NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a biopharmaceutical company focused on developing and delivering important therapeutics, conducting clinical research in areas of unmet need and creating education and support programs for the patients and families we serve. Our currently marketed products support the health of patients in the areas of women’s health, anemia management and cancer supportive care, including Makena
®
(hydroxyprogesterone caproate injection), Feraheme
®
(ferumoxytol) for intravenous (“IV”) use and MuGard
®
Mucoadhesive Oral Wound Rinse. Through services related to the preservation of umbilical cord blood stem cell and cord tissue units (the “CBR Services”) operated through Cord Blood Registry
®
(“CBR”), we also help families to preserve newborn stem cells, which are used today in transplant medicine for certain cancers and blood, immune and metabolic disorders, and which we believe have the potential to play a valuable role in the ongoing development of regenerative medicine.
We are subject to risks common to companies in the pharmaceutical industry including, but not limited to (as such risks pertain to our business) our dependence on the success of our product portfolio and maintaining commercialization of our products and services, including
Makena,
the CBR Services and
Feraheme
; intense competition, including from generic products; maintaining and defending the proprietary nature of our technology; our ability to expand our product portfolio through business development transactions; our dependence upon third-party manufacturers; our reliance on other third parties in our business, including to conduct our clinical trials and undertake our product distribution; our reliance on and the extent of reimbursement from third parties for the use of our products, including
Makena
’s high Medicaid reimbursement concentration; the impact of
Makena
’s loss of orphan drug exclusivity in February 2018; competition from compounded pharmacies; our ability to implement
Makena
’s next generation development programs, including regulatory approvals for such programs; our ability to differentiate
Makena
from compounded HPC products; perceptions related to pricing and access for
Makena
; the potential for cord blood stem cell and cord tissue science and its recognition in regenerative medicine; if our storage facility in Tucson, Arizona is damaged or destroyed; competition in the cord blood and tissue banking business; compliance with cord blood and tissue regulations and laws; post-approval commitments for
Makena
; limitations on
Feraheme
sales given its narrow chronic kidney disease indication and the potential impact on sales of any actual or perceived safety problems; our ability to receive regulatory approval for
Feraheme
in the broader iron deficiency anemia indication and
Feraheme
’s ability to compete in such market even if regulatory approval is received; competition from generic versions of
Feraheme
and iron replacement therapy products
;
our customer concentration, especially with regard to
Feraheme
; our ability to obtain approval for the sale of Rekynda
TM
(bremelanotide) by the FDA, our restrictions that may be imposed by the FDA; our ability to commercialize
Rekynda
; uncertainty regarding the market and competitors or
Rekynda
and Intrarosa
TM
(prasterone); our ability to commercialize
Intrarosa
, including the ability to drive awareness of dyspareunia; our ability to consummate the
Intrarosa
licensing transaction; uncertainties regarding federal and state legislative initiatives; potential inability to obtain raw or other materials; our potential failure to comply with federal, state or foreign healthcare fraud and abuse laws, marketing disclosure laws or other federal, state or foreign laws and regulations and potential civil or criminal penalties as a result thereof; our ability to managing our expanded product portfolio and operations; uncertainties regarding reporting and payment obligations under government pricing programs and our level of indebtedness; our ability to repay our indebtedness, including upon a change of our variable rate indebtedness; restrictions on our business related to our indebtedness; our access to sufficient capital; the availability of net operating loss carryforwards and other tax assets; employee retention; our ability to be profitable in the future; the potential fluctuation of our operating results; potential differences between actual future results and the estimates or assumptions used by us in preparation of our consolidated financial statements; the volatility of our stock price; current or potential litigation, including securities and product liability suits; provisions in our charter, by-laws and certain contracts that discourage an acquisition of our Company; the impact of disruptions to our information technology systems and the impact of market overhang on our stock price.
Throughout this Annual Report on Form 10-K, AMAG Pharmaceuticals, Inc. and our consolidated subsidiaries are collectively referred to as “the Company,” “AMAG,” “we,” “us,” or “our.”
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and include the accounts of our wholly-owned subsidiaries. Our results of operations for 2015 include the results of CBR, subsequent to August 17, 2015, the date of acquisition and for 2014 include the results of Lumara Health Inc. (“Lumara Health”) and its product
Makena
subsequent to the November 12, 2014 acquisition date. See
Note C, “
Business Combinations
,” for additional information. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used to determine amounts and values of, but are not limited to: revenue recognition related to product sales and services revenue; product sales allowances and accruals; allowance for doubtful accounts; investments; inventory; acquisition date fair value and subsequent fair value estimates used to assess impairment of long-lived assets, including goodwill, in-process research and development (“IPR&D”) and other intangible assets; contingent consideration; debt obligations; certain accrued liabilities, including clinical trial accruals and restructuring liabilities; income taxes and equity-based compensation expense. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash held in commercial bank accounts, money market funds and U.S. Treasury securities having an original maturity of less than three months at the date of acquisition. We consider all highly liquid investments with a maturity of three months or less as of the acquisition date to be cash equivalents. At December 31, 2016 and 2015, substantially all of our cash and cash equivalents were held in either commercial bank accounts or money market funds.
Investments
We account for and classify our investments as either “available-for-sale,” “trading,” or “held-to-maturity,” in accordance with the accounting guidance related to the accounting and classification of certain investments in debt and equity securities. The determination of the appropriate classification by us is based primarily on management’s ability and intent to sell the investment at the time of purchase. As of December 31, 2016 and 2015, all of our investments were classified as available-for-sale securities.
Available-for-sale securities are those securities which we view as available for use in current operations, if needed. We generally classify our available-for-sale securities as short-term investments, even though the stated maturity date may be one year or more beyond the current balance sheet date. Available-for-sale investments are stated at fair value with their unrealized gains and losses included in accumulated other comprehensive income (loss) within the consolidated statements of stockholders’ equity, until such gains and losses are realized in other income (expense) within the consolidated statements of operations or until an unrealized loss is considered other-than-temporary.
We recognize other-than-temporary impairments of our debt securities when there is a decline in fair value below the amortized cost basis and if (a) we have the intent to sell the security or (b) it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis. If either of these conditions is met, we recognize the difference between the amortized cost of the security and its fair value at the impairment measurement date in our consolidated statements of operations. If neither of these conditions is met, we must perform additional analyses to evaluate whether the unrealized loss is associated with the creditworthiness of the issuer of the security rather than other factors, such as interest rates or market factors. If we determine from this analysis that we do not expect to receive cash flows sufficient to recover the entire amortized cost of the security, a credit loss exists, the impairment is considered other-than-temporary and is recognized in our consolidated statements of operations.
Fair Value Measurements
Under current accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Current accounting guidance establishes a hierarchy used to categorize how fair value is measured and is based on three levels of inputs, of which the first two are considered observable and the third unobservable, as follows:
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.
We hold certain assets and liabilities that are required to be measured at fair value on a recurring basis, including our cash equivalents, investments, and acquisition-related contingent consideration.
Inventory
Inventory is stated at the lower of cost or market (net realizable value), with approximate cost being determined on a first-in, first-out basis. Prior to initial approval from the FDA or other regulatory agencies, we expense costs relating to the production of inventory in the period incurred, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the product to be realized, at which point we capitalize the costs as inventory. We assess the costs capitalized prior to regulatory approval each quarter for indicators of impairment, such as a reduced likelihood of approval. We expense costs associated with clinical trial material as research and development expense.
On a quarterly basis, we analyze our inventory levels to determine whether we have any obsolete, expired, or excess inventory. If any inventory is expected to expire prior to being sold, has a cost basis in excess of its net realizable value, is in excess of expected sales requirements as determined by internal sales forecasts, or fails to meet commercial sale specifications, the inventory is written-down through a charge to cost of product sales. The determination of whether inventory costs will be realizable requires estimates by management of future expected inventory requirements, based on sales forecasts. Once packaged,
Makena
currently has a shelf-life of
three years
and
Feraheme
has a shelf-life of
five years
. As a result of comparison to internal sales forecasts, we expect to fully realize the carrying value of our current
Makena
and
Feraheme
finished goods inventory. If actual market conditions are less favorable than those projected by management, inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.
Restricted Cash
As of December 31, 2016 and 2015, we classified
$2.6 million
of our cash as restricted cash, which included
$2.0 million
held in a restricted fund previously established by Lumara in connection with its Chapter 11 plan of reorganization to pay potential claims against its former directors and officers. In addition, the restricted cash balance as of December 31, 2016 and 2015 included a
$0.6 million
security deposit delivered to the landlord of our Waltham, Massachusetts headquarters in the form of an irrevocable letter of credit.
Concentrations and Significant Customer Information
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, investments, and accounts receivable. We currently hold our excess cash primarily in institutional money market funds, corporate debt securities, U.S. treasury and government agency securities, commercial paper and certificates of deposit. As of
December 31, 2016
, we did not have a material concentration in any single investment.
Our operations are located entirely within the U.S. We focus primarily on developing, manufacturing, and commercializing
Makena
and
Feraheme
and marketing and selling the CBR Services, who pay for the services directly. We perform ongoing credit evaluations of our product sales customers and generally do not require collateral. The following table sets forth customers or partners who represented
10%
or more of our total revenues for
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
AmerisourceBergen Drug Corporation
|
22
|
%
|
|
25
|
%
|
|
34
|
%
|
McKesson Corporation
|
11
|
%
|
|
11
|
%
|
|
21
|
%
|
Cardinal Health, Inc.
|
<10
|
%
|
|
<10
|
%
|
|
15
|
%
|
Takeda Pharmaceuticals Company Limited
|
—
|
%
|
|
12
|
%
|
|
11
|
%
|
In addition, approximately
12%
of our total revenues for
2015
were principally related to deferred
Feraheme
collaboration revenue recognized in connection with the termination of our license, development and commercialization agreement (the “Takeda Agreement”) with Takeda Pharmaceutical Company Limited (“Takeda”), which is headquartered in Japan, and which revenues were thus generated from outside the U.S. Substantially all of the revenues generated during
2016
were generated within the U.S.
Our net accounts receivable primarily represented amounts due for products sold directly to wholesalers, distributors, and specialty pharmacies and amounts due for CBR Services sold to consumers who pay for the services directly. Accounts receivable for our products and services are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts.
As part of our credit management policy, we perform ongoing credit evaluations of our product sales customers, and we have not required collateral from any customer. We have not experienced significant bad debts and have not established an allowance for doubtful accounts on our product sales at either
December 31, 2016
or
2015
. We maintain an allowance for doubtful accounts for estimated losses inherent in our CBR service revenues portfolio. In establishing the allowance, we consider historical losses adjusted to take into account current market conditions and customers’ financial conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all collection means have been exhausted and the potential for recovery is considered remote. If the financial condition of any of our significant product sales customers was to deteriorate and result in an impairment of its ability to make payments owed to us, an allowance for doubtful accounts may be required which could have a material effect on earnings in the period of any such adjustment.
Customers which represented greater than
10%
of our accounts receivable balance as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
McKesson Corporation
|
32
|
%
|
|
<10
|
%
|
AmerisourceBergen Drug Corporation
|
13
|
%
|
|
43
|
%
|
We are currently dependent on a single supplier for
Feraheme
drug substance (produced in two separate facilities) and finished drug product. In addition, we rely on single sources for certain materials required to support the CBR Services. We would be exposed to a significant loss of revenue from the sale of our products and services if our suppliers and/or manufacturers could not fulfill demand for any reason.
Property, Plant and Equipment, Net
Property, plant and equipment are recorded at cost and depreciated when placed into service using the straight-line method based on their estimated useful lives as follows:
|
|
|
|
Useful Life
|
Buildings and improvements
|
15 - 40 Years
|
Computer equipment and software
|
5 Years
|
Furniture and fixtures
|
5 Years
|
Leasehold improvements
|
Lesser of Lease or Asset Life
|
Laboratory and production equipment
|
5 Years
|
Land improvements
|
10 Years
|
Costs for capital assets not yet placed in service are capitalized on our balance sheets and will be depreciated in accordance with the above guidelines once placed into service. Costs for maintenance and repairs are expensed as incurred. Upon sale or other disposition of property, plant and equipment, the cost and related depreciation are removed from the accounts and any resulting gain or loss is charged to our consolidated statements of operations. Long-lived assets to be held and used are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Assets classified as held for sale are no longer subject to depreciation and are recorded at the lower of carrying value or estimated net realizable value.
Business Combinations
We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Acquisition-related costs are expensed as incurred. Any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.
Acquisition-Related Contingent Consideration
Contingent consideration arising from a business combination is included as part of the purchase price and is recognized at its estimated fair value as of the acquisition date. Subsequent to the acquisition date, we measure contingent consideration arrangements at fair value for each period until the contingency is resolved. These changes in fair value are recognized in selling, general and administrative expenses in our consolidated statements of operations. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time.
Goodwill and Intangible Assets
Goodwill is not amortized, but is reviewed for impairment annually as of October 31, or more frequently if indicators of impairment are present. We determine whether goodwill may be impaired by comparing the carrying value of our single reporting unit, including goodwill, to the fair value of the reporting unit. If the fair value is less than the carrying amount, a more detailed analysis is performed to determine whether goodwill is impaired. The impairment loss, if any, is measured as the excess of the carrying value of the goodwill over the fair value of the goodwill and is recorded in our consolidated statements of operations.
Finite-lived intangible assets are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such facts and circumstances exist, management compares the projected undiscounted future cash flows associated with the asset over its estimated useful life against the carrying amount. The impairment loss, if any, is measured as the excess of the carrying amount of the asset over its fair value.
Acquired IPR&D represents the fair value assigned to research and development assets that we acquire and have not been completed at the acquisition date. The fair value of IPR&D acquired in a business combination is capitalized on our consolidated balance sheet at the acquisition-date fair value and is determined by estimating the costs to develop the technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the projected net cash flows to present value. IPR&D is not amortized, but rather is reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed or abandoned. If we determine that IPR&D becomes impaired or is abandoned, the carrying value is written down to its fair value with the related impairment charge recognized in our consolidated statement of operations in the period in which the impairment occurs. Upon successful completion of each project and launch of the product, we will make a separate determination of the estimated useful life of the IPR&D intangible asset and the related amortization will be recorded as an expense prospectively over its estimated useful life.
Additionally, we have other indefinite-lived intangible assets which we acquired through our business combinations. These assets are reviewed for impairment on an annual basis or more frequently if indicators of impairment are present. If we determine that the asset becomes impaired, the carrying value is written down to its fair value with the related impairment charge recognized in our consolidated statements of operations in the period in which the impairment occurs.
Patents
We expense all patent-related costs in selling, general and administrative expenses as incurred.
Revenue Recognition and Related Sales Allowances and Accruals
Our primary sources of revenue during the reporting periods were: (a) product revenues from
Makena
and
Feraheme
; (b) service revenues associated with the CBR Services; and (c) license fees, collaboration and other revenues, which primarily included revenue recognized under collaboration agreements, royalties received from our license agreements, and international product revenues of
Feraheme
derived from our collaboration agreement with Takeda, which was terminated in 2015. Revenue is recognized when the following criteria are met:
|
|
•
|
Persuasive evidence of an arrangement exists;
|
|
|
•
|
Delivery of product has occurred or services have been rendered;
|
|
|
•
|
The sales price charged is fixed or determinable; and
|
|
|
•
|
Collection is reasonably assured.
|
Product Revenue
We recognize product revenues net of certain allowances and accruals in our consolidated statements of operations at the time of sale. Our contractual adjustments include provisions for returns, pricing and prompt payment discounts, as well as wholesaler distribution fees, rebates to hospitals that qualify for 340B pricing and volume-based and other commercial rebates. Governmental rebates relate to our reimbursement arrangements with state Medicaid programs. In addition, we also monitor our distribution channel to determine whether additional allowances or accruals are required based on inventory in our sales channel. Calculating these gross to net sales adjustments involves estimates and judgments based primarily on actual product sales data, forecasted customer buying patterns, and market research data related to utilization rates by various end-users. If we determine in future periods that our actual experience is not indicative of our expectations, if our actual experience changes, or if other factors affect our estimates, we may be required to adjust our allowances and accruals estimates, which would affect our net product sales in the period of the adjustment and could be significant.
Our U.S. product sales, which primarily represented revenues from
Makena
and
Feraheme
for
2016
,
2015
and
2014
were offset by provisions for allowances and accruals as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Gross U.S. product sales
|
$
|
748,839
|
|
|
$
|
561,255
|
|
|
$
|
190,512
|
|
Provision for U.S. product sales allowances and accruals:
|
|
|
|
|
|
Contractual adjustments
|
229,686
|
|
|
161,665
|
|
|
73,262
|
|
Governmental rebates
|
86,983
|
|
|
57,774
|
|
|
7,252
|
|
Total provision for U.S. product sales allowances and accruals
|
316,669
|
|
|
219,439
|
|
|
80,514
|
|
U.S. product sales, net
|
$
|
432,170
|
|
|
$
|
341,816
|
|
|
$
|
109,998
|
|
Classification of Product Sales Allowances and Accruals
Product sales allowances and accruals are primarily comprised of both direct and indirect fees, discounts and rebates and provisions for estimated product returns. Direct fees, discounts and rebates are contractual fees and price adjustments payable to wholesalers, specialty distributors and other customers that purchase products directly from us. Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as certain physicians, clinics, hospitals, group purchasing organizations (“GPOs”), and dialysis organizations that typically do not purchase products directly from us but rather from wholesalers and specialty distributors. In accordance with guidance related to accounting for fees and consideration given by a vendor to a customer, including a reseller of a vendor’s products, these fees, discounts and rebates are presumed to be a reduction of the selling price. Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities and are recorded in the same period that the related revenue is recognized. We estimate product sales allowances and accruals using either historical, actual and/or other data, including estimated patient usage, applicable contractual rebate rates, contract performance by the benefit providers, other current contractual and statutory requirements, historical market data based upon experience of our products and other products similar to them, specific known market events and trends such as competitive pricing and new product introductions, current and forecasted customer buying patterns and inventory levels, and the shelf life of our products. As part of this evaluation, we also review changes to federal and other legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to
three months
or longer after the sale.
Allowances against receivable balances primarily relate to prompt payment discounts, provider chargebacks and certain government agency rebates and are recorded at the time of sale, resulting in a reduction in product sales revenue and the reporting of product sales receivables net of allowances. Accruals related to Medicaid and provider volume rebates, wholesaler
and distributor fees, GPO fees, other discounts to healthcare providers and product returns are recorded at the time of sale, resulting in a reduction in product sales and the recording of an increase in accrued expenses.
Discounts
We typically offer a
2%
prompt payment discount to our customers as an incentive to remit payment in accordance with the stated terms of the invoice, generally
thirty days
days. Because we anticipate that those customers who are offered this discount will take advantage of the discount, we accrue
100%
of the prompt payment discount at the time of sale, based on the gross amount of each invoice. We adjust the accrual quarterly to reflect actual experience.
Chargebacks
Chargeback reserves represent our estimated obligations resulting from the difference between the prices at which we sell our products to wholesalers and the sales price ultimately paid to wholesalers under fixed price contracts by third-party payers, including governmental agencies. We determine our chargeback estimates based on actual product sales data and forecasted customer buying patterns. Actual chargeback amounts are determined at the time of resale to the qualified healthcare provider, and we generally issue credits for such amounts within several weeks of receiving notification from the wholesaler. Estimated chargeback amounts are recorded at the time of sale, and we adjust the allowance quarterly to reflect actual experience.
Distributor/Wholesaler and Group Purchasing Organization Fees
Fees under our arrangements with distributors and wholesalers are usually based upon units of product purchased during the prior month or quarter and are usually paid by us within several weeks of our receipt of an invoice from the wholesaler or distributor, as the case may be. Fees under our arrangements with GPOs are usually based upon member purchases during the prior quarter and are generally billed by the GPO within
30 days
after period end. Current accounting standards related to consideration given by a vendor to a customer, including a reseller of a vendor’s products, specify that cash consideration given by a vendor to a customer is presumed to be a reduction of the selling price of the vendor’s products or services and therefore should be characterized as a reduction of product sales. Consideration should be characterized as a cost incurred if we receive, or will receive, an identifiable benefit (goods or services) in exchange for the consideration and we can reasonably estimate the fair value of the benefit received. Because the fees we pay to wholesalers do not meet the foregoing conditions to be characterized as a cost, we have characterized these fees as a reduction of product sales and have included them in contractual adjustments or governmental rebates in the table above. We generally pay such amounts within several weeks of our receipt of an invoice from the distributor, wholesaler or GPO. Accordingly, we accrue the estimated fee due at the time of sale, based on the contracted price invoiced to the customer. We adjust the accrual quarterly to reflect actual experience.
Product Returns
Consistent with industry practice, we generally offer our wholesalers, specialty distributors and other customers a limited right to return our products based on the product’s expiration date. Currently the expiration dates for
Feraheme and
Makena
are
five years
and
three years
, respectively. We estimate product returns based on the historical return patterns and known or expected changes in the marketplace. We track actual returns by individual production lots. Returns on lots eligible for credits under our returned goods policy are monitored and compared with historical return trends and rates.
We expect that wholesalers and healthcare providers will not stock significant inventory due to the cost of the product, the expense to store our products, and/or that our products are readily available for distribution. We record an estimate of returns at the time of sale. If necessary, our estimated rate of returns may be adjusted for actual return experience as it becomes available and for known or expected changes in the marketplace. During 2014, we reduced our reserve for
Feraheme
product returns by approximately
$1.8 million
, primarily as a result of a lower than expected rate of product returns. The reduction of our reserve had an impact of increasing our 2014 net income by
$0.08
and
$0.07
per basic and diluted share, respectively. We did not significantly adjust our reserve for product returns during
2016
or
2015
. To date, our product returns of
Feraheme
and
Makena
have been relatively limited; however, returns experience may change over time. We may be required to make future adjustments to our product returns estimate, which would result in a corresponding change to our net product sales in the period of adjustment and could be significant.
Governmental Rebates
Governmental rebate reserves relate to our reimbursement arrangements with state Medicaid programs. We determine our estimates for Medicaid rebates, if applicable, based on actual product sales data and our historical product claims experience. In estimating these reserves, we provide for a Medicaid rebate associated with both those expected instances where Medicaid will
act as the primary insurer as well as in those instances where we expect Medicaid will act as the secondary insurer. Rebate amounts generally are invoiced quarterly and are paid in arrears, and we expect to pay such amounts within several weeks of notification by the Medicaid or provider entity. Estimated governmental rebates are recorded at the time of sale. During 2016, we revised our estimated Medicaid reserve based on actual claims received since the 2011 launch of
Makena
, our expectations of state level utilization, and estimated rebate claims not yet submitted. This revision resulted in a
$6.1 million
reduction of our estimated Medicaid rebate reserve related to prior period
Makena
sales. During
2015
, we reduced our
Makena-
related Medicaid and chargeback reserves, which were initially recorded at the time of the Lumara Health acquisition, by
$4.0 million
and
$1.9 million
, respectively. These measurement period adjustments were recorded to goodwill during
2015
. We did not significantly adjust our Medicaid rebate reserve during
2014
. We regularly assess our Medicaid reserve balance and the rate at which we accrue for claims against product sales. If we determine in future periods that our actual rebate experience is not indicative of expected claims, if actual claims experience changes, or if other factors affect estimated claims rates, we may be required to adjust our current Medicaid accumulated reserve estimate, which would affect net product sales in the period of the adjustment and could be significant.
Multiple Element Arrangements
We evaluate revenue from arrangements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting as defined in the accounting guidance related to revenue arrangements with multiple deliverables. Under current accounting guidance, companies are required to establish the selling price of its products and services based on a separate revenue recognition process using management’s best estimate of the selling price when there is no vendor-specific objective evidence or third-party evidence to determine the selling price of that item. If a delivered element is not considered to have standalone value, all elements of the arrangement are recognized as revenue as a single unit of accounting over the period of performance for the last such undelivered item or services. Significant management judgment is required in determining what elements constitute deliverables and what deliverables or combination of deliverables should be considered units of accounting.
When multiple deliverables are combined and accounted for as a single unit of accounting, we base our revenue recognition pattern on the last to be delivered element. Revenue is recognized using either a proportional performance or straight-line method, depending on whether we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and whether such performance obligations are provided on a best-efforts basis. To the extent we cannot reasonably estimate our performance obligations, we recognize revenue on a straight-line basis over the period we expect to complete our performance obligations. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. We may have to revise our estimates based on changes in the expected level of effort or the period we expect to complete our performance obligations.
For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. We determine the selling price to be used for allocating revenue to deliverables as follows: (a) vendor specific objective evidence; (b) third-party evidence of selling price and (c) the best estimate of the selling price. Vendor specific objective evidence generally exists only when we sell the deliverable separately and it is the price actually charged by us for that deliverable. Any discounts given to the customer are allocated by applying the relative selling price method.
Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in our consolidated balance sheets. Deferred revenue associated with our CBR service revenues includes (a) amounts collected in advance of unit processing and (b) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenues.
Service Revenue
Our service revenues for the CBR Services include the following
two
deliverables: (a) enrollment, including the provision of a collection kit and cord blood and cord tissue unit processing, which are delivered at the beginning of the relationship (the “processing services”), with revenue for this deliverable recognized after the collection and successful processing of the cord blood and cord tissue; and (b) the storage of newborn cord blood and cord tissue units (the “storage services”), for either an annual fee or a prepayment of
18
years or the lifetime of the newborn donor (the “lifetime option”), with revenue for this deliverable recognized ratably over the applicable storage period. For the lifetime option, storage fees are not charged during the lifetime of the newborn donor. However, revenue is recognized based on the average of male and female life expectancies using lifetime actuarial tables published by the Social Security Administration in effect at the time of the newborn’s birth. As there are other vendors who provide processing services and storage services at separately stated list prices, the processing
services and storage services, including the first year storage, each have standalone value to the customer, and therefore represent separate deliverables. The selling price for the processing services is estimated based on the best estimate of selling price because we do not have vendor specific objective evidence or third-party evidence of selling price for these elements. The selling price for the storage services is determined based on vendor specific objective evidence as we have standalone renewals to support the selling price.
License Fee, Collaboration and Other Revenues
The terms of product development and commercialization agreements entered into between us and our collaborative licensees may include non-refundable license fees, payments based on the achievement of certain milestones and performance goals, reimbursement of certain out-of-pocket costs, including research and development expenses, payment for manufacturing services, and royalties on product sales. We recognize license fee and research and development revenue under collaborative arrangements over the term of the applicable agreements using a proportional performance model, if practical. Otherwise, we recognize such revenue on a straight-line basis. Under this model, revenue is generally recognized in an amount equal to the lesser of the amount due under the agreements or an amount based on the proportional performance to date. In cases where project costs or other performance metrics are not estimable but there is an established contract period, revenues are recognized on a straight-line basis over the term of the relevant agreement. In cases where we are reimbursed for certain research and development costs associated with our collaboration agreements and where we are acting as the principal in carrying out these services, any reimbursement payments are recorded in license fee, collaboration and other revenues in our consolidated statement of operations to match the costs that we incur during the period in which we perform those services. Nonrefundable payments and fees are recorded as deferred revenue upon receipt and may require deferral of revenue recognition to future periods.
Our collaboration agreements may entitle us to additional payments upon the achievement of performance-based milestones. If a milestone involves substantive effort on our part and its achievement is not considered probable at the inception of the collaboration, we recognize the milestone consideration as revenue in the period in which the milestone is achieved only if it meets the following additional criteria:
|
|
•
|
The milestone consideration received is commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone;
|
|
|
•
|
The milestone is related solely to our past performance; and
|
|
|
•
|
The milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement.
|
There is significant judgment involved in determining whether a milestone meets all of these criteria. For milestones that do not meet the above criteria and are therefore not considered substantive milestones, we recognize that portion of the milestone payment equal to the percentage of the performance period completed at the time the milestone is achieved and the above conditions are met. The remaining portion of the milestone will be recognized over the remaining performance period using a proportional performance or straight-line method.
Research and Development Expenses
Research and development expenses include external expenses, such as costs of clinical trials, contract research and development expenses, certain manufacturing research and development costs, regulatory filing fees, consulting and professional fees and expenses, and internal expenses, such as compensation of employees engaged in research and development activities, the manufacture of product needed to support research and development efforts, related costs of facilities, and other general costs related to research and development. Manufacturing costs are generally expensed as incurred until a product has received the necessary initial regulatory approval.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Advertising costs, including promotional expenses, costs related to trade shows and CBR print media advertising space were
$16.4 million
,
$8.0 million
and
$2.1 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively.
Shipping and Handling Costs
We bill customers of our CBR Services a fee for the shipping of the collection kits to CBR. Shipping and handling revenues are reported in services revenues, with the associated costs in reported in costs of services.
Equity-Based Compensation
Equity-based compensation cost is generally measured at the estimated grant date fair value and recorded to expense over the requisite service period, which is generally the vesting period. Because equity-based compensation expense is based on awards ultimately expected to vest, we must make certain judgments about whether employees, officers, directors, consultants and advisors will complete the requisite service period, and reduce the compensation expense being recognized for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based upon historical experience and adjusted for unusual events such as corporate restructurings, which can result in higher than expected turnover and forfeitures. If factors change and we employ different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period.
We estimate the fair value of equity-based compensation involving stock options based on the Black-Scholes option pricing model. This model requires the input of several factors such as the expected option term, the expected risk-free interest rate over the expected option term, the expected volatility of our stock price over the expected option term, and the expected dividend yield over the expected option term and are subject to various assumptions. The fair value of awards calculated using the Black-Scholes option pricing model is generally amortized on a straight-line basis over the requisite service period, and is recognized based on the proportionate amount of the requisite service period that has been rendered during each reporting period.
We estimate the fair value of our restricted stock units (“RSUs”) whose vesting is contingent upon market conditions using the Monte-Carlo simulation model. The fair value of RSUs where vesting is contingent upon market conditions is amortized based upon the estimated derived service period. The fair value of RSUs granted to our employees and directors is determined based upon the quoted closing market price per share on the date of grant, adjusted for estimated forfeitures.
We believe our valuation methodologies are appropriate for estimating the fair value of the equity awards we grant to our employees and directors. Our equity award valuations are estimates and may not be reflective of actual future results or amounts ultimately realized by recipients of these grants. These amounts are subject to future quarterly adjustments based upon a variety of factors, which include, but are not limited to, changes in estimated forfeiture rates and the issuance of new equity-based awards.
Income Taxes
Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of our deferred tax assets will not be realized.
We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. We evaluate uncertain tax positions on a quarterly basis and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could impact our income tax provision in future periods. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as a provision for income tax in our consolidated statement of operations.
Comprehensive Income (Loss)
Our comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes changes in equity that are excluded from net income (loss), which for all periods presented in these consolidated financial statements related to unrealized holding gains and losses on available-for-sale investments, net of tax.
Basic and Diluted Net Income (Loss) per Share
We compute basic net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the relevant period. Diluted net income (loss) per common share has been computed by dividing net income (loss) by the diluted number of common shares outstanding during the period. Except where the result would be antidilutive to net income (loss), diluted net income (loss) per common share would be computed assuming the impact of the conversion of the
$200.0 million
of
2.5%
convertible senior notes due February 15, 2019 (the “Convertible Notes”), the exercise of outstanding stock options, the vesting of restricted stock units (“RSUs”), and the exercise of warrants.
We have a choice to settle the conversion obligation under the Convertible Notes in cash, shares or any combination of the two. Pursuant to certain covenants in our
six
-year
$350.0 million
term loan facility (the “2015 Term Loan Facility”), which we entered into in 2015 to partially fund the acquisition of CBR, we may be restricted from settling the conversion obligation in whole or in part with cash unless certain conditions in the 2015 Term Loan Facility are satisfied. We utilize the if-converted method to reflect the impact of the conversion of the Convertible Notes. This method assumes the conversion of the Convertible Notes into shares of our common stock and reflects the elimination of interest expense related to the Convertible Notes. Prior to the acquisition of Lumara Health in November 2014, we intended to settle the principal value of the Convertible Notes in cash and the excess conversion premium in shares. We utilized the treasury stock method to reflect the dilutive effect of the conversion premium in 2014, as if it were a freestanding written call option on our shares prior to the November 2014 acquisition of Lumara Health. The impact of the conversion premium has been considered in the calculation of diluted net income per share for 2014 by applying the closing price of our common stock on December 31, 2014 to calculate the number of shares issuable under the conversion premium.
The dilutive effect of the warrants, stock options and RSUs has been calculated using the treasury stock method.
The components of basic and diluted net income (loss) per share for
2016
,
2015
and
2014
were as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net income (loss) - basic
|
$
|
(2,483
|
)
|
|
$
|
32,779
|
|
|
$
|
135,817
|
|
Dilutive effect of convertible 2.5% notes
|
—
|
|
|
—
|
|
|
1,654
|
|
Net income (loss) - diluted
|
$
|
(2,483
|
)
|
|
$
|
32,779
|
|
|
$
|
137,471
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
34,346
|
|
|
31,471
|
|
|
22,416
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Warrants
|
—
|
|
|
2,466
|
|
|
—
|
|
Stock options and RSUs
|
—
|
|
|
1,371
|
|
|
520
|
|
Convertible 2.5% notes
|
—
|
|
|
—
|
|
|
2,289
|
|
Shares used in calculating dilutive net income (loss) per share
|
34,346
|
|
|
35,308
|
|
|
25,225
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.07
|
)
|
|
$
|
1.04
|
|
|
$
|
6.06
|
|
Diluted
|
$
|
(0.07
|
)
|
|
$
|
0.93
|
|
|
$
|
5.45
|
|
The following table sets forth the potential common shares issuable upon the exercise of outstanding options, the vesting of RSUs, the exercise of warrants (prior to consideration of the treasury stock method), and the conversion of the Convertible Notes, which were excluded from our computation of diluted net income (loss) per share because their inclusion would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Options to purchase shares of common stock
|
2,590
|
|
|
1,619
|
|
|
2,708
|
|
Shares of common stock issuable upon the vesting of RSUs
|
613
|
|
|
167
|
|
|
322
|
|
Warrants
|
7,382
|
|
|
—
|
|
|
7,382
|
|
Convertible 2.5% notes
|
7,382
|
|
|
7,382
|
|
|
—
|
|
Total
|
17,967
|
|
|
9,168
|
|
|
10,412
|
|
In connection with the issuance of the Convertible Notes, in February 2014, we entered into convertible bond hedges. The convertible bond hedges are not included for purposes of calculating the number of diluted shares outstanding, as their effect would be anti-dilutive. The convertible bond hedges are generally expected, but not guaranteed, to reduce the potential dilution and/or offset the cash payments we are required to make upon conversion of the Convertible Notes. During
2016
and
2014
, the average common stock price was below the exercise price of the warrants and during
2015
, the average common stock price was above the exercise price of the warrants.
Reclassifications
Certain amounts in the prior period have been reclassified in order to conform to the current period presentation. In accordance with Accounting Standards Update (“ASU”) No. 2015-3,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
, which we adopted in the first quarter of 2016, we reclassified total debt issuance costs related to our outstanding debt obligations from other long-term assets to the carrying amount of our debt, as a direct deduction, in our consolidated balance sheets as of December 31, 2015. See Note V , “
Recently Issued and Proposed Accounting Pronouncements
” for additional information.
C. BUSINESS COMBINATIONS
As part of our strategy to expand our product and service portfolio, in August 2015, we acquired CBR and the CBR Services and in November 2014, we acquired Lumara Health and its product
Makena
.
CBR Acquisition
On August 17, 2015 (the “CBR Acquisition Date”), we acquired CBR for
$700.0 million
in cash consideration, subject to estimated working capital, indebtedness and other adjustments. We believe CBR is a strong strategic fit for our growing business and offers a unique opportunity to reach a broader population of expectant mothers who may benefit from our product offerings in the maternal health space, including
Makena.
We accounted for the CBR acquisition as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price of an acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. We have allocated the purchase price to the net tangible and intangible assets acquired and liabilities assumed, based on available information and various assumptions we believed were reasonable, with the remaining purchase price recorded as goodwill.
The following table summarizes the components of the total purchase price paid for CBR, as adjusted for the final net working capital, indebtedness and other adjustments (in thousands):
|
|
|
|
|
|
Total Acquisition
Date Fair Value
|
Cash consideration
|
$
|
700,000
|
|
Estimated working capital, indebtedness and other adjustments
|
(17,837
|
)
|
Purchase price paid at closing
|
682,163
|
|
Cash paid on finalization of the net working capital, indebtedness and other adjustments
|
193
|
|
Total purchase price
|
$
|
682,356
|
|
The following table summarizes the fair values assigned to the CBR assets acquired and liabilities assumed by us along with the resulting goodwill at the CBR Acquisition Date, as adjusted for certain measurement period adjustments recorded since the CBR Acquisition Date (in thousands):
|
|
|
|
|
|
Total Acquisition Date Fair Value
|
Accounts receivable
|
$
|
8,660
|
|
Inventories
|
3,825
|
|
Prepaid and other current assets
|
8,480
|
|
Restricted cash - short-term
|
30,752
|
|
Property, plant and equipment
|
29,401
|
|
Customer relationships
|
297,000
|
|
Trade name and trademarks
|
65,000
|
|
Favorable lease asset
|
358
|
|
Deferred income tax assets
|
5,062
|
|
Other long-term assets
|
496
|
|
Accounts payable
|
(2,853
|
)
|
Accrued expenses
|
(13,770
|
)
|
Deferred revenues - short-term
|
(3,100
|
)
|
Payable to former CBR shareholders
|
(37,947
|
)
|
Deferred income tax liabilities
|
(149,873
|
)
|
Other long-term liabilities
|
(506
|
)
|
Total estimated identifiable net assets
|
$
|
240,985
|
|
Goodwill
|
441,371
|
|
Total
|
$
|
682,356
|
|
During 2016, we recorded measurement period adjustments related to the filing of pre-acquisition federal and state income tax returns and the finalization of other tax-related matters. These measurement period adjustments resulted in a net increase to goodwill of
$0.3 million
and were reflected as current period adjustments during the second quarter of 2016 in accordance with the guidance in ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
(“ASU 2015-16”). Measurement period adjustments recorded in the fourth quarter of 2015 consisted primarily of reductions to accounts receivable, inventories, prepaid and other current assets and property, plant and equipment totaling
$1.9 million
and increases to accrued expenses and long-term liabilities totaling
$0.5 million
, which resulted in an increase to goodwill of
$1.8 million
, net of
$0.6 million
of deferred taxes.
The gross contractual amount of accounts receivable at the CBR Acquisition Date of
$11.7 million
was adjusted to its fair value of
$8.7 million
. The fair value amounts for CBR’s customer relationships, trade names and trademarks were determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the assets (i.e., its highest and best use).
We determined the fair value of the customer relationships, using an income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining life. Some of the more significant assumptions used in the income approach from the perspective of a market participant include the estimated net cash flows for each year for the identifiable intangible asset, the discount rate that measures the risk inherent in each cash flow stream, as well as other factors. The customer relationships will be amortized to selling, general and administrative expenses based on an economic consumption model over an expected useful life of approximately
20 years
.
The fair value of the trade names and trademarks was determined using the relief from royalty method, which is also an income approach. We believe the fair values assigned to the CBR customer relationships, and the trade names and trademarks are based upon reasonable estimates and assumptions given available facts and circumstances as of the CBR Acquisition Date. If these assets are not successful, sales and profitability may be adversely affected in future periods, and as a result, the value of the assets may become impaired. The trade names and trademark intangible asset is deemed to be an indefinite-lived asset, which is not amortized but is subject to periodic assessments for impairment. See Note H, “
Goodwill and Intangible Assets
”
for additional information.
Based on the fair value adjustments primarily related to deferred revenue and identifiable intangible assets acquired, we recorded a net deferred tax liability of
$144.8 million
in acquisition accounting using a combined federal and state statutory income tax rate of
37.0%
. The net deferred tax liability represents the
$149.9 million
of deferred tax liabilities recorded in acquisition accounting, primarily related to the fair value adjustments to CBR’s deferred revenue and identifiable intangible assets, partially offset by
$5.1 million
of deferred tax assets acquired from CBR.
We incurred approximately
$11.2 million
of acquisition-related costs in 2015 related to the CBR acquisition. These costs primarily represented financial advisory fees, legal fees, due diligence and other costs and expenses.
In connection with the CBR acquisition, we incurred a
$6.8 million
bridge loan commitment fee, which was included in other income (expense) in our 2015 consolidated statement of operations and paid in the third quarter of 2015.
During the post-acquisition period in 2015, CBR generated approximately
$24.1 million
of revenue. Separate disclosure of CBR’s earnings for the post-acquisition period in 2015 is not practicable due to the integration of CBR’s operations into our business upon acquisition.
During the third quarter of 2016, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the CBR Acquisition Date.
Lumara Health Acquisition
On November 12, 2014, (the “Lumara Health Acquisition Date”), we acquired Lumara Health and its existing commercial product,
Makena,
for
$600.0 million
in cash, subject to certain net working capital and other adjustments, and issued approximately
3.2 million
shares of our common stock, having a value of approximately
$112.0 million
at the time of closing, to the holders of common stock of Lumara Health. The acquisition of Lumara Health provided a strategic commercial entry into the maternal health business. The addition of
Makena
, the only FDA-approved therapy to reduce the risk of preterm birth in certain at-risk women, added a complementary commercial platform to our portfolio and transformed us into a multi-product specialty pharmaceutical company.
We agreed to pay additional merger consideration, up to a maximum of
$350.0 million
, based upon the achievement of certain net sales milestones of
Makena
for the period from December 1, 2014 through December 31, 2019 as follows:
|
|
•
|
A one-time payment of
$100.0 million
payable upon achievement of
$300.0 million
in aggregate net sales in any consecutive
12
-month period, commencing in the month
f
ollowing the Lumara Health Acquisition Date (“the First Milestone”); plus
|
|
|
•
|
A one-time payment of
$100.0 million
payable upon achievement of
$400.0 million
in aggregate net sales in any consecutive
12
-month period commencing in the month following the last month in the First Milestone period (the “Second Milestone”); if the Third Milestone payment (described below) has been or is required to be made prior to achieving the Second Milestone, the Second Milestone payment shall be reduced from
$100.0 million
to
$50.0 million
; plus
|
|
|
•
|
A one-time payment of
$50.0 million
payable if aggregate net sales equal or exceed
$700.0 million
in any consecutive
24
calendar month period (which may include the First Milestone period) (the “Third Milestone”); however, no Third Milestone payment will be made if the Second Milestone payment has been or is required to be made in the full amount of
$100.0 million
; plus
|
|
|
•
|
A one-time payment of
$100.0 million
payable upon achievement of
$500.0 million
in aggregate net sales in any consecutive
12
-month period commencing in the month following the last month in the Second Milestone period (the “Fourth Milestone”); plus
|
|
|
•
|
A one-time payment of
$50.0 million
payable upon achievement of
$200.0 million
in aggregate net sales in each of the five (
5
) consecutive calendar years from and including the 2015 calendar year to the 2019 calendar year (the “Fifth Milestone”).
|
In the event that the conditions to more than one contingent payment are met in any calendar year, any portion of the total amount of contingent payment due in such calendar year in excess of
$100.0 million
shall be deferred until the next calendar year in which less than
$100.0 million
in contingent payments is due. This contingent consideration is recorded as a liability
and measured at fair value based upon significant unobservable inputs. We paid the former Lumara Health security holders
$100.0 million
in the fourth quarter of 2016 based on our achievement of the First Milestone during the third quarter of 2016.
The following table summarizes the components of the total purchase price paid for Lumara Health, as adjusted for the final net working capital and other adjustments (in thousands):
|
|
|
|
|
|
Total Acquisition Date Fair Value
|
Cash consideration
|
$
|
600,000
|
|
Fair value of AMAG common stock issued
|
111,964
|
|
Fair value of contingent milestone payments
|
205,000
|
|
Estimated working capital and other adjustments
|
821
|
|
Purchase price paid at closing
|
917,785
|
|
Less:
|
|
Cash received on finalization of the net working capital and other adjustments
|
(562
|
)
|
Cash acquired from Lumara Health
|
(5,219
|
)
|
Total purchase price
|
$
|
912,004
|
|
At the closing,
$35.0 million
of the cash consideration was contributed to a separate escrow fund to secure the former Lumara Health security holders’ obligations to indemnify us for certain matters, including breaches of representations and warranties, covenants included in the Lumara Health acquisition agreement, payments made by us to dissenting stockholders, specified tax claims, excess parachute claims, and certain claims related to the Women’s Health Division of Lumara Health, which was divested by Lumara Health prior to the closing. As of
December 31, 2016
, the funds held in escrow have been fully distributed to the former Lumara Health security holders.
The fair value of the
3.2 million
shares of AMAG common stock was determined based on the closing price of our common stock on the NASDAQ Global Select Market (“NASDAQ”) of
$34.88
per share on November 11, 2014, the closing price immediately prior to the closing of the transaction.
The fair value of the contingent milestone payments was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of
Makena
from December 1, 2014 through December 31, 2019. The cash flows were discounted at a rate of
5%
, which we believe is reasonable given the level of certainty of the pay-out.
The following table summarizes the fair values assigned to assets acquired and liabilities assumed by us along with the resulting goodwill at the Lumara Health Acquisition Date, as adjusted for certain measurement period adjustments for Lumara Health recorded during 2015 (in thousands):
|
|
|
|
|
|
Total Acquisition Date Fair Value
|
Accounts receivable
|
$
|
36,852
|
|
Inventories
|
30,300
|
|
Prepaid and other current assets
|
3,322
|
|
Deferred income tax assets
|
102,355
|
|
Property and equipment
|
60
|
|
Makena base technology
|
797,100
|
|
IPR&D
|
79,100
|
|
Restricted cash - long term
|
1,997
|
|
Other long-term assets
|
3,412
|
|
Accounts payable
|
(3,807
|
)
|
Accrued expenses
|
(36,561
|
)
|
Deferred income tax liabilities
|
(295,676
|
)
|
Other long-term liabilities
|
(4,563
|
)
|
Total estimated identifiable net assets
|
$
|
713,891
|
|
Goodwill
|
198,113
|
|
Total
|
$
|
912,004
|
|
The measurement period adjustments recorded in 2015 consisted primarily of a
$7.2 million
reduction to our
Makena
revenue reserves and a
$5.4 million
reduction related to net deferred tax liabilities, partially offset by a
$4.5 million
increase in the purchase price associated with the final settlement of net working capital with the former stockholders. These measurement period adjustments were reflected as current period adjustments during 2015 in accordance with the guidance in ASU 2015-16.
The gross contractual amount of accounts receivable at the Lumara Health Acquisition Date was
$40.5 million
. The
$30.3 million
fair value of inventories included a fair value step-up adjustment of
$26.1 million
, which will be amortized and recognized as cost of product sales in our consolidated statements of operations as the related inventories are sold. We recognized
$4.9 million
,
$11.6 million
and
$1.3 million
of the fair value adjustment as cost of product sales during the years ended
December 31, 2016
,
2015
and
2014
, respectively. An additional
$0.9 million
and
$1.2 million
of the fair value adjustment was recognized as research and development expense during the year ended
December 31, 2016
and
2015
, respectively. The remaining
$6.2 million
is estimated to be recognized as follows:
$2.1 million
in
2017
and
$4.1 million
in
2018
.
The fair value amounts for the
Makena
base technology and IPR&D were determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the assets (i.e., its highest and best use). We determined the fair value of the
Makena
base technology and the IPR&D using the income approach. Some of the more significant assumptions used in the income approach for these assets include the estimated net cash flows for each year for each project or product, the discount rate that measures the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors, including the major risks and uncertainties associated with the timely and successful completion of the IPR&D projects, such as legal and regulatory risk.
The fair value of the acquired IPR&D asset represents the value assigned to acquired research and development projects that, as of the Lumara Health Acquisition Date, had not established technological feasibility and had no alternative future use, including certain programs associated with the
Makena
next generation development program to extend the brand franchise beyond the February 2018 exclusivity date, such as new routes of administration, the use of new delivery technologies, as well as reformulation technologies. We believe the fair values assigned to the
Makena
base technology and IPR&D assets are based upon reasonable estimates and assumptions given available facts and circumstances as of the Lumara Health Acquisition Date. If these assets are not successful or successfully developed, sales and profitability may be adversely affected in future periods, and as a result, the value of the assets may become impaired.
Both AMAG and Lumara Health had deferred tax assets for which full valuation allowances were provided in the pre-acquisition financial statements. However, we considered certain of the deferred tax liabilities recorded in acquisition accounting as sources of income to support realization of Lumara Health’s deferred tax assets. We recorded a net deferred tax liability of
$193.3 million
in our consolidated balance sheet in acquisition accounting using a combined federal and state statutory income tax rate of
38.8%
. The net deferred tax liability represents the
$295.7 million
of deferred tax liabilities recorded in acquisition accounting (primarily related to the fair value adjustments to Lumara Health’s inventories and identifiable intangible assets) offset by
$102.4 million
of deferred tax assets acquired from Lumara Health which we have determined, are ‘more likely than not’ to be realized. See Note J, “
Income Taxes
,” for additional information.
We incurred approximately
$9.5 million
of acquisition-related costs in 2014 related to the acquisition of Lumara Health. These costs primarily represented financial advisory fees, legal fees, due diligence and other costs and expenses.
During the post-acquisition period in fiscal 2014, Lumara Health generated
$22.5 million
of revenue from sales of
Makena
. Separate disclosure of Lumara Health’s earnings for the post-acquisition period in fiscal 2014 is not practicable due to the integration of Lumara Health’s operations into our business upon acquisition.
During 2015, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the Lumara Health Acquisition Date.
Unaudited Pro Forma Supplemental Information
The following supplemental unaudited pro forma information presents our revenue and net income (loss) on a pro forma combined basis, including CBR and Lumara Health, assuming that the CBR acquisition occurred on January 1, 2014 and that the Lumara Health acquisition occurred on January 1, 2013. For purposes of preparing the following pro forma information, certain items recorded during 2015, such as the
$11.2 million
of acquisition-related costs, the
$10.4 million
loss on debt extinguishment, and
$9.2 million
of other one-time fees and expenses incurred in connection with the CBR acquisition financing, are excluded from 2015 and reflected in 2014. In addition, certain items recorded in 2014, such as the
$153.2 million
tax benefit and the
$9.5 million
of acquisition-related costs incurred in connection with the acquisition of Lumara Health, are excluded from 2014 and reflected as having occurred in 2013. The pro forma amounts do not include any expected cost savings or restructuring actions which may be achievable or may occur subsequent to the acquisition of Lumara Health or CBR, or the impact of any non-recurring activity. The following table presents the unaudited pro forma consolidated results (in thousands):
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2015
|
|
2014
|
Pro forma combined revenues
|
490,451
|
|
|
364,447
|
|
Pro forma combined net income (loss)
|
28,217
|
|
|
(57,739
|
)
|
The pro forma adjustments reflected in the pro forma combined net income (loss) in the above table primarily represent adjustments to historical amortization of intangible assets, to historical depreciation of property, plant and equipment, and reductions to historical CBR revenues due to fair value purchase accounting adjustments to intangible assets, property, plant and equipment and deferred revenue. In addition, the pro forma combined net income (loss) includes increased interest expense due to the increase in term loan borrowings and the issuance of
$500.0
million aggregate principal amount of
7.875%
Senior Notes due 2023 (the “2023 Senior Notes”) in connection with the CBR acquisition. Income taxes for all periods were adjusted accordingly. This pro forma financial information is not necessarily indicative of our consolidated operating results that would have been reported had the transactions been completed as described herein, nor is such information necessarily indicative of our consolidated results for any future period.
Goodwill
In connection with the CBR acquisition, we recognized
$441.4 million
of goodwill, primarily due to the synergies expected from combining our operations with CBR and to deferred tax liabilities related to fair value adjustments of intangible assets and deferred revenue. In connection with the Lumara Health acquisition, we recognized
$198.1 million
of goodwill, primarily due to the net deferred tax liabilities recorded on the fair value adjustments to Lumara Health’s inventories and identifiable intangible asset. The
$639.5 million
of goodwill resulting from the CBR and Lumara Health acquisitions is not deductible for income tax purposes.
D. INVESTMENTS
As of
December 31, 2016
and
2015
, our investments consisted of securities classified as available-for-sale in accordance with accounting standards which provide guidance related to accounting and classification of certain investments in debt and equity securities.
The following is a summary of our investments as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Corporate debt securities
|
|
|
|
|
|
|
|
Due in one year or less
|
$
|
106,430
|
|
|
$
|
3
|
|
|
$
|
(69
|
)
|
|
$
|
106,364
|
|
Due in one to three years
|
139,742
|
|
|
32
|
|
|
(281
|
)
|
|
139,493
|
|
U.S. treasury and government agency securities
|
|
|
|
|
|
|
|
|
Due in one year or less
|
1,021
|
|
|
—
|
|
|
—
|
|
|
1,021
|
|
Due in one to three years
|
11,395
|
|
|
—
|
|
|
(52
|
)
|
|
11,343
|
|
Commercial paper
|
|
|
|
|
|
|
|
|
Due in one year or less
|
40,560
|
|
|
—
|
|
|
—
|
|
|
40,560
|
|
Certificates of deposit
|
|
|
|
|
|
|
|
Due in one year or less
|
6,000
|
|
|
—
|
|
|
—
|
|
|
6,000
|
|
Total investments
|
$
|
305,148
|
|
|
$
|
35
|
|
|
$
|
(402
|
)
|
|
$
|
304,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Corporate debt securities
|
|
|
|
|
|
|
|
Due in one year or less
|
$
|
27,964
|
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
|
$
|
27,926
|
|
Due in one to three years
|
173,652
|
|
|
3
|
|
|
(904
|
)
|
|
172,751
|
|
Commercial paper
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
34,452
|
|
|
2
|
|
|
(5
|
)
|
|
34,449
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
2,500
|
|
|
—
|
|
|
—
|
|
|
2,500
|
|
Total investments
|
$
|
238,568
|
|
|
$
|
5
|
|
|
$
|
(947
|
)
|
|
$
|
237,626
|
|
Impairments and Unrealized Gains and Losses on Investments
We did not recognize any other-than-temporary impairment losses in our consolidated statements of operations related to our securities during
2016
,
2015
and
2014
. We considered various factors, including the length of time that each security was in an unrealized loss position and our ability and intent to hold these securities until the recovery of their amortized cost basis occurs. As of
December 31, 2016
,
none
of our investments has been in an unrealized loss position for more than one year. Future events may occur, or additional information may become available, which may cause us to identify credit losses where we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of a security and may necessitate the recording of future realized losses on securities in our portfolio. Significant losses in the estimated fair values of our investments could have a material adverse effect on our earnings in future periods.
E. FAIR VALUE MEASUREMENTS
The following tables represent the fair value hierarchy as of
December 31, 2016
and
2015
, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 Using:
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
9,951
|
|
|
$
|
9,951
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
245,857
|
|
|
—
|
|
|
245,857
|
|
|
—
|
|
U.S. treasury and government agency securities
|
12,364
|
|
|
—
|
|
|
12,364
|
|
|
—
|
|
Commercial paper
|
40,560
|
|
|
—
|
|
|
40,560
|
|
|
—
|
|
Certificates of deposit
|
6,000
|
|
|
—
|
|
|
6,000
|
|
|
—
|
|
Total Assets
|
$
|
314,732
|
|
|
$
|
9,951
|
|
|
$
|
304,781
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Lumara Health
|
$
|
145,974
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145,974
|
|
Contingent consideration - MuGard
|
2,021
|
|
|
—
|
|
|
—
|
|
|
2,021
|
|
Total Liabilities
|
$
|
147,995
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
147,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015 Using:
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
73,676
|
|
|
$
|
73,676
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
200,677
|
|
|
—
|
|
|
200,677
|
|
|
—
|
|
Commercial paper
|
34,449
|
|
|
—
|
|
|
34,449
|
|
|
—
|
|
Municipal securities
|
2,500
|
|
|
—
|
|
|
2,500
|
|
|
—
|
|
Total Assets
|
$
|
311,302
|
|
|
$
|
73,676
|
|
|
$
|
237,626
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration - Lumara Health
|
$
|
214,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
214,895
|
|
Contingent consideration - MuGard
|
7,664
|
|
|
—
|
|
|
—
|
|
|
7,664
|
|
Total Liabilities
|
$
|
222,559
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
222,559
|
|
Investments
Our cash equivalents are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our investments are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analyses of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analyses, we did not adjust or override any fair value measurements provided by our pricing services as of
December 31, 2016
or
2015
. In addition, there were
no
transfers or reclassifications of any securities between Level 1 and Level 2 during
2016
or
2015
.
Contingent consideration
We record contingent consideration related to the Lumara Health acquisition, as discussed in greater detail in Note C, “
Business Combinations
,” and related to our June 2013 license agreement for MuGard
®
Mucoadhesive Oral Wound Rinse (the “MuGard License Agreement”) with Abeona Therapeutics, Inc. (“Abeona”), under which we acquired the U.S. commercial rights for the management of oral mucositis and stomatitis (the “MuGard Rights”). There were
no
contingent consideration obligations related to the CBR acquisition.
The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are classified as Level 3 assets under the fair value hierarchy as these assets have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.
The following table presents a reconciliation of contingent consideration obligations related to the acquisition of Lumara Health and the MuGard Rights (in thousands):
|
|
|
|
|
Balance as of January 1, 2015
|
$
|
218,702
|
|
Payments made
|
(456
|
)
|
Adjustments to fair value of contingent consideration
|
4,271
|
|
Other adjustments
|
42
|
|
Balance as of December 31, 2015
|
$
|
222,559
|
|
Payments made
|
(100,246
|
)
|
Adjustments to fair value of contingent consideration
|
25,682
|
|
Balance as of December 31, 2016
|
$
|
147,995
|
|
The
$25.7 million
of adjustments to the fair value of the contingent consideration liability in
2016
were due to a
$31.1 million
increase to the
Makena
contingent consideration and a
$5.4 million
decrease to the
MuGard
contingent consideration. During the second quarter of 2016, we revised our forecast of total projected net sales for
MuGard
and reassessed the fair value of the contingent consideration liability related to the MuGard Rights. As a result, we reduced our
MuGard
-related contingent consideration liability by
$5.6 million
during the second quarter of 2016. These adjustments were included in selling, general and administrative expenses in our consolidated statements of operations. We have classified
$96.8 million
of the
Makena
contingent consideration and
$0.3 million
of the
MuGard
contingent consideration as short-term liabilities in our consolidated balance sheet as of
December 31, 2016
.
The fair value of the contingent milestone payments payable by us to the former stockholders of Lumara Health was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of
Makena
from December 1, 2014 through December 31, 2019. The cash flows were discounted at a rate of
5.0%
, which we believe is reasonable given the estimated likelihood of the pay-out. As of
December 31, 2016
, the total undiscounted milestone payment amounts we could pay in connection with the Lumara Health acquisition was
$250.0 million
through December 31, 2019.
The fair value of the contingent royalty payments payable by us to Abeona under the MuGard License Agreement was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately
11%
as of
December 31, 2016
. In addition, as of
December 31, 2016
, we estimated that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from
$2.0 million
to
$6.0 million
over the remainder of the
ten
year period, which commenced on June 6, 2013, the acquisition date, which is our best estimate of the period over which we expect the majority of the asset’s cash flows to be derived.
We believe the estimated fair values of Lumara Health and the MuGard Rights are based on reasonable assumptions, however, our actual results may vary significantly from the estimated results.
Debt
We estimate the fair value of our debt obligations by using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input. As of
December 31, 2016
, the estimated fair value of our 2023 Senior Notes, Convertible Notes and 2015 Term Loan Facility (each as defined below) was
$500.0 million
,
$282.1 million
and
$336.0 million
, respectively, which differed from their carrying values. See Note R, “
Debt
”
for additional information on our debt obligations.
F. INVENTORIES
Our major classes of inventories were as follows as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
14,382
|
|
|
$
|
19,673
|
|
Work in process
|
3,924
|
|
|
1,985
|
|
Finished goods
|
18,952
|
|
|
18,987
|
|
Total inventories
|
$
|
37,258
|
|
|
$
|
40,645
|
|
Total inventories as of
December 31, 2016
decreased by
$3.4 million
as compared to
2015
primarily due to inventory sold to customers, offset by new manufacturing activities during the year.
G. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Land
|
$
|
700
|
|
|
$
|
700
|
|
Land improvements
|
300
|
|
|
300
|
|
Building and improvements
|
9,500
|
|
|
9,500
|
|
Computer equipment and software
|
13,866
|
|
|
13,193
|
|
Furniture and fixtures
|
2,401
|
|
|
1,725
|
|
Leasehold improvements
|
3,718
|
|
|
1,717
|
|
Laboratory and production equipment
|
6,449
|
|
|
5,683
|
|
Construction in progress
|
1,619
|
|
|
786
|
|
|
38,553
|
|
|
33,604
|
|
Less: accumulated depreciation
|
(14,093
|
)
|
|
(4,879
|
)
|
Property, plant and equipment, net
|
$
|
24,460
|
|
|
$
|
28,725
|
|
During
2016
,
2015
and
2014
, depreciation expense was
$9.2 million
,
$3.9 million
and
$0.5 million
, respectively.
H. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Our goodwill balance consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
$
|
205,824
|
|
Goodwill acquired through CBR acquisition
|
441,075
|
|
Measurement period adjustments related to Lumara Health acquisition
|
(7,711
|
)
|
Balance as of December 31, 2015
|
639,188
|
|
Measurement period adjustments related to CBR acquisition
|
296
|
|
Balance as of December 31, 2016
|
$
|
639,484
|
|
Our
$639.5 million
goodwill balance consisted of
$198.1 million
of goodwill acquired through the November 2014 Lumara Health acquisition and
$441.4 million
acquired through the August 2015 CBR acquisition. During
2016
, the CBR goodwill increased by
$0.3 million
related to measurement period net tax adjustments. These measurement period adjustments have been reflected as current period adjustments in accordance with ASU 2015-16. As of
December 31, 2016
, we had
no
accumulated impairment losses related to goodwill.
Intangible Assets
As of
December 31, 2016
and
2015
, our identifiable intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
Amortization
|
|
Impairments
|
|
Net
|
|
Cost
|
|
Amortization
|
|
Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Makena
base technology
|
$
|
797,100
|
|
|
$
|
128,732
|
|
|
$
|
—
|
|
|
$
|
668,368
|
|
|
$
|
797,100
|
|
|
$
|
56,540
|
|
|
$
|
740,560
|
|
CBR customer relationships
|
297,000
|
|
|
13,590
|
|
|
—
|
|
|
283,410
|
|
|
297,000
|
|
|
1,061
|
|
|
295,939
|
|
CBR Favorable lease
|
358
|
|
|
119
|
|
|
239
|
|
|
—
|
|
|
358
|
|
|
63
|
|
|
295
|
|
MuGard Rights
|
16,893
|
|
|
1,169
|
|
|
15,724
|
|
|
—
|
|
|
16,893
|
|
|
1,016
|
|
|
15,877
|
|
|
1,111,351
|
|
|
143,610
|
|
|
15,963
|
|
|
951,778
|
|
|
1,111,351
|
|
|
58,680
|
|
|
1,052,671
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Makena
IPR&D
|
79,100
|
|
|
—
|
|
|
—
|
|
|
79,100
|
|
|
79,100
|
|
|
—
|
|
|
79,100
|
|
CBR trade names and trademarks
|
65,000
|
|
|
—
|
|
|
3,700
|
|
|
61,300
|
|
|
65,000
|
|
|
—
|
|
|
65,000
|
|
Total intangible assets
|
$
|
1,255,451
|
|
|
$
|
143,610
|
|
|
$
|
19,663
|
|
|
$
|
1,092,178
|
|
|
$
|
1,255,451
|
|
|
$
|
58,680
|
|
|
$
|
1,196,771
|
|
As of
December 31, 2016
, the weighted average remaining amortization period for our finite-lived intangible assets was approximately
8.5
years.
The
Makena
base technology and IPR&D intangible assets were acquired in November 2014 in connection with our acquisition of Lumara Health. Amortization of the
Makena
base technology asset is being recognized using an economic consumption model over
20 years
from the acquisition date, which we believe is an appropriate amortization period due to the estimated economic lives of the product rights and related intangibles.
The CBR intangible assets (the CBR customer relationships, favorable lease and trade names and trademarks) were acquired in August 2015 in connection with our acquisition of CBR. Amortization of the CBR customer relationships is being recognized using an estimated useful life of
20 years
from the acquisition date, which we believe is an appropriate amortization period due to the estimated economic lives of the CBR intangible assets. The favorable lease was being amortized on a straight-line basis over the remaining term of the lease. On May 4, 2016, we entered into a sublease arrangement for a portion of our CBR office space in San Bruno, California with a sublessee at a rate lower than the market rate used to determine the favorable lease intangible asset. We reevaluated the favorable lease asset based on the negotiated sublease rate, resulting in an impairment charge for the full
$0.2 million
net intangible asset in 2016. In addition, as part of our annual impairment test, we recorded an impairment charge of
$3.7 million
in the fourth quarter of
2016
related to the impairment of a portion of the CBR trade names and trademarks indefinite-lived intangible asset based on a revised long-term revenue forecast for CBR.
The MuGard Rights were acquired from Abeona in June 2013. Amortization of the MuGard Rights was being recognized using an economic consumption model over
ten years
from the acquisition date, which represented our best estimate of the period over which we expected the majority of the asset’s cash flows to be derived. Based on interactions with government payors during 2016, we determined that broader reimbursement coverage for
MuGard
by was unlikely and we assessed the MuGard Rights for potential impairment. From this assessment, we concluded that based on the lack of broad reimbursement and insurance coverage for
MuGard
and the resulting decrease in expected revenues and cash flows, the projected undiscounted cash flows were less than the book value, indicating impairment of this intangible asset. As a result of an analysis of the fair value of the net MuGard Rights intangible asset as compared to its recorded book value, we recognized an impairment charge for the full
$15.7 million
net intangible asset in the second quarter of 2016.
See Note C, “
Business Combinations
,” and Note Q, “
Collaboration, License and Other Strategic Agreements
,” for additional information on our intangible assets.
Total amortization expense for
2016
,
2015
and
2014
, was
$84.9 million
,
$53.5 million
and
$5.1 million
, respectively. Amortization expense for the
Makena
base technology and the MuGard Rights is recorded in cost of product sales in our consolidated statements of operations. Amortization expense for the CBR related intangibles is recorded in selling, general and administrative expenses in our consolidated statements of operations. We expect amortization expense related to our finite-lived intangible assets to be as follows (in thousands):
|
|
|
|
|
|
Period
|
|
Estimated Amortization Expense
|
Year Ending December 31, 2017
|
|
$
|
119,900
|
|
Year Ending December 31, 2018
|
|
81,433
|
|
Year Ending December 31, 2019
|
|
48,283
|
|
Year Ending December 31, 2020
|
|
46,845
|
|
Year Ending December 31, 2021
|
|
46,767
|
|
Thereafter
|
|
608,550
|
|
Total
|
|
$
|
951,778
|
|
I. CURRENT AND LONG-TERM LIABILITIES
Accrued Expenses
Accrued expenses consisted of the following as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Commercial rebates, fees and returns
|
$
|
89,466
|
|
|
$
|
45,161
|
|
Professional, license, and other fees and expenses
|
34,962
|
|
|
27,070
|
|
Interest expense
|
16,683
|
|
|
18,411
|
|
Salaries, bonuses, and other compensation
|
14,823
|
|
|
12,838
|
|
Restructuring expense
|
74
|
|
|
2,883
|
|
Total accrued expenses
|
$
|
156,008
|
|
|
$
|
106,363
|
|
Deferred Revenues
Our deferred revenue balances as of
December 31, 2016
and
2015
were related to our CBR Services revenues and included: (a) amounts collected in advance of unit processing and (b) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts.
Other Long-Term Liabilities
Other long-term liabilities at
December 31, 2016
and
2015
consisted of deferred rent related to the lease of our principal executive offices in Waltham, Massachusetts. In addition, other long-term liabilities include future payments to be made to certain states in compliance with a 2011 Lumara Health Settlement Agreement with the Department of Justice, which resolved certain claims under the qui tam provisions of the False Claims Act.
J. INCOME TAXES
For the years ended
December 31,
2016
,
2015
, and
2014
, all of our profit or loss before income taxes was from U.S. operations. The income tax expense (benefit) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
4,259
|
|
|
2,058
|
|
|
—
|
|
Total current
|
$
|
4,259
|
|
|
$
|
2,058
|
|
|
$
|
—
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
9,815
|
|
|
$
|
9,819
|
|
|
$
|
(142,884
|
)
|
State
|
(2,536
|
)
|
|
(4,812
|
)
|
|
(10,275
|
)
|
Total deferred
|
$
|
7,279
|
|
|
$
|
5,007
|
|
|
$
|
(153,159
|
)
|
Total income tax expense (benefit)
|
$
|
11,538
|
|
|
$
|
7,065
|
|
|
$
|
(153,159
|
)
|
The reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Statutory U.S. federal tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
(34.0
|
)%
|
State taxes, net of federal benefit
|
6.4
|
|
|
0.1
|
|
|
(7.9
|
)
|
Equity-based compensation expense
|
34.0
|
|
|
0.4
|
|
|
10.6
|
|
Contingent consideration
|
69.9
|
|
|
4.7
|
|
|
3.1
|
|
Transaction costs
|
—
|
|
|
3.9
|
|
|
9.7
|
|
Other permanent items, net
|
21.2
|
|
|
3.2
|
|
|
3.2
|
|
Tax credits
|
(32.3
|
)
|
|
(1.7
|
)
|
|
(3.0
|
)
|
Write-down of acquired state net operating losses
|
114.2
|
|
|
—
|
|
|
—
|
|
Valuation allowance
|
(115.2
|
)
|
|
(28.0
|
)
|
|
(864.9
|
)
|
Other, net
|
(5.8
|
)
|
|
0.1
|
|
|
—
|
|
Effective tax rate
|
127.4
|
%
|
|
17.7
|
%
|
|
(883.2
|
)%
|
For the year ended
December 31, 2016
, we recognized an income tax expense of
$11.5 million
, representing an effective tax rate of
127.4%
. The difference between the expected statutory federal tax rate of
35.0%
and the effective tax rate of
127.4%
for the year ended
December 31, 2016
, was primarily attributable to the impact of contingent consideration associated with Lumara Health, equity-based compensation expenses and other permanent items, including meals and entertainment expense, officers compensation and
Makena-
related expenses, offset by the benefit of the federal research and development and orphan drug tax credits generated during the year. The effective tax rate for the year-ended
December 31, 2016
reflected the significance of these permanent differences in relation to the pre-tax income for the year-ended
December 31, 2016
. As a result of state tax planning during 2016, we analyzed the acquired state net operating losses (“NOLs”) and determined that a significant portion were not utilizable and should be written down. This write-down was offset with a decrease in the valuation allowance as we had previously determined that it was more likely than not that these NOLs would not be utilized.
For the year ended
December 31, 2015
, we recognized income tax expense of
$7.1 million
representing an effective tax rate of
17.7%
. The difference between the expected statutory federal tax rate of
35.0%
and the
17.7%
effective tax rate for 2015 was primarily attributable to the impact of a valuation allowance release related to certain deferred tax assets, partially offset by non-deductible transaction costs associated with the acquisition of CBR, and non-deductible contingent consideration expense associated with Lumara Health.
We released a portion of our valuation allowance for the year ended
December 31, 2014
, due to taxable temporary differences available as a source of income as a result of the Lumara Health acquisition. As of
December 31, 2014
, we maintained a partial valuation allowance as we benefited only those deferred tax assets to the extent that existing taxable temporary differences could be used as a source of future income to realize the benefits of those deferred tax assets. During the
year ended
December 31, 2015
, we achieved a positive income position, and also acquired additional taxable temporary differences available as a source of income as a result of the CBR acquisition. Based primarily on this evidence, we concluded that as of
December 31, 2015
, the majority of our deferred tax assets are more likely than not to be realized.
For the year ended
December 31, 2014
, we recognized an income tax benefit of
$153.2 million
representing an effective tax rate of
(883.2)%
. The difference between the statutory tax rate and the effective tax rate was attributable to a non-recurring benefit of
$153.2 million
for the release of a portion of the valuation allowance due to taxable temporary differences available as a source of income to realize the benefit of certain pre-existing AMAG deferred tax assets as a result of the Lumara Health acquisition. Excluding the impact of this item, our overall tax provision and effective tax rate would have been zero. Other factors resulting in a difference between the statutory tax rate and the effective tax rate included certain non-deductible stock compensation expenses, non-deductible transaction costs and contingent consideration associated with the acquisition of Lumara Health, and other non-deductible expenses for tax purposes.
See Note C, “
Business Combinations
,” for more information on the Lumara Health and CBR acquisitions.
Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. As of
December 31, 2015
, we elected to early adopt new guidance issued by the FASB in November 2015 (ASU 2015-17), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The components of our deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Assets
|
|
|
|
Net operating loss carryforwards
|
$
|
116,275
|
|
|
$
|
172,944
|
|
Tax credit carryforwards
|
9,415
|
|
|
6,262
|
|
Deferred revenue
|
1,811
|
|
|
626
|
|
Equity-based compensation expense
|
8,045
|
|
|
5,464
|
|
Capitalized research & development
|
18,284
|
|
|
25,216
|
|
Reserves
|
8,018
|
|
|
8,900
|
|
Contingent consideration
|
4,140
|
|
|
1,258
|
|
Other
|
9,769
|
|
|
9,636
|
|
Liabilities
|
|
|
|
Property, plant and equipment depreciation
|
(2,145
|
)
|
|
(2,844
|
)
|
Intangible assets and inventory
|
(367,667
|
)
|
|
(400,357
|
)
|
Debt instruments
|
(1,040
|
)
|
|
(1,213
|
)
|
Other
|
(542
|
)
|
|
(3,178
|
)
|
|
(195,637
|
)
|
|
(177,286
|
)
|
Valuation allowance
|
(1,429
|
)
|
|
(11,859
|
)
|
Net deferred tax liabilities
|
$
|
(197,066
|
)
|
|
$
|
(189,145
|
)
|
The valuation allowance decreased by approximately
$10.4 million
for the year ended
December 31, 2016
, which was primarily attributable to the write-down of the acquired Lumara Health state NOLs. As a result of state tax planning during 2016, we analyzed the acquired state NOLs and determined that a significant portion were not utilizable and should be written down. We have considered several sources of taxable income in making our valuation allowance assessment, including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and forecasted future income. At
December 31, 2016
, the remaining valuation allowance related primarily to our federal capital loss carryforward and our state NOL carryforwards acquired from Lumara Health.
At
December 31, 2016
, we had federal and state NOL carryforwards of approximately
$377.6 million
and
$122.0 million
, respectively, of which
$281.1 million
and
$19.6 million
federal and state NOL carryforwards, were acquired as part of the Lumara Health transaction, respectively. Also included in the state NOL carryforwards at
December 31, 2016
were
$20.1
million
of state NOL carryforwards which were acquired as part of the CBR transaction. The state NOL carryforwards acquired from Lumara Health are subject to a full valuation allowance as it is not more likely than not that they will be realized. We also had federal capital loss carryforwards of
$1.5 million
to offset future capital gains. At
December 31, 2016
,
$58.3 million
and
$33.2 million
of federal and state NOLs, respectively, related to excess equity-based compensation tax deductions, the benefits for which will be recorded to additional paid-in capital when recognized through a reduction of cash taxes paid. The federal and state NOLs expire at various dates through
2036
. The capital loss carryforwards will expire through
2021
. We have federal tax credits of approximately
$8.6 million
to offset future tax liabilities of which
$1.5 million
were acquired as part of the Lumara Health transaction. We have state tax credits of
$1.2 million
to offset future tax liabilities. These federal and state tax credits will expire periodically through
2036
if not utilized.
Utilization of our NOLs and research and development (“R&D”) credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (“Section 382”) as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change as defined by Section 382 results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than
50%
over a
three
-year period. Since our formation, we have raised capital through the issuance of capital stock on several occasions. These financings, combined with the purchasing shareholders’ subsequent disposition of those shares, could result in a change of control, as defined by Section 382. We conducted an analysis under Section 382 to determine if historical changes in ownership through
December 31, 2016
would limit or otherwise restrict our ability to utilize these NOL and R&D credit carryforwards. As a result of this analysis, we do not believe there are any significant limitations on our ability to utilize these carryforwards. The NOL's and tax credits acquired from Lumara health are subject to restrictions under Section 382. These restricted NOL's and credits may be utilized subject to an annual limitation. While we identified two ownership changes associated with the attributes acquired as part of the Lumara Health transaction and determined these attributes are subject to an annual limitation, we do not expect the limitations to result in expiration of these attributes prior to utilization. However, future changes in ownership after
December 31, 2016
could affect the limitation in future years and any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization.
Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. As of
December 31, 2016
, we had
$13.3 million
of unrecognized tax benefits, of which
$13.0 million
would impact the effective tax rate, if recognized. As of December 31, 2015 we had
$12.7 million
of unrecognized tax benefits, of which
$12.4 million
would impact the effective tax rate, if recognized. We had
no
uncertain tax benefits recorded as of December 31, 2014.
A reconciliation of our changes in uncertain tax positions is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Uncertain tax benefits at the beginning of the year
|
$
|
12,695
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions based on tax positions related to the current year
|
300
|
|
|
12,695
|
|
|
—
|
|
Additions for tax positions from prior years
|
379
|
|
|
—
|
|
|
—
|
|
Subtractions for tax positions from prior years
|
(44
|
)
|
|
—
|
|
|
—
|
|
Uncertain tax benefits at the end of the year
|
$
|
13,330
|
|
|
$
|
12,695
|
|
|
$
|
—
|
|
During the year ended
December 31, 2016
, our unrecognized tax benefits increased by
$0.6 million
due primarily to tax reserves established on R&D tax credits.
During the year ended
December 31, 2015
, we completed studies of our historical R&D tax credits and other tax attributes, including those acquired in connection with the Lumara Health transaction. The increase in our unrecognized tax benefits is attributable to the results of these studies, which identified uncertain tax benefits of
$12.7 million
related to federal and state R&D credits and NOL carryforwards. These amounts were recorded as a reduction to our deferred tax assets as of
December 31, 2015
. A valuation allowance was recorded against these attributes at
December 31, 2014
, therefore there was
no
impact to income tax expense as a result of recording the unrecognized tax benefits during the year ended
December 31, 2015
.
We have recorded minimal interest or penalties on unrecognized benefits since inception. We recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. We do not expect our uncertain tax benefits to change significantly in the next 12 months.
The statute of limitations for assessment by the Internal Revenue Service (the “IRS”) and most state tax authorities is
closed for tax years prior to
December 31, 2013
, although carryforward attributes that were generated prior to tax year
2013
may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. We file income tax returns in the U.S. federal and various state jurisdictions. There are currently
no
federal or state audits in progress.
K. ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
The table below presents information about the effects of net income (loss) of significant amounts reclassified out of accumulated other comprehensive income (loss), net of tax, associated with unrealized gains (losses) on securities during
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
(4,205
|
)
|
|
$
|
(3,617
|
)
|
Other comprehensive income (loss) before reclassifications
|
261
|
|
|
(4
|
)
|
Reclassification adjustment for gains (losses) included in net income (loss)
|
106
|
|
|
(584
|
)
|
Ending balance
|
$
|
(3,838
|
)
|
|
$
|
(4,205
|
)
|
L. EQUITY-BASED COMPENSATION
We currently maintain
four
equity compensation plans, namely our Third Amended and Restated 2007 Equity Incentive Plan, as amended (the “2007 Plan”), our Amended and Restated 2000 Stock Plan (the “2000 Plan”), the Lumara Health Inc. Amended and Restated 2013 Incentive Compensation Plan (the “Lumara Health 2013 Plan”) and our 2015 Employee Stock Purchase Plan (“2015 ESPP”). All outstanding stock options granted under each of our equity compensation plans other than our 2015 ESPP (discussed below) have an exercise price equal to the closing price of a share of our common stock on the grant date.
Our 2007 Plan was originally approved by our stockholders in November 2007, and succeeded our 2000 Plan, under which
no
further grants may be made. Any shares that remained available for issuance under the 2000 Plan as of the date of adoption of the 2007 Plan are included in the number of shares that may be issued under the 2007 Plan. Any shares subject to outstanding awards granted under the 2000 Plan that expire or terminate for any reason prior to exercise will be added to the total number of shares of our stock available for issuance under the 2007 Plan. The total number of shares available for issuance under the 2007 Plan is
6,995,325
. As of
December 31, 2016
, there were
1,786,672
shares remaining available for issuance under the 2007 Plan, which excludes shares subject to outstanding awards under the 2000 Plan. All outstanding options under the 2007 Plan have either a
seven
or
ten
-year term and all outstanding options under the 2000 Plan have a
ten
-year term.
In November 2014, we assumed the Lumara Health 2013 Plan in connection with the acquisition of Lumara Health. The total number of shares issuable pursuant to awards under this plan as of the effective date of the acquisition and after taking into account any adjustments as a result of the acquisition, was
200,000
shares. As of
December 31, 2016
, there were
9,710
shares remaining available for issuance under the Lumara Health 2013 Plan, which are available for grants to certain employees, officers, directors, consultants, and advisors of AMAG and our subsidiaries who are newly-hired or who previously performed services for Lumara Health. All outstanding options under the Lumara Health 2013 Plan have a
ten
-year term.
The 2007 Plan and the Lumara Health 2013 Plan provides for the grant of stock options, RSUs, restricted stock, stock, stock appreciation rights and other equity interests in our company. We generally issue common stock from previously authorized but unissued shares to satisfy option exercises and restricted stock awards. The terms and conditions of each award are determined by our Board of Directors (the “Board”) or the Compensation Committee of our Board. The terms and conditions of each award assumed in the acquisition of Lumara Health were previously determined by Lumara Health prior to being assumed in connection with the acquisition, subject to applicable adjustments made in connection with such acquisition.
In May 2015, our stockholders approved our 2015 ESPP, which authorizes the issuance of up to
200,000
shares of our common stock to eligible employees. The terms of the 2015 ESPP permit eligible employees to purchase shares (subject to certain plan and tax limitations) in semi-annual offerings through payroll deductions of up to an annual maximum of
10%
of the employee’s “compensation” as defined in the 2015 ESPP. Shares are purchased at a price equal to
85%
of the fair market value of our common stock on either the first or last business day of the offering period, whichever is lower. Plan periods consist of
six
-month periods typically commencing June 1 and ending November 30 and commencing December 1 and ending May 31. As of
December 31, 2016
,
79,324
shares have been issued under our 2015 ESPP.
During
2016
, we also granted equity through inducement grants outside of these plans to certain employees to induce them to accept employment with us (collectively, “Inducement Grants”). The options were granted at an exercise price equal to the fair market value of a share of our common stock on the respective grant dates and will be exercisable in
four
equal annual installments beginning on the first anniversary of the respective grant dates. The RSU grants will vest in
three
equal annual installments beginning on the first anniversary of the respective grant dates. The foregoing grants were made pursuant to inducement grants outside of our stockholder approved equity plans as permitted under the NASDAQ Stock Market listing rules. We assessed the terms of these awards and determined there was no possibility that we would have to settle these awards in cash and therefore, equity accounting was applied.
Stock Options
The following table summarizes stock option activity during
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Equity
|
|
2000 Equity
|
|
2013 Lumara
|
|
Inducement
|
|
|
|
Plan
|
|
Plan
|
|
Equity Plan
|
|
Grants
|
|
Total
|
Outstanding at December 31, 2015
|
1,963,162
|
|
|
14,040
|
|
|
96,000
|
|
|
830,975
|
|
|
2,904,177
|
|
Granted
|
581,648
|
|
|
—
|
|
|
92,400
|
|
|
110,000
|
|
|
784,048
|
|
Exercised
|
(134,455
|
)
|
|
—
|
|
|
—
|
|
|
(21,250
|
)
|
|
(155,705
|
)
|
Expired or terminated
|
(251,533
|
)
|
|
(8,840
|
)
|
|
(54,219
|
)
|
|
(104,750
|
)
|
|
(419,342
|
)
|
Outstanding at December 31, 2016
|
2,158,822
|
|
|
5,200
|
|
|
134,181
|
|
|
814,975
|
|
|
3,113,178
|
|
Restricted Stock Units
The following table summarizes RSU activity during
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Equity
|
|
2000 Equity
|
|
2013 Lumara
|
|
Inducement
|
|
|
|
Plan
|
|
Plan
|
|
Equity Plan
|
|
Grants
|
|
Total
|
Outstanding at December 31, 2015
|
446,330
|
|
|
—
|
|
|
52,350
|
|
|
155,675
|
|
|
654,355
|
|
Granted
|
659,618
|
|
|
—
|
|
|
1,500
|
|
|
64,500
|
|
|
725,618
|
|
Vested
|
(209,599
|
)
|
|
—
|
|
|
(16,749
|
)
|
|
(74,219
|
)
|
|
(300,567
|
)
|
Expired or terminated
|
(122,545
|
)
|
|
—
|
|
|
(9,407
|
)
|
|
(10,500
|
)
|
|
(142,452
|
)
|
Outstanding at December 31, 2016
|
773,804
|
|
|
—
|
|
|
27,694
|
|
|
135,456
|
|
|
936,954
|
|
Equity-based compensation expense
Equity-based compensation expense for
2016
,
2015
and
2014
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cost of product sales and services
|
$
|
520
|
|
|
$
|
371
|
|
|
$
|
122
|
|
Research and development
|
3,476
|
|
|
2,992
|
|
|
1,596
|
|
Selling, general and administrative
|
18,547
|
|
|
13,874
|
|
|
6,907
|
|
Total equity-based compensation expense
|
$
|
22,543
|
|
|
$
|
17,237
|
|
|
$
|
8,625
|
|
Income tax effect
|
(6,232
|
)
|
|
(4,885
|
)
|
|
—
|
|
After-tax effect of equity-based compensation expense
|
$
|
16,311
|
|
|
$
|
12,352
|
|
|
$
|
8,625
|
|
We reduce the compensation expense being recognized to account for estimated forfeitures, which we estimate based primarily on historical experience, adjusted for unusual events such as corporate restructurings, which may result in higher than expected turnover and forfeitures. Under current accounting guidance, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
As a result of our historical net losses, there was
no
income tax effect on our equity-based compensation expense for 2014.
We have not recognized any excess tax benefits from equity-based compensation in additional paid-in capital because the excess tax benefits have not yet reduced cash taxes paid. Accordingly, there was
no
impact recorded in cash flows from financing activities or cash flows from operating activities as reported in the accompanying consolidated statements of cash flows.
The following table summarizes the weighted average assumptions we utilized for purposes of valuing grants of options to our employees and non-employee directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
Non-Employee
|
|
|
|
Non-Employee
|
|
|
|
Non-Employee
|
|
Employees
|
|
Directors
|
|
Employees
|
|
Directors
|
|
Employees
|
|
Directors
|
Risk free interest rate (%)
|
1.32
|
|
1.10
|
|
1.55
|
|
1.24
|
|
1.56
|
|
1.28
|
Expected volatility (%)
|
49
|
|
54
|
|
47
|
|
46
|
|
47
|
|
46
|
Expected option term (years)
|
5.00
|
|
3.00
|
|
5.00
|
|
4.00
|
|
5.00
|
|
4.00
|
Dividend yield
|
none
|
|
none
|
|
none
|
|
none
|
|
none
|
|
none
|
Risk free interest rates utilized are based upon published U.S. Treasury yields at the date of the grant for the expected option term. During
2016
,
2015
and
2014
, we estimated our expected stock price volatility by using the historical volatility of our own common stock price over the prior period equivalent to our expected option term, in order to better reflect expected future volatility. To compute the expected option term, we analyze historical exercise experience as well as expected stock option exercise patterns.
The following table summarizes details regarding stock options granted under our equity incentive plans for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
($ in thousands)
|
Outstanding at beginning of year
|
2,904,177
|
|
|
$
|
34.97
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
784,048
|
|
|
24.59
|
|
|
—
|
|
|
—
|
|
Exercised
|
(155,705
|
)
|
|
17.99
|
|
|
—
|
|
|
—
|
|
Expired and/or forfeited
|
(419,342
|
)
|
|
44.10
|
|
|
—
|
|
|
—
|
|
Outstanding at end of year
|
3,113,178
|
|
|
$
|
31.97
|
|
|
7.4
|
|
|
$
|
28,113
|
|
Outstanding at end of year - vested and unvested expected to vest
|
2,915,930
|
|
|
$
|
31.53
|
|
|
7.4
|
|
|
$
|
27,038
|
|
Exercisable at end of year
|
1,536,405
|
|
|
$
|
27.92
|
|
|
6.3
|
|
|
$
|
17,928
|
|
The weighted average grant date fair value of stock options granted during
2016
,
2015
and
2014
was
$10.63
, $
23.57
and
$10.63
, respectively. A total of
822,775
stock options vested during
2016
. The aggregate intrinsic value of options exercised during
2016
,
2015
and
2014
, excluding purchases made pursuant to our employee stock purchase plans, measured as of the exercise date, was approximately
$1.5 million
,
$31.2 million
and
$5.9 million
, respectively. The intrinsic value of a stock option is the amount by which the fair market value of the underlying stock on a specific date exceeds the exercise price of the common stock option.
The following table summarizes details regarding RSUs granted under our equity incentive plans for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Restricted Stock Units
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at beginning of year
|
654,355
|
|
|
$
|
36.90
|
|
Granted
|
725,618
|
|
|
22.28
|
|
Vested
|
(300,567
|
)
|
|
30.38
|
|
Forfeited
|
(142,452
|
)
|
|
26.66
|
|
Outstanding at end of year
|
936,954
|
|
|
$
|
28.78
|
|
Outstanding at end of year and expected to vest
|
781,165
|
|
|
$
|
28.79
|
|
The weighted average grant date fair value of RSUs granted during
2016
,
2015
and
2014
was
$22.28
,
$52.71
and
$22.88
, respectively. The total fair value of RSUs that vested during
2016
,
2015
and
2014
was
$9.1 million
,
$3.5 million
and
$2.7 million
, respectively.
At
December 31, 2016
, the amount of unrecorded equity-based compensation expense for both option and RSU awards, net of forfeitures, attributable to future periods was approximately
$37.7 million
. Of this amount,
$21.1 million
was associated with stock options and is expected to be amortized on a straight-line basis to expense over a weighted average period of approximately
2.5
years, and
$16.6 million
was associated with RSUs and is expected to be amortized on a straight-line basis to expense over a weighted average period of approximately
1.8
years. Such amounts will be amortized primarily to research and development or selling, general and administrative expense. These future estimates are subject to change based upon a variety of future events, which include, but are not limited to, changes in estimated forfeiture rates, employee turnover, and the issuance of new stock options and other equity-based awards.
M. EMPLOYEE SAVINGS PLAN
We provide a 401(k) Plan to our employees by which they may defer compensation for income tax purposes under Section 401(k) of the Internal Revenue Code. Each employee may elect to defer a percentage of his or her salary up to a specified maximum. Our 401(k) Plan provides, among other things, for a company contribution of
3%
of each employee’s combined salary and certain other compensation for the plan year. Salary deferred by employees and contributions by us to the 401(k) Plan are not taxable to employees until withdrawn from the 401(k) Plan and contributions are deductible by us when made. The amount of our company contribution for the 401(k) Plan was
$1.9 million
,
$1.8 million
and
$0.8 million
for
2016
,
2015
and
2014
, respectively.
N. STOCKHOLDERS’ EQUITY
Preferred Stock
Our certificate of incorporation authorizes our Board to issue preferred stock from time to time in one or more series. The rights, preferences, restrictions, qualifications and limitations of such stock are determined by our Board. In September 2009, our Board adopted a shareholder rights plan (the “Rights Agreement”).
On February 11, 2014, in connection with the pricing of the Convertible Notes, we and American Stock Transfer & Trust Company, LLC (the “Rights Agent”) entered into an amendment (the “Convertible Notes Amendment”) to the Rights Agreement. The Convertible Notes Amendment, among other things, provides that, notwithstanding anything in the Rights Agreement to the contrary, each of JPMorgan Chase Bank, National Association, London Branch, Morgan Stanley & Co. International plc and Royal Bank of Canada (together the “Call Spread Counterparties”) shall be deemed not to beneficially own any common shares underlying, or synthetically owned pursuant to, any warrant held by such Call Spread Counterparty, any common shares held by such Call Spread Counterparty (or any affiliate thereof) to hedge its exposure with respect to the convertible bond hedges and warrants, any common shares underlying, or synthetically owned pursuant to, any Derivative Securities (as such term is defined in the Rights Agreement), including the Convertible Notes, held, or entered into, by such Call Spread Counterparty (or any affiliate thereof) to hedge its exposure with respect to the convertible bond hedges and warrants or any Convertible Notes held by such Call Spread Counterparty (or any affiliate thereof) in its capacity as underwriter in the notes offering.
On September 26, 2014, we adopted another amendment to our Rights Agreement (which was approved by our stockholders at our 2015 annual meeting of stockholders) to help preserve our substantial tax assets associated with NOLs and other tax benefits by deterring certain stockholders from increasing their percentage ownership in our stock (the “NOL Amendment”). The NOL Amendment shortened the expiration date of the Rights Agreement from September 17, 2019 to March 31, 2017, decreased the exercise price of the rights from
$250.00
to
$80.00
in connection therewith, and made changes to the definition of “beneficial ownership,” as used in the Rights Agreement, as amended, to make it consistent with how ownership is defined under Section 382 of the Internal Revenue Code of 1986, as amended. The original Rights Agreement provided for a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of our common stock, which dividend was paid on September 17, 2009. Rights will separate from the common stock and will become exercisable upon the earlier of (a) the close of business on the 10th calendar day following the first public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of
4.99%
or more (which percentage had been
20%
before the NOL Amendment) of the outstanding shares of common stock, other than as a result of repurchases of stock by us or certain inadvertent actions by a stockholder or (b) the close of business on the 10th business day (or such later day as the Board may determine) following the commencement of a tender offer or exchange offer that could result, upon its consummation, in a person or group becoming the beneficial owner of
4.99%
or more (which percentage had been
20%
before the NOL Amendment) of the outstanding shares of common stock (the earlier of such dates being herein referred to as the “Distribution Date”).
The NOL Amendment provides that the Rights are not exercisable until the Distribution Date and will expire at the earliest of: (a) March 31, 2017; (b) the time at which the Rights are redeemed or exchanged; (c) the effective date of the repeal of Section 382 or any successor statute if the Board determines that the NOL Rights Plan is no longer necessary or desirable for the preservation of our tax benefits; (d) the first day of our taxable year to which the Board determines that no tax benefits may be carried forward; or (e) September 26, 2015 if stockholder approval of the NOL Amendment had not been obtained by or on such date.
There can be no assurance that the NOL Amendment will result in us being able to preserve all or any of the substantial tax assets associated with NOLs and other tax benefits.
Common Stock Transactions
In August 2015, we sold approximately
3.6 million
shares of our common stock at a public offering price of
$63.75
per share, resulting in net proceeds to us of approximately
$218.6 million
.
In March 2015, we sold approximately
4.6 million
shares of our common stock at a public offering price of
$44.00
per share, resulting in net proceeds to us of approximately
$188.8 million
.
At our 2015 Annual Meeting, our stockholders approved a proposal to amend our Certificate of Incorporation, as amended and restated and then currently in effect, to increase the number of authorized shares of our common stock from
58,750,000
shares to
117,500,000
shares (which amendment was subsequently filed with the Secretary of State of the State of Delaware).
Share Repurchase Program
In January 2016, we announced that our board of directors authorized a program to repurchase up to
$60.0 million
in shares of our common stock. The repurchase program does not have an expiration date and may be suspended for periods or discontinued at any time. Under the program, we may purchase our stock from time to time at the discretion of management in the open market or in privately negotiated transactions. The number of shares repurchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, along with working capital requirements, general business conditions and other factors. We may also from time to time establish a trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934 to facilitate purchases of our shares under this program. During
2016
, we repurchased and retired
831,744
shares of common stock under this repurchase program for
$20.0 million
, at an average purchase price of
$24.05
per share.
O. BUSINESS SEGMENTS
We have determined that we conduct our operations in
one
business segment: the manufacture, development and commercialization of products and services for use in treating various conditions, with a focus on women’s health, anemia management and cancer supportive care. Long-lived assets consist entirely of property, plant and equipment and are located in the U.S. for all periods presented.
P. COMMITMENTS AND CONTINGENCIES
Commitments
Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. These include commitments related to our facility leases, purchases of inventory and other purchases related to our products, debt obligations, and other purchase obligations.
Facility Lease Obligations
In June 2013, we entered into a lease agreement with BP Bay Colony LLC (the “Landlord”) for the lease of certain real property located at 1100 Winter Street, Waltham, Massachusetts (the “Waltham Premises”) for use as our principal executive offices. Beginning in September 2013, the initial term of the lease is five years and two months with
one
five
-year extension term at our option. During 2015, we entered into several amendments to the original lease to add additional space and to extend the term of the original lease to June 2021. In addition to base rent, we are also required to pay a proportionate share of the Landlord’s operating costs.
The Landlord agreed to pay for certain agreed-upon improvements to the Waltham Premises and we agreed to pay for any increased costs due to changes by us to the agreed-upon plans. We record all tenant improvements paid by us as leasehold improvements and amortize these improvements over the shorter of the estimated useful life of the improvement or the remaining life of the initial lease term. Amortization of leasehold improvements is included in depreciation expense.
In addition, in connection with our facility lease for the Waltham Premises, in June 2013 we delivered to the Landlord a security deposit of
$0.4 million
in the form of an irrevocable letter of credit. This security deposit was increased to
$0.6 million
in 2015. The cash securing this letter of credit is classified on our balance sheet as of
December 31, 2016
and
2015
as a long-term asset and is restricted in its use.
We lease certain real property located at 1200 Bayhill Drive, San Bruno, California. The lease expires in September 2017.
Facility-related rent expense, net of deferred rent amortization, for all the leased properties was
$2.8 million
,
$1.5 million
and
$0.8 million
for
2016
,
2015
and
2014
, respectively.
Future minimum payments under our non-cancelable facility-related leases as of
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
Period
|
|
Future Minimum Lease Payments
|
Year Ending December 31, 2017
|
|
$
|
2,925
|
|
Year Ending December 31, 2018
|
|
2,123
|
|
Year Ending December 31, 2019
|
|
2,258
|
|
Year Ending December 31, 2020
|
|
2,330
|
|
Year Ending December 31, 2021
|
|
1,165
|
|
Total
|
|
$
|
10,801
|
|
Purchase Commitments
In connection with our acquisition of CBR, we have certain minimum purchase commitments associated with an agreement entered into by CBR prior to our acquisition. This agreement expires in December 2018, with the remaining amount of minimum purchase commitments totaling $
5.3 million
as of
December 31, 2016
.
Contingent Consideration Related to Business Combinations
In connection with our acquisition of Lumara Health in November 2014, we agreed to pay up to an additional
$350.0 million
, of which
$100.0 million
was paid in 2016, based on the achievement of certain sales milestones. Due to the contingent nature of these milestone payments, we cannot predict the amount or timing of such payments with certainty. See Note C, “
Business Combinations
,” for more information on the Lumara Health acquisition and related milestone payments.
Contingent Regulatory and Commercial Milestone Payments
In July 2015, we entered into an option agreement with Velo Bio, LLC, a privately-held life-sciences company (“Velo”) that granted us an option to acquire the global rights (the “DIF Rights”) to an orphan drug candidate, digoxin immune fab (“DIF”), a poly clonal antibody in clinical development for the treatment of severe preeclampsia in pregnant woman. If we exercise the option to acquire the DIF Rights, we will be responsible for payments totaling up to
$65.0 million
(including the payment of the option exercise price and the regulatory milestone payments) and up to an additional
$250.0 million
in sales milestone payments based on the achievement of annual sales milestones at targets ranging from
$100.0 million
to
$900.0 million
. See Note Q, “
Collaboration, License and Other Strategic Agreements
,” for more information on the Velo option. We anticipate Velo will begin its Phase 2b/3a clinical study in the first quarter of 2017, and as such
no
contingencies related to this agreement have been recorded in our consolidated financial statements as of
December 31, 2016
.
In connection with a development and license agreement (the “Antares Agreement”) with Antares Pharma, Inc. (“Antares”), we are required to pay royalties to Antares on net sales of the auto-injection system for use with hydroxyprogesterone caproate (the “
Makena
auto-injector”) commencing on the launch of the
Makena
auto-injector in a particular country until the
Makena
auto-injector is
no
longer sold or offered for sale in such country (the “Antares Royalty Term”). The royalty rates range from high single digit to low double digits and are tiered based on levels of net sales of the
Makena
auto-injector and decrease after the expiration of licensed patents or where there are generic equivalents to the
Makena
auto-injector being sold in a particular country. We expect to file an sNDA for approval of the
Makena
auto-injector in the second quarter of 2017.
Other Funding Commitments
As of
December 31, 2016
, we had several ongoing clinical studies in various clinical trial stages. Our most significant clinical trial expenditures were to clinical research organizations (“CROs”). The contracts with CROs are generally cancellable, with notice, at our option. We have recorded accrued expenses in our consolidated balance sheet of approximately
$10.6 million
representing expenses incurred with these organizations as of
December 31, 2016
, net of any amounts prepaid to these CROs.
Severance Arrangements
We have entered into employment agreements or other arrangements with most of our executive officers and certain other employees, which provide for the continuation of salary and certain benefits and, in certain instances, the acceleration of the vesting of certain equity awards to such individuals in the event that the individual is terminated other than for cause, as defined in the applicable employment agreements or arrangements.
Indemnification Obligations
As permitted under Delaware law, pursuant to our certificate of incorporation, by-laws and agreements with all of our current directors, executive officers, and certain of our employees, we are obligated to indemnify such individuals for certain events or occurrences while the officer, director or employee is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification obligations is not capped. Our director and officer insurance policy limits our initial exposure to
$1.5 million
and our policy provides significant coverage. As a result, we believe the estimated fair value of these indemnification obligations is likely to be immaterial.
We are also a party to a number of other agreements entered into in the ordinary course of business, which contain typical provisions and which obligate us to indemnify the other parties to such agreements upon the occurrence of certain events. Such indemnification obligations are usually in effect from the date of execution of the applicable agreement for a period equal to the applicable statute of limitations. Our aggregate maximum potential future liability under such indemnification provisions is uncertain. Except for expenses we incurred related to the Silverstrand class action lawsuit, which was settled in 2015, we have not incurred any expenses as a result of such indemnification provisions. Accordingly, we have determined that the estimated aggregate fair value of our potential liabilities under such indemnification provisions is not significant, and we have not recorded any liability related to such indemnification.
Contingencies
Legal Proceedings
We accrue a liability for legal contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. For certain matters referenced below, the liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, we will provide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, we will provide disclosure to that effect. We expense legal costs as they are incurred.
Sandoz Patent Infringement Lawsuit
On February 5, 2016, we received a Paragraph IV certification notice letter regarding an Abbreviated New Drug Application submitted to the FDA by Sandoz Inc. (“Sandoz”) requesting approval to engage in commercial manufacture, use and sale of a generic version of ferumoxytol. A generic version of
Feraheme
can be marketed only with the approval of the FDA of the respective application for such generic version. The Drug Price Competition and Patent Term Restoration Act of 1984, as amended, (the “Hatch-Waxman Act”), requires an ANDA applicant whose proposed drug is a generic version of a previously-approved drug listed in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known as the “Orange Book,” to certify to any patents listed in the Orange Book for the previously-approved drug and, in the case of a Paragraph IV certification, to notify the owner of the approved application and the relevant patent-holder. The Paragraph IV certification notice is required to contain a detailed factual and legal statement explaining the basis for the applicant’s opinion that the proposed product does not infringe the subject patents, that such patents are invalid or unenforceable, or both. If a patent infringement suit is filed within
45
days of receipt of the Paragraph IV notice, a so-called 30-month stay is triggered that generally prevents the FDA from approving the ANDA until the expiration of the 30-month stay period, conclusion of the litigation in the generic applicant’s favor, or expiration of the patent, whichever is earlier. In its notice letter, Sandoz claims that our ferumoxytol patents are invalid, unenforceable and/or not infringed by Sandoz’s manufacture, use, sale or offer for sale of the generic version. In March 2016, we initiated a patent infringement suit alleging that Sandoz’ ANDA filing itself constituted an act of infringement and that if it is approved, the manufacture, use, offer for sale, sale or importation of Sandoz’ ferumoxytol products would infringe our patents. By the filing of this complaint, we believe
30 month
stay was triggered and that the FDA is prohibited from granting approval of Sandoz’ application until the earliest of 30 months from the date of receipt of the notice of certification by the patent owner, the conclusion of litigation in the generic’s favor, or expiration of the patent(s). If the litigation is resolved in favor of the applicant or the challenged patent expires during the
30 months
stay period, the stay is lifted and the FDA may thereafter approve the application based on the applicable standards for approval. On May 2, 2016, Sandoz filed a response to our patent infringement suit and the trial is scheduled for March 12, 2018. Any future unfavorable outcome in this matter could negatively affect the magnitude and timing of future
Feraheme
revenues. We intend to vigorously enforce our intellectual property rights relating to ferumoxytol.
Other
On July 20, 2015, the Federal Trade Commission (the “FTC”) notified us that it is conducting an investigation into whether Lumara Health or its predecessor engaged in unfair methods of competition with respect to
Makena
or any hydroxyprogesterone caproate product. We have fully cooperated with the FTC and provided a thorough response to the FTC in August 2015 and are awaiting their review of our response. The FTC noted in its letter that the existence of the investigation does not indicate that the FTC has concluded that Lumara Health or its predecessor has violated the law and we believe that our contracts and practices comply with relevant law and policy, including the federal Drug Quality and Security Act (the “DQSA”), which was enacted in November 2013, and public statements from and enforcement actions by the FDA regarding its implementation of the DQSA. We have provided the FTC with a response that provides a brief overview of the DQSA for context, which we believe will be helpful, including: (a) how the statute outlined that large-scale compounding of products that are copies or near-copies of FDA-approved drugs (like
Makena
) is not in the interests of public safety; (b) our belief that the DQSA has had a significant impact on the compounding of hydroxyprogesterone caproate; and (c) how our contracts with former compounders allow those compounders to continue to serve physicians and patients with respect to supplying medically necessary alternative/altered forms of hydroxyprogesterone caproate.
On or about April 6, 2016, we received Notice of a Lawsuit and Request to Waive Service of a Summons in a case entitled Plumbers’ Local Union No. 690 Health Plan v. Actavis Group et. al. (“Plumbers’ Union”), which was filed in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania and, after removal to federal court, is now
pending in the United States District Court for the Eastern District of Pennsylvania (Civ. Action No. 16-65-AB). Thereafter, we were also made aware of a related complaint entitled Delaware Valley Health Care Coalition v. Actavis Group et. al. (“Delaware Valley”), which was filed with the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania District Court of Pennsylvania (Case ID: 160200806). The complaints name K-V Pharmaceutical Company (“KV”) (Lumara Health’s predecessor company), certain of its successor entities, subsidiaries and affiliate entities (the “Subsidiaries”), along with a number of other pharmaceutical companies. We acquired Lumara Health in November 2014, a year after KV emerged from bankruptcy protection, at which time it, along with its then existing subsidiaries, became our wholly-owned subsidiary. We have not been served with process or waived service of summons in either case. The actions are being brought alleging unfair and deceptive trade practices with regard to certain pricing practices that allegedly resulted in certain payers overpaying for certain of KV’s generic products. On July 21, 2016, the Plaintiff in the Plumbers’ Union case dismissed KV with prejudice to refiling and on October 6, 2016, all claims against the Subsidiaries were dismissed without prejudice. We are in discussions with Plaintiff’s counsel to similarly dismiss all claims in the Delaware Valley case. Because the Delaware Valley case is in the earliest stages and we have not been served with process in this case, we are currently unable to predict the outcome or reasonably estimate the range of potential loss associated with this matter, if any.
We may periodically become subject to other legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which we are focused. Other than the above actions, we are not aware of any material claims against us as of
December 31, 2016
.
Q. COLLABORATION, LICENSE AND OTHER STRATEGIC AGREEMENTS
Our commercial strategy includes expanding our portfolio through the in-license or acquisition of additional pharmaceutical products or companies, including revenue-generating commercial products and late-state development assets. As of
December 31, 2016
, we were a party to the following collaborations:
Velo
Under our option agreement with Velo, we made an upfront payment of
$10.0 million
in the third quarter of 2015 for the option to acquire the DIF Rights. DIF has been granted both orphan drug and fast-track review designations by the FDA for use in treating severe preeclampsia. Under the option agreement, Velo will complete a Phase 2b/3a clinical study, which we expect to begin in the first quarter of 2017. Following the conclusion of the DIF Phase 2b/3a study, we may terminate, or, for additional consideration, exercise or extend, our option to acquire the DIF Rights. If we exercise the option to acquire the DIF Rights, we would be responsible for additional costs in pursuing FDA approval, and would be obligated to pay to Velo certain milestone payments and single-digit royalties based on regulatory approval and commercial sales of the product. If we exercise the option, we will be responsible for payments totaling up to
$65.0 million
(including the payment of the option exercise price and the regulatory milestone payments) and up to an additional
$250.0 million
in sales milestone payments based on the achievement of annual sales milestones at targets ranging from
$100.0 million
to
$900.0 million
.
We have determined that Velo is a variable interest entity (“VIE”) as it does not have enough equity to finance its activities without additional financial support. As we do not have the power to direct the activities of the VIE that most significantly affect its economic performance, which we have determined to be the Phase 2b/3a clinical study, we are not the primary beneficiary of and do not consolidate the VIE.
Antares
In September 2014, Lumara Health entered into the Antares Agreement with Antares, which in connection with our acquisition of Lumara Health in November of 2014, grants us an exclusive, worldwide, royalty-bearing license, with the right to sublicense, to certain intellectual property rights, including know-how, patents and trademarks, to develop, use, sell, offer for sale and import and export the
Makena
auto-injector. In consideration for the license, to support joint meetings and a development strategy with the FDA, and for initial tooling and process validation, Lumara Health paid Antares an up-front payment in October 2014. Under the Antares Agreement, we are responsible for the clinical development and preparation, submission and maintenance of all regulatory applications in each country where we desire to market and sell the
Makena
auto-injector, including the U.S. We are required to pay royalties to Antares on net sales of the
Makena
auto-injector for the life of the Antares Royalty Term. The royalty rates range from high single digit to low double digits and are tiered based on levels of net sales of the
Makena
auto-injector and decrease after the expiration of licensed patents or where there are generic equivalents to the
Makena
auto-injector being sold in a particular country. Antares is the exclusive supplier of the device components of the
Makena
auto-injector and Antares remains responsible for the manufacture and supply of the device components and assembly of the
Makena
auto-injector. We are responsible for the supply of the drug to be used in the assembly of the finished auto-injector product. The development and license agreement terminates at the end of the Antares Royalty Term, but is subject to early termination by us for convenience, by Antares if we do not submit regulatory filings in the U.S. by a certain date and by either party upon an uncured breach by or bankruptcy of the other party.
Abeona
In June 2013, we entered into the MuGard License Agreement under which Abeona granted us an exclusive, royalty-bearing license, with the right to grant sublicenses, to certain intellectual property rights, including know-how, patents and trademarks, to use, import, offer for sale, sell, manufacture and commercialize
MuGard
in the U.S. and its territories (the “MuGard Territory”) for the management of oral mucositis/stomatitis (that may be caused by radiotherapy and/or chemotherapy) and all types of oral wounds (mouth sores and injuries), including certain ulcers/canker sores and traumatic ulcers, such as those caused by oral surgery or ill-fitting dentures or braces.
In consideration for the license, we paid Abeona an upfront license fee of
$3.3 million
in June 2013. We are required to pay royalties to Abeona on net sales of
MuGard
until the later of (a) the expiration of the licensed patents or (b) the tenth anniversary of the first commercial sale of
MuGard
in the MuGard Territory (the “MuGard Royalty Term”). These tiered, double-digit royalty rates decrease after the expiration of the licensed patents and are subject to off-set against certain of our expenses. After the expiration of the MuGard Royalty Term, the license shall become a fully paid-up, royalty-free and perpetual license in the MuGard Territory.
Abeona remains responsible for the manufacture of
MuGard
and we have entered into a quality agreement and a supply agreement under which we purchase
MuGard
inventory from them. Our inventory purchases are at the price actually paid by Abeona to purchase it from a third-party plus a mark-up to cover administration, handling and overhead.
Abeona is responsible for maintenance of the licensed patents at its own expense, and we retain the first right to enforce any licensed patent against third-party infringement. The MuGard License Agreement terminates at the end of the MuGard Royalty Term, but is subject to early termination by us for convenience and by either party upon an uncured breach by or bankruptcy of the other party.
R. DEBT
Our outstanding debt obligations as of
December 31, 2016
and
December 31, 2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
2023 Senior Notes
|
$
|
489,612
|
|
|
$
|
488,481
|
|
2015 Term Loan Facility
|
317,546
|
|
|
332,688
|
|
2.5% Convertible Notes
|
179,363
|
|
|
170,749
|
|
Total long-term debt
|
986,521
|
|
|
991,918
|
|
Less: current maturities
|
21,166
|
|
|
17,500
|
|
Long-term debt, net of current maturities
|
$
|
965,355
|
|
|
$
|
974,418
|
|
2023 Senior Notes
On August 17, 2015, in connection with the CBR acquisition, we completed a private placement of
$500 million
aggregate principal amount of
7.875%
Senior Notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes were issued pursuant to an Indenture, dated as of August 17, 2015 (the “Indenture”), by and among us, certain of our subsidiaries acting as guarantors of the 2023 Senior Notes and Wilmington Trust, National Association, as trustee. The Indenture contains certain customary negative covenants, which are subject to a number of limitations and exceptions. Certain of the covenants will be suspended during any period in which the 2023 Senior Notes receive investment grade ratings.
The 2023 Senior Notes, which are senior unsecured obligations of the Company, will mature on September 1, 2023 and bear interest at a rate of
7.875%
per year, with interest payable semi-annually on September 1 and March 1 of each year (which began in March 2016). We may redeem some or all of the 2023 Senior Notes at any time, or from time to time, on or after September 1, 2018 at the redemption prices listed in the Indenture, plus accrued and unpaid interest to, but not including, the date of redemption. In addition, prior to September 1, 2018, we may redeem up to
35%
of the aggregate principal amount of the 2023 Senior Notes utilizing the net cash proceeds from certain equity offerings, at a redemption price of
107.875%
of the principal amount thereof, plus accrued and unpaid interest to, but not including, the date of redemption; provided that at least
65%
of the aggregate amount of the 2023 Senior Notes originally issued under the Indenture remain outstanding after such redemption. We may also redeem all or some of the 2023 Senior Notes at any time, or from time to time, prior to September 1, 2018, at a price equal to
100%
of the principal amount of the 2023 Senior Notes to be redeemed, plus a “make-whole” premium plus accrued and unpaid interest, if any, to the date of redemption. Upon the occurrence of a “change of control,” as defined in the Indenture, we are required to offer to repurchase the 2023 Senior Notes at
101%
of the aggregate principal amount thereof, plus any accrued and unpaid interest to, but not including, the repurchase date. The Indenture contains customary events of default, which allow either the trustee or the holders of not less than
25%
in aggregate principal amount of the then-outstanding 2023 Senior Notes to accelerate, or in certain cases, which automatically cause the acceleration of, the amounts due under the 2023 Senior Notes.
At
December 31, 2016
, the principal amount of the outstanding borrowings was
$500.0 million
and the carrying value of the outstanding borrowings, net of issuance costs and other lender fees and expenses, was
$489.6 million
.
2015 Term Loan Facility
On August 17, 2015, to fund a portion of the purchase price of CBR, we entered into a credit agreement with a group of lenders, including Jefferies Finance LLC as administrative and collateral agent, that provided us with, among other things, a
six
-year
$350.0 million
term loan facility. We borrowed the full
$350.0 million
available under the 2015 Term Loan Facility on August 17, 2015. The credit agreement also allows for the incurrence of incremental loans in an amount up to
$225.0 million
. The unamortized original issue costs and other lender fees and expenses, including a prepayment penalty, included
$6.8 million
of the unamortized original issue costs and other lender fees and expenses from our then existing
five
-year term loan facility as a result of accounting guidance for the modification of debt arrangements.
The 2015 Term Loan Facility bears interest, at our option, at the London Interbank Offered Rate (“LIBOR”) plus a margin of
3.75%
or the prime rate plus a margin of
2.75%
. The LIBOR is subject to a
1.00%
floor and the prime rate is subject to a
2.00%
floor. As of
December 31, 2016
, the stated interest rate, based on the LIBOR, was
4.75%
, and the effective interest rate was
5.65%
.
We must repay the 2015 Term Loan Facility in installments of
$4.4 million
per quarter due on the last day of each quarter beginning with the quarter ended
December 31, 2015
. The 2015 Term Loan Facility matures on
August 17, 2021
.
The 2015 Term Loan Facility includes an annual mandatory prepayment of the debt in an amount equal to
50%
of our excess cash flow (as defined in the 2015 Term Loan Facility) as measured on an annual basis, beginning with the year ending
December 31, 2016
. As a result, as of
December 31, 2016
,
$3.7 million
was estimated and reclassified from long-term debt to current portion of long-term debt in our consolidated balance sheet as the first excess payment is expected to be made in April 2017. On or after
December 31, 2016
, the applicable excess cash flow percentage shall be reduced based on the total net leverage ratio as of the last day of the period. Excess cash flow is generally defined as our adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) less debt service costs, unfinanced capital expenditures, unfinanced acquisition expenditures, contingent consideration paid, and current income taxes as well as other adjustments specified in the credit agreement.
The 2015 Term Loan Facility has a lien on substantially all of our assets, including a pledge of
100%
of the equity interests in our domestic subsidiaries and a pledge of
65%
of the voting equity interests and
100%
of the non-voting equity interests in our direct foreign subsidiaries. The 2015 Term Loan Facility contains customary events of default and affirmative and negative covenants for transactions of this type. All obligations under the 2015 Term Loan Facility are unconditionally guaranteed by
substantially all of our direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of such subsidiaries, with certain exclusions.
At
December 31, 2016
, the principal amount of the outstanding borrowings was
$328.1 million
and the carrying value of the outstanding borrowings, net of issuance costs and other lender fees and expenses, was
$317.5 million
.
2.5%
Convertible Notes
On February 14, 2014, we issued
$200.0 million
aggregate principal amount of the Convertible Notes. We received net proceeds of
$193.3 million
from the sale of the Convertible Notes, after deducting fees and expenses of
$6.7 million
. We used
$14.1 million
of the net proceeds from the sale of the Convertible Notes to pay the cost of the convertible bond hedges, as described below (after such cost was partially offset by the proceeds to us from the sale of warrants in the warrant transactions described below).
The Convertible Notes are governed by the terms of an indenture between us, as issuer, and Wilmington Trust, National Association, as the trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of
2.5%
per year, payable semi-annually in arrears on February 15 and August 15 of each year. The Convertible Notes will mature on
February 15, 2019
, unless earlier repurchased or converted. Upon conversion of the Convertible Notes, at a holder’s election, such Convertible Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election (subject to certain limitations in the 2015 Term Loan Facility), at a conversion rate of approximately
36.9079
shares of common stock per
$1,000
principal amount of the Convertible Notes, which corresponds to an initial conversion price of approximately
$27.09
per share of our common stock.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends. At any time prior to the close of business on the business day immediately preceding May 15, 2018, holders may convert their Convertible Notes at their option only under the following circumstances:
|
|
1)
|
during any calendar quarter (and only during such calendar quarter), if the last reported sale price of our common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the conversion price on each applicable trading day;
|
|
|
2)
|
during the
five
business day period after any
five
consecutive trading day period (the “measurement period”) in which the trading price per
$1,000
principal amount of the Convertible Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
|
|
|
3)
|
upon the occurrence of specified corporate event.
|
On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of
$1,000
principal amount, at the option of the holder regardless of the foregoing circumstances. Based on the last reported sale price of our common stock during the last
30
trading days of
2016
, the Convertible Notes were not convertible as of
December 31, 2016
.
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the Convertible Notes in cash, common stock or a combination of cash and common stock, at our option (subject to certain limitations in the 2015 Term Loan Facility). The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the Convertible Notes and the fair value of the liability of the Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over
five years
. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
Our outstanding Convertible Note balances as of
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
December 31, 2016
|
Liability component:
|
|
|
Principal
|
$
|
199,998
|
|
Less: debt discount and issuance costs, net
|
(20,635
|
)
|
Net carrying amount
|
$
|
179,363
|
|
In connection with the issuance of the Convertible Notes, we incurred approximately
$6.7 million
of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total
$6.7 million
of debt issuance costs,
$1.3 million
was allocated to the equity component and recorded as a reduction to additional paid-in capital and
$5.4 million
was allocated to the liability component and is now recorded as a reduction of the Convertible Notes in our consolidated balance sheets. The portion allocated to the liability component is amortized to interest expense using the effective interest method over
five
years.
We determined the expected life of the debt was equal to the
five
-year term on the Convertible Notes. The effective interest rate on the liability component was
7.23%
for the period from the date of issuance through
December 31, 2016
. As of
December 31, 2016
, the “if-converted value” did not exceed the remaining principal amount of the Convertible Notes.
The following table sets forth total interest expense recognized related to the Convertible Notes during
2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Contractual interest expense
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
$
|
4,375
|
|
Amortization of debt issuance costs
|
1,072
|
|
|
985
|
|
|
800
|
|
Amortization of debt discount
|
7,544
|
|
|
6,927
|
|
|
5,629
|
|
Total interest expense
|
$
|
13,616
|
|
|
$
|
12,912
|
|
|
$
|
10,804
|
|
As of
December 31, 2016
, the principal amount of the Convertible Notes was
$200.0 million
and the carrying value of the Convertible Notes was
$179.4 million
.
Convertible Bond Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes and in order to reduce the potential dilution to our common stock and/or offset cash payments due upon conversion of the Convertible Notes, in February 2014 we entered into convertible bond hedge transactions covering approximately
7.4 million
shares of our common stock underlying the
$200.0 million
aggregate principal amount of the Convertible Notes with the call spread counterparties. The convertible bond hedges have an exercise price of approximately
$27.09
per share, subject to adjustment upon certain events, and are exercisable when and if the Convertible Notes are converted. If upon conversion of the Convertible Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the call spread counterparties will deliver shares of our common stock and/or cash with an aggregate value approximately equal to the difference between the price of our common stock at the conversion date and the exercise price, multiplied by the number of shares of our common stock related to the convertible bond hedges being exercised. The convertible bond hedges are separate transactions entered into by us and are not part of the terms of the Convertible Notes or the warrants, discussed below. Holders of the Convertible Notes will not have any rights with respect to the convertible bond hedges. We paid
$39.8 million
for these convertible bond hedges and recorded this amount as a reduction to additional paid-in capital, net of tax, in 2014.
In February 2014, we also entered into separate warrant transactions with each of the call spread counterparties relating to, in the aggregate, approximately
7.4 million
shares of our common stock underlying the
$200.0 million
aggregate principal amount of the Convertible Notes. The initial exercise price of the warrants is
$34.12
per share, subject to adjustment upon certain events, which is
70%
above the last reported sale price of our common stock of
$20.07
on February 11, 2014. The warrants would separately have a dilutive effect to the extent that the market value per share of our common stock, as measured under the terms of the warrants, exceeds the applicable exercise price of the warrants. The warrants were issued to the call spread counterparties pursuant to the exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended. We received
$25.6 million
for these warrants and recorded this amount to additional paid-in capital in 2014.
Aside from the initial payment of
$39.8 million
to the call spread counterparties for the convertible bond hedges, which was partially offset by the receipt of
$25.6 million
for the warrants, we are not required to make any cash payments to the call spread counterparties under the convertible bond hedges and will not receive any proceeds if the warrants are exercised.
Future Payments
Future annual principal payments on our long-term debt as of
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
Period
|
|
Future Annual Principal Payments
|
Year Ending December 31, 2017
|
|
$
|
21,166
|
|
Year Ending December 31, 2018
|
|
17,500
|
|
Year Ending December 31, 2019
|
|
217,498
|
|
Year Ending December 31, 2020
|
|
17,500
|
|
Year Ending December 31, 2021
|
|
254,459
|
|
Thereafter
|
|
500,000
|
|
Total
|
|
$
|
1,028,123
|
|
S. RESTRUCTURING
In connection with the CBR and Lumara Health acquisitions, we initiated restructuring programs in the third quarter of 2015 and the fourth quarter of 2014, respectively, which included severance benefit expenses primarily related to certain former CBR and Lumara Health employees. As a result of these restructurings, we recorded
$0.7 million
charges in
2016
as compared to
$4.1 million
in
2015
. We expect to pay the remaining restructuring costs by the end of the first quarter of
2017
.
The following table outlines the components of our restructuring expenses which were included in current liabilities for
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
Accrued restructuring, beginning of period
|
$
|
2,883
|
|
|
$
|
1,953
|
|
Employee severance, benefits and related costs
|
715
|
|
|
3,874
|
|
Payments
|
(3,524
|
)
|
|
(2,944
|
)
|
Accrued restructuring, end of period
|
$
|
74
|
|
|
$
|
2,883
|
|
T. CONSOLIDATED QUARTERLY FINANCIAL DATA - UNAUDITED
The following tables provide unaudited consolidated quarterly financial data for
2016
and
2015
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
Total revenues
|
$
|
109,300
|
|
|
$
|
127,419
|
|
|
$
|
143,782
|
|
|
$
|
151,591
|
|
Gross profit (a)
|
85,474
|
|
|
84,563
|
|
|
113,092
|
|
|
116,349
|
|
Operating expenses
|
78,026
|
|
|
66,486
|
|
|
74,332
|
|
|
101,764
|
|
Net income (loss)
|
$
|
(7,527
|
)
|
|
$
|
(596
|
)
|
|
$
|
16,196
|
|
|
$
|
(10,557
|
)
|
Net income (loss) per share - basic
|
$
|
(0.22
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.47
|
|
|
$
|
(0.31
|
)
|
Net income (loss) per share - diluted
|
$
|
(0.22
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
June 30, 2015
|
|
September 30, 2015
|
|
December 31, 2015
|
Total revenues (b)
|
$
|
89,505
|
|
|
$
|
123,884
|
|
|
$
|
96,152
|
|
|
$
|
108,735
|
|
Gross profit (b)
|
68,479
|
|
|
104,205
|
|
|
73,803
|
|
|
83,288
|
|
Operating expenses (b)
|
39,671
|
|
|
43,081
|
|
|
75,188
|
|
|
60,615
|
|
Net income (loss) (c)
|
$
|
12,904
|
|
|
$
|
33,258
|
|
|
$
|
(20,584
|
)
|
|
$
|
7,201
|
|
Net income (loss) per share - basic
|
$
|
0.47
|
|
|
$
|
1.09
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.21
|
|
Net income (loss) per share - diluted
|
$
|
0.39
|
|
|
$
|
0.82
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.20
|
|
The sum of quarterly income (loss) per share totals differ from annual income (loss) per share totals due to rounding.
|
|
(a)
|
Gross profit for the second quarter of 2016 includes the impairment charge of
$15.7 million
relating to the MuGard Rights intangible asset.
|
(b) In August 2015, we acquired CBR and recorded
$24.1 million
and
$10.0 million
in CBR service revenue and cost of services, respectively, in 2015 and additional operating costs incurred as a result of the acquisition.
(c) In August 2015, we repaid the remaining
$323.0 million
outstanding principal amount and recognized a
$10.4 million
loss on debt extinguishment as a result of the early repayment, which we recorded in other income (expense) in our 2015 consolidated statements of operations.
U. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Additions (a)
|
|
Deductions Charged to Reserves
|
|
Balance at End of Period
|
Year ended December 31, 2016:
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (a)
|
$
|
900
|
|
|
$
|
3,209
|
|
|
$
|
(948
|
)
|
|
$
|
3,161
|
|
Accounts receivable allowances (b)
|
$
|
10,783
|
|
|
$
|
122,792
|
|
|
$
|
(124,042
|
)
|
|
$
|
9,533
|
|
Rebates, fees and returns reserves
|
$
|
45,162
|
|
|
$
|
186,941
|
|
|
$
|
(142,637
|
)
|
|
$
|
89,466
|
|
Valuation allowance for deferred tax assets (c)
|
$
|
11,859
|
|
|
$
|
632
|
|
|
$
|
(11,062
|
)
|
|
$
|
1,429
|
|
Year ended December 31, 2015:
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (a)
|
$
|
—
|
|
|
$
|
900
|
|
|
$
|
—
|
|
|
$
|
900
|
|
Accounts receivable allowances (b)
|
$
|
11,618
|
|
|
$
|
93,887
|
|
|
$
|
(94,722
|
)
|
|
$
|
10,783
|
|
Rebates, fees and returns reserves
|
$
|
43,892
|
|
|
$
|
120,293
|
|
|
$
|
(119,023
|
)
|
|
$
|
45,162
|
|
Valuation allowance for deferred tax assets (c)
|
$
|
33,557
|
|
|
$
|
—
|
|
|
$
|
(21,698
|
)
|
|
$
|
11,859
|
|
Year ended December 31, 2014:
|
|
|
|
|
|
|
|
Accounts receivable allowances (b)
|
$
|
2,728
|
|
|
$
|
60,054
|
|
|
$
|
(51,164
|
)
|
|
$
|
11,618
|
|
Rebates, fees and returns reserves
|
$
|
4,819
|
|
|
$
|
52,548
|
|
|
$
|
(13,475
|
)
|
|
$
|
43,892
|
|
Valuation allowance for deferred tax assets (c)
|
$
|
166,416
|
|
|
$
|
20,299
|
|
|
$
|
(153,158
|
)
|
|
$
|
33,557
|
|
|
|
(a)
|
Additions to allowance for doubtful accounts are recorded in selling, general and administrative expenses. Additions to rebates, fees and returns reserves are recorded as a reduction of revenues.
|
|
|
(b)
|
These accounts receivable allowances represent discounts and other chargebacks related to the provision for our product sales.
|
|
|
(c)
|
The valuation allowance for deferred tax assets includes purchase accounting adjustments and other activity related to our acquisition of Lumara Health.
|
V. RECENTLY ISSUED AND PROPOSED ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by us as of the specified effective date.
In January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). This new standard eliminates Step 2 from the goodwill impairment test. ASU 2017-04 requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 still allows the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for any annual or interim goodwill impairment tests in the fiscal years beginning after December 15, 2019 and must be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have adopted ASU 2017-01 as of January 1, 2017, with prospective application for our interim or annual goodwill impairment tests.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”). This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for us on January 1, 2018. However, we have adopted ASU 2017-01 as of January 1, 2017, with prospective application to any business development transaction. Depending upon individual facts and circumstances of future transactions, this guidance will likely result in more transactions being accounted for as asset acquisitions rather than business combinations.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). This new standard clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment costs or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. This new standard also clarifies that an entity should determine each separately identifiable source of use within the cash receipts and payments on the basis of the nature of the underlying cash flows. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. ASU 2016-15 will be effective for us on January 1, 2018. We are currently evaluating the impact of our adoption of ASU 2016-15 in our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will be effective for us for fiscal years beginning on or after January 1, 2020, including interim periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of our adoption of ASU 2016-13 in our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(
“
ASU 2016-09”). The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 will be effective for us on January 1, 2017. We are currently evaluating the impact of our adoption of ASU 2016-09 in our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). This new standard requires entities to recognize on its balance sheet assets and liabilities associated with the rights and obligations created by leases with terms greater than twelve months. This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods and early adoption is permitted. We are currently evaluating the impact of ASU 2016-02 in our consolidated financial statements and we currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). This new standard amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in our results of operations. This new standard does not apply to investments accounted for under the equity method of accounting or those that result in consolidation of the investee. Equity investments that do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for changes in observable prices. A financial liability that is measured at fair value in accordance with the fair value option is required to be presented separately in other comprehensive income for the portion of the total change in the fair value resulting from change in the instrument-specific credit risk. In addition, a valuation allowance should be evaluated on deferred tax assets related to available-for-sale debt securities in combination with other deferred tax assets. ASU 2016-01 will be effective for us on January 1, 2018. The adoption of ASU 2016-01 is not expected to have a material impact on our financial position or results of operations.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
(“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and sets forth new disclosure requirements related to the adjustments. We adopted ASU 2015-16 as of January 1, 2016. See Note C, “
Business Combinations
”
for additional information.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory
(Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”). The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of ASU 2015-11 is required to be measured 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. ASU 2015-11 will be effective for us on January 1, 2017. The adoption of ASU 2015-11 is not expected to have a material impact on our results of operations, cash flows or financial position.
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15,
Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
(“ASU 2015-15”), which allows presentation of debt issuance costs related to line-of-credit arrangements as either in accordance with the amendments in ASU 2015-03, or as an asset with subsequent amortization of the debt issuance costs ratably over the term of the arrangement. We adopted this guidance retrospectively in the first quarter of 2016. As a result, we presented
$11.2 million
of unamortized debt issuance costs as of December 31, 2015 as direct deductions from the carrying amounts of the related debt liabilities. We previously included the
$11.2 million
of unamortized debt issuance costs in “other long-term assets” in our condensed consolidated balance sheet as of December 31, 2015.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“
ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures, if required. ASU 2014-15 will be effective for annual reporting periods ending after December 15, 2016, which will be our fiscal year ending December 31, 2016, and to annual and interim periods thereafter. We adopted ASU 2014-15 as of December 31, 2016 in our consolidated financial statements and related disclosures, which did not have a material impact on our results of operations, cash flows or financial position.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification Topic 606
(“ASU 2014-09”). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customer
Topic 606s, Principal versus Agent Considerations
, which clarifies the implementation guidance
on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers Topic 606, Identifying Performance Obligations and Licensing
, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers Topic 606, Narrow-Scope Improvements and Practical Expedients
,
related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected from customers. In December 2016, the FASB issued ASU No. 2016-20, T
echnical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which amends certain narrow aspects of the guidance issued in ASU 2014-09 including guidance related to the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples. We are currently evaluating the method of adoption and the potential impact that Topic 606 may have on our financial position and results of operations. These ASUs are effective for entities for interim and annual reporting periods beginning after December 15, 2017, including interim periods within that year, which for us is the period beginning January 1, 2018. Early adoption is permitted any time after the original effective date. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. We have not yet selected a transition method and are currently evaluating the impact of this standard in our consolidated financial statements.
W. SUBSEQUENT EVENTS
Palatin License Agreement
On January 8, 2017, we entered into a license agreement (the “Palatin License Agreement”) with Palatin Technologies, Inc. (“Palatin”) under which we acquired (a) an exclusive license in all countries of North America (the “Rekynda Territory”), with the right to grant sub-licenses, to research, develop and commercialize
Rekynda
and any other products containing bremelanotide (collectively, the “Rekynda Products”), an investigational product designed to be an on-demand treatment for hypoactive sexual desire disorder in pre-menopausal women, (b) a worldwide non-exclusive license, with the right to grant sub-licenses, to manufacture the Rekynda Products, and (c) a non-exclusive license in all countries outside the Rekynda Territory, with the right to grant sub-licenses, to research, develop and manufacture (but not commercialize) the Rekynda Products. Following the satisfaction of the conditions to closing under the Palatin License Agreement, the transaction closed on February 2, 2017.
Under the terms of the Palatin License Agreement, in February 2017 we paid Palatin
$60.0 million
as a one-time upfront payment and will reimburse Palatin up to an aggregate amount of
$25.0 million
for all reasonable, documented, out-of-pocket expenses incurred by Palatin in connection with the development and regulatory activities necessary to submit a new drug application in the U.S. for
Rekynda
for the treatment of hypoactive sexual desire disorder (“HSDD”) in pre-menopausal women.
In addition, the Palatin License Agreement provides for future contingent payments of (a) up to
$80.0 million
upon achievement of certain regulatory milestones, including FDA approval and (b) up to
$300.0 million
of aggregate sales milestone payments upon the achievement of certain annual net sales milestones over the course of the license. The first sales milestone of
$25.0 million
will be triggered when
Rekynda
annual net sales exceed
$250.0 million
. We are also obligated to pay Palatin tiered royalties on annual net sales of the Rekynda Products, on a product-by-product basis, in the Rekynda Territory ranging from the high-single digits to the low double-digits. The royalties will expire on a product-by-product and country-by-country basis upon the latest to occur of (a) the earliest date on which there are
no
valid claims of Palatin patent rights covering such Rekynda Product in such country, (b) the expiration of the regulatory exclusivity period for such Rekynda Product in such country and (c)
10
years following the first commercial sale of such Rekynda Product in such country. These royalties are subject to reduction in the event that: (i) we must license additional third party intellectual property in order to develop, manufacture or commercialize a Rekynda Product or (ii) generic competition occurs with respect to a Rekynda Product in a given country, subject to an aggregate cap on such deductions of royalties otherwise payable to Palatin. After the expiration of the applicable royalties for any Rekynda Product in a given country, the license for such Rekynda Product in such country would become a fully paid-up, royalty-free, perpetual and irrevocable license.
Pending Endoceutics License Agreement
On February 13, 2017, we entered into a license agreement (the “Endoceutics License Agreement”) with Endoceutics, Inc. (“Endoceutics”) pursuant to which Endoceutics has agreed to grant to us rights to
Intrarosa
, an FDA-approved product for the treatment of moderate-to-severe dyspareunia (pain during sexual intercourse), a symptom of VVA due to menopause. The Endoceutics License Agreement grants us the right to develop and commercialize pharmaceutical products containing
dehydroepiandrosterone (“DHEA”), including
Intrarosa
, at dosage strengths of 13 mg or less per dose and formulated for intravaginal delivery, excluding any dosage strengths over 13 mg per dose and combinations with other active pharmaceutical ingredients, in the U.S. for the treatment of vulvar and vaginal atrophy (“VVA”) and female sexual dysfunction (“FSD”). The closing of the transactions contemplated by the Endoceutics License Agreement (the “Effective Date”) is subject to clearance under the Hart-Scott-Rodino Act and other customary closing conditions.
Subject to the terms of the Endoceutics License Agreement, Endoceutics has agreed to conduct clinical studies for the use of
Intrarosa
in FSD to support an application for regulatory approval for
Intrarosa
for the treatment of FSD in the U.S. We and Endoceutics have agreed to share the direct costs related to such studies based upon a negotiated allocation with us funding up to
$20.0
million. We may, with Endoceutics’ consent (not to be unreasonably withheld, conditioned or delayed), conduct any other studies of
Intrarosa
for the treatment of VVA and FSD anywhere in the world for the purpose of obtaining or maintaining regulatory approval of or commercializing
Intrarosa
for the treatment of VVA or FSD in the U.S. All data generated in connection with the above described studies would be owned by Endoceutics and licensed to us pursuant to the Endoceutics License Agreement.
We will have the exclusive right to commercialize
Intrarosa
for the treatment of VVA or FSD in the U.S., subject to the terms of the Endoceutics License Agreement, including having final decision making authority with respect to commercial strategy, pricing and reimbursement and other commercialization matters. We have agreed to use commercially reasonable efforts to market, promote and otherwise commercialize
Intrarosa
for the treatment of VVA or FSD in the U.S., including
a commitment to a minimum marketing spend for
Intrarosa
in 2017.
Endoceutics has the right to directly conduct, itself or through its affiliates or subcontractors, additional commercialization activities for
Intrarosa
for the treatment of VVA or FSD in the U.S., which scope of activities will be agreed to by the parties acting reasonably and in good faith, and has the right to conduct activities related generally to the field of intracinology, in each case, subject to our right to withhold approval in certain instances.
Upon Closing, we will make an upfront payment of
$50.0 million
and, subject to certain conditions, will issue
600,000
shares of unregistered common stock, to Endoceutics,
300,000
of which will be subject to a
180
-day lock-up provision, and the other
300,000
of which will be subject to a one-year lock-up provision. We have also agreed to make a payment to Endoceutics of up to
$10.0 million
upon the delivery of launch quantities of
Intrarosa
and a payment of
$10.0 million
on the first anniversary of the closing. In addition, we have also agreed to pay tiered royalties to Endoceutics equal to a percentage of net sales of
Intrarosa
in the U.S. ranging from mid-teens (for calendar year net sales up to
$150.0 million
) to mid
twenty percent
(for any calendar year net sales that exceed
$1 billion
) (such royalty rate to be dependent on the aggregate annual net sales of
Intrarosa
) for the commercial life of
Intrarosa
, with deductions (a) after the later of (i) the expiration date of the last to expire of a licensed patent containing a valid patent claim or (ii)
ten years
after the first commercial sale of
Intrarosa
for the treatment of VVA or FSD in the U.S., (b) for generic competition and (c) for third party payments. Endoceutics is also eligible to receive certain sales milestone payments, including a first sales milestone payment of
$15.0 million
, which would be triggered when
Intrarosa
annual net U.S. sales exceed
$150.0 million
, and a second milestone payment of
$30.0 million
, which would be triggered when annual net U.S. sales exceed
$300.0 million
. If annual net U.S. sales exceed
$500.0 million
, there are additional sales milestone payments totaling up to
$850.0 million
, which would be triggered at various increasing sales thresholds.
In connection with the Endoceutics License Agreement, we and Endoceutics have agreed to enter into an exclusive commercial supply agreement on or about the Effective Date, pursuant to which Endoceutics, itself or through affiliates or contract manufacturers, would agree to manufacture and supply
Intrarosa
to us (the “Supply Agreement”) and would be our exclusive supplier of
Intrarosa
in the U.S., subject to certain rights for us to manufacture and supply
Intrarosa
in the event of a cessation notice or supply failure (as such terms are defined in the Supply Agreement). Under the Supply Agreement, Endoceutics would maintain at all times a second source supplier for the manufacture of DHEA and the drug product and identify and validate and transfer manufacturing intellectual property to the second source supplier within
two
years of the Effective Date. The Supply Agreement will remain in effect until the termination of the Endoceutics License Agreement, unless terminated earlier by either party for an uncured material breach or insolvency of the other party, or by us if we exercise our rights to manufacture and supply
Intrarosa
following a cessation notice or supply failure.
Under the Endoceutics License Agreement, except as permitted under the Endoceutics License Agreement or the Supply Agreement, and except for any compounds or products affecting the melanocortin receptor pathway, including without limitation, bremelanotide (collectively, “Excluded Product”), we will not be permitted to research, develop, manufacture, or commercialize (i) DHEA for delivery by any route of administration anywhere in world, (ii) any compound (including DHEA) or product for use in VVA anywhere in the world, or (iii) commencing on the date of an approval of
Intrarosa
for the treatment of FSD in the U.S. and continuing for the remainder of the term of the Endoceutics License Agreement, any compound (including DHEA) for use in FSD (each, a “Competing Product”). Any compound or product for use in FSD that would be a Competing Product in the United States but that (i) does not contain DHEA and (ii) was acquired or licensed or for which the
research, development, manufacture or commercialization of such compound or product is initiated by us or our affiliates, in each case, prior to the date of an approval of
Intrarosa
for the treatment of FSD in the U.S., will be an Excluded Product and will not be subject to the exclusivity obligations under the Endoceutics License Agreement in the treatment of FSD, subject to certain restrictions in the Endoceutics License Agreement. These noncompete restrictions are subject to certain exclusions relating to the acquisition of competing programs.
The Endoceutics License Agreement expires on the date of expiration of all royalty obligations due thereunder unless earlier terminated in accordance with the Endoceutics License Agreement. The Endoceutics License Agreement may be terminated by either Party if the Effective Date has not occurred within
180
days following the execution date or such date as the parties may mutually agree. The Endoceutics License Agreement may be terminated by either Party for material breach that is either uncured after a
90
-day notice period, or if such breach cannot be cured within such
90
-day period, if the breaching party does not commence appropriate and material actions to cure such breach within the notice period and continue to diligently cure such breach for a period not to exceed
90
days, in either case, subject to tolling or determination of the arbitrators, if dispute resolution procedures are initiated within
30
days of the termination notice. We have the ability to elect not to terminate the Endoceutics License Agreement in the case of a material breach, in which case future milestone and royalty payments owed to Endoceutics would be reduced by a negotiated percentage or by an amount determined by arbitration. Either party may terminate under certain situations relating to the bankruptcy or insolvency of the other party. We may terminate the Endoceutics License Agreement for a valid business reason upon
365
days prior written notice to Endoceutics; or upon
60
days written notice in the event we reasonably determine in good faith, after due inquiry and after discussions with Endoceutics, that we cannot reasonably continue to develop or commercialize any Product as a result of a safety issue regarding the use of
Intrarosa
. We may also terminate the Endoceutics License Agreement upon
180
days notice if there is a change of control of AMAG and the acquiring entity (alone or with its affiliates) is engaged in a competing program (as defined in the Licensed Agreement) in the U.S. or in at least
three
countries within the European Union.