous acquisitions of
$23.2 million
for the
three months
ended
March 31, 2016
and
$35.4 million
for the comparable
2015
period. During
2016
and
2015
, these costs are net of a benefit due to changes in the fair value of contingent consideration of
$10.7 million
and
$0.8 million
, respectively.
|
|
|
(4)
|
Separation benefits and other cost reduction initiatives include charges to increase excess inventory reserves of
$26.9 million
related to the 2016
U.S. Generic Pharmaceuticals
restructuring initiative, employee separation costs of
$6.8 million
and other restructuring costs of
$4.4 million
for the
three
months ended
March 31, 2016
. Amounts in the comparable
2015
period include employee separation costs of
$32.4 million
and a
$7.9 million
charge recorded upon the cease use date of our Auxilium subsidiary’s former corporate headquarters, representing the liability for our remaining obligations under the respective lease agreement, net of estimated sublease income. These amounts were primarily recorded as
Selling, general and administrative
expense in our
Condensed Consolidated Statements of Operations
. See
Note 4. Restructuring
for discussion of our material restructuring initiatives.
|
|
|
(5)
|
These amounts include charges for Litigation-related and other contingencies, net as further described in
Note 12. Commitments and Contingencies
.
|
Interest income and expense are considered corporate items and included in Corporate unallocated. Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
NOTE 7. FAIR VALUE MEASUREMENTS
Financial Instruments
The financial instruments recorded in our
Condensed Consolidated Balance Sheets
include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at
$1.00
per unit, which assists in providing adequate liquidity upon demand by the holder. Money
market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.
Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, 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.
|
|
|
•
|
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.
|
Marketable Securities
Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the above-defined fair value hierarchy. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in
Marketable securities
in the
Condensed Consolidated Balance Sheets
at
March 31, 2016
and
December 31, 2015
.
At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. The Company reviews unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Equity and Cost Method Investments
As of
March 31, 2016
, we have investments that we account for using the equity or cost method of accounting totaling
$9.8 million
. The Company divested a joint venture investment owned through its Litha subsidiary during the three months ended
March 31, 2016
. The Company classified this joint venture investment as Assets held for sale as of
December 31, 2015
in the accompanying
Condensed Consolidated Balance Sheets
.
With respect to our other equity or cost method investments, which are included in Other Assets in our
Condensed Consolidated Balance Sheets
at
March 31, 2016
and
December 31, 2015
, the Company did not recognize any other-than-temporary impairments. We considered various factors, including the operating results of our equity method investments and the lack of an unrealized loss position on our cost method investments.
Acquisition-Related Contingent Consideration
The fair value of contingent consideration liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.
Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at
March 31, 2016
and
December 31, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date using:
|
March 31, 2016
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
56,135
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56,135
|
|
Equity securities
|
2,480
|
|
|
—
|
|
|
—
|
|
|
2,480
|
|
Total
|
$
|
58,615
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,615
|
|
Liabilities:
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration—short-term
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,045
|
|
|
$
|
48,045
|
|
Acquisition-related contingent consideration—long-term
|
—
|
|
|
—
|
|
|
76,466
|
|
|
76,466
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,511
|
|
|
$
|
124,511
|
|
At
March 31, 2016
, money market funds include
$56.1 million
in Qualified Settlement Funds to be disbursed to mesh-related product liability claimants. See
Note 12. Commitments and Contingencies
for further discussion of our product liability cases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date using:
|
December 31, 2015
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
51,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,145
|
|
Equity securities
|
3,889
|
|
|
—
|
|
|
—
|
|
|
3,889
|
|
Total
|
$
|
55,034
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,034
|
|
Liabilities:
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration—short-term
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65,265
|
|
|
$
|
65,265
|
|
Acquisition-related contingent consideration—long-term
|
—
|
|
|
—
|
|
|
78,237
|
|
|
78,237
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
143,502
|
|
|
$
|
143,502
|
|
At
December 31, 2015
, money market funds include $
51.1 million
in Qualified Settlement Funds to be disbursed to mesh-related product liability claimants. See
Note 12. Commitments and Contingencies
for further discussion of our product liability cases.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Beginning of period
|
$
|
143,502
|
|
|
$
|
46,005
|
|
Amounts acquired
|
—
|
|
|
148,100
|
|
Amounts settled
|
(9,474
|
)
|
|
(4,723
|
)
|
Transfers (in) and/or out of Level 3
|
—
|
|
|
—
|
|
Measurement period adjustments
|
—
|
|
|
(4,313
|
)
|
Changes in fair value recorded in earnings
|
(10,688
|
)
|
|
(808
|
)
|
Effect of currency translation
|
1,171
|
|
|
—
|
|
End of period
|
$
|
124,511
|
|
|
$
|
184,261
|
|
The fair value measurement of the contingent consideration obligations was determined using risk-adjusted discount rates ranging from
6.5%
to
22.0%
.
Changes in fair value recorded in earnings
related to acquisition-related contingent consideration are included in the
Condensed Consolidated Statements of Operations
as
Acquisition-related and integration items
, and amounts recorded for the short-term and long-term portions of acquisition related contingent consideration are included in
Accrued expenses
and Other liabilities, respectively, in the
Condensed Consolidated Balance Sheets
.
The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the three months ended
March 31, 2016
by acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
Acquisitions
|
|
Fair Value Adjustments and Accretion
|
|
Payments and Other
|
|
Balance as of March 31, 2016
|
Qualitest acquisition
|
$
|
1,137
|
|
|
$
|
—
|
|
|
$
|
(1,137
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Sumavel acquisition
|
631
|
|
|
—
|
|
|
55
|
|
|
—
|
|
|
686
|
|
Auxilium acquisition
|
26,435
|
|
|
—
|
|
|
3,157
|
|
|
(3,081
|
)
|
|
26,511
|
|
Lehigh Valley Technologies, Inc. acquisitions
|
97,003
|
|
|
—
|
|
|
(12,710
|
)
|
|
(6,393
|
)
|
|
77,900
|
|
Other
|
18,296
|
|
|
—
|
|
|
1,118
|
|
|
—
|
|
|
19,414
|
|
Total
|
$
|
143,502
|
|
|
$
|
—
|
|
|
$
|
(9,517
|
)
|
|
$
|
(9,474
|
)
|
|
$
|
124,511
|
|
The following is a summary of available-for-sale securities held by the Company at
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
(Losses)
|
|
Fair Value
|
March 31, 2016
|
|
|
|
|
|
|
|
Money market funds
|
$
|
56,135
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56,135
|
|
Total included in cash and cash equivalents
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total included in restricted cash and cash equivalents
|
$
|
56,135
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56,135
|
|
Equity securities
|
$
|
26
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
39
|
|
Total other short-term available-for-sale securities
|
$
|
26
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
39
|
|
Equity securities
|
$
|
1,766
|
|
|
$
|
675
|
|
|
$
|
—
|
|
|
$
|
2,441
|
|
Long-term available-for-sale securities
|
$
|
1,766
|
|
|
$
|
675
|
|
|
$
|
—
|
|
|
$
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
(Losses)
|
|
Fair Value
|
December 31, 2015
|
|
|
|
|
|
|
|
Money market funds
|
$
|
51,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,145
|
|
Total included in cash and cash equivalents
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Total included in restricted cash and cash equivalents
|
$
|
51,142
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,142
|
|
Equity securities
|
$
|
24
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
34
|
|
Total other short-term available-for-sale securities
|
$
|
24
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
34
|
|
Equity securities
|
$
|
1,766
|
|
|
$
|
2,089
|
|
|
$
|
—
|
|
|
$
|
3,855
|
|
Long-term available-for-sale securities
|
$
|
1,766
|
|
|
$
|
2,089
|
|
|
$
|
—
|
|
|
$
|
3,855
|
|
Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis as of
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date using:
|
|
Total Expense for the Three Months Ended March 31, 2016
|
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
Certain Astora property, plant and equipment (Note 3)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4,892
|
)
|
Certain U.S. Generic Pharmaceuticals intangible assets (Note 9)
|
—
|
|
|
—
|
|
|
45,522
|
|
|
(129,625
|
)
|
Certain Astora intangible assets (Note 3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,287
|
)
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,522
|
|
|
$
|
(150,804
|
)
|
NOTE 8. INVENTORIES
Inventories consist of the following at
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Raw materials (1)
|
$
|
206,404
|
|
|
$
|
210,038
|
|
Work-in-process (1)
|
134,017
|
|
|
177,821
|
|
Finished goods (1)
|
330,033
|
|
|
364,634
|
|
Total
|
$
|
670,454
|
|
|
$
|
752,493
|
|
(1) The components of inventory shown in the table above are net of allowance for obsolescence.
Inventory that is in excess of the amount expected to be sold within one year, which relates primarily to XIAFLEX
®
inventory, is classified as long-term inventory and is not included in the table above. At
March 31, 2016
and
December 31, 2015
,
$26.5 million
and
$24.9 million
, respectively, of long-term inventory was included in Other assets in the
Condensed Consolidated Balance Sheets
.
NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the
three months
ended
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
U.S. Branded Pharmaceuticals
|
|
U.S. Generic Pharmaceuticals
|
|
International Pharmaceuticals
|
|
Total
|
Balance as of December 31, 2015:
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,676,276
|
|
|
$
|
5,789,934
|
|
|
$
|
592,424
|
|
|
$
|
8,058,634
|
|
Accumulated impairment losses
|
(673,500
|
)
|
|
—
|
|
|
(85,780
|
)
|
|
(759,280
|
)
|
Balance as of December 31, 2015
|
$
|
1,002,776
|
|
|
$
|
5,789,934
|
|
|
$
|
506,644
|
|
|
$
|
7,299,354
|
|
Measurement period adjustments
|
—
|
|
|
97,430
|
|
|
435
|
|
|
97,865
|
|
Effect of currency translation on gross balance
|
—
|
|
|
—
|
|
|
29,485
|
|
|
29,485
|
|
Effect of currency translation on accumulated impairment
|
—
|
|
|
—
|
|
|
(1,922
|
)
|
|
(1,922
|
)
|
Balance as of March 31, 2016:
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,676,276
|
|
|
$
|
5,887,364
|
|
|
$
|
622,344
|
|
|
$
|
8,185,984
|
|
Accumulated impairment losses
|
(673,500
|
)
|
|
—
|
|
|
(87,702
|
)
|
|
(761,202
|
)
|
|
$
|
1,002,776
|
|
|
$
|
5,887,364
|
|
|
$
|
534,642
|
|
|
$
|
7,424,782
|
|
Other Intangible Assets
The following is a summary of other intangibles held by the Company at
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost basis:
|
Balance as of December 31, 2015
|
|
Acquisitions
(1)
|
|
Impairments
(2)
|
|
Other
(3)
|
|
Effect of Currency Translation
|
|
Balance as of March 31, 2016
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
1,742,880
|
|
|
$
|
(114,200
|
)
|
|
$
|
(55,100
|
)
|
|
$
|
(3,821
|
)
|
|
$
|
3,027
|
|
|
$
|
1,572,786
|
|
Total indefinite-lived intangibles
|
$
|
1,742,880
|
|
|
$
|
(114,200
|
)
|
|
$
|
(55,100
|
)
|
|
$
|
(3,821
|
)
|
|
$
|
3,027
|
|
|
$
|
1,572,786
|
|
Definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
Licenses (weighted average life of 10 years)
|
$
|
676,867
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
676,867
|
|
Customer relationships (weighted average life of 15 years)
|
11,318
|
|
|
—
|
|
|
(11,318
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Tradenames (weighted average life of 12 years)
|
7,537
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
7,532
|
|
Developed technology (weighted average life of 12 years)
|
6,731,573
|
|
|
(32,300
|
)
|
|
(89,525
|
)
|
|
1,862
|
|
|
31,986
|
|
|
6,643,596
|
|
Total definite-lived intangibles (weighted average life of 11 years)
|
$
|
7,427,295
|
|
|
$
|
(32,300
|
)
|
|
$
|
(100,843
|
)
|
|
$
|
1,862
|
|
|
$
|
31,981
|
|
|
$
|
7,327,995
|
|
Total other intangibles
|
$
|
9,170,175
|
|
|
$
|
(146,500
|
)
|
|
$
|
(155,943
|
)
|
|
$
|
(1,959
|
)
|
|
$
|
35,008
|
|
|
$
|
8,900,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
Balance as of December 31, 2015
|
|
Amortization
|
|
Impairments
|
|
Other
|
|
Effect of Currency Translation
|
|
Balance as of March 31, 2016
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total indefinite-lived intangibles
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
$
|
(508,225
|
)
|
|
$
|
(14,881
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(523,106
|
)
|
Customer relationships
|
(7,858
|
)
|
|
—
|
|
|
7,858
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tradenames
|
(6,544
|
)
|
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,566
|
)
|
Developed technology
|
(818,606
|
)
|
|
(196,766
|
)
|
|
2,173
|
|
|
322
|
|
|
(3,846
|
)
|
|
(1,016,723
|
)
|
Total definite-lived intangibles
|
$
|
(1,341,233
|
)
|
|
$
|
(211,669
|
)
|
|
$
|
10,031
|
|
|
$
|
322
|
|
|
$
|
(3,846
|
)
|
|
$
|
(1,546,395
|
)
|
Total other intangibles
|
$
|
(1,341,233
|
)
|
|
$
|
(211,669
|
)
|
|
$
|
10,031
|
|
|
$
|
322
|
|
|
$
|
(3,846
|
)
|
|
$
|
(1,546,395
|
)
|
Net other intangibles
|
$
|
7,828,942
|
|
|
|
|
|
|
|
|
|
|
$
|
7,354,386
|
|
__________
|
|
(1)
|
Includes measurement period adjustments relating to the Par acquisition, partially offset by the capitalization of payments relating to XIAFLEX
®
.
|
|
|
(2)
|
Includes the impairment of certain intangible assets of our
U.S. Generic Pharmaceuticals
segment of approximately
$129.6 million
, and the impairment of certain intangible assets in connection with the wind down of our Astora business, with a net impairment of approximately
$16.3 million
, which is reported as
Discontinued operations, net of tax
in the
Condensed Consolidated Statements of Operations
for the
three months
ended
March 31, 2016
. See
Note 3. Discontinued Operations and Held for Sale
for further information relating to the Astora wind down.
|
|
|
(3)
|
Includes the sale of certain intangible assets in our
International Pharmaceuticals
segment, partially offset by certain IPR&D assets totaling
$3.8 million
being placed into service.
|
Amortization expense for the
three months
ended
March 31, 2016
and
2015
totaled
$211.7 million
and
$95.3 million
, respectively. Estimated amortization of intangibles for the five fiscal years subsequent to
December 31, 2015
is as follows (in thousands):
|
|
|
|
|
2016
|
$
|
807,613
|
|
2017
|
$
|
690,977
|
|
2018
|
$
|
609,018
|
|
2019
|
$
|
549,786
|
|
2020
|
$
|
522,080
|
|
Changes in the gross carrying amount of our other intangibles for the
three months
ended
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
Gross
Carrying
Amount
|
December 31, 2015
|
$
|
9,170,175
|
|
Impairment of certain Astora intangible assets
|
(26,318
|
)
|
Capitalization of payments relating to XIAFLEX®
|
8,000
|
|
Sale of certain International Pharmaceuticals intangible assets
|
(1,959
|
)
|
Impairment of certain U.S. Generic Pharmaceuticals intangible assets
|
(129,625
|
)
|
Measurement period adjustments relating to acquisitions closed during 2015
|
(154,500
|
)
|
Effect of currency translation
|
35,008
|
|
March 31, 2016
|
$
|
8,900,781
|
|
Impairments
U.S. Generic Pharmaceuticals Segment
During the three months ended March 31, 2016, the Company identified certain market and regulatory conditions impacting the commercial potential of certain indefinite and definite-lived intangible assets in our U.S. Generic Pharmaceuticals segment. Accordingly, we tested these assets for impairment and determined that the carrying value of certain of these assets was no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges of
$29.3 million
during the first quarter of 2016. In addition, the Company recognized pre-tax, non-cash asset impairment charges of
$100.3 million
related to the 2016
U.S. Generic Pharmaceuticals
restructuring initiative, which resulted from the discontinuation of certain commercial products and the abandonment of certain IPR&D projects. See
Note 4. Restructuring
for discussion of our material restructuring initiatives.
NOTE 10. LICENSE AND COLLABORATION AGREEMENTS
Our subsidiaries have entered into certain license, collaboration and discovery agreements with third parties for product development. These agreements require our subsidiaries to share in the development costs of such products and the third parties grant marketing rights to our subsidiaries for such products.
The Company and its subsidiaries are generally required to make upfront payments as well as other payments upon successful completion of regulatory or sales milestones. In addition, these agreements generally require our subsidiaries to pay royalties on sales of the products arising from these agreements. These agreements generally permit termination by our subsidiaries with no significant continuing obligation.
Novartis AG, Novartis Consumer Health, Inc. and Sandoz, Inc.
The Company has exclusive U.S. marketing rights to Voltaren
®
Gel (Voltaren
®
Gel) pursuant to a License and Supply Agreement entered into in 2008 with and among Novartis AG and Novartis Consumer Health, Inc. (Novartis) (the 2008 Voltaren
®
Gel Agreement). Effective March 1, 2015, Novartis Consumer Health, Inc. assigned the 2008 Voltaren
®
Gel Agreement to its affiliate, Sandoz, Inc. On December 11, 2015, the Company, Novartis AG and Sandoz entered into a new License and Supply Agreement (as amended and in effect the
2015 Voltaren
®
Gel Agreement
) effectively renewing our exclusive U.S. marketing and license rights to commercialize Voltaren
®
Gel (the Branded Licensed Product) and granting the Company the exclusive right to launch an authorized generic of Voltaren
®
Gel (the Generic Licensed Product, and, together with the Branded Licensed Product, the Licensed Product). Pursuant to the
2015 Voltaren
®
Gel Agreement
, the former 2008 Voltaren
®
Gel Agreement will expire on June 30, 2016 in accordance with its terms. The
2015 Voltaren
®
Gel Agreement
will become effective on July 1, 2016 and will be accounted for as a business combination as of the effective date. The initial term of the 2015 Voltaren
®
Gel Agreement will expire on June 30, 2023 with an automatic extension of the term for
one
year thereafter unless a written notice of non-extension is provided at least
six
months in
advance of termination. Voltaren
®
Gel royalties incurred during the
three months
ended
March 31, 2016
and
2015
were
$7.0 million
and
$7.5 million
, respectively, representing minimum royalties pursuant to the 2008 Voltaren
®
Gel Agreement.
Under the 2008 Voltaren® Gel Agreement, the Company agreed (i) to make certain guaranteed minimum annual royalty payments beginning in the fourth year of the 2008 Voltaren® Gel Agreement (2008 Guaranteed Minimum Annual Royalty Payment), (ii) to expend a minimum amount of annual advertising and promotional expenses (A&P Expenditures) on the commercialization of Voltaren® Gel and (iii) to perform a minimum number of face-to-face one-on-one discussions with physicians and other health care practitioners (Details), each subject to certain limitations set forth in the 2008 Voltaren® Gel Agreement, including the requirement that a third party generic equivalent product is not launched. Under the 2015 Voltaren
®
Gel Agreement, the Company agreed to make certain guaranteed minimum annual royalty payments (2015 Guaranteed Minimum Annual Royalty Payment) subject to certain limitations set forth in the 2015 Voltaren® Gel Agreement, including the requirement that a third party generic equivalent product is not launched. In March 2016, Amneal Pharmaceuticals LLC (Amneal) launched a generic equivalent of Voltaren® Gel and, therefore, the Company’s obligations to make the 2008 Guaranteed Minimum Annual Royalty Payment, to expend A&P Expenditures and to perform Details for the remainder of the term of the 2008 Voltaren® Gel Agreement terminated as of the date of the launch of the generic equivalent product by Amneal. In addition, the Company’s obligation to make the 2015 Guaranteed Minimum Annual Royalty Payment also terminated. Amounts incurred for such A&P Expenditures during the
three months
ended
March 31, 2016
and
2015
were
$2.2 million
and
$0.8 million
, respectively.
BioSpecifics Technologies Corp.
The Company, through an affiliate, is party to a development and license agreement, as amended (the BioSpecifics Agreement) with BioSpecifics Technologies Corp. (BioSpecifics). The BioSpecifics Agreement was originally entered into by Auxilium in June 2004 to obtain exclusive worldwide rights to develop, market and sell certain products containing BioSpecifics’ enzyme, which we refer to as XIAFLEX
®
. Auxilium’s licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration, and currently, Auxilium’s licensed rights cover the indications of Dupuytren’s contracture (DC), Dupuytren’s Nodules, Peyronie’s Disease (PD), Adhesive Capsulitis, cellulite, canine lipomas, Plantar Fibromatosis and Lateral Hip Fat. Auxilium may further expand the BioSpecifics Agreement, at its option, to cover other indications as they are developed by Auxilium or BioSpecifics.
Under the BioSpecifics Agreement, we are responsible, at our own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. BioSpecifics is currently conducting exploratory clinical trials evaluating XIAFLEX
®
as a treatment for a number of conditions, including lipomas in humans and uterine fibroids. The Company has the option to license development and marketing rights to these indications based on a full analysis of the data from the clinical trials, which would transfer responsibility for the future development costs to the Company and trigger opt-in payments and potential future milestone and royalty payments to BioSpecifics.
The BioSpecifics Agreement extends, on a country-by-country and product-by-product basis, for the longer of the patent life, the expiration of any regulatory exclusivity period or
twelve
years from the effective date. Either party may terminate the BioSpecifics Agreement as a result of the other party’s breach or bankruptcy. We may terminate the BioSpecifics Agreement with
90
days’ written notice.
We must pay BioSpecifics on a country-by-country and product-by-product basis a specified percentage within a range of
5%
to
15%
of net sales for products covered by the BioSpecifics Agreement. This royalty applies to net sales by the Company or its sublicensees, including Actelion Pharmaceuticals Ltd (Actelion), Asahi Kasei Pharma Corporation (Asahi Kasei) and Swedish Orphan Biovitrum AB (Sobi). We are also obligated to pay a percentage of any future regulatory or commercial milestone payments received from such sublicensees. In addition, the Company and its affiliates pay BioSpecifics an amount equal to a specified mark-up on certain cost of goods related to supply of XIAFLEX
®
(which mark-up is capped at a specified percentage within the range of
5%
to
15%
of the cost of goods of XIAFLEX
®
) for products sold by the Company and its affiliates.
NOTE 11. DEBT
The following table presents the carrying amounts of the Company’s total indebtedness at
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Principal Amount
|
|
Unamortized Discount and Deferred Loan Costs
|
|
Principal Amount
|
|
Unamortized Discount and Deferred Loan Costs
|
7.25% Senior Notes due 2022
|
$
|
400,000
|
|
|
$
|
(12,127
|
)
|
|
$
|
400,000
|
|
|
$
|
(12,535
|
)
|
5.75% Senior Notes due 2022
|
700,000
|
|
|
(9,739
|
)
|
|
700,000
|
|
|
(10,088
|
)
|
5.375% Senior Notes due 2023
|
750,000
|
|
|
(10,206
|
)
|
|
750,000
|
|
|
(10,511
|
)
|
6.00% Senior Notes due 2023
|
1,635,000
|
|
|
(26,968
|
)
|
|
1,635,000
|
|
|
(27,694
|
)
|
6.00% Senior Notes due 2025
|
1,200,000
|
|
|
(22,245
|
)
|
|
1,200,000
|
|
|
(22,713
|
)
|
Term Loan A Facility Due 2019
|
1,003,750
|
|
|
(12,616
|
)
|
|
1,017,500
|
|
|
(13,831
|
)
|
Term Loan B Facility Due 2021
|
2,793,000
|
|
|
(48,213
|
)
|
|
2,800,000
|
|
|
(49,900
|
)
|
Revolving Credit Facility
|
225,000
|
|
|
—
|
|
|
225,000
|
|
|
—
|
|
Other debt
|
134
|
|
|
—
|
|
|
134
|
|
|
—
|
|
Total long-term debt, net
|
$
|
8,706,884
|
|
|
$
|
(142,114
|
)
|
|
$
|
8,727,634
|
|
|
$
|
(147,272
|
)
|
Less current portion, net
|
335,579
|
|
|
—
|
|
|
328,705
|
|
|
—
|
|
Total long-term debt, less current portion, net
|
$
|
8,371,305
|
|
|
$
|
(142,114
|
)
|
|
$
|
8,398,929
|
|
|
$
|
(147,272
|
)
|
The total fair value of the Company’s Total long-term debt, net at
March 31, 2016
and
December 31, 2015
, was
$8.4 billion
and
$8.6 billion
, respectively.
The fair value of the Company’s long-term debt is estimated using the quoted market prices for the same or similar debt issuances. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
Credit Facility
There were
$225.0 million
in revolving loans at
March 31, 2016
. We have
$773.0 million
of remaining credit available through the revolving credit facilities as of
March 31, 2016
.
The Company’s credit agreement contains affirmative and negative covenants that the Company believes to be usual and customary for a senior secured credit facility. The negative covenants include, among other things, limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with the Company’s affiliates. As of
March 31, 2016
, we were in compliance with all such covenants.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Manufacturing, Supply and Other Service Agreements
Our subsidiaries contract with various third party manufacturers, suppliers and service providers to provide raw materials used in our subsidiaries’ products and semi-finished and finished goods, as well as certain packaging, labeling services, customer service support, warehouse and distribution services. These contracts include agreements with Novartis Consumer Health, Inc., Novartis AG, and Sandoz, Inc. (collectively, Novartis), Teikoku Seiyaku Co., Ltd., Noramco, Inc., Grünenthal GmbH, Sharp Corporation, UPS Supply Chain Solutions, Inc. and Jubilant HollisterStier Laboratories LLC. If, for any reason, we are unable to obtain sufficient quantities of any of the finished goods or raw materials or components required for our products or services needed to conduct our business, it could have an adverse effect on our business, financial condition, results of operations and cash flows.
In addition to the manufacturing and supply agreements described above, we have agreements with various companies for clinical development services. Although we have no reason to believe that the parties to these agreements will not meet their obligations, failure by any of these third parties to honor their contractual obligations may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Teikoku Seiyaku Co., Ltd.
Under the terms of the Company's agreement (the Teikoku Agreement) with Teikoku Seiyaku Co. Ltd. (Teikoku), during the
three months
ended
March 31, 2016
and
2015
, we recorded
$3.8 million
and
$5.0 million
of royalties to Teikoku, respectively. These
amounts were included in our
Condensed Consolidated Statements of Operations
as
Cost of revenues
. At
March 31, 2016
,
$3.8 million
was recorded as a royalty payable and included in Accounts payable in the accompanying
Condensed Consolidated Balance Sheets
.
The Teikoku Agreement will not expire until December 31, 2021, unless terminated in accordance with its terms. After December 31, 2021, the Teikoku Agreement shall be automatically renewed on the first day of January each year unless terminated in accordance with its terms. Either party may terminate the Teikoku Agreement, following a
45
-day cure period, in the event that the Company fails to issue firm purchase orders for the annual minimum quantity for each year after 2017. The Company is the exclusive licensee for any authorized generic for Lidoderm
®
until August 15, 2017.
Noramco, Inc.
Pursuant to the terms of the Company’s 2012 agreement with Noramco, the Company made payments to Noramco during the
three months
ended
March 31, 2016
and
2015
totaling
$8.4 million
and
$6.5 million
, respectively. These payments are recorded in
Cost of revenues
in our
Condensed Consolidated Statements of Operations
.
Grünenthal GmbH
Pursuant to the terms of the Company’s December 2007 License, Development and Supply Agreement with Grünenthal, the Company made payments to Grünenthal during the
three months
ended
March 31, 2016
and
2015
totaling
$7.2 million
and
$7.5 million
, respectively. These payments are recorded in
Cost of revenues
in our
Condensed Consolidated Statements of Operations
.
Legal Proceedings
We and certain of our subsidiaries are involved in various claims, legal proceedings and governmental investigations that arise from time to time in the ordinary course of our business, including those relating to product liability, intellectual property, regulatory compliance and commercial matters. These and other matters that are not being disclosed herein are, in the opinion of our management, immaterial both individually and in the aggregate with respect to our financial position, results of operations and cash flows. If and when such matters, in the opinion of our management, become material either individually or in the aggregate, we will disclose such matters. While we cannot predict the outcome of these legal proceedings and we intend to defend vigorously our position, an adverse outcome in any of these proceedings could have a material adverse effect on our current and future financial position, results of operations and cash flows.
As of
March 31, 2016
, our reserve for loss contingencies totaled
$1.95 billion
, of which
$1.90 billion
relates to our product liability accrual for vaginal mesh cases. We had previously announced that we had reached master settlement agreements with several of the leading plaintiffs’ law firms to resolve claims relating to vaginal mesh products sold by our AMS subsidiary. The agreements were entered into solely by way of compromise and settlement and are not in any way an admission of liability or fault. Although we believe there is a reasonable possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.
Product Liability
We and certain of our subsidiaries have been named as defendants in numerous lawsuits in various U.S. federal and state courts, as well as in Canada and other countries, alleging personal injury resulting from the use of certain of our products and the products of our subsidiaries. These matters are described below in more detail.
We believe that certain settlements and judgments, as well as legal defense costs, relating to certain product liability matters are or may be covered in whole or in part under our product liability insurance policies with a number of insurance carriers. In certain circumstances, insurance carriers reserve their rights to contest or deny coverage. We intend to contest vigorously any and all such disputes with our insurance carriers and to enforce our rights under the terms of our insurance policies. Accordingly, we will record receivables with respect to amounts due under these policies only when the resolution of any dispute has been reached and realization of the potential claim for recovery is considered probable. Amounts recovered under our product liability insurance policies will likely be less than the stated coverage limits and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available.
Vaginal Mesh Cases.
In October 2008, the FDA issued a Public Health Notification (October 2008 Public Health Notification) regarding potential complications associated with transvaginal placement of surgical mesh to treat pelvic organ prolapse (POP) and stress urinary incontinence (SUI). The notification provides recommendations and encourages physicians to seek specialized training in mesh procedures, to advise their patients about the risks associated with these procedures and to be diligent in diagnosing and reporting complications.
In July 2011, the FDA issued an update to the October 2008 Public Health Notification regarding mesh to further advise the public and the medical community of the potential complications associated with transvaginal placement of surgical mesh to treat POP and SUI. In the July 2011 update, the FDA stated that adverse events are not rare. Furthermore, the FDA questioned the relative effectiveness of transvaginal mesh as a treatment for POP as compared to non-mesh surgical repair. The July 2011 notification continued to encourage physicians to seek specialized training in mesh procedures, to consider and to advise their patients about the risks associated with these procedures and to be diligent in diagnosing and reporting complications. In January 2016, the FDA issued a
statement reclassifying surgical mesh for transvaginal POP repair from Class II to Class III. Surgical mesh for SUI repair remains a Class II device.
In January 2012, the FDA ordered manufacturers of transvaginal surgical mesh used for POP and of single incision mini-slings for urinary incontinence, such as our AMS subsidiary, to conduct post-market safety studies and to monitor adverse event rates relating to the use of these products. AMS received a total of
19
class-wide post-market study orders regarding its pelvic floor repair and mini-sling products; however, the FDA agreed to place
16
of these study orders on hold for a variety of reasons. AMS commenced
three
of these post-market study orders; however, it recently notified the FDA of its termination of these studies and is in the process of winding them down in connection with the wind down of our Astora business.
Since 2008, we and certain of our subsidiaries, including AMS and/or Astora, have been named as defendants in multiple lawsuits in the U.S. in various state courts and in a multidistrict litigation (MDL) in the Southern District of West Virginia (MDL No. 2325), in Canada, where various class action and individual complaints are pending, and in other countries alleging personal injury resulting from the use of transvaginal surgical mesh products designed to treat POP and SUI. Plaintiffs in these suits allege various personal injuries including chronic pain, incontinence and inability to control bowel function and permanent deformities, and seek compensatory and punitive damages, where available.
We and certain plaintiffs’ counsel representing mesh-related product liability claimants have entered into various Master Settlement Agreements (MSAs) and other settlement agreements regarding settling up to approximately
49,000
filed and unfiled mesh claims handled or controlled by the participating counsel. These MSAs, which were executed at various times since June 2013, were entered into solely by way of compromise and settlement and are not in any way an admission of liability or fault by us or any of our subsidiaries. All MSAs are subject to a process that includes guidelines and procedures for administering the settlements and the release of funds. In certain cases, the MSAs provide for the creation of Qualified Settlement Funds (QSFs) into which funds may be deposited pursuant to certain schedules set forth in those agreements. All MSAs have participation thresholds requiring participation by the majority of claims represented by each law firm party to the MSA. If certain participation thresholds are not met, then we will have the right to terminate the settlement with that law firm. In addition, one agreement gives us a unilateral right of approval regarding which claims may be eligible to participate under that settlement. To the extent fewer claims than are authorized under an agreement participate, the total settlement payment under that agreement will be reduced by an agreed-upon amount for each such non-participating claim. Funds deposited in QSFs are included in restricted cash and cash equivalents in the
Condensed Consolidated Balance Sheets
.
Distribution of funds to any individual claimant is conditioned upon the receipt of documentation substantiating the validity of the claim, a full release and a dismissal of the entire action or claim as to all AMS parties and affiliates. Prior to receiving funds, an individual claimant shall represent and warrant that liens, assignment rights or other claims that are identified in the claims administration process have been or will be satisfied by the individual claimant. The amount of settlement awards to participating claimants, the claims evaluation process and procedures used in conjunction with award distributions, and the negotiations leading to the settlement, shall be kept confidential by all parties and their counsel.
We expect that valid claims under the MSAs will continue to be settled. However, we intend to vigorously contest pending and future claims that are invalid or in excess of the maximum claim amounts under the MSAs. We are also aware of a substantial number of additional claims or potential claims, some of which may be invalid or contested, for which we lack sufficient information to determine whether any potential liability is probable, and such claims have not been included in our estimated product liability accrual. We intend to contest these claims vigorously.
As of the date of this report, we believe that the current product liability accrual includes all known claims for which liability is probable and estimable. In order to evaluate whether a mesh claim is probable of a loss, we must obtain and evaluate certain information pertaining to each individual claim, including but not limited to the following items: the name and social security number of the plaintiff, evidence of an AMS implant, the date of implant, the date the claim was first asserted to AMS, the date that plaintiff’s counsel was retained, and most importantly, medical records establishing the injury alleged. Without access to at least this information and the opportunity to evaluate it, we are not in a position to determine whether a loss is probable for such claims. It is currently not possible to determine the validity or outcome of any additional or potential claims and such claims may result in additional losses that could have a material adverse effect on our business, financial condition, results of operations and cash flow. We will continue to monitor the situation, including with respect to any additional claims of which we may later become aware, and, if appropriate, make further adjustments to the product liability accrual based on new information.
The following table presents the changes in the vaginal mesh QSFs and product liability balance during the
three months
ended
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Qualified Settlement Funds
|
|
Product Liability
|
Balance as of December 31, 2015
|
$
|
578,970
|
|
|
$
|
2,086,176
|
|
Additional charges
|
—
|
|
|
2,450
|
|
Cash distributions to Qualified Settlement Funds
|
120,919
|
|
|
—
|
|
Cash distributions to settle disputes from Qualified Settlement Funds
|
(184,678
|
)
|
|
(184,678
|
)
|
Cash distributions to settle disputes
|
—
|
|
|
(1,561
|
)
|
Balance as of March 31, 2016
|
$
|
515,211
|
|
|
$
|
1,902,387
|
|
Approximately
$1.53 billion
of the total liability amount shown above is classified as Current portion of legal settlement accrual, with the remainder to be paid over time in accordance with the MSA agreements and classified as Long-term legal settlement accrual, less current portion, net in the
March 31, 2016
Condensed Consolidated Balance Sheets
. Charges related to vaginal mesh product liability for all periods presented are reported in Discontinued operations, net of tax in our
Condensed Consolidated Statements of Operations
.
We expect to fund the payments under all current settlement agreements over the course of the next
two
years, with completion by December 31, 2017. As the funds are disbursed out of the QSFs from time to time, the product liability accrual will be reduced accordingly with a corresponding reduction to restricted cash and cash equivalents. In addition, we may pay cash distributions to settle disputes separate from the QSFs, which will also decrease the product liability accrual but will not decrease restricted cash and cash equivalents.
In addition, we have been contacted regarding a civil investigation that has been initiated by a number of state attorneys general into mesh products, including transvaginal surgical mesh products designed to treat POP and SUI. In November 2013, we received a subpoena relating to this investigation from the state of California, and have subsequently received additional subpoenas from other states. We are currently cooperating with this investigation. At this time, we cannot predict or determine the outcome of this investigation or reasonably estimate the amount or range of amounts of fines or penalties, if any, that might result from a settlement or an adverse outcome from this investigation.
Testosterone Cases.
We and certain of our subsidiaries, including EPI and Auxilium Pharmaceuticals, Inc. (Auxilium), along with other pharmaceutical manufacturers, have been named as defendants in lawsuits alleging personal injury resulting from the use of prescription medications containing testosterone, including Fortesta
®
Gel, Delatestryl
®
, Testim
®
, TESTOPEL
®
and Striant
®
. Plaintiffs in these suits allege various personal injuries, including pulmonary embolism, stroke and other vascular and/or cardiac injuries and seek compensatory and/or punitive damages, where available. In June 2014, an MDL was formed to include claims involving all testosterone replacement therapies filed against EPI, Auxilium, and other manufacturers of such products, and certain transferable cases pending in federal court were coordinated in the Northern District of Illinois as part of MDL No. 2545. In addition to the federal cases filed against EPI and Auxilium that have been transferred to the Northern District of Illinois as tag-along actions to MDL No. 2545, litigation has also been filed against EPI in the Court of Common Pleas Philadelphia County and in certain other state courts. Litigation similar to that described above may also be brought by other plaintiffs in various jurisdictions, and cases brought in federal court will be transferred to the Northern District of Illinois as tag-along actions to MDL No. 2545. However, we cannot predict the timing or outcome of any such litigation, or whether any such additional litigation will be brought against us. We intend to contest the litigation vigorously and to explore all options as appropriate in our best interest. As of
April 29, 2016
, approximately
1,111
cases are currently pending against us; some of which may have been filed on behalf of multiple plaintiffs, and including a class action complaint filed in Canada.
In November 2015, the U.S. District Court for the Northern District of Illinois entered an order granting defendants’ motion to dismiss claims involving certain testosterone products that were approved pursuant to abbreviated new drug applications, including TESTOPEL
®
. Plaintiffs filed a motion for reconsideration and clarification of this order. In March 2016, the District Court granted plaintiffs’ motion in part and entered an order permitting certain claims to go forward to the extent they are based on allegations of fraudulent off-label marketing.
In November 2014, a civil class action complaint was filed in the Northern District of Illinois against EPI, Auxilium, and various other manufacturers of testosterone products on behalf of a proposed class of health insurance companies and other third party payers that had paid for certain testosterone products, alleging that the marketing efforts of EPI, Auxilium, and other defendant manufacturers with respect to certain testosterone products constituted racketeering activity in violation of 18 U.S.C. §1962(c), and other civil Racketeer Influenced and Corrupt Organizations Act claims. Further, the complaint alleges that EPI, Auxilium, and other defendant manufacturers violated various state consumer protection laws through their marketing of certain testosterone products and raises other state law claims. In March 2015, defendants filed a motion to dismiss the complaint and plaintiffs responded by filing amended complaints. In February 2016, the District Court granted in part and denied in part defendants’ motion to dismiss. The
District Court declined to dismiss plaintiffs’ claims for conspiracy to commit racketeering activity in violation of 18 U.S.C. §1962(d) and claims for negligent misrepresentation. In April 2016, plaintiffs filed a third amended complaint. In October 2015, a similar civil class action complaint was filed against EPI and other defendant manufacturers in the Northern District of Illinois. Similar litigation may be brought by other plaintiffs. We are unable to predict the outcome of this matter or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for this matter, if any, but we will explore all options as appropriate in our best interest.
Qualitest Pharmaceuticals Civil Investigative Demands
In April 2013, our subsidiaries, EPI and Qualitest, received Civil Investigative Demands (CIDs) from the U.S. Attorney’s Office for the Southern District of New York. The CIDs request documents and information regarding the manufacture and sale of chewable fluoride tablets and other products sold by Qualitest. EPI and Qualitest reached a resolution of potential claims of the federal government and numerous states related to the manufacture and sale of certain chewable fluoride tablets that were the subject of these CIDs. In December 2015, that settlement with the federal government was approved by the U.S. District Court for the Southern District of New York. In February 2016, the settlement with the states was approved by the District Court. All settlement amounts pursuant to these agreements have been paid as of March 31, 2016.
Unapproved Drug Litigation
In September 2013, the State of Louisiana filed a Petition for Damages against certain of our subsidiaries, EPI, Qualitest and Boca, and over
50
other pharmaceutical companies alleging the defendants or their subsidiaries marketed products that were not approved by the FDA. See
State of Louisiana v. Abbott Laboratories, Inc., et al
., C624522 (19th Jud. Dist. La.). The State of Louisiana sought damages, fines, penalties, attorneys’ fees and costs under various causes of action. In October 2015, the court ordered judgment for Defendants on their exception for no right of action. The case is currently on appeal to the Louisiana Court of Appeals, First District.
We intend to contest the above case vigorously and to explore other options as appropriate in our best interest. Litigation similar to that described above may also be brought by other plaintiffs in various jurisdictions. However, we cannot predict the timing or outcome of any such litigation, or whether any such litigation will be brought against us. We are unable to predict the outcome of this matter or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for this matter, if any.
Opioid-Related Litigations, Subpoenas and Document Requests
In June 2014, Corporation Counsel for the City of Chicago filed suit in Illinois state court against multiple defendants, including our subsidiaries, Endo Health Solutions Inc. (EHSI) and EPI, for alleged violations of city ordinances and other laws relating to defendants’ alleged opioid sales and marketing practices. In June 2014, the case was removed to the U.S. District Court for the Northern District of Illinois. In December 2014, defendants moved to dismiss the Amended Complaint and in May 2015, the District Court issued an order granting that motion in part, dismissing the case as to EHS and EPI. In August 2015, plaintiff filed its Second Amended Complaint against multiple defendants, including EPI and ESHI. In November 2015, defendants moved to dismiss the Second Amended Complaint.
In May 2014 and in June 2014, a lawsuit was filed in California Superior Court (Orange County) in the name of the People of the State of California, acting by and through County Counsel for Santa Clara County and the Orange County District Attorney, against multiple defendants, including our subsidiaries EHSI and EPI. The complaint asserts violations of California’s statutory Unfair Competition and False Advertising laws, as well as asserting a claim for public nuisance, based on alleged misrepresentations in connection with sales and marketing of opioids, including OPANA
®
. Plaintiff seeks declaratory relief, restitution, civil penalties (including treble damages), abatement, an injunction, and attorneys’ fees and costs. Defendants, which include our subsidiaries, filed various motions attacking the pleadings, including one requesting that the Superior Court refrain from proceeding under the doctrines of primary jurisdiction and equitable abstention. That motion was granted in August 2015, and the case has been stayed pending further proceedings and findings by the FDA.
In December 2015, a lawsuit was filed in the Chancery Court of the First Judicial District of Hinds County, Mississippi by the State of Mississippi against multiple defendants, including our subsidiaries EHSI and EPI. The complaint alleges violations of Mississippi’s Consumer Protection Act and various other claims arising out of defendants’ alleged opioid sales and marketing practices. Plaintiff seeks declaratory relief, restitution, civil penalties, abatement, an injunction, and attorneys’ fees and costs. In March 2016, defendants moved to dismiss the complaint.
In September 2013, our subsidiaries EPI and EHSI received a subpoena from the State of New York Office of Attorney General seeking documents and information regarding the sales and marketing of OPANA
®
.
In February 2016, EPI and EHSI agreed with the State of New York Office of Attorney General to an Assurance of Discontinuance pursuant to the provisions of New York law, whereby EPI and EHSI agreed to modify certain business practices related to the marketing and sale of OPANA
®
, as well as to pay certain monetary penalties. The cost of those penalties has been incorporated into our legal loss contingency reserve.
In September 2014, our subsidiaries EPI and EHSI received a Request for Information from the State of Tennessee Office of the Attorney General and Reporter seeking documents and information regarding the sales and marketing of opioids, including OPANA
®
ER. We are currently cooperating with the State of Tennessee Office of the Attorney General and Reporter in this investigation.
In August 2015, our subsidiaries EPI and EHSI received a subpoena from the State of New Hampshire Office of the Attorney General seeking documents and information regarding the sales and marketing of opioids, including OPANA
®
ER. We were cooperating with the State of New Hampshire Office of the Attorney General in its investigation until we learned that it was being assisted in the investigation by outside counsel hired on a contingent fee basis. The New Hampshire Attorney General initiated an action in the Superior Court for the State of New Hampshire to enforce the subpoena despite this contingent fee arrangement, and we (along with other companies that had received similar subpoenas) responded by filing a motion for protective order to preclude the use of contingent fee counsel. In addition, we filed a separate motion seeking declaratory relief. In March 2016, the Superior Court granted the motion for protective order on the grounds that the contingent fee agreement was invalid as
ultra vires
and that the office of the Attorney General had acted outside of its statutory authority in entering into the agreement with the contingent fee counsel. At this time, it is uncertain whether the Attorney General will be able to proceed with contingent fee counsel.
In March 2016, EPI and EHSI received a CID from the Department of Justice for the State of Oregon seeking documents and information regarding the sales and marketing of OPANA
®
ER. We are currently cooperating with the State of Oregon in its investigation.
With respect to the litigations brought on behalf of the City of Chicago, the People of the State of California and the State of Mississippi, we intend to contest those matters vigorously. We are unable to predict the outcome of these matters or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss, if any, for these matters but will explore all options as appropriate in our best interest.
Antitrust Litigation and Investigations
Multiple direct and indirect purchasers of Lidoderm
®
have filed a number of cases against our subsidiary EPI and co-defendants Teikoku Seiyaku Co., Ltd., Teikoku Pharma USA, Inc. (collectively, Teikoku) and Actavis plc (now Allergan plc) and a number of its subsidiaries (collectively referred to herein as Allergan, Actavis or Watson). Certain of these actions have been asserted on behalf of classes of direct and indirect purchasers, while others are individual cases brought by one or more alleged direct or indirect purchasers. The complaints in these cases generally allege that EPI, Teikoku and Actavis entered into an anticompetitive conspiracy to restrain trade through the settlement of patent infringement litigation concerning U.S. Patent No. 5,827,529 (the ‘529 patent) and other patents. Some of the complaints also allege that Teikoku wrongfully listed the ‘529 patent in the Orange Book as related to Lidoderm
®
,
that EPI and Teikoku commenced sham patent litigation against Actavis and that EPI abused the FDA citizen petition process by filing a citizen petition and amendments solely to interfere with generic companies’ efforts to obtain FDA approval of their versions of Lidoderm
®
. The cases allege violations of Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2) and various state antitrust and consumer protection statutes as well as common law remedies in some states. These cases generally seek damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees.
The U.S. Judicial Panel on Multidistrict Litigation, pursuant to 28 U.S.C. § 1407, issued an order in April 2014 transferring these cases as
In Re Lidoderm Antitrust Litigation
, MDL No. 2521, to the U.S. District Court for the Northern District of California. The cases are in the discovery phase of the litigation in accordance with the pre-trial schedule. Trial is currently scheduled to begin in 2017. Litigation similar to that described above may also be brought by other plaintiffs in various jurisdictions, and cases brought in federal court will be transferred to the Northern District of California as tag-along actions to
In Re Lidoderm Antitrust Litigation
.
Multiple direct and indirect purchasers of OPANA
®
ER have filed cases against our subsidiaries EHSI and EPI, and other pharmaceutical companies, including Penwest Pharmaceuticals Co., which we subsequently acquired, and Impax Laboratories Inc. (Impax), all of which have been transferred and coordinated for pretrial proceedings in the Northern District of Illinois by the Judicial Panel on Multidistrict Litigation. Some of these cases have been filed on behalf of putative classes of direct and indirect purchasers, while others have been filed on behalf of individual retailers. These cases generally allege that the agreement reached by EPI and Impax to settle patent infringement litigation concerning multiple patents pertaining to OPANA
®
ER and EPI’s introduction of the re-formulation of OPANA
®
ER violated antitrust laws. The complaints allege violations of Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2), various state antitrust and consumer protection statutes, as well as state common law. These cases generally seek damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. In February 2016, the District Court issued orders (i) denying defendants’ motion to dismiss the claims of the direct purchasers, (ii) denying in part and granting in part defendants’ motion to dismiss the claims of the indirect purchasers and (iii) granting defendants’ motion to dismiss the complaints filed by certain retailers, but giving them permission to file amended complaints, which they have done. We cannot predict whether or not additional cases similar to those described above will be filed by other plaintiffs or the timing or outcome of any such litigation.
In February 2014, our subsidiary, EPI received a CID (the February 2014 CID) from the U.S. Federal Trade Commission (the FTC). The FTC issued a second CID to EPI in March 2014 (the March 2014 CID). The February 2014 CID requested documents and information concerning EPI’s settlement agreements with Actavis and Impax settling the OPANA
®
ER patent litigation, EPI’s Development and Co-Promotion Agreement with Impax,
and its settlement agreement with Actavis settling the Lidoderm
®
patent litigation, as well as information concerning the marketing and sales of OPANA
®
ER and Lidoderm
®
.
The March 2014 CID requested
documents and information concerning EPI’s acquisition of U.S. Patent No. 7,852,482 (the ‘482 patent), as well as additional information concerning certain litigation relating to, and the marketing and sales of OPANA
®
ER. The FTC also issued subpoenas for investigational hearings (similar to depositions) to our employees and former employees. In March 2016, the FTC filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania against us and our subsidiary EPI, as well as against Allergan, Impax, and Teikoku, alleging generally that the settlement agreements with Actavis and Impax, respectively, constituted, in whole or part, unfair methods of competition in violation Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). The FTC also alleges that one provision of the agreement with Actavis violated Section 7 of the Clayton Act, 15 U.S.C. § 18. The complaint seeks injunctive and declaratory relief and other remedies, including restitution and disgorgement.
We are unable to predict the outcome of these matters or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for these matters, if any, but will explore all options as appropriate in our best interest.
In November 2014, EPI received a CID from the State of Florida Office of the Attorney General issued pursuant to the Florida Antitrust Act of 1980, Section 542.28 and seeking documents and other information concerning EPI’s settlement agreement with Actavis settling the Lidoderm
®
patent litigation, as well as information concerning the marketing and sales of Lidoderm
®
.
In February 2015, EPI and EHSI received a CID for Production of Documents and Information from the State of Alaska Office of Attorney General issued pursuant to Alaska’s Antitrust and Unfair Trade Practices and Consumer Protection law seeking documents and other information concerning settlement agreements with Actavis and Impax settling the OPANA
®
ER patent litigation as well as information concerning EPI’s settlement agreement with Actavis settling the Lidoderm patent litigation, as well as information concerning the marketing and sales of Lidoderm.
In February 2016, EPI received a subpoena from the State of South Carolina Office of the Attorney General seeking documents and other information concerning EPI’s settlement agreement with Actavis settling the Lidoderm
®
patent litigation, as well as information concerning the marketing and sales of Lidoderm
®
.
In December 2014, our subsidiary, Par, received a Subpoena to Testify Before Grand Jury from the Antitrust Division of the DOJ and issued by the U.S. District Court for the Eastern District of Pennsylvania. The subpoena requests documents and information focused primarily on product and pricing information relating to Par’s authorized generic version of Lanoxin (digoxin) oral tablets and Par’s generic doxycycline products, and on communications with competitors and others regarding those products. Par is currently cooperating fully with the investigation.
In January 2009, the FTC filed a lawsuit against our subsidiary, Par, in the U.S. District Court for the Central District of California, which was subsequently transferred to the U.S. District Court for the Northern District of Georgia, and which alleged violations of antitrust law arising out of Par’s settlement of certain patent litigation concerning the generic version of AndroGel
®
. The FTC complaint generally seeks a finding that Par’s settlement agreement violates Section 5(a) of the Federal Trade Commission Act, and a permanent injunction against Par’s ability to engaged in certain types of patent settlements in the future. Beginning in February 2009, certain private plaintiffs, including distributors and retailers, filed similar litigation. Generally, the private plaintiff suits seek equitable relief, unspecified damages and costs.
In February 2010, the District Court granted a motion to dismiss the FTC’s claims and granted in part and denied in part a motion to dismiss the claims of the private plaintiffs. In April 2012, the U.S. Court of Appeals for the 11
th
Circuit affirmed the District Court’s decision on the motion to dismiss the FTC’s claims. In September 2012, the District Court granted a motion for summary judgment against the private plaintiffs’ claims of sham litigation. In July 2013, the Supreme Court of the U.S. reversed the Court of Appeals’ and District Court’s decisions and remanded the case to the District Court for further proceedings. We intend to contest this litigation vigorously and to explore all options as appropriate in our best interest.
In February 2015, Par received a CID from the Office of the Attorney General for the State of Alaska seeking production of certain documents and information regarding Par’s settlement of the AndroGel
®
patent litigation as well as documents produced in the on-going litigation filed by the FTC.
We are currently cooperating with the DOJ, the State of Florida Office of the Attorney General, the State of Alaska Office of the Attorney General and the State of South Carolina Office of the Attorney General in their respective investigations. Investigations similar to these antitrust matters described above may be brought by others. We are unable to predict the outcome of these investigations or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for these investigations, if any, but will explore all options as appropriate in our best interest.
False Claims Act Litigation
The Attorneys General of Florida, Indiana and Virginia and the U.S. Office of Personnel Management (the USOPM) have issued subpoenas, and the Attorneys General of Michigan, Tennessee, Texas, and Utah have issued CIDs, to our subsidiary, Par, among other companies. The demands generally request documents and information pertaining to allegations that certain of Par’s sales and marketing practices caused pharmacies to substitute ranitidine capsules for ranitidine tablets, fluoxetine tablets for fluoxetine capsules, and two 7.5 mg buspirone tablets for one 15 mg buspirone tablet, under circumstances in which some state Medicaid programs at
various times reimbursed the new dosage form at a higher rate than the dosage form being substituted. Par has provided documents in response to these subpoenas to the respective Attorneys General and the USOPM. The aforementioned subpoenas and CIDs culminated in the federal and state law qui tam action brought on behalf of the U.S. and several states by Bernard Lisitza. The complaint was unsealed in August 2011. Lisitza’s corrected second amended complaint generally seeks (i) a finding that defendants violated and be enjoined from future violations of the federal False Claims Act and state false claims acts; (ii) treble damages and maximum civil penalties for each violation of the federal False Claims Act and state false claims acts; (iii) an applicable percentage share of the proceeds; and (iv) expenses, fees, and costs. The U.S. intervened in this action and filed a separate complaint in September 2011, alleging claims for violations of the Federal False Claims Act and common law fraud. The U.S.’s second corrected complaint generally seeks (i) treble damages and civil penalties for violations under the federal False Claims Act and (ii) compensatory and punitive damages for common law fraud. The states of Michigan and Indiana have also intervened as to claims arising under their respective state false claim acts, common law fraud, and unjust enrichment. Michigan’s complaint generally seeks (i) treble damages and civil penalties and (ii) common law compensatory and punitive damages. Indiana’s amended complaint generally seeks treble damages, costs, and attorney’s fees. We intend to vigorously defend these lawsuits. At this time, we are unable to predict the outcome of this matter or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for this matter, if any.
Pricing Matters
In March 2016, EPI received a CID from the U.S. Attorney’s Office for the Southern District of New York. The CID requests documents and information regarding contracts with Pharmacy Benefit Managers regarding Frova
®
. We are currently cooperating with this investigation. We are unable to predict the outcome of these matters or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss, if any, for these matters but will explore all options as appropriate in our best interest.
Beginning in January 2016, several complaints, including multiple class action complaints, have been filed in the Philadelphia Court of Common Pleas and the U.S. Court for the Eastern District of Pennsylvania against us and certain of our subsidiaries, including Par, along with other manufacturers of certain generic pharmaceutical products, seeking compensatory and punitive or treble damages, as well as injunctive relief and alleging that certain marketing and pricing practices by the defendant companies violated state law, including consumer protection law and/or federal and state antitrust laws. Additional similar claims may be brought by other plaintiffs in various jurisdictions.
In December 2015, EPI received Interrogatories and Subpoena Duces Tecum from the State of Connecticut Office of Attorney General requesting information regarding pricing of certain of its generic products, including Doxycycline Hyclate, Amitriptyline Hydrochloride, Doxazosin Mesylate, Methotrexate Sodium and Oxybutynin Chloride. We are currently cooperating with this investigation.
We are unable to predict the outcome of these matters or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss, if any, for these matters but will explore all options as appropriate in our best interest.
Megace ES
®
(megestrol acetate oral suspension) Cases
In September 2011, our subsidiary, Par, along with EDT Pharma Holdings Ltd. (Elan) (now known as Alkermes Pharma Ireland Limited), filed a complaint against TWi Pharmaceuticals, Inc. (TWi) in the U.S. District Court for the District of Maryland alleging infringement of U.S. Patent No. 7,101,576 because TWi filed an ANDA with a Paragraph IV certification seeking FDA approval of a generic version of Megace
®
ES. A bench trial was held in October 2013, and in February 2014, the District Court issued a decision in favor of TWi, finding all asserted claims of the 7,101,576 patent invalid for obviousness. Par appealed. In August 2014, the District Court issued a preliminary injunction enjoining TWi’s launch of its generic product pending disposition of the appeal. In December 2014, the Federal Circuit reversed the District Court’s decision, remanding for further findings of fact. In March 2015, the District Court issued another preliminary injunction enjoining TWi’s launch of its generic product pending disposition of the case on remand. In July 2015, the District Court issued a new decision in favor of TWi, finding all of the asserted claims invalid, and TWi launched its generic product. Par appealed again, and in December 2015, the District Court’s decision in favor of TWi was affirmed without opinion. On February 22, 2016, TWi moved the District Court to recover its lost profits, which TWi alleges in the amount of
$16 million
, resulting from the previous injunctions to which the District Court subjected TWi, as well as attorneys’ fees and costs. Par has opposed TWi’s motion. We believe that a loss is probable and we have incorporated our best estimate of this loss into our reserve for loss contingencies. It is possible that the outcome of this matter could result in an additional loss above the amount reserved.
In June 2013, Par, along with Alkermes Pharma Ireland Limited, filed a complaint against Breckenridge Pharmaceutical, Inc. in the U.S. District Court for the District of Delaware, alleging infringement of U.S. Patent Nos. 6,592,903 and 7,101,576 because Breckenridge filed an ANDA with a Paragraph IV certification seeking FDA approval of a generic version of Megace
®
ES. The complaint sought (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. A stipulation to stay the proceedings was entered in July 2014. In January 2016, we terminated the case by filing a stipulation of dismissal with prejudice.
In June 2015, Par, along with Alkermes Pharma Ireland Limited, filed a complaint against Breckenridge Pharmaceutical, Inc., TWi Pharmaceuticals, Inc., and TWi Pharmaceuticals USA, Inc. in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 9,040,088 because the defendants had filed ANDAs seeking FDA approval of generic versions of Megace
®
ES. In August 2015, Par and Alkermes Pharma Ireland Limited filed an additional complaint in the same court against TWi and Breckenridge alleging infringement of U.S. Patent Nos. 9,101,540 and 9,101,549, followed by a third complaint in Delaware District Court alleging infringement of U.S. Patent No. 9,107,827. Our complaint sought (i) a finding of infringement, validity and/or enforceability; and (ii) a permanent injunction. In January 2016, we terminated the cases by filing stipulations of dismissal with prejudice.
Paragraph IV Certifications on OPANA
®
ER
In late 2012,
two
patents (U.S. Patent Nos. 8,309,122 and 8,329,216) were issued to EPI covering OPANA
®
ER (oxymorphone hydrochloride extended-release tablets CII). In December 2012, EPI filed a complaint against Actavis (now Allergan) in U.S. District Court for the Southern District of New York for patent infringement based on its ANDA for a non-crush-resistant generic version of OPANA
®
ER. In May 2013 and June 2013, EPI filed similar suits in the U.S. District Court for the Southern District of New York against the following applicants for non-crush-resistant OPANA
®
ER: Roxane Laboratories, Inc. (Roxane) and Ranbaxy Laboratories Limited (Ranbaxy). Those suits allege infringement of U.S. Patent Nos. 7,851,482, 8,309,122, and 8,329,216. In July 2013, Actavis and Roxane were granted FDA approval to market all strengths of their respective non-crush-resistant formulations of OPANA
®
ER. A trial in this case was held from March 2015 through April 2015 in the U.S. District Court for the Southern District of New York. In August 2015, the District Court ruled that all defendants infringed the claims of U.S. Patent Nos. 8,309,122 and 8,329,216. The District Court also ruled that the defendants failed to show that U.S. Patent Nos. 8,309,122 and 8,329,216 were invalid, enjoined the defendants from launching their generic products until the expiration of those patents and directed Actavis to withdraw its generic product within
60 days
. In October 2015, the District Court tolled the
60
day period until it decided
two
pending post-trial motions. In April 2016, the District Court issued an order upholding its August 2015 ruling in EPI’s favor and confirming the prior injunction against the manufacture or sale of the generic version of the non-crush-resistant OPANA
®
ER currently offered by Actavis, the U.S. generics business of Allergan, and the additional approved but not yet marketed generic version of the product developed by Roxane. The time for appealing the ruling has not yet expired and we expect the defendants to appeal. We intend to continue vigorously asserting our intellectual property rights and to oppose any such appeal.
We intend to defend vigorously our intellectual property rights and to pursue all available legal and regulatory avenues in defense of the non-crush-resistant formulation OPANA
®
ER, including enforcement of the product’s intellectual property rights and approved labeling. However, there can be no assurance that we will be successful. If we are unsuccessful, competitors that already have obtained, or are able to obtain, FDA approval of their products may be able to launch their generic versions of non-crush-resistant OPANA
®
ER prior to the applicable patents’ expirations. Additionally, we cannot predict or determine the timing or outcome of related litigation but will explore all options as appropriate in our best interest. In addition to the above litigation, it is possible that another generic manufacturer may also seek to launch a generic version of non-crush-resistant OPANA
®
ER and challenge the applicable patents.
From
September 21, 2012
through
October 30, 2013
, EPI and its partner Grünenthal received Paragraph IV Notices from each of Teva Pharmaceuticals USA, Inc. (Teva), Amneal Pharmaceuticals, LLC (Amneal), ThoRx Laboratories, Inc. (ThoRx), Allergan, Impax and Ranbaxy, advising of the filing by each such company of an ANDA for a generic version of the formulation of OPANA
®
ER designed to be crush-resistant. These Paragraph IV Notices refer to U.S. Patent Nos. 8,075,872, 8,114,383, 8,192,722, 8,309,060, 8,309,122 and 8,329,216, which variously cover the formulation of OPANA
®
ER, a highly pure version of the active pharmaceutical ingredient and the release profile of OPANA
®
ER. EPI filed lawsuits against each of these filers in the U.S. District Court for the Southern District of New York. Each lawsuit was filed within the
45
-day deadline to invoke a
30
-month stay of FDA approval pursuant to the Hatch-Waxman legislative scheme. We intend, and have been advised by Grünenthal that it too intends, to defend vigorously the intellectual property rights covering the formulation of OPANA
®
ER designed to be crush-resistant and to pursue all available legal and regulatory avenues in defense of crush-resistant OPANA
®
ER, including enforcement of the product’s intellectual property rights and approved labeling. A trial in this case was held from March 2015 through April 2015 in the U.S. District Court for the Southern District of New York against the remaining filers. In August 2015, the District Court issued an Opinion holding that all defendants infringed the claims of U.S. Patent Nos. 8,309,060, 8,309,122 and 8,329,216. The Opinion also held that the defendants had shown that U.S. Patent No. 8,309,060 was invalid, but that the defendants had failed to show that U.S. Patent Nos. 8,309,122 and 8,329,216 were invalid. The District Court also issued an Order enjoining the defendants from launching their generic products until the expiration of U.S. Patent Nos. 8,309,122 and 8,329,216. The time for appealing that Opinion and Order has not yet expired and we expect the defendants to appeal the decision. We intend to continue to vigorously assert our intellectual property and oppose appeals by the defendants. However, there can be no assurance that we and/or Grünenthal will be successful. If we are unsuccessful and Teva, Amneal, ThoRx, Allergan or Impax is able to obtain FDA approval of its product, generic versions of crush-resistant OPANA
®
ER may be launched prior to the applicable patents’ expirations in 2023 through 2029. Additionally, we cannot predict or determine the timing or outcome of this defense but will explore all options as appropriate in our best interest. In addition to the above litigation, it is possible that another generic manufacturer may also seek to launch a generic version of crush-resistant OPANA
®
ER and challenge the applicable patents.
In August 2014 and October 2014, the U.S. Patent Office issued U.S. Patent Nos. 8,808,737 and 8,871,779 respectively, which cover a method of using OPANA
®
ER and a highly pure version of the active pharmaceutical ingredient of OPANA
®
ER. In November 2014, EPI filed lawsuits against Teva, ThoRx, Actavis, Impax, Ranbaxy, Roxane, Amneal, and Sandoz Inc. in the U.S. District Court for the District of Delaware alleging infringement of these new patents, which expire in 2027 and 2029, respectively. On November 17, 2015, the District Court held the ‘737 patent invalid for claiming unpatentable subject matter. That patent has been dismissed from all suits and the suits administratively closed as to that patent, subject to appeal at the end of the case on the ‘779 patent.
Paragraph IV Certification on Fortesta
®
Gel
In January 2013, EPI and its licensor Strakan Limited received a notice from Watson (now Allergan) advising of the filing by Watson of an ANDA for a generic version of Fortesta
®
(testosterone) Gel. In February 2013, EPI filed a lawsuit against Watson in the U.S. District Court for the Eastern District of Texas, Marshall division. Because the suit was filed within the
45
-day period under the Hatch-Waxman Act for filing a patent infringement action, we believe that it triggered an automatic
30
-month stay of approval under the Act. A two-day trial was held on or about February 26 and 27, 2015. In August 2015, the District Court issued an Order holding that the asserted patents are not invalid and are infringed by Watson’s ANDA. As a result, the District Court ordered that that the effective date for the approval of Watson’s ANDA to be the date no sooner than the latest expiration date of the ’913 Patent and the ’865 Patent in November of 2018. Watson filed an appeal in October 2015.
We intend, and have been advised by Strakan Limited that it too intends, to defend vigorously Fortesta
®
Gel and to pursue all available legal and regulatory avenues in defense of Fortesta
®
Gel, including enforcement of the product’s intellectual property rights and approved labeling. However, there can be no assurance that we and/or Strakan will be successful. If we and/or Strakan are unsuccessful and Watson is able to obtain FDA approval of its product, Watson may be able to launch its generic version of Fortesta
®
Gel prior to the applicable patents’ expirations in 2018. Additionally, we cannot predict or determine the timing or outcome of this litigation but will explore all options as appropriate in our best interest. In addition to the above litigation, it is possible that another generic manufacturer may also seek to launch a generic version of Fortesta
®
Gel and challenge the applicable patents.
Other Legal Proceedings
In addition to the above proceedings, proceedings similar to those described above may also be brought in the future. Additionally, we are involved in, or have been involved in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these claims and other proceedings. Currently, neither we nor our subsidiaries are involved in any other legal proceedings that we expect to have a material effect on our business, financial condition, results of operations and cash flows.
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the tax effects allocated to each component of
Other comprehensive income (loss)
for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
Before-
Tax
Amount
|
|
Tax Benefit (Expense)
|
|
Net-of-Tax
Amount
|
|
Before-Tax
Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-
Tax
Amount
|
Net unrealized (loss) gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain arising during the period
|
$
|
(1,386
|
)
|
|
$
|
526
|
|
|
$
|
(860
|
)
|
|
$
|
2,198
|
|
|
$
|
(685
|
)
|
|
$
|
1,513
|
|
Net unrealized gain (loss) on foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss) arising during the period
|
54,572
|
|
|
26,191
|
|
|
80,763
|
|
|
(131,380
|
)
|
|
32
|
|
|
(131,348
|
)
|
Other comprehensive income (loss)
|
$
|
53,186
|
|
|
$
|
26,717
|
|
|
$
|
79,903
|
|
|
$
|
(129,182
|
)
|
|
$
|
(653
|
)
|
|
$
|
(129,835
|
)
|
The following is a summary of the accumulated balances related to each component of Other comprehensive loss, net of taxes, at
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Net unrealized gains
|
$
|
955
|
|
|
$
|
1,815
|
|
Foreign currency translation loss
|
(305,313
|
)
|
|
(386,020
|
)
|
Accumulated other comprehensive loss
|
$
|
(304,358
|
)
|
|
$
|
(384,205
|
)
|
NOTE 14. SHAREHOLDERS' EQUITY
Changes in Shareholder’s Equity
The following table displays a reconciliation of our beginning and ending balances in shareholders' equity for the
three months
ended
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
Endo
International plc
|
|
Noncontrolling
interests
|
|
Total
Shareholders’
Equity
|
Shareholders’ equity at January 1, 2016
|
$
|
5,968,030
|
|
|
$
|
(54
|
)
|
|
$
|
5,967,976
|
|
Net loss
|
(133,869
|
)
|
|
(2
|
)
|
|
(133,871
|
)
|
Other comprehensive income
|
79,847
|
|
|
56
|
|
|
79,903
|
|
Compensation related to share-based awards
|
14,967
|
|
|
—
|
|
|
14,967
|
|
Tax withholding for restricted shares
|
(10,272
|
)
|
|
—
|
|
|
(10,272
|
)
|
Exercise of options
|
1,952
|
|
|
—
|
|
|
1,952
|
|
Issuance of ordinary shares related to the employee stock purchase plan
|
1,434
|
|
|
—
|
|
|
1,434
|
|
Other
|
2,057
|
|
|
—
|
|
|
2,057
|
|
Shareholders’ equity at March 31, 2016
|
$
|
5,924,146
|
|
|
$
|
—
|
|
|
$
|
5,924,146
|
|
The following table displays a reconciliation of our beginning and ending balances in shareholders' equity for the
three months
ended
March 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
Endo
International plc
|
|
Noncontrolling
interests
|
|
Total
Shareholders’
Equity
|
Shareholders’ equity at January 1, 2015
|
$
|
2,374,757
|
|
|
$
|
33,456
|
|
|
$
|
2,408,213
|
|
Net loss
|
(75,718
|
)
|
|
—
|
|
|
(75,718
|
)
|
Other comprehensive loss
|
(129,229
|
)
|
|
(606
|
)
|
|
(129,835
|
)
|
Compensation related to share-based awards
|
13,837
|
|
|
—
|
|
|
13,837
|
|
Tax withholding for restricted shares
|
(11,930
|
)
|
|
—
|
|
|
(11,930
|
)
|
Exercise of options
|
18,470
|
|
|
—
|
|
|
18,470
|
|
Buy-out of noncontrolling interests, net of contributions
|
(6,876
|
)
|
|
(32,732
|
)
|
|
(39,608
|
)
|
Ordinary shares issued in connection with the Auxilium acquisition
|
1,519,320
|
|
|
—
|
|
|
1,519,320
|
|
Fair value of equity component of acquired Auxilium Notes
|
278,014
|
|
|
—
|
|
|
278,014
|
|
Conversion of Auxilium Notes
|
145,101
|
|
|
—
|
|
|
145,101
|
|
Other
|
13,852
|
|
|
—
|
|
|
13,852
|
|
Shareholders’ equity at March 31, 2015
|
$
|
4,139,598
|
|
|
$
|
118
|
|
|
$
|
4,139,716
|
|
During the
three months
ended
March 31, 2015
, the Company completed a buy-out of the noncontrolling interest associated with our Litha subsidiary. The following table reflects the effect on the Company’s equity for the
three months
ended
March 31, 2015
(in thousands):
|
|
|
|
|
|
March 31, 2015
|
Adjustment to Accumulated other comprehensive loss related to the reallocation (from noncontrolling to controlling interests) of foreign currency translation loss attributable to our noncontrolling interest in Litha
|
$
|
(3,904
|
)
|
Decrease in noncontrolling interests for buy-out of Litha
|
(32,732
|
)
|
Decrease in additional paid-in capital for buy-out of Litha
|
(2,972
|
)
|
Total cash consideration paid related to buy-out of Litha
|
$
|
(39,608
|
)
|
Share-Based Compensation
As discussed in
Note 3. Discontinued Operations and Held for Sale
, the operating results of the Company’s AMS business is reported as Discontinued operations, net of tax in the
Condensed Consolidated Statements of Operations
for all periods presented. However, as share-based compensation is not material for this business, amounts in this
Note 14. Shareholders' Equity
have not been adjusted to exclude the impact of this business.
The Company recognized share-based compensation expense of
$15.0 million
and
$51.4 million
during the
three months
ended
March 31, 2016
and
2015
, respectively. The share-based compensation expense recognized during the
three months
ended
March 31, 2015
includes a charge related to the acceleration of Auxilium employee equity awards at closing of
$37.6 million
. As of
March 31, 2016
, the total remaining unrecognized compensation cost related to all non-vested share-based compensation awards amounted to
$104.0 million
. As of
March 31, 2016
, the weighted average remaining requisite service period of the non-vested stock options was
3.3
years and for non-vested restricted stock units was
2.6
years.
NOTE 15. OTHER INCOME, NET
The components of
Other income, net
for the
three months
ended
March 31, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Foreign currency loss (gain), net
|
$
|
996
|
|
|
$
|
(23,134
|
)
|
Equity (earnings) loss from unconsolidated subsidiaries, net
|
(2,344
|
)
|
|
851
|
|
Costs associated with unused financing commitments
|
—
|
|
|
11,810
|
|
Other miscellaneous
|
(559
|
)
|
|
(1,522
|
)
|
Other income, net
|
$
|
(1,907
|
)
|
|
$
|
(11,995
|
)
|
Foreign currency loss (gain), net results from the remeasurement of the Company’s foreign currency denominated assets and liabilities. In addition, the Company incurred
$11.8 million
during the
three months
ended
March 31, 2015
related to unused commitment fees primarily associated with financing for the Auxilium acquisition.
NOTE 16. INCOME TAXES
During the
three months
ended
March 31, 2016
, the Company recognized an income tax
benefit
of
$118.7 million
on
$207.5 million
of
loss from continuing operations before income tax
, compared to
$166.9 million
of tax
benefit
on
$16.4 million
of
loss from continuing operations before income tax
during the comparable
2015
period. The tax benefit for the current period is primarily related to the overall geographical mix of pretax earnings
as well as the discrete tax benefit associated with
the impairment associated with the U.S. Generic Pharmaceutical business. The tax
benefit
for the comparable
2015
period was primarily related to benefits resulting from the expected realization of deferred tax assets for certain components of our AMS business that was held for sale in such period.
NOTE 17. NET (LOSS) INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of basic and diluted net
loss per share
for the
three months
ended
March 31, 2016
and
2015
(in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
(Loss) income from continuing operations
|
$
|
(88,763
|
)
|
|
$
|
150,492
|
|
Less: Net loss from continuing operations attributable to noncontrolling interests
|
(2
|
)
|
|
—
|
|
(Loss) income from continuing operations attributable to Endo International plc ordinary shareholders
|
(88,761
|
)
|
|
150,492
|
|
Loss from discontinued operations attributable to Endo International plc ordinary shareholders, net of tax
|
(45,108
|
)
|
|
(226,210
|
)
|
Net loss attributable to Endo International plc ordinary shareholders
|
$
|
(133,869
|
)
|
|
$
|
(75,718
|
)
|
Denominator:
|
|
|
|
For basic per share data—weighted average shares
|
222,302
|
|
|
169,653
|
|
Dilutive effect of ordinary share equivalents
|
—
|
|
|
2,375
|
|
Dilutive effect of various convertible notes and warrants
|
—
|
|
|
4,797
|
|
For diluted per share data—weighted average shares
|
222,302
|
|
|
176,825
|
|
Basic net
loss per share
data is computed based on the weighted average number of ordinary shares outstanding during the period. Diluted
loss per share
data is computed based on the weighted average number of ordinary shares outstanding and, if there is net income from continuing operations attributable to Endo ordinary shareholders during the period, the dilutive impact of ordinary share equivalents outstanding during the period. Ordinary share equivalents are measured under the treasury stock method.
For the
three months
ended
March 31, 2015
, stock options and stock awards of
0.8 million
were excluded from the diluted share calculation because their effect would have been anti-dilutive. All stock options and stock awards were excluded from the diluted share calculation for the
three months
ended
March 31, 2016
because their effect would have been anti-dilutive, as the Company was in a loss position.
The
1.75%
Convertible Senior Subordinated Notes due
April 15, 2015
were only included in the dilutive net
loss per share
calculations using the treasury stock method during periods in which the average market price of our ordinary shares was above the applicable conversion price of the Convertible Notes, or
$29.20
per share, and the impact would not have been anti-dilutive. In these periods, under the treasury stock method, we calculated the number of shares issuable under the terms of these notes based on the average market price of the shares during the period, and included that number in the total diluted shares outstanding for the period.
We entered into convertible note hedge and warrant agreements, which were settled in 2015 and 2014, that, in combination, had the economic effect of reducing the dilutive impact of the Convertible Notes. However, we separately analyzed the impact of the convertible note hedge and the warrant agreements on diluted weighted average shares outstanding. As a result, the purchases of the convertible note hedges were excluded because their impact would have been be anti-dilutive. The treasury stock method was applied when the warrants were in-the-money with the proceeds from the exercise of the warrant used to repurchase shares based on the average share price in the calculation of diluted weighted average shares. Until the warrants were in-the-money, they had no impact to the diluted weighted average share calculation.
The dilutive impact of the
Auxilium Notes
was calculated using the if-converted method, assuming the notes were converted at the time of issuance.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources and critical accounting estimates at
Endo International plc
. This discussion should be read in conjunction with the accompanying quarterly unaudited
Condensed Consolidated Financial Statements
and our Annual Report on Form 10-K, for the year ended
December 31, 2015
(
Annual Report
). Our
Annual Report
includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial and operating results. Except for the historical information contained in this Report, including the following discussion, this Report contains forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" beginning on page i of this Report.
Unless otherwise indicated or required by the context, references throughout to “Endo”, the “Company”, “we”, “our” or “us” refer to financial information and transactions of Endo International plc and its consolidated subsidiaries.
RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past, and may continue to fluctuate. These fluctuations are primarily due to (1) the timing of mergers, acquisitions and other business development activity, (2) the timing of new product launches, (3) purchasing patterns of our customers, (4) market acceptance of our products, (5) the impact of competitive products and products we recently acquired, (6) pricing of our products and (7) litigation-related charges. These fluctuations are also attributable to charges incurred for compensation related to share-based payments, amortization of intangible assets, asset impairment charges and certain upfront, milestone and other payments made or accrued pursuant to acquisition or licensing agreements.
Consolidated Results Review
Total Revenues.
Total revenues for the
three months
ended
March 31, 2016
increase
d
35%
to
$963.5 million
from the comparable
2015
period. This revenue
increase
was primarily attributable to revenues related to our January 2015 acquisition of Auxilium and September 2015 acquisition of Par. The
increase
s were partially offset by decreased revenues for certain products in our
U.S. Branded Pharmaceuticals
segment, driven mainly by
decrease
d Voltaren
®
Gel, Lidoderm
®
and OPANA
®
ER revenues related to generic competition and decreased revenues from our legacy
U.S. Generic Pharmaceuticals
segment, driven by
a decrease in price and volume as the result of competitive pressure on commoditized generic products
.
Gross margin, costs and expenses.
The following table sets forth costs and expenses for the
three months
ended
March 31, 2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
Cost of revenues
|
$
|
688,705
|
|
|
71
|
|
$
|
384,266
|
|
|
54
|
Selling, general and administrative
|
178,355
|
|
|
19
|
|
211,578
|
|
|
30
|
Research and development
|
41,692
|
|
|
4
|
|
17,897
|
|
|
3
|
Litigation-related and other contingencies, net
|
5,200
|
|
|
1
|
|
13,000
|
|
|
2
|
Asset impairment charges
|
129,625
|
|
|
13
|
|
7,000
|
|
|
1
|
Acquisition-related and integration items
|
12,554
|
|
|
1
|
|
34,640
|
|
|
5
|
Total costs and expenses*
|
$
|
1,056,131
|
|
|
110
|
|
$
|
668,381
|
|
|
94
|
__________
|
|
*
|
Percentages may not add due to rounding.
|
Cost of revenues
and gross margin.
Cost of revenues
for the
three months
ended
March 31, 2016
increased
79%
to
$688.7 million
from the comparable
2015
period. This
increase
was primarily attributable to increased costs related to our acquisition of Par and charges to increase excess inventory reserves of approximately
$45 million
at our
U.S. Generic Pharmaceuticals
segment due to the underperformance of certain products and the planned discontinuance of several products as part of the 2016
U.S. Generic Pharmaceuticals
restructuring initiative announced in May 2016. Gross margins in
2016
decrease
d to
29%
from
46%
in
2015
. This
decrease
was primarily attributable to growth in lower margin generic pharmaceutical product sales, increased intangible asset amortization of
$116.4 million
, the charges to increase excess inventory reserves mentioned above, increased inventory step-up amortization as a result of recent acquisitions of
$23.8 million
and a decline in higher margin branded pharmaceutical product sales due to generic competition on certain products.
Selling, general and administrative
expenses.
Selling, general and administrative
expenses for the
three months
ended
March 31, 2016
decreased
16%
to
$178.4 million
from the comparable
2015
period. The
decrease
was primarily a result of a non-recurring charge during the
first quarter of 2015
related to the acceleration of Auxilium employee equity awards at closing of
$37.6 million
and non-recurring restructuring charges during the
first quarter of 2015
of
$26.0 million
related to the Auxilium acquisition. These decreases were partially offset by increased expenses as the result of the acquisition of Par.
Research and development
expenses.
Research and development
expenses for the
three months
ended
March 31, 2016
increased
133%
to
$41.7 million
from the comparable
2015
period. The
increase
was primarily attributable to increased expenses as the result of the acquisition of Par.
Litigation-related and other contingencies, net
.
Charges for
Litigation-related and other contingencies, net
for the
three months
ended
March 31, 2016
totaled
$5.2 million
, compared to
$13.0 million
in the comparable
2015
period. These amounts mainly relate to fluctuations in charges associated with certain litigation matters. The Company’s legal proceedings and other contingent matters are described in more detail in
Note 12. Commitments and Contingencies
of the
Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q
.
Asset impairment charges
.
Asset impairment charges
for the
three months
ended
March 31, 2016
totaled
$129.6 million
, compared to
$7.0 million
in the comparable
2015
period. This
increase
primarily relates to pre-tax, non-cash impairment charges of
$129.6 million
recorded during the
three months
ended
March 31, 2016
in our U.S. Generic Pharmaceuticals segment, including pre-tax, non-cash asset impairment charges of
$100.3 million
related to the 2016
U.S. Generic Pharmaceuticals
restructuring initiative, which resulted from the discontinuation of certain commercial products and the abandonment of certain IPR&D projects. In addition, we recorded
$29.3 million
of asset impairment charges resulting from certain market conditions impacting the commercial potential of certain intangible assets in our U.S. Generic Pharmaceuticals segment. A decline in future market conditions below our current estimates could result in additional impairment charges, which could be material.
Acquisition-related and integration items
.
Acquisition-related and integration items
for the
three months
ended
March 31, 2016
decreased
64%
to
$12.6 million
from the comparable
2015
period. This decrease was due to non-recurring prior year acquisition-related and integration costs associated with our acquisition of Auxilium, which closed during the first quarter of 2015. In addition, during 2016 the Company recorded
$10.7 million
of income, net, resulting from the change in the fair value of certain contingent consideration. The change in contingent consideration is due to certain market conditions impacting the commercial potential of the underlying products.
Interest expense, net
.
The components of
Interest expense, net
for the
three months
ended
March 31, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Interest expense
|
$
|
117,470
|
|
|
$
|
73,849
|
|
Interest income
|
(677
|
)
|
|
(710
|
)
|
Interest expense, net
|
$
|
116,793
|
|
|
$
|
73,139
|
|
Interest expense for the
three months
ended
March 31, 2016
increase
d
59%
to
$117.5 million
from the comparable
2015
period. This
increase
was primarily attributable to an increase in our average total indebtedness to
$8.6 billion
in
2016
from
$5.0 billion
in
2015
.
Loss on extinguishment of debt
.
Loss on extinguishment of debt
was
zero
for the
three months
ended
March 31, 2016
compared to
$1.0 million
during the comparable
2015
period.
Other income, net
.
The components of
Other income, net
for the
three months
ended
March 31, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Foreign currency loss (gain), net
|
$
|
996
|
|
|
$
|
(23,134
|
)
|
Equity (earnings) loss from unconsolidated subsidiaries, net
|
(2,344
|
)
|
|
851
|
|
Costs associated with unused financing commitments
|
—
|
|
|
11,810
|
|
Other miscellaneous
|
(559
|
)
|
|
(1,522
|
)
|
Other income, net
|
$
|
(1,907
|
)
|
|
$
|
(11,995
|
)
|
Foreign currency loss (gain), net results from the remeasurement of the Company’s foreign currency denominated assets and liabilities. In addition, the Company incurred
$11.8 million
during the
three months
ended
March 31, 2015
related to unused commitment fees primarily associated with financing for the Auxilium acquisition.
Income tax benefit
.
During the
three months
ended
March 31, 2016
, the Company recognized an income tax
benefit
of
$118.7 million
on
$207.5 million
of
loss from continuing operations before income tax
, compared to
$166.9 million
of tax
benefit
on
$16.4 million
of
loss from continuing operations before income tax
during the comparable
2015
period. The tax benefit for the current period is primarily related to the overall geographical mix of pretax earnings as well as the discrete tax benefit associated with the tax impact of the impairment associated with the U.S. Generic Pharmaceutical business. The tax
benefit
for the comparable
2015
period was primarily related to benefits resulting from the expected realization of deferred tax assets for certain components of our AMS business that was held for sale in such period.
The Company and its subsidiaries are subject to income taxes in various jurisdictions and significant judgment is required in evaluating the Company’s tax positions to determine the provision for income taxes, including reserves, for any uncertainty. The tax laws in the jurisdictions in which the Company operates are also subject to change, sometimes with retroactive effect. Existing and future tax laws and regulations may limit our ability to use U.S. tax attributes, including net operating losses, to offset U.S. taxable income. For a period of time following the 2014 Paladin transaction, our U.S. affiliates could be precluded from utilizing U.S. tax attributes to offset taxable income if we complete certain transactions. In addition, the U.S. Treasury Department recently issued new temporary and proposed regulations related to corporate inversions and earnings stripping. The limitations on the use of certain tax attributes and deductions in these regulations are in addition to existing rules that could impose more restrictive limitations in the event that cumulative changes in our stock ownership within a three-year period exceed certain thresholds. Such changes or the adoption of additional limitations could
impact our overall utilization of deferred tax assets, potentially resulting in a material adverse impact to our financial statements and cash flows from operations.
Discontinued operations, net of tax
.
As a result of our decision to sell our AMS business and wind down our Astora business, which comprises the entirety of our former
Devices
segment, the operating results of this business are reported as
Discontinued operations, net of tax
in the
Condensed Consolidated Statements of Operations
for all periods presented. The results of our discontinued operations totaled
$45.1 million
of
loss
, net of tax, during the three months
ended
March 31, 2016
compared to
$226.2 million
of
loss
, net of tax, in the comparable
2015
period.
The fluctuation in Discontinued operations during the
three months
ended
March 31, 2016
compared to the prior period was mainly related to a decrease in impairment charges of
$201.6 million
, partially offset by a decrease in income from operations due to the sale of the Men’s Health and Prostate Health components. In connection with previously classifying AMS as held-for-sale, the Company was required to compare the estimated fair values of the underlying disposal groups, less the costs to sell, to the respective carrying amounts. As a result of this analysis, the Company recorded a combined asset impairment charge of
$222.8 million
during the three months ended March 31, 2015.
2016
Outlook
We estimate that our
2016
total revenues will be between
$3.87 billion
and
$4.03 billion
. This estimate is based on our expectation of growth for company revenues from our core products and the full year impact of our 2015 acquisitions, including our acquisition of Par, which closed on September 25, 2015. We consistently apply our lean operating model principles to streamline general and administrative expenses, optimize commercial spend and focus research and development efforts onto lower-risk projects and higher-return investments to Endo’s current business. The Company also intends to seek long-term, durable growth both internally and through strategic acquisitions in order to support its objective of transforming Endo into a leading global specialty pharmaceuticals company. There can be no assurance that the Company will achieve these results.
Business Segment Results Review
The three reportable business segments in which the Company operates are: (1)
U.S. Branded Pharmaceuticals
, (2)
U.S. Generic Pharmaceuticals
and (3)
International Pharmaceuticals
. These segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s
adjusted income (loss) from continuing operations before income tax
, a financial measure not determined in accordance with U.S. GAAP, which we define as
loss from continuing operations before income tax
before
certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs, earn-out payments or adjustments, changes in the fair value of contingent consideration and bridge financing costs; cost reduction and integration-related initiatives such as separation benefits, retention payments, other exit costs and certain costs associated with integrating an acquired company’s operations; excess costs that will be eliminated pursuant to integration plans; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; certain non-cash interest expense; litigation-related and other contingent matters; gains or losses from early termination of debt activities; foreign currency gains or losses on intercompany financing arrangements; and certain other items that the Company believes do not reflect its core operating performance
.
Certain of the corporate general and administrative expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as Corporate unallocated, including interest expense. The Company’s consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segments less these unallocated corporate costs.
We refer to
adjusted income (loss) from continuing operations before income tax
in making operating decisions because we believe it provides meaningful supplemental information regarding the Company’s operational performance. For instance, we believe that this measure facilitates its internal comparisons to our historical operating results and comparisons to competitors’ results. The Company believes this measure is useful to investors in allowing for greater transparency related to supplemental information used in our financial and operational decision-making. In addition, we have historically reported similar financial measures to our investors and believe that the inclusion of comparative numbers provides consistency in our current financial reporting. Further, we believe that
adjusted income (loss) from continuing operations before income tax
may be useful to investors as we are aware that certain of our significant shareholders utilize
adjusted income (loss) from continuing operations before income tax
to evaluate our financial performance. Finally,
adjusted income (loss) from continuing operations before income tax
is utilized in the calculation of adjusted diluted income per share, which is used by the Compensation Committee of the Company’s Board of Directors in assessing the performance and compensation of substantially all of our employees, including our executive officers.
There are limitations to using financial measures such as
adjusted income (loss) from continuing operations before income tax
. Other companies in our industry may define
adjusted income (loss) from continuing operations before income tax
differently than we do. As a result, it may be difficult to use
adjusted income (loss) from continuing operations before income tax
or similarly named adjusted financial measures that other companies may use to compare the performance of those companies to our performance.
Because of these limitations,
adjusted income (loss) from continuing operations before income tax
should not be considered as a measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business. The Company compensates for these limitations by providing reconciliations of our
segment adjusted income from continuing operations before income tax
to our consolidated
loss from continuing operations before income tax
, which is determined in accordance with U.S. GAAP and included in our
Condensed Consolidated Statements of Operations
.
Revenues.
The following table displays our revenue by reportable segment for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net revenues to external customers:
|
|
|
|
U.S. Branded Pharmaceuticals
|
$
|
308,813
|
|
|
$
|
284,507
|
|
U.S. Generic Pharmaceuticals
|
583,390
|
|
|
356,962
|
|
International Pharmaceuticals (1)
|
71,336
|
|
|
72,659
|
|
Total net revenues to external customers
|
$
|
963,539
|
|
|
$
|
714,128
|
|
__________
|
|
(1)
|
Revenues generated by our
International Pharmaceuticals
segment are primarily attributable to Canada, Mexico and South Africa.
|
U.S. Branded Pharmaceuticals
. The following table displays the significant components of our
U.S. Branded Pharmaceuticals
revenues to external customers for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Pain Management:
|
|
|
|
Lidoderm®
|
$
|
19,712
|
|
|
$
|
25,160
|
|
OPANA® ER
|
44,670
|
|
|
46,859
|
|
Percocet®
|
33,593
|
|
|
36,299
|
|
Voltaren® Gel
|
35,747
|
|
|
45,471
|
|
|
$
|
133,722
|
|
|
$
|
153,789
|
|
Specialty Pharmaceuticals:
|
|
|
|
Supprelin® LA
|
$
|
17,252
|
|
|
$
|
16,282
|
|
XIAFLEX®
|
44,045
|
|
|
27,966
|
|
|
$
|
61,297
|
|
|
$
|
44,248
|
|
Branded Other Revenues
|
113,794
|
|
|
86,470
|
|
Total U.S. Branded Pharmaceuticals
|
$
|
308,813
|
|
|
$
|
284,507
|
|
Pain Management
Net sales of Lidoderm
®
for the
three months
ended
March 31, 2016
decrease
d
22%
to
$19.7 million
from the comparable
2015
period. This decrease was attributable to volume decreases partially offset by an increase in price. In September 2013 Actavis (now Allergan) launched a generic form of Lidoderm
®
, in May 2014 the Company’s U.S. Generic Pharmaceuticals launched its authorized generic of Lidoderm
®
and in August 2015 Mylan launched a generic form of Lidoderm
®
. To the extent additional competitors are able to launch generic versions of Lidoderm
®
, our revenues could decline.
Net sales of OPANA
®
ER for the
three months
ended
March 31, 2016
decrease
d
5%
to
$44.7 million
from the comparable
2015
period. Net sales continue to be impacted by competing generic versions of the non-crush resistant formulation of OPANA
®
ER, which launched beginning in early 2013. To the extent additional competitors are able to launch generic versions of the non-crush resistant formulation OPANA
®
ER, our revenues could decline further. However, in April 2016, the U.S. District Court affirmed a ruling upholding two of the Company’s patents covering OPANA
®
ER. In addition, in April 2016, the U.S. District Court issued an order upholding its August 2015 ruling in the Company’s favor and confirming the prior injunction against the manufacture or sale of the generic version of non-crush-resistant OPANA
®
ER currently offered by Actavis, the U.S. generics business of Allergan, and the additional approved but not yet marketed generic version of the product developed by Roxane. As a result, it is expected that the generic product currently sold by Actavis will be removed from the market and other generic versions of the product will not be launched in the near term by other generic companies.
Net sales of Percocet
®
for the
three months
ended
March 31, 2016
decrease
d
7%
to
$33.6 million
from the comparable
2015
period. This
decrease
was attributable to volume decreases, partially offset by price increases.
Net sales of Voltaren
®
Gel for the
three months
ended
March 31, 2016
decrease
d
21%
to
$35.7 million
from the comparable
2015
period. This
decrease
was primarily attributable to the March 24, 2016 launch of Amneal Pharmaceuticals LLC’s generic equivalent of Voltaren® Gel. Subject to FDA approval, it is possible one or more additional competing generic products could potentially enter the market during 2016, which could negatively impact future sales of Voltaren
®
Gel.
Specialty Pharmaceuticals
Net sales of Supprelin
®
LA for the
three months
ended
March 31, 2016
increase
d
6%
to
$17.3 million
from the comparable
2015
period. This revenue
increase
was primarily attributable to volume and price increases.
Net sales of XIAFLEX
®
for the
three months
ended
March 31, 2016
increased
57%
to
$44.0 million
from the comparable
2015
period. This revenue increase was primarily attributable to a full quarter of Auxilium revenues.
Branded Other
Net sales of Branded Other products for the
three months
ended
March 31, 2016
increase
d
32%
to
$113.8 million
from the comparable
2015
period. This
increase
was primarily attributable to the acquisitions of Auxilium and Par which we acquired on January, 29 2015 and
September 25, 2015
, respectively.
U.S. Generic Pharmaceuticals
.
The following table displays the significant components of our
U.S. Generic Pharmaceuticals
revenues to external customers for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
U.S. Generic Pharmaceuticals
|
|
|
|
U.S. Generics Base (1)
|
$
|
347,429
|
|
|
$
|
241,696
|
|
Sterile Injectables
|
123,689
|
|
|
—
|
|
New Launches and Alternative Dosages (2)
|
112,272
|
|
|
115,266
|
|
Total U.S. Generic Pharmaceuticals
|
$
|
583,390
|
|
|
$
|
356,962
|
|
__________
|
|
(1)
|
U.S. Generics Base
includes solid oral-extended release, solid oral-immediate release and pain/controlled substances products.
|
|
|
(2)
|
New Launches and Alternative Dosages
includes liquids, semi-solids, patches, powders, ophthalmics, sprays and new product launches. Products are included in New Launches during the calendar year of launch and the subsequent calendar year such that the period of time any product will be considered a New Launch will range from thirteen to twenty-four months. New Launches contributed
$29.3 million
and
$7.3 million
of revenues to the three months ended March 31, 2016 and 2015. The table below presents the top 5 New Launch products by revenue for each period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of
|
|
Three Months Ended March 31,
|
Launch
|
|
2016
|
|
2015
|
2014
|
|
|
|
|
|
|
|
Telemisartan
|
|
Valsartan/HCTZ
|
|
Lorazepam
|
|
|
|
|
|
|
|
Methylphenidate
|
|
Disulfiram
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Ethacrynate Sodium
|
|
Megace ES AG
|
|
Dutas/Tams Caps
|
|
Isosorbide ER
|
|
Gildess FE 24
|
|
Zafirlukast
|
|
Propranolol
|
|
Testosterone Gel Sachets
|
|
|
|
Hydrocortisone Cream
|
|
Pramipexole DHCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Dantrolene Caps
|
|
Frova AG
|
|
Darifenacin HBr ER Tabs
|
|
|
|
|
|
|
Net sales of
U.S. Generics Base
for the
three months
ended
March 31, 2016
increase
d
44%
to
$347.4 million
from the comparable
2015
period. This
increase
was attributable to approximately
$181 million
in revenue as a result of the acquisition of Par, partially offset by
a decrease in price and volume as the result of competitive pressure on commoditized generic products
.
Net sales of
Sterile Injectables
for the
three months
ended
March 31, 2016
increase
d to
$123.7 million
from the comparable
2015
period. This
increase
was attributable to revenue as a result of the acquisition of Par.
Net sales of
New Launches and Alternative Dosages
for the
three months
ended
March 31, 2016
decrease
d
3%
to
$112.3 million
from the comparable
2015
period. This
decrease
was primarily attributable to increased competitive pressure on patches, ophthalmics and other alternative doses, partially offset by launch products from the Par acquisition.
International Pharmaceuticals
.
Revenues from our
International Pharmaceuticals
segment for the
three months
ended
March 31, 2016
decrease
d
2%
to
$71.3 million
from the comparable
2015
period. This decrease was primarily attributable to unfavorable fluctuations in foreign currency rates, partially offset by an increase in revenue at Paladin.
Adjusted income (loss) from continuing operations before income tax
.
The following table displays our
adjusted income (loss) from continuing operations before income tax
by reportable segment for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Adjusted income (loss) from continuing operations before income tax:
|
|
|
|
U.S. Branded Pharmaceuticals
|
$
|
168,781
|
|
|
$
|
158,794
|
|
U.S. Generic Pharmaceuticals
|
$
|
211,768
|
|
|
$
|
183,457
|
|
International Pharmaceuticals
|
$
|
21,754
|
|
|
$
|
16,567
|
|
Corporate unallocated
|
$
|
(153,073
|
)
|
|
$
|
(111,068
|
)
|
During the quarter ended
December 31, 2015
, we realigned certain costs between our
International Pharmaceuticals
segment,
U.S. Branded Pharmaceuticals
segment and corporate unallocated costs based on how our chief operating decision maker currently reviews segment performance. As a result of this realignment, certain expenses included in our consolidated
adjusted income (loss) from continuing operations before income tax
for the
three months
ended
March 31, 2015
have been reclassified among our various segments to conform to current period presentation. The net impact of these reclassification adjustments increased U.S. Branded Pharmaceuticals segment and corporate unallocated costs by
$0.6 million
and
$7.6 million
, respectively, with an offsetting
$8.2 million
decrease to
International Pharmaceuticals
segment costs. The realignment of these expenses did not impact periods prior to 2015.
U.S. Branded Pharmaceuticals
.
Adjusted income from continuing operations before income tax for the
three months
ended
March 31, 2016
increase
d
6%
to
$168.8 million
from the comparable
2015
period. This
increase
was primarily attributable to the acquisition of Auxilium on January 29, 2015.
U.S. Generic Pharmaceuticals
.
Adjusted income from continuing operations before income tax for the
three months
ended
March 31, 2016
increase
d
15%
to
$211.8 million
from the comparable
2015
period. In
2016
, revenues and gross margins
increase
d primarily due to the Par acquisition on
September 25, 2015
. These increases were partially offset by a decrease resulting from competitive pressure on commoditized generic products and charges to increase excess inventory reserves of approximately
$18 million
at our
U.S. Generic Pharmaceuticals
segment due to the underperformance of certain products.
International Pharmaceuticals
.
Adjusted income from continuing operations before income tax for the
three months
ended
March 31, 2016
increase
d
31%
to
$21.8 million
from the comparable
2015
period. This
increase
was primarily attributable to an increase in gross margin resulting from the divestiture of certain lower margin products and decreased operating expenses, partially offset by unfavorable fluctuations in foreign currency rates.
Corporate unallocated
. Corporate unallocated adjusted loss from continuing operations before income tax for the
three months
ended
March 31, 2016
increase
d
38%
to
$153.1 million
from the comparable
2015
period. This
increase
was primarily attributable to the previously discussed
increase
in interest expense.
Reconciliation to GAAP.
The table below provides reconciliations of our
segment adjusted income from continuing operations before income tax
to our consolidated
loss from continuing operations before income tax
, which is determined in accordance with U.S. GAAP, for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Total segment adjusted income from continuing operations before income tax:
|
$
|
402,303
|
|
|
$
|
358,818
|
|
Corporate unallocated costs (1)
|
(153,073
|
)
|
|
(111,068
|
)
|
Upfront and milestone payments to partners
|
(1,417
|
)
|
|
(2,667
|
)
|
Asset impairment charges (2)
|
(129,625
|
)
|
|
(7,000
|
)
|
Acquisition-related and integration items (3)
|
(12,554
|
)
|
|
(34,640
|
)
|
Separation benefits and other cost reduction initiatives (4)
|
(38,456
|
)
|
|
(41,807
|
)
|
Amortization of intangible assets
|
(211,669
|
)
|
|
(95,269
|
)
|
Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans
|
(68,476
|
)
|
|
(39,916
|
)
|
Non-cash interest expense related to the 1.75% Convertible Senior Subordinated Notes
|
—
|
|
|
(1,379
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
(980
|
)
|
Impact of Voltaren
®
Gel generic competition
|
7,750
|
|
|
—
|
|
Certain litigation-related charges, net (5)
|
(5,200
|
)
|
|
(13,000
|
)
|
Costs associated with unused financing commitments
|
—
|
|
|
(11,810
|
)
|
Acceleration of Auxilium employee equity awards at closing
|
—
|
|
|
(37,603
|
)
|
Foreign currency impact related to the remeasurement of intercompany debt instruments
|
(1,255
|
)
|
|
21,090
|
|
Other, net
|
4,194
|
|
|
854
|
|
Total consolidated loss from continuing operations before income tax
|
$
|
(207,478
|
)
|
|
$
|
(16,377
|
)
|
__________
|
|
(1)
|
Corporate unallocated costs include certain corporate overhead costs, interest expense, net, and certain other income and expenses.
|
|
|
(2)
|
Asset impairment charges primarily related to charges to write down intangible assets as further described in
Note 9. Goodwill and Other Intangibles
.
|
|
|
(3)
|
Acquisition-related and integration-items include costs directly associated with previous acquisitions of
$23.2 million
for the
three months
ended
March 31, 2016
and
$35.4 million
for the comparable
2015
period. During
2016
and
2015
, these costs are net of a benefit due to changes in the fair value of contingent consideration of
$10.7 million
and
$0.8 million
, respectively.
|
|
|
(4)
|
Separation benefits and other cost reduction initiatives include charges to increase excess inventory reserves of
$26.9 million
related to the 2016
U.S. Generic Pharmaceuticals
restructuring initiative, employee separation costs of
$6.8 million
and other restructuring costs of
$4.4 million
for the
three
months ended
March 31, 2016
. Amounts in the comparable
2015
period include employee separation costs of
$32.4 million
and a
$7.9 million
charge recorded upon the cease use date of our Auxilium subsidiary’s former corporate headquarters, representing the liability for our remaining obligations under the respective lease agreement, net of estimated sublease income. These amounts were primarily recorded as
Selling, general and administrative
expense in our
Condensed Consolidated Statements of Operations
. See
Note 4. Restructuring
for discussion of our material restructuring initiatives.
|
|
|
(5)
|
These amounts include charges for Litigation-related and other contingencies, net as further described in
Note 12. Commitments and Contingencies
.
|
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is cash generated from operations. Our principal liquidity requirements are for working capital for operations, licenses, milestone payments, capital expenditures, debt service payments and acquisitions. The Company’s working capital was
$(127.1) million
at
March 31, 2016
compared to
$(21.8) million
at
December 31, 2015
. Working capital at
March 31, 2016
includes restricted cash and cash equivalents of
$515.2 million
held in Qualified Settlement Funds for mesh product liability settlement agreements, which is expected to be paid to qualified claimants within the next twelve months. Working capital at
December 31, 2015
included restricted cash and cash equivalents of
$579.0 million
held in Qualified Settlement Funds for mesh product liability settlement agreements.
We have historically had broad access to financial markets that provide liquidity.
Cash and cash equivalents
, which primarily consisted of bank deposits, time deposits and money market accounts, totaled
$222.0 million
at
March 31, 2016
compared to
$272.3 million
at
December 31, 2015
.
During and beyond
2016
, we expect cash generated from operations together with our cash, cash equivalents and the revolving credit facilities to be sufficient to cover cash needs for working capital and general corporate purposes, certain contingent liabilities, payment of contractual obligations, principal and interest payments on our indebtedness, capital expenditures, ordinary share repurchases and any regulatory and/or sales milestones that may become due.
At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our near-term product candidates. Additionally, we may not be successful in implementing, or may face unexpected changes or expenses in connection with our lean operating model and strategic direction, including the potential for opportunistic corporate development transactions. Any of the above could adversely affect our future cash flows. We may need to obtain additional funding for future transactions, to repay our outstanding indebtedness, or for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at all. Any issuances of equity securities or convertible securities could have a dilutive effect on the ownership interest of our current shareholders and may adversely impact net income per share in future periods. An acquisition may be accretive or dilutive and, by its nature, involves numerous risks and uncertainties. As a result of our acquisition efforts we are likely to experience significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs or costs of restructuring activities.
Borrowings
.
At
March 31, 2016
, the Company’s indebtedness includes a credit agreement with combined outstanding principal borrowings of
$3,796.8 million
and additional availability of approximately
$773.0 million
under the revolving credit facilities.
The credit agreement contains affirmative and negative covenants that the Company believes to be usual and customary for a senior secured credit facility. The negative covenants include, among other things, limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with the Company’s affiliates. As of
March 31, 2016
, we were in compliance with all such covenants.
At
March 31, 2016
, the Company’s indebtedness includes senior notes with aggregate principal amounts totaling
$4.7 billion
. These notes mature between 2022 and 2025, subject to earlier repurchase or redemption in accordance with the terms of the respective indentures. Interest rates on these notes range from
5.375%
to
7.25%
. These notes are senior unsecured obligations of the Company’s subsidiaries and are issued or guaranteed on a senior unsecured basis, as applicable, by all of our significant subsidiaries (other than Astora Women's Health Technologies, Grupo Farmacéutico Somar, S.A. de C.V., and Litha Healthcare Group Limited) and certain of our other subsidiaries, except for the 7.25% Senior Notes due 2022, which are issued by Endo Health Solutions Inc. and guaranteed on a senior unsecured basis by the guarantors named in the Fifth Supplemental Indenture relating to such notes.
The indentures governing our various senior notes contain affirmative and negative covenants that the Company believes to be usual and customary for senior unsecured credit agreements. The negative covenants, among other things, restrict the Company’s ability and the ability of its restricted subsidiaries to incur certain additional indebtedness and issue preferred stock, make restricted payments, sell certain assets, agree to any restrictions on the ability of restricted subsidiaries to make payments to us, create certain liens, merge, consolidate, or sell substantially all of the Company’s assets, or enter into certain transactions with affiliates. As of
March 31, 2016
, we were in compliance with all covenants.
During the remainder of
2016
, we anticipate that any excess cash will be used to pay down our borrowings.
Credit ratings.
The Company’s corporate credit ratings assigned by Moody’s Investors Service and Standard & Poor’s are
B1
with a
negative
outlook and
B+
with a
stable
outlook, respectively.
Working capital
.
The components of our working capital and our liquidity at
March 31, 2016
and
December 31, 2015
are below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Total current assets
|
$
|
3,079,903
|
|
|
$
|
3,452,537
|
|
Less: total current liabilities
|
(3,206,967
|
)
|
|
(3,474,312
|
)
|
Working capital
|
$
|
(127,064
|
)
|
|
$
|
(21,775
|
)
|
Current ratio
|
-1.0:1
|
|
|
-1.0:1
|
|
Working capital
decrease
d by
$105.3 million
from
December 31, 2015
to
March 31, 2016
. The
decrease
in total current assets of
$372.6 million
was primarily driven by decreases in Accounts receivable, Inventories, net and Restricted cash and cash equivalents. The
decrease
in total current liabilities of
$267.3 million
was primarily driven by changes in Accrued expenses, Accounts payable and the Current portion of legal settlement accrual.
The following table summarizes our
Condensed Consolidated Statements of Cash Flows
for the
three months
ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net cash flow (used in) provided by:
|
|
|
|
Operating activities
|
$
|
(49,825
|
)
|
|
$
|
(89,808
|
)
|
Investing activities
|
31,070
|
|
|
(930,484
|
)
|
Financing activities
|
(34,592
|
)
|
|
996,861
|
|
Effect of foreign exchange rate
|
2,967
|
|
|
(7,861
|
)
|
Net decrease in cash and cash equivalents
|
$
|
(50,380
|
)
|
|
$
|
(31,292
|
)
|
Net cash used in operating activities
.
Net cash
used in
operating activities was
$49.8 million
for the
three months
ended
March 31, 2016
compared to
$89.8 million
used in
operating activities in the comparable
2015
period.
Net cash used in operating activities
represents the cash receipts and cash disbursements from all of our activities other than investing activities and financing activities. Changes in cash from operating activities reflect, among other things, the timing of cash collections from customers, payments to suppliers, managed care organizations, government agencies, collaborative partners and employees, as well as tax payments in the ordinary course of business.
The
$40.0 million
decrease
in
Net cash used in operating activities
for the
three months
ended
March 31, 2016
compared to the comparable
2015
period was primarily the result of the timing of cash collections and cash payments related to our operations.
The following table summarizes certain of our significant infrequent pre-tax cash outlays impacting net cash used in operating activities for the
three months
ended
March 31, 2016
and
2015
(in thousands). The cash outlays were mainly related to mesh-related product liability payments and cash outlays as a result of significant acquisitions and the associated transaction and integration costs:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Payments for mesh-related product liability and other litigation matters
|
$
|
213,886
|
|
|
$
|
130,975
|
|
Unused commitment fees
|
—
|
|
|
11,810
|
|
Separation and restructuring payments
|
19,351
|
|
|
11,719
|
|
Transaction costs and certain integration charges paid in connection with acquisitions
|
30,462
|
|
|
44,206
|
|
Total
|
$
|
263,699
|
|
|
$
|
198,710
|
|
Net cash provided by (used in) investing activities
.
Net cash
provided by
investing activities was
$31.1 million
for the
three months
ended
March 31, 2016
compared to
$930.5 million
used in
investing activities in the comparable
2015
period.
This
$961.6 million
fluctuation
in cash
provided by
investing activities for the
three months
ended
March 31, 2016
compared to the comparable
2015
period relates primarily to cash used for acquisitions in
2015
of
$911.9 million
. In addition,
$184.7 million
of cash was released from the Qualified Settlement Funds (QSFs) for mesh settlements during the three months ended
March 31, 2016
, which was
$57.5 million
more than cash released from the QSFs during the prior year. Also, we paid
$120.9 million
into QSFs for mesh settlements during the
three months
ended
March 31, 2016
, which was
$49.8 million
less than cash paid into the QSFs during the prior year. These net increases were partially offset by the release of
$40 million
of cash from the escrow account associated with the acquisition of the remaining outstanding share capital of Litha during the
three months
ended
March 31, 2015
. Cash payments into QSFs and escrow accounts result in a cash outflow for investing activities. Cash releases from QSFs and escrow accounts result in a cash inflow for investing activities. Payments related to our QSFs are further described in
Note 12. Commitments and Contingencies
of the
Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q
.
Net cash (used in) provided by financing activities
.
Net cash
used in
financing activities was
$34.6 million
for the
three months
ended
March 31, 2016
compared to
$996.9 million
provided by
financing activities in the comparable
2015
period.
Items contributing to the
$1,031.5 million
fluctuation
in cash
used in
financing activities for the
three months
ended
March 31, 2016
compared to the comparable
2015
period include
a decrease
in proceeds from the issuance of notes of
$1,200.0 million
, partially offset by
a decrease
in the repurchase of convertible notes of
$149.1 million
and
a decrease
in cash buy-outs of controlling interests of
$39.6 million
related to the acquisition of the remaining share capital of Litha.
Fluctuations.
Our quarterly results have fluctuated in the past and may continue to fluctuate. These fluctuations may be due to the timing of new product launches, purchasing patterns of our customers, market acceptance of our products, the impact of competitive products and pricing, asset impairment charges, restructuring costs, including separation benefits, business combination transaction costs, upfront, milestone and certain other payments made or accrued pursuant to licensing agreements and changes in the
fair value of financial instruments and contingent assets and liabilities recorded as part of a business combination. Further, a substantial portion of our total revenues are through three wholesale drug distributors who in turn supply our products to pharmacies, hospitals and physicians. Accordingly, we are potentially subject to a concentration of credit risk with respect to our trade receivables.
Contractual Obligations.
As of
March 31, 2016
, there were no material changes in our contractual obligations from those disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015
, filed with the Securities and Exchange Commission on
February 29, 2016
.
Inflation.
We do not believe that inflation had a material adverse effect on our financial statements for the periods presented.
Off-balance sheet arrangements.
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimates have not changed materially since
December 31, 2015
. For additional discussion of the Company’s critical accounting estimates, see “Critical Accounting Estimates” in
Item 7
of our Annual Report on Form 10-K for the year ended
December 31, 2015
filed with the Securities and Exchange Commission on
February 29, 2016
.
RECENT ACCOUNTING PRONOUNCEMENTS
For discussion of recent accounting pronouncements, refer to
Note 2. Recent Accounting Pronouncements
in the
Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q
.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in the financial markets, including interest rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable rate indebtedness associated with the term loan portion and revolving credit facilities portion of our credit agreement. To the extent we utilize amounts under our term loans and revolving credit facilities, we would be exposed to additional interest rate risk. At
March 31, 2016
, our term loans include principal amount of floating-rate debt of
$3.8 billion
and our revolving credit facilities include principal amount of floating-rate debt of
$225.0 million
. Borrowings under our revolving credit facilities and our Term Loan A facility bear interest at a rate equal to an applicable margin plus London Interbank Offered Rate (LIBOR). In addition, borrowings under our Term Loan B facility bear interest at a rate equal to an applicable margin plus LIBOR, subject to a LIBOR floor of
0.75%
. A hypothetical 1% increase in LIBOR over the
0.75%
floor would result in
$40.2 million
in incremental annual interest expense.
As of
March 31, 2016
and
December 31, 2015
, we had no other assets or liabilities with significant interest rate sensitivity.
Investment Risk
At
March 31, 2016
and
December 31, 2015
, we had immaterial investments in available-for-sale securities, primarily associated with equity securities of publicly traded companies. Any decline in value below our original investments will be evaluated to determine if the decline in value is considered temporary or other-than-temporary. An other-than-temporary decline in fair value would be included as a charge to earnings.
Foreign Currency Exchange Risk
We operate and transact business in various foreign countries and are therefore subject to risks associated with foreign currency exchange rate fluctuations. The Company manages this foreign currency risk, in part, through operational means including managing foreign currency revenues in relation to same currency costs as well as managing foreign currency assets in relation to same currency liabilities. The Company is also exposed to the potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans. Additionally, certain of the Company’s subsidiaries maintain their books of record in currencies other than their respective functional currencies. These subsidiaries’ financial statements are remeasured into their respective functional currencies using current or historical exchange rates. Such remeasurement adjustments could have an adverse effect on the Company’s results of operations.
All assets and liabilities of our international subsidiaries, which maintain their financial statements in local currency, are translated to U.S. dollars at period-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in shareholders’ equity. Gains and losses on foreign currency transactions and short term inter-company receivables from foreign subsidiaries are included in
Other income, net
.
Fluctuations in foreign currency rates resulted in a net
loss
of
$1.0 million
for the
three months
ended
March 31, 2016
. This compares to a net
gain
of
$23.1 million
in the comparable
2015
period.
Based on the Company’s significant foreign currency denominated intercompany loans existing at
March 31, 2016
, we estimate that a 10% appreciation or depreciation in the underlying currencies of our foreign currency denominated intercompany loans, relative to the U.S. Dollar, would result in approximately
$3.0 million
in incremental foreign currency gains or losses, respectively.
In addition, we purchase Lidoderm
®
in U.S. dollars from Teikoku Seiyaku Co., Ltd., a Japanese manufacturer. As part of the purchase agreement with Teikoku, there is a price adjustment feature that prevents the cash payment in U.S. dollars from falling outside of a certain pre-defined range in Japanese yen even if the spot rate is outside of that range.
Inflation
We do not believe that inflation has had a significant impact on our revenues or operations.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934, as of
March 31, 2016
. Based on that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of
March 31, 2016
.
Changes in Internal Control over Financial Reporting
The Company acquired certain entities during the year ended
December 31, 2015
. Particularly as it relates to the Par acquisition, as permitted by the Securities and Exchange Commission, management elected to exclude this acquisition from its assessment of the effectiveness of its internal controls over financial reporting as of December 31, 2015. The Company began to integrate the Par business into its internal control over financial reporting structure during the
three months
ended
March 31, 2016
. As such, there have been changes during the
three months
ended
March 31, 2016
associated with the establishment and continued integration of internal control over financial reporting with respect to Par.