|
|
Item 4.02
|
Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
|
On April 19, 2017, the Company’s Board of Directors, after consultation with management and discussion with Ernst & Young LLP, the Company’s independent registered public accounting firm (“EY”), and following the recommendation of the Company’s Audit Committee, concluded that the Company’s previously issued financial statements (and any related audit reports of EY) for the following periods (collectively, the “Relevant Periods”) should no longer be relied upon:
|
|
•
|
the fiscal years ended June 28, 2014 and June 27, 2015;
|
|
|
•
|
the transition period from June 28, 2015 to December 31, 2015; and
|
|
|
•
|
the quarterly periods ended December 28, 2013, March 29, 2014, September 27, 2014, December 27, 2014, March 28, 2015, September 26, 2015, April 2, 2016, July 2, 2016 and October 1, 2016.
|
This determination follows a correction in accounting under U.S. generally accepted accounting principles (“U.S. GAAP”) related to the Tysabri
®
royalty stream. In addition, in connection with the financial closing for the year ended December 31, 2016, the Company identified certain deferred tax assets that existed at the time of the acquisition of Omega Pharma Invest N.V. (“Omega”) on April 1, 2015, in the amount of approximately $220 million. The resulting balance sheet reclassification will require a reduction of goodwill, offset by a corresponding reduction to net deferred tax liabilities at the date of the Omega acquisition. Further, the Company has evaluated the accounting effect subsequent to the acquisition date related to the identified deferred tax assets, including the impairments of Omega goodwill recorded in fiscal 2016, and has also concluded that a correction of accounting is required in certain Relevant Periods.
The Company has determined that it is necessary to restate certain previously issued financial statements to address these issues. However, the Company does not expect these changes to have a material impact on net cash flows and doe snot expect an impact on the previously closed sale of Tysbri
®
.
On February 27, 2017, the Company announced the agreement to sell the Tysabri
®
royalty stream to Royalty Pharma. The transaction closed on March 27, 2017, and Tysabri
®
will no longer be reported in the Company’s financial statements after the first quarter of 2017.
The Company acquired the Tysabri
®
royalty stream in its acquisition of Elan Pharmaceuticals plc (“Elan”) in 2013. The royalty stream was recognized as revenue in the financial statements included in Elan’s filings with the U.S. Securities and Exchange Commission. At the time of the acquisition, the Company reviewed the accounting application of the Tysabri
®
royalty stream and concluded that the right to receive quarterly royalty payments from Biogen, Inc. should be an intangible asset and such payments recognized as revenue in the Company’s financial statements. This accounting treatment was reviewed with EY and agreed to under EY’s audit opinions included in the Company’s Form 10-K filings for the fiscal years ended June 28, 2014 and June 27, 2015 and the transition period from June 28, 2015 to December 31, 2015, with unqualified audit opinions in all periods.
During the 2016 year-end audit process, and in anticipation of the Company’s potential sale of its royalty rights, the Company and EY discussed the Tysabri
®
royalty stream and the potential effects of the accounting and disclosures associated with the pending 2018 adoption of ASC 606 “Revenues from Contracts with Customers.” As previously disclosed in the Company’s Form 12b-25 filing on February 27, 2017, in conjunction with these reviews, EY notified the Company on February 22, 2017 that it was reevaluating the historical revenue recognition practices associated with the Tysabri
®
royalty stream; specifically, EY was reassessing the classification of the intangible asset related to the royalty stream and its potential reclassification as a financial asset. After an extensive evaluation of the facts and circumstances and the judgments required to determine the appropriate classification, it was determined that under U.S. GAAP the Tysabri
®
royalty stream should be recorded as a financial asset, rather than an intangible asset, on the date of acquisition, and the Company adopted this change.
The Company has elected to account for the Tysabri
®
financial asset using the fair value option model, which requires the Company to adjust its financial statements for the Relevant Periods to (1) remove the Tysabri
®
royalty stream
from net sales in its income statement, (2) remove the amortization expense (reflected in cost of goods sold) associated with recording the Tysabri
®
royalty stream as an intangible asset, and (3) include the quarterly changes in fair value of the Tysabri
®
royalty stream as a component of other income/expense. The change in accounting may affect the amount and timing of noncash income or expense associated with the Tysabri
®
asset, and the Company’s Statements of Cash Flows for the Relevant Periods will reflect the cash received from the Tysabri
®
royalty stream as cash from investing activities, rather than as cash from operating activities.
The Company currently anticipates filing a Form 10-K for the fiscal year ended December 31, 2016 that will contain audited restated financial statements for the fiscal years ended June 28, 2014 and June 27, 2015 and the transition period from June 28, 2015 to December 31, 2015, as well as restated information for the quarterly periods included within the fiscal year ended June 27, 2015, the transition period from June 28, 2015 to December 31, 2015, and the fiscal year ended December 31, 2016. The Company also anticipates filing amended Form 10-Qs for the quarterly periods ended April 2, 2016, July 2, 2016 and October 1, 2016. In connection with the restatement of its consolidated financial statements to reflect the accounting for Tysabri
®
as a financial asset and the Omega deferred tax assets, the Company also will record other previously identified adjustments in the restated financial statements.
The Company is in the process of assessing its internal control over financial reporting during the Relevant Periods, and it is possible the Company may identify one or more material weaknesses.