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 maternal and women’s health, anemia management and cancer supportive care, including Makena
®
(hydroxyprogesterone caproate injection), Intrarosa
®
(prasterone) vaginal inserts, Feraheme
®
(ferumoxytol injection) for intravenous (“IV”) use, and MuGard
®
Mucoadhesive Oral Wound Rinse. In addition, in February 2017, we acquired the rights to research, develop and commercialize bremelanotide in North America. Through services related to the preservation of umbilical cord blood stem cell and cord tissue units 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 ability to successfully commercialize our products and services, intense competition, including from generic products; maintaining and defending the proprietary nature of our technology; our dependence upon third-party manufacturers and our potential inability to obtain raw or other materials; our reliance on and the extent of reimbursement from third parties for the use of our products, including the impact of generic competitors, Makena’s high Medicaid reimbursement concentration and the limited level of reimbursement for Intrarosa; our ability to expand our product portfolio through business development transactions; the approval of bremelanotide and our ability to commercialize bremelanotide, if approved; employee retention and our ability to manage our expanded product portfolio and operations; potential litigation, including securities and product liability suits; our ability to work effectively and collaboratively with our licensors; our reliance on other third parties in our business, including to conduct our clinical trials and undertake our product and distribution; our ability to attract and retain key employees; if our storage facility in Tucson, Arizona is damaged or destroyed; our potential failure to comply with federal and state healthcare fraud and abuse laws, marketing disclosure laws, cord blood and tissue regulations and laws or other federal and state laws and regulations and potential civil or criminal penalties as a result thereof; uncertainties regarding reporting and payment obligations under government pricing programs; post-approval commitments for Makena; our ability to comply with data protection laws and regulations; the impact of disruptions to our information technology systems; our level of and ability to repay our indebtedness; our access to sufficient capital; the availability of net operating loss carryforwards and other tax assets; potential differences between actual future results and the estimates or assumptions used by us in preparation of our consolidated financial statements, including goodwill and intangible assets; the volatility of our stock price; the potential fluctuation of our operating results; and provisions in our charter, by-laws and certain contracts that discourage an acquisition of our company.
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 its August 17, 2015 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; marketable securities; 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, inclusive of valuation allowances, 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 marketable securities with a maturity of three months or less as of the acquisition date to be cash equivalents. At December 31, 2017 and 2016, substantially all of our cash and cash equivalents were held in either commercial bank accounts or money market funds.
Marketable Securities
We account for and classify our marketable securities as either “available-for-sale,” “held-to-maturity,” or “trading debt securities,” in accordance with the accounting guidance related to the accounting and classification of certain investments in marketable securities. The determination of the appropriate classification by us is based primarily on management’s ability and intent to sell the debt security at the time of purchase. As of December 31, 2017 and 2016, all of our marketable securities were classified as available-for-sale.
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 marketable securities 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 marketable 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 analysis 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.
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 U.S. Food and Drug Administration (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, our products have a shelf-life ranging from
three
to
five years
. As a result of comparison to internal sales forecasts, we expect to fully realize the carrying value of our 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, 2017 and 2016, we classified
$0.7 million
and
$2.6 million
of our cash as restricted cash, respectively. The December 31, 2016 balance included both
$2.0 million
held in a restricted fund previously established by Lumara Health, Inc. (“Lumara Health”) in connection with its Chapter 11 plan of reorganization to pay potential claims against its former directors and officers, as well as a
$0.6 million
security deposit delivered to the landlord of our Waltham, Massachusetts
headquarters in the form of an irrevocable letter of credit. In December 2017, the
$2.0 million
previously established by Lumara in connection with its Chapter 11 plan of reorganization was unrestricted and the funds were moved into operating cash.
Concentrations and Significant Customer Information
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, 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, 2017
, 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, Feraheme, Mugard, Intrarosa, bremelanotide, and marketing and selling the CBR Services. 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
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
AmerisourceBergen Drug Corporation
|
21
|
%
|
|
22
|
%
|
|
25
|
%
|
|
McKesson Corporation
|
19
|
%
|
|
11
|
%
|
|
11
|
%
|
|
Takeda Pharmaceuticals Company Limited
|
—
|
%
|
|
—
|
%
|
|
12
|
%
|
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. All of the revenues generated during
2017
and 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 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. We did not experience any significant bad debts and have not established an allowance for doubtful accounts on our product sales at December 31, 2017 and
2016
.
Customers which represented greater than
10%
of our accounts receivable balance as of
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
AmerisourceBergen Drug Corporation
|
27
|
%
|
|
13
|
%
|
|
McKesson Corporation
|
22
|
%
|
|
32
|
%
|
We are currently dependent on a single supplier for Feraheme drug substance (produced in
two
separate facilities) and finished drug product as well as for drug substance and fill finish services for Intrarosa. 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 and Asset Acquisitions
The purchase price allocation for business combinations requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. We early adopted ASU No. 2017-01, “
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”) as of January 1, 2017. Under ASU 2017-01, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the single asset or group of assets, as applicable, is not a business.
We account for acquired businesses using the acquisition method of accounting, under which 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 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.
The purchase price allocations are initially prepared on a preliminary basis and are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocations are made as soon as practicable but no later than one year from the acquisition date.
Acquired inventory is recorded at its fair value, which may require a step-up adjustment to recognize the inventory at its expected net realizable value. The inventory step-up is recorded to cost of product sales in our consolidated statements of operations when related inventory is sold, and we record step-up costs associated with clinical trial material as research and development expense.
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
We test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and
circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that could indicate impairment and trigger an interim impairment assessment include, but are not limited to, an adverse change in current economic and market conditions, including a significant prolonged decline in market capitalization, a significant adverse change in legal factors, unexpected adverse business conditions, and an adverse action or assessment by a regulator. Our annual impairment test date is October 31. We have determined that we operate in a single operating segment and have a single reporting unit.
In performing our goodwill impairment tests during 2017, we utilized the approach prescribed under the Accounting Standards Codification (“ASC”) 350, as amended by Accounting Standards Update (“ASU”) 2017-04,
Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which we adopted on January 1, 2017 (“ASU 2017-04”). ASU 2017-04 requires that an entity 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.
Prior to our adoption of ASU 2017-04, we utilized the two-step approach prescribed under ASC 350 in performing our goodwill impairment tests. The first step required a comparison of the reporting unit’s carrying value to its fair value. If the carrying value of a reporting unit exceeded its estimated fair value, a second step was required to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of a reporting unit’s goodwill to its carrying value. The second step required us to perform a hypothetical purchase price allocation as of the measurement date and estimate the fair value of net tangible and intangible assets. The fair value of intangible assets is determined as described below and is subject to significant judgment.
Intangible Assets
We amortize our intangible assets that have finite lives based on either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized. 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.
If we acquire a business as defined under applicable accounting standards, then the acquired IPR&D is capitalized as an intangible asset. If we acquire an asset or a group of assets that do not meet the definition of a business, then the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense as they are incurred
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 sheets 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.
The projected discounted cash flow models used to estimate our IPR&D reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including the following:
|
|
|
|
•
|
Probability of successfully completing clinical trials and obtaining regulatory approval;
|
|
|
|
|
•
|
Market size, market growth projections, and market share;
|
|
|
|
|
•
|
Estimates regarding the timing of and the expected costs to advance our clinical programs to commercialization;
|
|
|
|
|
•
|
Estimates of future cash flows from potential product sales; and
|
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, Feraheme, and Intrarosa; (b) service revenues associated with the CBR Services; and (c) license fees, collaboration and other revenues, which primarily included revenue recognized under our 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 product sales, which primarily represented revenues from Makena and Feraheme for
2017
,
2016
and
2015
were offset by provisions for allowances and accruals as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Gross product sales
|
$
|
920,061
|
|
|
$
|
748,839
|
|
|
$
|
561,255
|
|
|
Provision for product sales allowances and accruals:
|
|
|
|
|
|
|
Contractual adjustments
|
310,588
|
|
|
229,686
|
|
|
161,665
|
|
|
Governmental rebates
|
113,828
|
|
|
86,983
|
|
|
57,774
|
|
|
Total provision for product sales allowances and accruals
|
424,416
|
|
|
316,669
|
|
|
219,439
|
|
|
Product sales, net
|
$
|
495,645
|
|
|
$
|
432,170
|
|
|
$
|
341,816
|
|
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
. 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 our products have a range of
three years
to
five years
. 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 products, 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. We did not significantly adjust our reserve for product returns during
2017
,
2016
, or 2015. To date, our product returns 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 2017 and 2016, we refined 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 refinement resulted in a
$1.2 million
increase and a
$6.1 million
reduction of our estimated Medicaid rebate reserve related to prior period Makena sales in 2017 and 2016, respectively. 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, 18 year and lifetime storage options are 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 annual 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.
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 print media advertising space were
$22.7 million
,
$16.4 million
and
$8.0 million
for the years ended December 31,
2017
,
2016
and
2015
, 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 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 advisers 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, such as total shareholder return, 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 whose vesting is dependent on future service 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
We use the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A deferred tax asset is established for the expected future benefit of net operating loss (“NOL”) and credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance against net deferred tax assets is required if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Significant judgments, estimates and assumptions regarding future events, such as the amount, timing and character of income, deductions and tax credits, are required in the determination of our provision for income taxes and whether valuation allowances are required against deferred tax assets. In evaluating our ability to recover our deferred tax assets, we consider all available evidence, both positive and negative, including the existence of taxable temporary differences, our past operating results, the existence of cumulative income in the most recent fiscal years, changes in the business in which we operate and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state and federal operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage the underlying business. As of
December 31, 2017
, we maintained a valuation allowance on certain of our state NOL and credit carryforwards.
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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”), was enacted. The 2017 Tax Act includes significant changes to the U.S. corporate income tax system, including a reduction of the federal corporate income tax rate from
35% to 21%, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. We have recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the year ended December 31, 2017. While we believe these estimates are reasonable, the ultimate impact may differ from these provisional amounts due to further review of the enacted legislation, changes in interpretations and assumptions we have made, and additional accounting and regulatory guidance that may be issued.
Comprehensive (Loss) Income
Our comprehensive (loss) income consists of net (loss) income and other comprehensive (loss) income. Other comprehensive (loss) income includes changes in equity that are excluded from net (loss) income, which for all periods presented in these consolidated financial statements related to unrealized holding gains and losses on available-for-sale marketable securities, net of tax.
Basic and Diluted Net (Loss) Income 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, diluted net income per common share would be computed assuming the impact of the conversion of the
2.5%
convertible senior notes due in 2019 (the “2019 Convertible Notes”) and the
3.25%
convertible senior notes due in 2022 (the “2022 Convertible Notes”), the exercise of outstanding stock options, the vesting of RSUs, and the exercise of warrants.
We have a choice to settle the conversion obligation of our 2022 Convertible Notes and the 2019 Convertible Notes (together, the “Convertible Notes”) in cash, shares or any combination of the two. Prior to May 2017, and pursuant to certain covenants in our
six
-year
$350.0 million
term loan facility (the “2015 Term Loan Facility”), which was repaid in full in May 2017, we were restricted from settling the conversion obligation in whole or in part with cash unless certain conditions in the 2015 Term Loan Facility were satisfied. Prior to the repayment of the 2015 Term Loan Facility, we utilized the if-converted method to reflect the impact of the conversion of the Convertible Notes. Our current policy is to settle the principal balance of the Convertible Notes in cash. As such, subsequent to the repayment of the 2015 Term Loan Facility, we apply the treasury stock method to these securities and the dilution related to the conversion premium, if any, of the Convertible Notes is included in the calculation of diluted weighted-average shares outstanding to the extent each issuance is dilutive based on the average stock price during each reporting period being greater than the conversion price of the respective Convertible Notes.
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
2017
,
2016
and
2015
were as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Net (loss) income
|
$
|
(199,228
|
)
|
|
$
|
(2,483
|
)
|
|
$
|
32,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
34,907
|
|
|
34,346
|
|
|
31,471
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Warrants
|
—
|
|
|
—
|
|
|
2,466
|
|
|
Stock options and RSUs
|
—
|
|
|
—
|
|
|
1,371
|
|
|
Shares used in calculating dilutive net (loss) income per share
|
34,907
|
|
|
34,346
|
|
|
35,308
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(5.71
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
1.04
|
|
|
Diluted
|
$
|
(5.71
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.93
|
|
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 (loss) income per share because their inclusion would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Options to purchase shares of common stock
|
3,531
|
|
|
2,590
|
|
|
1,619
|
|
|
Shares of common stock issuable upon the vesting of RSUs
|
1,070
|
|
|
613
|
|
|
167
|
|
|
Warrants
|
1,008
|
|
|
7,382
|
|
|
—
|
|
|
2022 Convertible Notes
|
11,695
|
|
|
—
|
|
|
—
|
|
|
2019 Convertible Notes
|
790
|
|
|
7,382
|
|
|
7,382
|
|
|
Total
|
18,094
|
|
|
17,967
|
|
|
9,168
|
|
In connection with the issuance of the 2019 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 remaining 2019 Convertible Notes. During
2017
and
2015
, the average common stock price was below the exercise price of the warrants and during
2016
, the average common stock price was above the exercise price of the warrants.
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.
C. BUSINESS COMBINATIONS
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 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, Net,
”
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.
Unaudited Pro Forma Supplemental Information
The following supplemental unaudited pro forma information presents our revenue and net income on a pro forma combined basis, including CBR, assuming that the CBR acquisition occurred on January 1, 2015. 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. The pro forma amount does not include any then expected cost savings or restructuring action which might have been achievable or might have occurred subsequent to the acquisition CBR, or the impact of any non-recurring activity. The following table presents the unaudited pro forma consolidated result (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Pro forma revenues
|
490,451
|
|
|
Pro forma net income
|
28,217
|
|
The pro forma adjustments reflected in the pro forma net income 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 net income 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 were adjusted accordingly. This pro forma financial information is not necessarily indicative of our consolidated operating results that would have been reported had the transaction 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. The goodwill resulting from the CBR acquisition is not deductible for income tax purposes.
D. MARKETABLE SECURITIES
As of
December 31, 2017
and
2016
, our marketable securities 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 marketable securities.
The following is a summary of our marketable securities as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Description of Securities:
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Short-term investments:*
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
57,257
|
|
|
$
|
—
|
|
|
$
|
(68
|
)
|
|
$
|
57,189
|
|
|
U.S. treasury and government agency securities
|
1,999
|
|
|
—
|
|
|
(13
|
)
|
|
1,986
|
|
|
Commercial paper
|
1,999
|
|
|
—
|
|
|
—
|
|
|
1,999
|
|
|
Certificates of deposit
|
9,151
|
|
|
—
|
|
|
—
|
|
|
9,151
|
|
|
Total short-term investments
|
70,406
|
|
|
—
|
|
|
(81
|
)
|
|
70,325
|
|
|
Long-term investments:**
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
59,282
|
|
|
1
|
|
|
(320
|
)
|
|
58,963
|
|
|
U.S. treasury and government agency securities
|
7,381
|
|
|
—
|
|
|
(76
|
)
|
|
7,305
|
|
|
Total long-term investments
|
66,663
|
|
|
1
|
|
|
(396
|
)
|
|
66,268
|
|
|
Total investments
|
$
|
137,069
|
|
|
$
|
1
|
|
|
$
|
(477
|
)
|
|
$
|
136,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Description of Securities:
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Short-term investments:*
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
106,430
|
|
|
$
|
3
|
|
|
$
|
(69
|
)
|
|
$
|
106,364
|
|
|
U.S. treasury and government agency securities
|
1,021
|
|
|
—
|
|
|
—
|
|
|
1,021
|
|
|
Commercial paper
|
40,560
|
|
|
—
|
|
|
—
|
|
|
40,560
|
|
|
Certificates of deposit
|
6,000
|
|
|
—
|
|
|
—
|
|
|
6,000
|
|
|
Total short-term investments
|
154,011
|
|
|
3
|
|
|
(69
|
)
|
|
153,945
|
|
|
Long-term investments:**
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
139,742
|
|
|
32
|
|
|
(281
|
)
|
|
139,493
|
|
|
U.S. treasury and government agency securities
|
11,395
|
|
|
—
|
|
|
(52
|
)
|
|
11,343
|
|
|
Total long-term investments
|
151,137
|
|
|
32
|
|
|
(333
|
)
|
|
150,836
|
|
|
Total investments
|
$
|
305,148
|
|
|
$
|
35
|
|
|
$
|
(402
|
)
|
|
$
|
304,781
|
|
* Represents marketable securities with a remaining maturity of less than one year.
** Represents marketable securities with a remaining maturity of one to three years.
Impairments and Unrealized Gains and Losses on Marketable Securities
We did
no
t recognize any other-than-temporary impairment losses in our consolidated statements of operations related to our marketable securities during
2017
,
2016
and
2015
. We considered various factors, including the length of time that each security was in a realized loss position and our ability and intent to hold these securities until recovery of their amortized cost basis occurs. As of
December 31, 2017
, we have no material losses 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 marketable securities could have a material adverse effect on our earnings in future periods.
E. FAIR VALUE MEASUREMENTS
We apply the provisions of Accounting Standards Codification Topic 820,
Fair Value Measurements
(“ASC 820”) for our financial assets and liabilities that are re-measured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis. Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. Financial assets and liabilities are categorized within the valuation hierarchy based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
|
|
|
|
•
|
Level 1—Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2—Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
|
|
|
|
|
•
|
Level 3—Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
|
The following tables represent the fair value hierarchy as of
December 31, 2017
and
2016
, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 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
|
$
|
4,591
|
|
|
$
|
4,591
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Corporate debt securities
|
116,152
|
|
|
—
|
|
|
116,152
|
|
|
—
|
|
|
U.S. treasury and government agency securities
|
9,291
|
|
|
—
|
|
|
9,291
|
|
|
—
|
|
|
Commercial paper
|
1,999
|
|
|
—
|
|
|
1,999
|
|
|
—
|
|
|
Certificates of deposit
|
9,151
|
|
|
—
|
|
|
9,151
|
|
|
—
|
|
|
Total Assets
|
$
|
141,184
|
|
|
$
|
4,591
|
|
|
$
|
136,593
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Lumara Health
|
$
|
49,187
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,187
|
|
|
Contingent consideration - MuGard
|
898
|
|
|
—
|
|
|
—
|
|
|
898
|
|
|
Total Liabilities
|
$
|
50,085
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Marketable securities
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 marketable securities 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 analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value measurements provided by our pricing services as of
December 31, 2017
or
2016
. In addition, there were
no
transfers or reclassifications of any securities between Level 1 and Level 2 during
2017
or
2016
.
Contingent consideration
In accordance with GAAP, for asset acquisitions, such as Intrarosa, we record contingent consideration for obligations we consider to be probable and estimable and these liabilities are not adjusted to fair value. As of December 31, 2017,
$10.0 million
of contingent consideration was recorded in accrued expenses and is required to be paid to Endoceutics, Inc. (“Endoceutics”) in April 2018 on the first anniversary of the closing of a license agreement we entered into with Endoceutics (the “Endoceutics License Agreement”). We recorded contingent consideration related to the November 2014 acquisition of Lumara Health 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, 2016
|
$
|
222,559
|
|
|
Payments made
|
(100,246
|
)
|
|
Adjustments to fair value of contingent consideration
|
25,682
|
|
|
Balance as of December 31, 2016
|
$
|
147,995
|
|
|
Payments made
|
(50,224
|
)
|
|
Adjustments to fair value of contingent consideration
|
(47,686
|
)
|
|
Balance as of December 31, 2017
|
$
|
50,085
|
|
During
2017
, we adjusted the fair value of our contingent consideration liability by approximately
$47.7 million
, primarily due to a decrease to the Makena contingent consideration based on a revision of our long-term forecast of total projected net Makena sales, which impacted both the amount and timing of future milestone payments. In addition, during
2017
we paid a
$50.0 million
sales milestone to the former stockholders of Lumara Health and a
$0.2 million
royalty payment for MuGard. We have classified
$49.2 million
of the Makena contingent consideration and
$0.2 million
of the MuGard contingent consideration as short-term liabilities in our consolidated balance sheet as of
December 31, 2017
.
The
$25.7 million
adjustment to the fair value of the contingent consideration liability in
2016
was 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. In addition, during
2016
we made a
$100.0 million
sales milestone payment to the former stockholders of Lumara Health.
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, 2017
, the total undiscounted milestone payment amounts we could pay in connection with the Lumara Health acquisition was
$200.0 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
14%
as of
December 31, 2017
. In addition, as of
December 31, 2017
, 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, 2017
, the estimated fair value of our 2023 Senior Notes (as defined below), the 2022 Convertible Notes and the 2019 Convertible Notes was
$463.7 million
,
$282.9 million
and
$21.6 million
, respectively, which differed from their carrying values. See Note Q, “
Debt,
”
for additional information on our debt obligations.
F. INVENTORIES
Our major classes of inventories were as follows as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Raw materials
|
$
|
12,418
|
|
|
$
|
14,382
|
|
|
Work in process
|
4,146
|
|
|
3,924
|
|
|
Finished goods
|
20,792
|
|
|
18,952
|
|
|
Total inventories
|
$
|
37,356
|
|
|
$
|
37,258
|
|
G. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Land
|
$
|
700
|
|
|
$
|
700
|
|
|
Land improvements
|
300
|
|
|
300
|
|
|
Building and improvements
|
9,552
|
|
|
9,500
|
|
|
Computer equipment and software
|
14,073
|
|
|
13,866
|
|
|
Furniture and fixtures
|
2,512
|
|
|
2,401
|
|
|
Leasehold improvements
|
4,959
|
|
|
3,718
|
|
|
Laboratory and production equipment
|
8,030
|
|
|
6,449
|
|
|
Construction in progress
|
5,360
|
|
|
1,619
|
|
|
|
45,486
|
|
|
38,553
|
|
|
Less: accumulated depreciation
|
(19,490
|
)
|
|
(14,093
|
)
|
|
Property, plant and equipment, net
|
$
|
25,996
|
|
|
$
|
24,460
|
|
During
2017
,
2016
and
2015
, depreciation expense was
$7.2 million
,
$9.2 million
, and
$3.9 million
, respectively.
H. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Our goodwill balance consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
$
|
639,188
|
|
|
Measurement period adjustments related to Lumara Health acquisition
|
296
|
|
|
Balance as of December 31, 2017 and 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. As of
December 31, 2017
, we had
no
accumulated impairment losses related to goodwill.
We test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that could indicate impairment and trigger an interim impairment assessment include, but are not limited to, an adverse change in current economic and market conditions, including a significant prolonged decline in market capitalization, a significant adverse change in legal factors, unexpected adverse business conditions, and an adverse action or assessment by a regulator. Our annual impairment test date is October 31. We have determined that we operate in a single operating segment and have a single reporting unit.
In performing our goodwill impairment tests during 2017, we utilized the approach prescribed under ASC 350, as amended by ASU 2017-04 which requires that an entity 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.
When we perform any goodwill impairment test, the estimated fair value of our reporting unit is determined using an income approach that utilizes a discounted cash flow (“DCF”) model or, a market approach, when appropriate, which assesses our market capitalization as adjusted for a control premium, or a combination thereof. The DCF model is based upon expected future after-tax operating cash flows of the reporting unit discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows (ii) the probability of regulatory approvals, and (iii) future economic conditions, all of which may differ from actual future cash flows. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in the DCF model, is based on estimates of the weighted average cost of capital (“WACC”) of market participants relative to our reporting unit. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC. Any changes in these assumptions may affect our fair value estimate and the result of an impairment test. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. In addition, in order to assess the reasonableness of the fair value of our reporting unit as calculated under the DCF model, we also compare the reporting unit’s fair value to our market capitalization and calculate an implied control premium (the excess sum of the reporting unit’s fair value over its market capitalization). We evaluate the implied control premium by comparing it to control premiums of recent comparable market transactions, as applicable. Throughout 2017 and as of December 31, 2017, our market capitalization was lower than our stockholders’ equity, or book value. We believe that a market participant buyer would be required to pay a control premium for our business that would cover the difference between our market capitalization and our book value.
During the third quarter of 2017, we determined that the significant reduction in the long-term forecasted cash flows of our largest product, Makena, which led to a
$319.2 million
impairment of the Makena base technology intangible asset, was an indicator that an interim impairment test of goodwill was necessary at September 30, 2017. We performed a quantitative goodwill impairment test at September 30, 2017 in accordance with ASU 2017-04, to both assess whether a goodwill impairment existed and if so, the amount of the impairment loss. We considered our market capitalization, as adjusted for a control premium, to be one indicator of the fair value of our reporting unit. On September 30, 2017, our stock price closed at
$18.45
, resulting in a market capitalization of approximately
$653.0 million
, which was
18%
below the carrying amount of the reporting unit as of September 30, 2017.
As described in the accounting guidance for evaluating long-lived assets for impairment, an entity’s fair value may include a control premium in addition to the quoted market price to determine the fair value of a single reporting unit entity, as an acquiring entity is often willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. This accounting guidance also indicates that the quoted market price of an individual security need not be the sole measurement basis of the fair value of a single reporting unit. During the third quarter of 2017, we obtained a control premium analysis which benchmarked average control premiums paid in prior merger and acquisition transactions among biotechnology and pharmaceutical companies. The analysis indicated that control premiums vary depending on facts and circumstances for each transaction. The range of control premiums observed was between
30%
and
83%
, with a mean of
64%
. Management believes that using this market approach of assessing reasonable control premiums provided a sufficient basis to assess whether the fair value of our reporting unit, including a range of reasonable control premiums, was above its carrying amount as of September 30, 2017. Incorporating control premiums in this range to our September 30, 2017 market capitalization of
$653.0 million
resulted in a fair value which was at least
6%
greater (at the low end of the range) than the carrying amount of our net assets as of September 30, 2017. As a result of this review, we determined that there was
no
impairment of our goodwill at September 30, 2017.
On October 31, 2017 (the “measurement date”), we conducted our 2017 annual goodwill impairment test using an income approach, specifically a DCF model, and a market approach to estimate the fair value of our reporting unit as of the measurement date. We used a range of discount rates between
10.0%
and
19.5%
across our commercial products and product candidates, which resulted in a weighted average discount rate of
13.6%
to determine the fair value of our reporting unit. We believe the discount rate and other inputs and assumptions are consistent with those that a market participant would use. In addition, we believe we utilized reasonable estimates and assumptions about future revenues, cost projections, and cash flows as of the measurement date. As a corroborating step in our 2017 annual impairment assessment, we compared our implied control premium, as determined by the difference between the fair value of our reporting unit as estimated by our DCF analysis and our market capitalization, to control premiums of recent comparable market transactions. The results indicated that the implied control premium was within the range of control premiums observed in prior merger and acquisition transactions
among biotechnology and pharmaceutical companies. We believe that using this market approach further corroborated our DCF fair value assessment at October 31, 2017. As a result of our DCF analysis, we determined that the fair value of our reporting unit exceeded its carrying value by
18%
and as such,
no
impairment was recorded as of October 31, 2017. In performing a sensitivity analysis, had we increased the weighted average discount rate by
1%
, the fair value of the reporting unit would have still exceeded the carrying value. In addition, we determined that there were no other indicators of impairment through December 31, 2017 requiring further assessment.
Assumptions related to revenue, growth rates and operating margin are based on management’s annual and ongoing forecasting, budgeting and planning processes and represent our best estimate of the future results of operations across the company as of that point in time. These estimates are subject to many assumptions, such as the economic environment in which our reporting unit operates, expectations of regulatory approval of our products in development or under review with the FDA, demand for our products and competitor actions. If we were to apply different assumptions, or if the outcome of regulatory or other developments, or actual demand for our products and competitor actions, are inconsistent with our assumptions, our estimated discounted future cash flows and the resulting estimated fair value of our reporting unit would increase or decrease, and could result in the fair value of our reporting unit being less than its carrying value in an impairment test.
Prior to our adoption of ASU 2017-04, we utilized the two-step approach prescribed under ASC 350 in performing our goodwill impairment tests. The first step required a comparison of the reporting unit’s carrying value to its fair value. If the carrying value of a reporting unit exceeded its estimated fair value, a second step was required to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of a reporting unit’s goodwill to its carrying value. The second step required us to perform a hypothetical purchase price allocation as of the measurement date and estimate the fair value of net tangible and intangible assets. The fair value of intangible assets is determined as described above and is subject to significant judgment. We conducted our 2016 and 2015 annual goodwill impairment tests on October 31 of each respective year. We used the market approach, as more fully described above, in making our impairment test conclusions. As a result of our analysis, our reporting unit had a fair value well in excess of its carrying value for both 2016 and 2015, and as such,
no
impairments were recorded in either of the respective periods.
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
Amortization
|
|
Impairments
|
|
Net
|
|
Cost
|
|
Amortization
|
|
Impairments
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Makena base technology
|
$
|
797,100
|
|
|
$
|
255,754
|
|
|
$
|
319,246
|
|
|
$
|
222,100
|
|
|
$
|
797,100
|
|
|
$
|
128,732
|
|
|
$
|
—
|
|
|
$
|
668,368
|
|
|
CBR customer relationships
|
297,000
|
|
|
29,309
|
|
|
—
|
|
|
267,691
|
|
|
297,000
|
|
|
13,590
|
|
|
—
|
|
|
283,410
|
|
|
Intrarosa developed technology
|
77,655
|
|
|
3,376
|
|
|
—
|
|
|
74,279
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
CBR Favorable lease
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
358
|
|
|
119
|
|
|
239
|
|
|
—
|
|
|
MuGard Rights
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,893
|
|
|
1,169
|
|
|
15,724
|
|
|
—
|
|
|
|
1,171,755
|
|
|
288,439
|
|
|
319,246
|
|
|
564,070
|
|
|
1,111,351
|
|
|
143,610
|
|
|
15,963
|
|
|
951,778
|
|
|
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
|
|
|
—
|
|
|
3,700
|
|
|
61,300
|
|
|
Total intangible assets
|
$
|
1,315,855
|
|
|
$
|
288,439
|
|
|
$
|
322,946
|
|
|
$
|
704,470
|
|
|
$
|
1,255,451
|
|
|
$
|
143,610
|
|
|
$
|
19,663
|
|
|
$
|
1,092,178
|
|
The Makena base technology and IPR&D intangible assets were acquired in November 2014 in connection with our acquisition of Lumara Health. During the third quarter of 2017, we received new information from a variety of sources, including from external consulting firms and our authorized generic partner, regarding the potential competitive landscape for the Makena intramuscular (“IM”) product (the “Makena IM product”) upon loss of orphan drug exclusivity in February 2018. The information received from one of our external consulting firms included competitive intelligence information, which indicated that several generic manufacturers had either likely filed an Abbreviated New Drug Application (“ANDA”) with the FDA in the third quarter of 2017 or were likely to file an ANDA in the fourth quarter of 2017. During the third quarter of 2017, we also began negotiations with our own authorized generic partner and gained industry insight into how the competitive landscape of the market might evolve once multiple generics entered. This information, combined with continued progress on our own authorized generic strategy, was incorporated into our revised long-range revenue forecasts for the Makena IM product during the third quarter of 2017. This new information received in the third quarter, altered our previous
assumptions, including the potential number of generic entrants and potential timing of entry following the loss of its orphan drug exclusivity, which significantly impacted our long-term revenue forecast for the Makena IM product.
We determined that the revised long-term forecast resulting from the information received in the third quarter of 2017 constituted a triggering event with respect to our Makena base technology intangible asset, which relates solely to the Makena IM product. We estimated that the sum of the undiscounted projected cash flows of the Makena IM product was less than the carrying value of the corresponding intangible asset. Therefore, we reassessed the fair value of the Makena base technology intangible asset using an income approach, a Level 3 measurement technique. We determined that as of September 30, 2017, the fair value of the Makena base technology intangible asset was less than the carrying value and accordingly, we recorded an impairment charge of
$319.2 million
, which was recorded within a separate operating expense line item in our consolidated statements of operations.
Amortization of the Makena base technology asset is being recognized using an economic consumption model. Prior to the third quarter of 2017, this asset was being amortized over
20 years
from the acquisition date, which we believed was an appropriate amortization period. During the third quarter of 2017, we reassessed the remaining useful life of the Makena base technology intangible asset. Based on the revised long-term forecast for the Makena IM product, we believe that the substantive period of revenue from the Makena IM asset will be through 2024 and thus concluded that
seven
years is an appropriate amortization period based on its revised estimated remaining economic life. Accordingly, we prospectively adjusted the remaining useful life of the Makena base technology intangible asset to
seven
years.
Further, during the third and fourth quarters of 2017, we evaluated our Makena IPR&D intangible asset, which is related to the Makena auto-injector, for impairment and concluded that its fair value was greater than its carrying value, and therefore it was not impaired. Furthermore, additional information may become available, which may cause us to identify additional impairment charges. Such charges could have a material adverse effect on our earnings in future periods.
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 CBR 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. In May 4, 2016, we entered into a sublease arrangement for a portion of our former 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. As part of our 2017 annual impairment test, we evaluated our CBR trade name and trademark intangible assets and concluded that its fair value was greater than its carrying value and therefore it was not impaired. As part of our 2016 annual impairment test, we recorded an impairment charge of
$3.7 million
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 Intrarosa developed technology was acquired in April 2017 from Endoceutics. Amortization of the Intrarosa developed technology is being recognized on a straight line basis over
11.5
years.
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 payers 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.
As of
December 31, 2017
, the weighted average remaining amortization period for our finite-lived intangible assets was approximately
10.8
years. Total amortization expense for
2017
,
2016
and
2015
, was
$146.1 million
,
$84.9 million
and
$53.5 million
, respectively. Amortization expense for the Makena base technology, Intrarosa developed technology, and the MuGard Rights is recorded in cost of product sales in our consolidated statements of operations. Amortization expense for the CBR related intangible assets 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, 2018
|
|
$
|
188,574
|
|
|
Year Ending December 31, 2019
|
|
39,527
|
|
|
Year Ending December 31, 2020
|
|
31,907
|
|
|
Year Ending December 31, 2021
|
|
31,696
|
|
|
Year Ending December 31, 2022
|
|
31,640
|
|
|
Thereafter
|
|
240,726
|
|
|
Total
|
|
$
|
564,070
|
|
I. CURRENT AND LONG-TERM LIABILITIES
Accrued Expenses
Accrued expenses consisted of the following as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Commercial rebates, fees and returns
|
$
|
102,357
|
|
|
$
|
89,466
|
|
|
Professional, license, and other fees and expenses
|
28,692
|
|
|
24,248
|
|
|
Salaries, bonuses, and other compensation
|
19,099
|
|
|
14,823
|
|
|
Interest expense
|
13,525
|
|
|
16,683
|
|
|
Intrarosa-related license fees
|
10,000
|
|
|
—
|
|
|
Accrued research and development
|
1,817
|
|
|
10,714
|
|
|
Restructuring expense
|
—
|
|
|
74
|
|
|
Total accrued expenses
|
$
|
175,490
|
|
|
$
|
156,008
|
|
Deferred Revenues
Our deferred revenue balances as of
December 31, 2017
and
2016
of
$66.9 million
and
$49.8 million
respectively, 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.
J. INCOME TAXES
For the years ended
December 31,
2017
,
2016
, and
2015
, all of our profit or loss before income taxes was from U.S. operations. The income tax (benefit) expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
2,180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
5,375
|
|
|
4,259
|
|
|
2,058
|
|
|
Total current
|
$
|
7,555
|
|
|
$
|
4,259
|
|
|
$
|
2,058
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
$
|
(167,667
|
)
|
|
$
|
9,815
|
|
|
$
|
9,819
|
|
|
State
|
(10,754
|
)
|
|
(2,536
|
)
|
|
(4,812
|
)
|
|
Total deferred
|
$
|
(178,421
|
)
|
|
$
|
7,279
|
|
|
$
|
5,007
|
|
|
Total income tax (benefit) expense
|
$
|
(170,866
|
)
|
|
$
|
11,538
|
|
|
$
|
7,065
|
|
The reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Statutory U.S. federal tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State taxes, net of federal benefit
|
3.4
|
|
|
6.4
|
|
|
0.1
|
|
|
Impact of 2017 tax reform on deferred tax balance
|
4.8
|
|
|
—
|
|
|
—
|
|
|
Equity-based compensation expense
|
(1.0
|
)
|
|
34.0
|
|
|
0.4
|
|
|
Contingent consideration
|
4.5
|
|
|
69.9
|
|
|
4.7
|
|
|
Transaction costs
|
—
|
|
|
—
|
|
|
3.9
|
|
|
Other permanent items, net
|
(0.6
|
)
|
|
21.2
|
|
|
3.2
|
|
|
Tax credits
|
0.7
|
|
|
(32.3
|
)
|
|
(1.7
|
)
|
|
Write-down of acquired state net operating losses
|
—
|
|
|
114.2
|
|
|
—
|
|
|
Valuation allowance
|
(0.8
|
)
|
|
(115.2
|
)
|
|
(28.0
|
)
|
|
Other, net
|
0.2
|
|
|
(5.8
|
)
|
|
0.1
|
|
|
Effective tax rate
|
46.2
|
%
|
|
127.4
|
%
|
|
17.7
|
%
|
For the year ended
December 31, 2017
, we recognized an income tax benefit of
$170.9 million
, representing an effective tax rate of
46.2%
. The difference between the expected statutory federal tax rate of
35.0%
and the effective tax rate of
46.2%
for the year ended
December 31, 2017
, was primarily attributable to the impact of the 2017 federal tax reform legislation, as discussed below, contingent consideration associated with Lumara Health, federal research and orphan drug tax credits generated during the year, and the impact of state income taxes, partially offset by equity-based compensation expenses and an increase to our valuation allowance.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”), was enacted. The 2017 Tax Act includes significant changes to the U.S. corporate income tax system, including a reduction of the federal corporate income tax rate from
35.0%
to
21.0%
, effective January 1, 2018. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. As a result of the reduction in the federal tax rate from
35.0%
to
21.0%
, we revalued our ending net deferred tax liabilities at December 31, 2017 and recognized a provisional
$17.6 million
tax benefit. We are still assessing the implications of the 2017 Tax Act on both a federal and state level, as further discussed below.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. SAB 118 allows us to record provisional amounts during a measurement period which is similar to the measurement period used when accounting for business combinations. We have recognized the provisional tax impacts related to the revaluation of deferred tax
assets and liabilities and included these amounts in our consolidated financial statements for the year ended December 31, 2017. While we believe these estimates are reasonable, the ultimate impact may differ from these provisional amounts due to further review of the enacted legislation, changes in interpretations and assumptions we have made, and additional accounting and regulatory guidance that may be issued.
For the year ended
December 31, 2016
, we recognized 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
127.4%
effective tax rate for 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, partially 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 statutory tax rate and the effective tax rate was primarily attributable to 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.
See Note C, “
Business Combinations
,” for more information on the CBR acquisition.
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. The components of our deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Assets
|
|
|
|
|
Net operating loss carryforwards
|
$
|
61,070
|
|
|
$
|
116,275
|
|
|
Tax credit carryforwards
|
15,892
|
|
|
9,415
|
|
|
Deferred revenue
|
3,420
|
|
|
1,811
|
|
|
Equity-based compensation expense
|
6,401
|
|
|
8,045
|
|
|
Capitalized research & development
|
7,872
|
|
|
18,284
|
|
|
Reserves
|
4,273
|
|
|
8,018
|
|
|
Contingent consideration
|
1,406
|
|
|
4,140
|
|
|
Other
|
6,777
|
|
|
9,769
|
|
|
Valuation allowance
|
(5,597
|
)
|
|
(1,429
|
)
|
|
Liabilities
|
|
|
|
|
Property, plant and equipment depreciation
|
(1,501
|
)
|
|
(2,145
|
)
|
|
Intangible assets and inventory
|
(107,906
|
)
|
|
(367,667
|
)
|
|
Debt instruments
|
(15,744
|
)
|
|
(1,040
|
)
|
|
Other
|
(290
|
)
|
|
(542
|
)
|
|
Net deferred tax liabilities
|
$
|
(23,927
|
)
|
|
$
|
(197,066
|
)
|
The valuation allowance
increased
by approximately
$4.2 million
for the year ended
December 31, 2017
, which was primarily attributable to the establishment of a valuation allowance on certain state NOL and credit carryforwards. During the year ended
December 31, 2017
, we entered into a three-year cumulative loss position and established a valuation allowance on certain deferred tax assets to the extent that our existing taxable temporary differences would not be available as a source of income to realize the benefits of those deferred tax assets. At
December 31, 2017
, the valuation allowance related primarily to certain of our state NOL and credit carryforwards.
At
December 31, 2017
, we had federal and state NOL carryforwards of approximately
$265.8 million
and
$90.9 million
, respectively, of which
$165.5 million
and
$16.6 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, 2017
were
$10.9 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. The federal and state NOLs expire at various dates through
2037
. We have federal tax credits of approximately
$14.8 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
$1.4 million
to offset future tax liabilities. These federal and state tax credits will expire periodically through
2037
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, 2017
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 NOLs and tax credits acquired from Lumara health are subject to restrictions under Section 382. These restricted NOLs 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, 2017
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. A reconciliation of our changes in unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Unrecognized tax benefits at the beginning of the year
|
$
|
13,330
|
|
|
$
|
12,695
|
|
|
$
|
—
|
|
|
Additions based on tax positions related to the current year
|
574
|
|
|
300
|
|
|
12,695
|
|
|
Additions for tax positions from prior years
|
340
|
|
|
379
|
|
|
—
|
|
|
Subtractions for federal tax reform
|
(3,296
|
)
|
|
—
|
|
|
—
|
|
|
Subtractions for tax positions from prior years
|
(78
|
)
|
|
(44
|
)
|
|
—
|
|
|
Unrecognized tax benefits at the end of the year
|
$
|
10,870
|
|
|
$
|
13,330
|
|
|
$
|
12,695
|
|
Included in the balance of unrecognized tax benefits as of
December 31,
2017
,
2016
, and
2015
are
$10.7 million
,
$13.0 million
, and
$12.4 million
, respectively, of unrecognized tax benefits that would impact the effective tax rate if recognized.
Our unrecognized tax benefits as of
December 31, 2017
decreased by
$2.5 million
as compared to December 31, 2016 primarily due to the change in the federal tax rate, which reduced the future value of our federal NOLs and the corresponding value of the unrecognized tax benefits related to those NOLs. This decrease was partially offset by tax reserves established on R&D tax credits.
Our unrecognized tax benefits as of December 31, 2016 increased by
$0.6 million
as compared to December 31, 2015 primarily due 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. Our unrecognized tax benefits as of December 31, 2015 were attributable to the results of those studies, which identified uncertain tax positions 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 tax benefits since inception. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. We do not expect our unrecognized 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, 2014, although carryforward attributes that were generated prior to tax year
2014
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 LOSS
The table below presents information about the effects of net income (loss) of significant amounts reclassified out of accumulated other comprehensive loss, net of tax, associated with unrealized gains on securities during
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Beginning balance
|
$
|
(3,838
|
)
|
|
$
|
(4,205
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(70
|
)
|
|
261
|
|
|
Reclassification adjustment for gains included in net loss
|
—
|
|
|
106
|
|
|
Ending balance
|
$
|
(3,908
|
)
|
|
$
|
(3,838
|
)
|
L. EQUITY-BASED COMPENSATION
We currently maintain
three
equity compensation plans, namely our Fourth Amended and Restated 2007 Equity Incentive Plan, as amended (the “2007 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. During the fourth quarter of 2017, the then outstanding awards under our Amended and Restated 2000 Stock Plan (the “2000 Plan”) expired.
Our 2007 Plan was originally approved by our stockholders in November 2007, and succeeded our 2000 Plan, which has expired and 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 were included in the number of shares that were issued under the 2007 Plan. In addition, any shares subject to outstanding awards granted under the 2000 Plan that expired or terminated for any reason prior to exercise were added to the total number of shares of our stock available for issuance under the 2007 Plan. In May 2017, our stockholders approved an amendment to our 2007 Plan to, among other things, increase the number of shares available for issuance thereunder by
2,485,000
shares. The total number of shares available for issuance under the 2007 Plan was
9,494,365
as of
December 31, 2017
and there were
2,715,012
shares remaining available for issuance under the 2007 Plan. As of
December 31, 2017
, all outstanding options under the 2007 Plan as of
December 31, 2017
have either a
seven
or
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, 2017
, there were
21,108
shares remaining available for issuance under the Lumara Health 2013 Plan, which are available for grants to certain employees, officers, directors, consultants, and advisers 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 provide 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, 2017
,
199,904
shares have been issued under our 2015 ESPP.
During
2017
, we also granted equity through inducement grants outside of our equity compensation 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
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Equity
|
|
2000 Equity
|
|
2013 Lumara
|
|
Inducement
|
|
|
|
|
Plan
|
|
Plan
|
|
Equity Plan
|
|
Grants
|
|
Total
|
|
Outstanding at December 31, 2016
|
2,158,822
|
|
|
5,200
|
|
|
134,181
|
|
|
814,975
|
|
|
3,113,178
|
|
|
Granted
|
1,044,817
|
|
|
—
|
|
|
10,075
|
|
|
91,100
|
|
|
1,145,992
|
|
|
Exercised
|
(92,529
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(92,529
|
)
|
|
Expired or terminated
|
(520,737
|
)
|
|
(5,200
|
)
|
|
(18,720
|
)
|
|
(90,625
|
)
|
|
(635,282
|
)
|
|
Outstanding at December 31, 2017
|
2,590,373
|
|
|
—
|
|
|
125,536
|
|
|
815,450
|
|
|
3,531,359
|
|
Restricted Stock Units
The following table summarizes RSU activity during
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Equity
|
|
2000 Equity
|
|
2013 Lumara
|
|
Inducement
|
|
|
|
|
Plan
|
|
Plan
|
|
Equity Plan
|
|
Grants
|
|
Total
|
|
Outstanding at December 31, 2016
|
773,804
|
|
|
—
|
|
|
27,694
|
|
|
135,456
|
|
|
936,954
|
|
|
Granted
|
797,027
|
|
|
—
|
|
|
—
|
|
|
24,300
|
|
|
821,327
|
|
|
Vested
|
(361,548
|
)
|
|
—
|
|
|
(13,330
|
)
|
|
(56,312
|
)
|
|
(431,190
|
)
|
|
Expired or terminated
|
(242,660
|
)
|
|
—
|
|
|
(2,753
|
)
|
|
(11,903
|
)
|
|
(257,316
|
)
|
|
Outstanding at December 31, 2017
|
966,623
|
|
|
—
|
|
|
11,611
|
|
|
91,541
|
|
|
1,069,775
|
|
In February 2017, we granted RSUs under our 2007 Plan to certain members of our senior management covering a maximum of
191,250
shares of common stock. These performance-based RSUs will vest, if at all, on February 22, 2020, based on our total shareholder return (“TSR”) performance measured against the median TSR of a defined group of companies over a
three
-year period. As of
December 31, 2017
, the maximum shares of common stock that may be issued under these awards is
162,750
. The maximum aggregate total fair value of these RSUs is
$3.2 million
, which is being recognized as expense over a period of
three
years from the date of grant, net of any estimated and actual forfeitures.
Equity-based compensation expense
Equity-based compensation expense for
2017
,
2016
and
2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Cost of product sales and services
|
$
|
1,278
|
|
|
$
|
520
|
|
|
$
|
371
|
|
|
Research and development
|
3,225
|
|
|
3,476
|
|
|
2,992
|
|
|
Selling, general and administrative
|
19,161
|
|
|
18,547
|
|
|
13,874
|
|
|
Total equity-based compensation expense
|
$
|
23,664
|
|
|
$
|
22,543
|
|
|
$
|
17,237
|
|
|
Income tax effect
|
(6,884
|
)
|
|
(6,232
|
)
|
|
(4,885
|
)
|
|
After-tax effect of equity-based compensation expense
|
$
|
16,780
|
|
|
$
|
16,311
|
|
|
$
|
12,352
|
|
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.
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,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
Non-Employee
|
|
|
|
Non-Employee
|
|
|
|
Non-Employee
|
|
|
Employees
|
|
Directors
|
|
Employees
|
|
Directors
|
|
Employees
|
|
Directors
|
|
Risk free interest rate (%)
|
1.86
|
|
1.61
|
|
1.32
|
|
1.10
|
|
1.55
|
|
1.24
|
|
Expected volatility (%)
|
53
|
|
57
|
|
49
|
|
54
|
|
47
|
|
46
|
|
Expected option term (years)
|
5.0
|
|
4.0
|
|
5.0
|
|
3.0
|
|
5.0
|
|
4.0
|
|
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
2017
,
2016
and
2015
, 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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
($ in thousands)
|
|
Outstanding at beginning of year
|
3,113,178
|
|
|
$
|
31.97
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
1,145,992
|
|
|
20.11
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
(92,529
|
)
|
|
15.39
|
|
|
—
|
|
|
—
|
|
|
Expired and/or forfeited
|
(635,282
|
)
|
|
33.56
|
|
|
—
|
|
|
—
|
|
|
Outstanding at end of year
|
3,531,359
|
|
|
$
|
28.27
|
|
|
7.2
|
|
|
$
|
55
|
|
|
Outstanding at end of year - vested and unvested expected to vest
|
3,267,530
|
|
|
$
|
28.37
|
|
|
7.1
|
|
|
$
|
55
|
|
|
Exercisable at end of year
|
1,871,179
|
|
|
$
|
29.33
|
|
|
5.8
|
|
|
$
|
55
|
|
The weighted average grant date fair value of stock options granted during
2017
,
2016
and
2015
was
$9.52
, $
10.63
and
$23.57
, respectively. A total of
699,701
stock options vested during
2017
. The aggregate intrinsic value of options exercised during
2017
,
2016
and
2015
, excluding purchases made pursuant to our 2015 ESPP, measured as of the exercise date, was
approximately
$0.4 million
,
$1.5 million
and
$31.2 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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Restricted Stock Units
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at beginning of year
|
936,954
|
|
|
$
|
28.78
|
|
|
Granted
|
821,327
|
|
|
24.18
|
|
|
Vested
|
(431,190
|
)
|
|
28.45
|
|
|
Forfeited
|
(257,316
|
)
|
|
25.95
|
|
|
Outstanding at end of year
|
1,069,775
|
|
|
$
|
26.07
|
|
|
Outstanding at end of year and expected to vest
|
886,876
|
|
|
$
|
26.19
|
|
The weighted average grant date fair value of RSUs granted during
2017
,
2016
and
2015
was
$24.18
,
$22.28
and
$52.71
, respectively. The total fair value of RSUs that vested during
2017
,
2016
and
2015
was
$12.3 million
,
$9.1 million
and
$3.5 million
, respectively.
At
December 31, 2017
, the amount of unrecorded equity-based compensation expense for both option and RSU awards, attributable to future periods was approximately
$34.3 million
. Of this amount,
$17.0 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
2.4
years,
$14.9 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
1.7
years, and
$2.4 million
was associated with performance-based RSUs and is expected to be amortized on a straight-line basis to expense over a weighted average period of approximately
2.1
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. As of December 31, 2017 our 401(k) Plan provided, among other things, for a company contribution of
3%
of each employee’s combined salary and certain other compensation for the plan year. Effective January 1, 2018, the company contribution increased to
4%
. 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
$2.9 million
,
$2.2 million
and
$1.7 million
for
2017
,
2016
and
2015
, respectively.
N. STOCKHOLDERS’ EQUITY
Preferred Stock and our 2017 NOL Rights Agreement
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. Following the expiration of our prior rights agreement and in an effort to protect stockholder value by continuing to help preserve our substantial tax assets associated with NOLs and certain other deferred tax assets, our Board entered into a new shareholder rights plan with American Stock Transfer & Trust Company, LLC, as Rights Agent, in April 2017 (which was approved by our stockholders at our May 2017 annual meeting of stockholders and which is essentially a restatement of the prior rights agreement, but with an expiration date of April 6, 2018, subject to earlier expiration as described below) (the “2017 NOL Rights Agreement”).
Our business operations have generated significant NOLs, and we may generate additional NOLs in future years. Under federal tax laws, we generally can use our NOLs and certain related tax credits to offset ordinary income tax paid in our prior two tax years or on our future taxable income for up to
20 years
, when they “expire” for such purposes. Until they expire, we
can “carry forward” NOLs and certain related tax credits that we do not use in any particular year to offset taxable income in future years. Our ability to utilize our NOLs to offset future taxable income may be significantly limited if we experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). Under Section 382, an “ownership change” occurs if a stockholder or a group of stockholders that is deemed to own at least
5%
of our outstanding stock increases its ownership by more than
50
percentage points over its lowest ownership percentage within a rolling
three
-year period. If an ownership change occurs, Section 382 would impose an annual limit on the amount of our NOLs that we can use to offset taxable income equal to the product of the total value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the ownership change. The 2017 NOL Rights Agreement is intended to act as a deterrent to any person or group acquiring
4.99%
or more of our outstanding common stock without the prior approval of our Board.
Under the 2017 NOL Rights Agreement, stockholders of record as of April 17, 2017 (the “Record Date”) were issued
one
preferred share purchase right (a “Right”) for each outstanding share of common stock, par value
$0.01
per share (the “Common Shares”), outstanding as of the Record Date. The Rights will also attach to new Common Shares issued after the Record Date. Each Right entitles the registered holder to purchase from us one one-thousandth of a share of our Series A Junior Participating Preferred Stock, par value
$0.01
per share (the “Preferred Shares”) at a price of
$80
per one one-thousandth of a Preferred Share (the “Purchase Price”), subject to adjustment. Each Preferred Share is designed to be the economic equivalent of
1,000
Common Shares.
The Rights will separate from the common stock and become exercisable on the earlier of (a) the
ten
th day after a public announcement that a person or group of affiliated or associated persons, has become an “Acquiring Person” (as such term is defined in the 2017 NOL Rights Agreement) or (b)
ten
business days (or such later date as the Board may determine) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer which would result in the beneficial ownership by an Acquiring Person of
4.99%
(or, in the case of a Grandfathered Person, the Grandfathered Percentage applicable to such Grandfathered Person (as such terms are defined in the 2017 NOL Rights Agreement)) or more of the outstanding Common Shares (the earlier of such dates being called the “Distribution Date”).
In the event that we are acquired in a merger or other business combination transaction or
50%
or more of our consolidated assets or earning power are sold to an Acquiring Person, its affiliates or associates or certain other persons in which such persons have an interest, proper provision will be made so that each such holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.
The Rights will expire on the earliest of the close of business on (1) April 6, 2018, (2) the effective date of the repeal of Section 382 or any successor statute if the Board determines that the 2017 NOL Rights Agreement is no longer necessary or desirable for the preservation of tax benefits or (3) the first day of a taxable year of the Company to which the Board determines that no tax benefits may be carried forward (the “Final Expiration Date”), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by us.
The terms of the Rights generally may be amended by the Board without the consent of the holders of the Rights, except that from and after the time that the Rights are no longer redeemable, no such amendment may adversely affect the interests of the holders of the Rights (excluding the interests of any Acquiring Person and any group of affiliated or associated persons).
There can be no assurance that the 2017 NOL Rights Agreement will result in us being able to preserve all or any of the substantial tax assets associated with NOLs and other tax benefits.
Share Repurchase Program
In January 2016, we announced that our Board 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
2017
, we repurchased and retired
1,366,266
shares of common stock under this repurchase program for
$19.5 million
, at an average purchase price of
$14.27
per share. 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. As of
December 31, 2017
,
$20.5 million
remains available for the repurchase of shares under the program.
O. 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, 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, the Landlord hold a security deposit of
$0.7 million
and $
0.6 million
in the form of an irrevocable letter of credit which is classified on our balance sheet as a long-term asset as of
December 31, 2017
and
2016
, respectively.
We lease certain real property located at 611 Gateway Boulevard, South San Francisco, California. The lease expires in July 2022.
Facility-related rent expense, net of deferred rent amortization, for all the leased properties was
$3.0 million
,
$2.8 million
, and
$1.5 million
for
2017
,
2016
and
2015
, respectively.
Future minimum payments under our non-cancelable facility-related leases as of
December 31, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Period
|
|
Future Minimum Lease Payments
|
|
Year Ending December 31, 2018
|
|
$
|
2,792
|
|
|
Year Ending December 31, 2019
|
|
3,100
|
|
|
Year Ending December 31, 2020
|
|
3,189
|
|
|
Year Ending December 31, 2021
|
|
1,488
|
|
|
Year Ending December 31, 2022
|
|
374
|
|
|
Total
|
|
$
|
10,943
|
|
Purchase Obligations
Purchase obligations primarily represent minimum purchase commitments for inventory. As of
December 31, 2017
, our minimum purchase commitments totaled $
16.5 million
.
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
through December 31, 2019, of which, $
50.0 million
and
$100.0 million
were paid in 2017 and 2016, respectively, 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 any future payments with certainty.
Contingent Regulatory and Commercial Milestone Payments
In connection with the Endoceutics License Agreement, we are required to pay Endoceutics
$10.0 million
in April 2018 on the first anniversary of the closing. In addition, we are required to pay Endoceutics 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 of Intrarosa exceed
$300.0 million
. If annual net U.S. sales of Intrarosa exceed
$500.0 million
, there are additional sales milestone payments totaling up to
$850.0 million
, which would be triggered at various sales thresholds. We are also obligated 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 $
1.0 billion
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)
10 years
after the first commercial sale of Intrarosa for the treatment of vulvar and vaginal atrophy (“VVA”) or female sexual dysfunction (“FSD”) in the U.S. (as applicable), (b) for generic competition and (c) for third-party payments, subject to an aggregate cap on such deductions of royalties otherwise payable to Endoceutics.
In connection with the license agreement we entered into with Palatin Technologies, Inc. (“Palatin”) in January 2017 (the “Palatin License Agreement”), we are required to pay Palatin up to
$380.0 million
in regulatory and commercial milestone payments including up to
$80.0 million
upon achievement of certain regulatory milestones, including
$20.0 million
upon the acceptance by the FDA of our New Drug Application (“NDA”) for bremelanotide and
$60.0 million
upon FDA approval, and up to
$300.0 million
of aggregate sales milestone payments upon the achievement of certain annual net sales over the course of the license. We are also obligated to pay Palatin tiered royalties on annual net sales of the Bremelanotide Products (as defined below), on a product-by-product basis, in the Palatin Territory, as defined below, ranging from the high-single digits to the low double-digits.
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 P, “
Collaboration, License and Other Strategic Agreements
,” for more information on the Velo option. Velo began its Phase 2b/3a clinical study in the second quarter of 2017, and until we exercise our option,
no
contingencies related to this agreement have been recorded in our consolidated financial statements as of
December 31, 2017
.
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. Antares is also entitles to sales-based milestone payments.
Employment 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 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 ANDA 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 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. If the litigation is resolved in favor of the applicant or the challenged patent expires during the 30 month stay period, the stay is lifted and the FDA may thereafter approve the application based on the applicable standards for approval. By the filing of this complaint, we believe the 30 month stay was triggered and that Sandoz is prohibited from marketing its ferumoxytol product, even if it receives conditional approval from the FDA until the earliest of (a) August 5, 2018 (30 months from the date we received Sandoz's a notice of certification), (b) the conclusion of litigation in Sandoz’s favor, or (c) expiration of the patent(s). On May 2, 2016, Sandoz filed a response to our patent infringement suit and the trial is scheduled for March 19, 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. 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 providing a brief overview of the DQSA for context, which we believe was 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. We believe we have fully cooperated with the FTC and we have had no further interactions with the FTC on this matter since we provided our response to the FTC in August 2015.
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, 2017
.
P. 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-stage development assets. As of
December 31, 2017
, we were a party to the following collaborations:
Endoceutics
In February 2017, we entered into the Endoceutics License Agreement with Endoceutics. Pursuant to the Endoceutics License Agreement, Endoceutics granted 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 combinations with other active pharmaceutical ingredients, in the U.S. for the treatment of VVA and FSD. The transactions contemplated by the Endoceutics License Agreement closed on April 3, 2017. We accounted for the Endoceutics License Agreement as an asset acquisition under ASU No. 2017-01, described in Note T,
Recently Issued and Proposed Accounting Pronouncements.
Upon the closing of the Endoceutics License Agreement, we made an upfront payment of
$50.0 million
and issued
600,000
shares of unregistered common stock to Endoceutics, which had a value of
$13.5 million
, as measured on April 3, 2017, the date of closing. Of these
600,000
shares,
300,000
were subject to a
180
-day lock-up provision, and the other
300,000
are subject to a
one
-year lock-up provision. In addition, we paid Endoceutics
$10.0 million
in the third quarter of 2017 upon the delivery by Endoceutics of Intrarosa launch quantities and have agreed to make a payment of
$10.0 million
in April 2018 on the first anniversary of the closing. The anniversary payment is reflected in accrued expenses at
December 31, 2017
. In the second quarter of 2017, we recorded a total of
$83.5 million
of consideration paid, of which
$77.7 million
was allocated to the Intrarosa developed technology intangible asset and
$5.8 million
was recorded as IPR&D expense based on their relative fair values.
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 U.S. sales up to
$150.0 million
to mid
twenty
percent for any calendar year net sales that exceed
$1.0 billion
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)
10 years
after the first commercial sale of Intrarosa for the treatment of VVA or FSD in the U.S. (as applicable), (b) for generic competition and (c) for third-party payments, subject to an aggregate cap on such deductions of royalties otherwise payable to Endoceutics. 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 annual net U.S. sales of Intrarosa exceed
$150.0 million
, and a second milestone payment of
$30.0 million
, which would be triggered when annual net U.S. sales of Intrarosa exceed
$300.0 million
. If annual net U.S. sales of Intrarosa exceed
$500.0 million
, there are additional sales milestone payments totaling up to
$850.0 million
, which would be triggered at various sales thresholds.
In the third quarter of 2017, Endoceutics initiated a clinical study to support an application for U.S. regulatory approval for Intrarosa for the treatment of hypoactive sexual desire disorder (“HSDD”) in post-menopausal women. 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 have the exclusive right to commercialize Intrarosa for the treatment of VVA and 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 and, if approved, FSD in the U.S. Endoceutics has the right to directly conduct additional commercialization activities for Intrarosa for the treatment of VVA and FSD in the U.S. and has the right to conduct activities related generally to the field of intracrinology, in each case, subject to our review and approval and our right to withhold approval in certain instances. Each party's commercialization activities and budget are described in a commercialization plan, which is updated annually.
In April 2017, we entered into an exclusive commercial supply agreement with Endoceutics pursuant to which Endoceutics, itself or through affiliates or contract manufacturers, agreed to manufacture and supply Intrarosa to us (the “Endoceutics Supply Agreement”) and will 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 Endoceutics Supply Agreement). Under the Endoceutics Supply Agreement, Endoceutics has agreed to maintain at all times a second source supplier for the manufacture of DHEA and the drug product and to identify, validate and transfer manufacturing intellectual property to the second source supplier by April 2019. The Endoceutics 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.
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.
Palatin
In January 2017, we entered into the Palatin License Agreement with Palatin under which we acquired (a) an exclusive license in all countries of North America (the “Palatin Territory”), with the right to grant sub-licenses, to research, develop and commercialize bremelanotide and any other products containing bremelanotide (collectively, the “Bremelanotide Products”), an investigational product designed to be a treatment for HSDD in pre-menopausal women, (b) a worldwide non-exclusive license, with the right to grant sub-licenses, to manufacture the Bremelanotide Products, and (c) a non-exclusive license in all countries outside the Palatin Territory, with the right to grant sub-licenses, to research and develop (but not commercialize) the Bremelanotide Products. Following the satisfaction of the conditions to closing under the Palatin License Agreement, the transaction closed in February 2017. We accounted for the Palatin License Agreement as an asset acquisition under ASU No. 2017-01.
Under the terms of the Palatin License Agreement, in February 2017 we paid Palatin
$60.0 million
as a one-time upfront payment and subject to agreed-upon deductions reimbursed Palatin approximately
$25.0 million
for reasonable, documented, out-of-pocket expenses incurred by Palatin in connection with the development and regulatory activities necessary to submit an NDA in the U.S. for bremelanotide for the treatment of HSDD in pre-menopausal women. As of
December 31, 2017
, we have fulfilled these payment obligations to Palatin. The
$60.0 million
upfront payment made in February 2017 to Palatin was recorded as IPR&D expense as the product candidate had not received regulatory approval.
In addition, the Palatin License Agreement requires us to make future contingent payments of (a) up to
$80.0 million
upon achievement of certain regulatory milestones, including
$20.0 million
upon the acceptance by the FDA of our NDA for bremelanotide and
$60.0 million
upon FDA approval, and (b) up to
$300.0 million
of aggregate sales milestone payments upon the achievement of certain annual net sales in North America over the course of the license. The first sales milestone payment
of
$25.0 million
will be triggered when bremelanotide annual net sales in North America exceed
$250.0 million
. We are also obligated to pay Palatin tiered royalties on annual net sales in North America of the Bremelanotide Products, on a product-by-product basis, in the Palatin 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 Bremelanotide Product in such country, (b) the expiration of the regulatory exclusivity period for such Bremelanotide Product in such country and (c)
10 years
following the first commercial sale of such Bremelanotide Product in such country. These royalties are subject to reduction in the event that: (a) we must license additional third-party intellectual property in order to develop, manufacture or commercialize a Bremelanotide Product or (b) generic competition occurs with respect to a Bremelanotide 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 Bremelanotide Product in a given country, the license for such Bremelanotide Product in such country would become a fully paid-up, royalty-free, perpetual and irrevocable license. The Palatin License Agreement expires on the date of expiration of all royalty obligations due thereunder, unless earlier terminated in accordance with the Palatin License Agreement.
Velo
In July 2015, we entered into an option agreement with Velo, a privately held life-sciences company that granted us an option to acquire the rights to an orphan drug candidate, DIF, a polyclonal antibody in clinical development for the treatment of severe preeclampsia in pregnant women. We made an upfront payment of
$10.0 million
in 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 began in the second 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
. In the event the royalty rate applicable to the quarter in which a milestone payment threshold is first achieved is
zero
, the applicable milestone payment amount will increase by
50%
.
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
Through our acquisition of Lumara Health, we are party to a development and license agreement with Antares, which 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 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. In addition, we are required to pay Antares sales milestone payments upon the achievement of certain annual net sales. 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 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 and possessions (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 in the MuGard Territory 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. 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.
Q. DEBT
Our outstanding debt obligations as of
December 31, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2023 Senior Notes
|
$
|
466,291
|
|
|
$
|
489,612
|
|
|
2022 Convertible Notes
|
248,194
|
|
|
—
|
|
|
2019 Convertible Notes
|
20,198
|
|
|
179,363
|
|
|
2015 Term Loan Facility
|
—
|
|
|
317,546
|
|
|
Total long-term debt
|
734,683
|
|
|
986,521
|
|
|
Less: current maturities
|
—
|
|
|
21,166
|
|
|
Long-term debt, net of current maturities
|
$
|
734,683
|
|
|
$
|
965,355
|
|
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.
In October 2017, we repurchased
$25.0 million
of the 2023 Senior Notes in a privately negotiated transaction, resulting in a loss on extinguishment of debt of
$1.1 million
. At
December 31, 2017
, the principal amount of the outstanding borrowings was
$475.0 million
and the carrying value of the outstanding borrowings, net of issuance costs and other lender fees and expenses, was
$466.3 million
.
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.
Convertible Notes
The outstanding balances of our Convertible Notes as of
December 31, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 Convertible Notes
|
|
2019 Convertible Notes
|
|
Total
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Principal
|
$
|
320,000
|
|
|
$
|
21,417
|
|
|
$
|
341,417
|
|
|
Less: debt discount and issuance costs, net
|
71,806
|
|
|
1,219
|
|
|
73,025
|
|
|
Net carrying amount
|
$
|
248,194
|
|
|
$
|
20,198
|
|
|
$
|
268,392
|
|
|
Gross equity component
|
$
|
72,576
|
|
|
$
|
9,905
|
|
|
$
|
82,481
|
|
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of our Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option (the “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. The carrying amount of the liability components 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 (the “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.
2022 Convertible Notes
In the second quarter of 2017, we issued
$320.0 million
aggregate principal amount of convertible senior notes due in 2022 (the “2022 Convertible Notes”) and received net proceeds of
$310.4 million
from the sale of the 2022 Convertible Notes, after deducting fees and expenses of
$9.6 million
. The approximately
$9.6 million
of debt issuance costs 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
$9.6 million
of debt issuance costs,
$2.2 million
was allocated to the Equity Component and recorded as a reduction to additional paid-in capital and
$7.4 million
was allocated to the liability component and is now recorded as a reduction of the 2022 Convertible Notes in our consolidated balance sheet. The portion allocated to the liability component is amortized to interest expense using the effective interest method over
five
years.
The 2022 Convertible Notes are governed by the terms of an indenture between us, as issuer, and Wilmington Trust, National Association, as the trustee. The 2022 Convertible Notes are senior unsecured obligations and bear interest at a rate of
3.25%
per year, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2017. The 2022 Convertible Notes will mature on
June 1, 2022
, unless earlier repurchased or converted. Upon conversion of the 2022 Convertible Notes, such 2022 Convertible Notes will be convertible into, at our election, cash, shares of our common stock, or a combination thereof, at a conversion rate of
36.5464
shares of common stock per
$1,000
principal amount of the 2022 Convertible Notes, which corresponds to an initial conversion price of approximately
$27.36
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 March 1, 2022, holders may convert their 2022 Convertible Notes at their option only under the following circumstances:
|
|
|
|
1)
|
during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending September 30, 2017, 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 2022 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 events.
|
On or after March 1, 2022, until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2022 Convertible Notes, in multiples of
$1,000
principal amount, at the option of the holder regardless of the foregoing circumstances. The 2022 Convertible Notes were not convertible as of
December 31, 2017
.
We determined the expected life of the debt was equal to the
five
-year term on the 2022 Convertible Notes. The effective interest rate on the liability component was
9.49%
for the period from the date of issuance through
December 31, 2017
. As of
December 31, 2017
, the “if-converted value” did not exceed the remaining principal amount of the 2022 Convertible Notes.
2019 Convertible Notes
In February 2014, we issued
$200.0 million
aggregate principal amount of the 2019 Convertible Notes. We received net proceeds of
$193.3 million
from the sale of the 2019 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 2019 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). In May 2017 and September 2017, we entered into privately negotiated transactions with certain investors to repurchase approximately
$158.9 million
and
$19.6 million
, respectively, aggregate principal amount of the 2019 Convertible Notes for an aggregate repurchase price of approximately
$171.3 million
and
$21.4 million
, respectively, including accrued interest. Pursuant to ASC Topic 470,
Debt
(“ASC 470”), the accounting for the May 2017 repurchase of the 2019 Convertible Notes was evaluated on a creditor-by-creditor basis with regard to the 2022 Convertible Notes to determine modification versus extinguishment accounting. We concluded that the May 2017 repurchase of the 2019 Convertible Notes should be accounted for as an extinguishment and we recorded a debt extinguishment gain of
$0.2 million
related to the difference between the consideration paid, the fair value of the liability component and carrying values at the repurchase date. As a result of the September 2017 repurchase of the 2019 Convertible Notes, we recorded a debt extinguishment loss of
$0.3 million
related to the difference between the consideration paid, the fair value of the liability component and carrying value at the repurchase date.
The 2019 Convertible Notes are governed by the terms of an indenture between us, as issuer, and Wilmington Trust, National Association, as the trustee. The 2019 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 2019 Convertible Notes will mature on
February 15, 2019
repurchased or converted. Upon conversion of the remaining 2019 Convertible Notes, such 2019 Convertible Notes will be convertible into, at our election, cash, shares of our common stock, or a combination thereof, at a conversion rate of
36.9079
shares of common stock per
$1,000
principal amount of the 2019 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 2019 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 measurement period in which the trading price per
$1,000
principal amount of the 2019 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 events.
|
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 2019 Convertible Notes, in multiples of
$1,000
principal amount, at the option of the holder, regardless of the foregoing circumstances. The 2019 Convertible Notes were not convertible as of
December 31, 2017
.
We determined the expected life of the debt was equal to the
five
-year term of the 2019 Convertible Notes. The effective interest rate on the liability component was
7.79%
for the period from the date of issuance through
December 31, 2017
. As of
December 31, 2017
, the “if-converted value” did not exceed the remaining principal amount of the 2019 Convertible Notes.
Convertible Notes Interest Expense
The following table sets forth total interest expense recognized related to the Convertible Notes during
2017
,
2016
, and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Contractual interest expense
|
$
|
8,961
|
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
Amortization of debt issuance costs
|
1,275
|
|
|
1,072
|
|
|
985
|
|
|
Amortization of debt discount
|
11,071
|
|
|
7,544
|
|
|
6,927
|
|
|
Total interest expense
|
$
|
21,307
|
|
|
$
|
13,616
|
|
|
$
|
12,912
|
|
Convertible Bond Hedge and Warrant Transactions
In connection with the pricing of the 2019 Convertible Notes and in order to reduce the potential dilution to our common stock and/or offset cash payments due upon conversion of the 2019 Convertible Notes, in February 2014 we entered into convertible bond hedge transactions and separate warrant transactions of our common stock underlying the aggregate principal amount of the 2019 Convertible Notes with the call spread counterparties. In connection with the May 2017 and September 2017 repurchases of the 2019 Convertible Notes, as discussed above, we entered into agreements with the call spread counterparties to terminate a portion of the then existing convertible bond hedge transactions in an amount corresponding to the amount of such 2019 Convertible Notes repurchased and to terminate a portion of the then-existing warrant transactions.
As of
December 31, 2017
, the remaining bond hedge transactions covered approximately
0.8 million
shares of our common stock underlying the remaining
$21.4 million
principal amount of the 2019 Convertible Notes. 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 2019 Convertible Notes are converted. If upon conversion of the 2019 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 were separate transactions entered into by us and were not part of the terms of the 2019 Convertible Notes or the warrants, discussed below. Holders of the 2019 Convertible Notes will not have any rights with respect to the convertible bond hedges.
As of
December 31, 2017
, the remaining warrant transactions covered approximately
1.0 million
shares of our common stock underlying the remaining
$21.4 million
principal amount of the 2019 Convertible Notes. The initial exercise price of the warrants is
$34.12
per share, subject to adjustment upon certain events, which was
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.
As part of the May 2017 agreements to partially terminate the bond hedge and warrant transactions, we received approximately
$0.3 million
, which we recorded as a net increase to additional paid-in capital during 2017.
2015 Term Loan Facility
In August 2015, 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, under which we borrowed the full amount.
The 2015 Term Loan Facility included 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 ended December 31, 2016. We prepaid
$3.0 million
of the debt in April 2017.
In May 2017, we repaid the remaining
$321.8 million
of outstanding borrowings and accrued interest of the 2015 Term Loan Facility and, in accordance with ASC 470, recognized a
$9.7 million
loss on debt extinguishment.
Future Payments
Future annual principal payments on our long-term debt as of
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
Period
|
Future Annual Principal Payments
|
|
Year Ending December 31, 2018
|
$
|
—
|
|
|
Year Ending December 31, 2019
|
21,417
|
|
|
Year Ending December 31, 2020
|
—
|
|
|
Year Ending December 31, 2021
|
—
|
|
|
Year Ending December 31, 2022
|
320,000
|
|
|
Thereafter
|
475,000
|
|
|
Total
|
$
|
816,417
|
|
|
|
|
|
R.
|
CONSOLIDATED QUARTERLY FINANCIAL DATA - UNAUDITED
|
The following tables provide unaudited consolidated quarterly financial data for
2017
and
2016
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
December 31, 2017
|
|
Total revenues
|
$
|
139,472
|
|
|
$
|
158,394
|
|
|
$
|
153,741
|
|
|
$
|
158,338
|
|
|
Gross profit
(1)
|
106,889
|
|
|
120,731
|
|
|
(202,149
|
)
|
|
82,064
|
|
|
Operating expenses
|
146,913
|
|
|
117,091
|
|
|
47,581
|
|
|
89,210
|
|
|
Net (loss) income
|
$
|
(36,560
|
)
|
|
$
|
(14,066
|
)
|
|
$
|
(152,061
|
)
|
|
$
|
3,460
|
|
|
Net (loss) income per share - basic
|
$
|
(1.06
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
0.10
|
|
|
Net (loss) income per share - diluted
|
$
|
(1.06
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
|
Total revenues
|
$
|
109,300
|
|
|
$
|
127,419
|
|
|
$
|
143,782
|
|
|
$
|
151,591
|
|
|
Gross profit
(2)
|
85,474
|
|
|
84,563
|
|
|
113,092
|
|
|
116,349
|
|
|
Operating expenses
|
78,026
|
|
|
66,486
|
|
|
74,332
|
|
|
101,764
|
|
|
Net (loss) income
|
$
|
(7,527
|
)
|
|
$
|
(596
|
)
|
|
$
|
16,196
|
|
|
$
|
(10,557
|
)
|
|
Net (loss) income per share - basic
|
$
|
(0.22
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.47
|
|
|
$
|
(0.31
|
)
|
|
Net (loss) income per share - diluted
|
$
|
(0.22
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.31
|
)
|
The sum of quarterly (loss) income per share totals differ from annual (loss) income per share totals due to rounding.
|
|
|
|
(1)
|
Gross profit for the third quarter of 2017 included an impairment charge of
$319.2 million
relating to the Makena base technology intangible asset.
|
|
|
|
|
(2)
|
Gross profit for the second quarter of 2016 included an impairment charge of
$15.7 million
relating to the MuGard Rights intangible asset.
|
|
|
|
|
S.
|
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Additions
(1)
|
|
Deductions Charged to Reserves
|
|
Balance at End of Period
|
|
Year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
(1)
|
$
|
3,161
|
|
|
$
|
3,852
|
|
|
$
|
(3,308
|
)
|
|
$
|
3,705
|
|
|
Accounts receivable allowances
(2)
|
$
|
9,533
|
|
|
$
|
168,945
|
|
|
$
|
(166,418
|
)
|
|
$
|
12,060
|
|
|
Rebates, fees and returns reserves
(1)
|
$
|
89,466
|
|
|
$
|
255,471
|
|
|
$
|
(244,235
|
)
|
|
$
|
100,702
|
|
|
Valuation allowance for deferred tax assets
(3)
|
$
|
1,429
|
|
|
$
|
4,732
|
|
|
$
|
(564
|
)
|
|
$
|
5,597
|
|
|
Year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
(1)
|
$
|
900
|
|
|
$
|
3,209
|
|
|
$
|
(948
|
)
|
|
$
|
3,161
|
|
|
Accounts receivable allowances
(2)
|
$
|
10,783
|
|
|
$
|
122,792
|
|
|
$
|
(124,042
|
)
|
|
$
|
9,533
|
|
|
Rebates, fees and returns reserves
(1)
|
$
|
45,162
|
|
|
$
|
186,941
|
|
|
$
|
(142,637
|
)
|
|
$
|
89,466
|
|
|
Valuation allowance for deferred tax assets
(3)
|
$
|
11,859
|
|
|
$
|
632
|
|
|
$
|
(11,062
|
)
|
|
$
|
1,429
|
|
|
Year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
(1)
|
$
|
—
|
|
|
$
|
900
|
|
|
$
|
—
|
|
|
$
|
900
|
|
|
Accounts receivable allowances
(2)
|
$
|
11,618
|
|
|
$
|
93,887
|
|
|
$
|
(94,722
|
)
|
|
$
|
10,783
|
|
|
Rebates, fees and returns reserves
(1)
|
$
|
43,892
|
|
|
$
|
120,293
|
|
|
$
|
(119,023
|
)
|
|
$
|
45,162
|
|
|
Valuation allowance for deferred tax assets
(3)
|
$
|
33,557
|
|
|
$
|
—
|
|
|
$
|
(21,698
|
)
|
|
$
|
11,859
|
|
________________________
|
|
|
|
(1)
|
Addition 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.
|
|
|
|
|
(2)
|
Accounts receivable allowances represent discounts and other chargebacks related to the provision for our product sales.
|
|
|
|
|
(3)
|
The valuation allowance for deferred tax assets includes purchase accounting adjustments and other activity related to our acquisition of Lumara Health. At
December 31, 2017
, the valuation allowance related primarily to certain of our state NOL and credit carryforwards.
|
T. 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 No. 2017-01. This 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. As discussed in Note B.
Summary of Significant Accounting Policies
,
we have early 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 November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”).which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We will adopt the standard on January 1, 2018 using the retrospective approach. The adoption of ASU 2016-18 is not expected to have a material effect on the Company's consolidated financial statements.
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 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. The adoption of ASU 2016-15 is not expected to have a material effect on the Company's 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”). This 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. We adopted ASU 2016-09 during the first quarter of 2017 and will now record all excess tax benefits and deficiencies related to share-based compensation in our condensed consolidated statements of operations as discrete events in the interim reporting period in which the benefit or deficiency occurs. Such benefits and deficiencies will not be considered in the calculation of our annual estimated effective tax rate. Any excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable (i.e. was not realized) are to be recorded using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the new guidance is adopted. We recorded a cumulative-effect adjustment to our accumulated deficit from previously unrecognized excess tax benefits of
$21.6 million
during the first quarter of 2017. Lastly, we will continue to use the current method of estimated forfeitures each period rather than accounting for forfeitures as they occur.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). This statement 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 statement 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 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 the Company's consolidated financial statements.
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, Technical 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. 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, which for us was January 1, 2017. 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. During the fourth quarter of 2017 we finalized our assessments over the impact that these new standards will have on our consolidated results of operations, financial position and disclosures and are finalizing our accounting policies. As of December 31, 2017, we have not identified any accounting changes that would materially impact the amount of reported revenues with respect to our product or service revenues. However, we expect to capitalize incremental contract acquisition costs (specifically sales commissions related to the CBR Services) and amortize over the contractual relationship with the customer. We currently plan to adopt the standard using the “modified retrospective method.” Under that method, we will apply the rules to contracts that are not completed as of January 1, 2018, and recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. As of December 31, 2017, we expect to recognize an immaterial adjustment to retained earnings reflecting the cumulative impact for the accounting changes related to contract acquisition costs upon adoption of these new standards. There are also certain considerations related to internal control over financial reporting that are associated with implementing Topic 606. We are evaluating our internal control framework over revenue recognition to identify any changes that may need to be made in response to the new guidance. In addition, disclosure requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the current guidance. We will have completed the design and implementation of the appropriate controls to obtain and disclose the information required under Topic 606 in our first quarter of 2018.