NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE
THREE AND NINE MONTHS
ENDED
SEPTEMBER 30, 2018
NOTE 1. BASIS OF PRESENTATION
Endo International plc is an Ireland-domiciled, global specialty pharmaceutical company focused on generic and branded pharmaceuticals. We aim to be the premier partner to healthcare professionals and payment providers, delivering an innovative suite of generic and branded drugs to meet patients’ needs.
Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our,” or “us” refer to financial information and transactions of Endo International plc and its subsidiaries.
The accompanying unaudited
Condensed Consolidated Financial Statements
of Endo International plc and its subsidiaries have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying
Condensed Consolidated Financial Statements
of Endo International plc and its subsidiaries, which are unaudited, include all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of
September 30, 2018
and the results of our operations and our cash flows for the periods presented. Operating results for the
three and nine months ended September 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
. The year-end Condensed Consolidated Balance Sheet data as of
December 31, 2017
was derived from audited financial statements.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Certain prior period amounts have been reclassified to conform to the current period presentation as a result of our fourth-quarter 2017 adoption of Accounting Standards Update (ASU) No. 2016-18
“Statement of Cash Flows (Topic 230) - Restricted Cash”
(ASU 2016-18). The table below presents the effects of ASU 2016-18 on the Company’s Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to Adoption
|
|
Impact of Adoption
|
|
Subsequent to Adoption
|
Net cash provided by operating activities
|
$
|
424,062
|
|
|
$
|
(1,900
|
)
|
|
$
|
422,162
|
|
Net cash (used in) provided by investing activities
|
(69,802
|
)
|
|
78,766
|
|
|
8,964
|
|
Net cash used in financing activities
|
(135,353
|
)
|
|
—
|
|
|
(135,353
|
)
|
Effect of foreign exchange rate
|
3,686
|
|
|
297
|
|
|
3,983
|
|
Movement in cash held for sale
|
(1,450
|
)
|
|
—
|
|
|
(1,450
|
)
|
Net change (1)
|
$
|
221,143
|
|
|
$
|
77,163
|
|
|
$
|
298,306
|
|
Beginning-of-period balance (2)
|
517,250
|
|
|
287,930
|
|
|
805,180
|
|
End-of-period balance (2)
|
$
|
738,393
|
|
|
$
|
365,093
|
|
|
$
|
1,103,486
|
|
__________
|
|
(1)
|
This line refers to the “Net increase in cash and cash equivalents” prior to the adoption of ASU 2016-18 and the “Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents” after the adoption.
|
|
|
(2)
|
These lines refer to the beginning or end of period amounts of “Cash and cash equivalents” prior to the adoption of ASU 2016-18 and the beginning or end of period amounts of “Cash, cash equivalents, restricted cash and restricted cash equivalents” after the adoption.
|
Additionally, the information in this Quarterly Report on Form 10-Q has been retrospectively recast to reflect the change in reportable segments referenced in
Note 6. Segment Results
.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies Updated since December 31, 2017
Significant changes to our significant accounting policies since December 31, 2017 are detailed below. For additional discussion of the Company’s significant accounting policies, see
Note 2. Summary of Significant Accounting Policies
in the
Consolidated Financial Statements
, included in
Part IV, Item 15
of our Annual Report on Form 10-K for the year ended
December 31, 2017
, filed with the Securities and Exchange Commission on February 27, 2018.
Revenue Recognition
.
The Company adopted
Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
(ASC 606) on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. For further discussion of the impact of adoption, refer to the “
Recent Accounting Pronouncements Adopted or Otherwise Effective as of
September 30, 2018
” section below. ASC 606 applies to contracts with commercial substance that establish the payment terms and each party’s rights regarding the goods or services to be transferred, to the extent collection of substantially all of the related consideration is probable. Under ASC 606, we recognize revenue for contracts meeting these criteria when (or as) we satisfy our performance obligations for such contracts by transferring control of the underlying promised goods or services to our customers. The amount of revenue we recognize reflects our estimate of the consideration we expect to be entitled to receive, subject to certain constraints, in exchange for such goods or services. This amount is referred to as the transaction price.
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship products to a customer pursuant to a purchase order and invoice the customer upon shipment. For contracts such as these, revenue is recognized when our contractual performance obligations have been fulfilled and control has been transferred to the customer pursuant to the contract’s terms, which is generally upon delivery to the customer. The amount of revenue we recognize is equal to the fixed amount of the transaction price, adjusted for our estimates of a number of significant variable components including, but not limited to, estimates for chargebacks, rebates, sales incentives and allowances, distribution service agreement (DSA) and other fees for services, returns and allowances. The Company utilizes the expected value method when estimating the amount of variable consideration to include in the transaction price with respect to each of the foregoing variable components and the most likely amount method when estimating the amount of variable consideration to include in the transaction price with respect to future potential milestone payments that do not qualify for the sales- and usage-based royalty exception. Variable consideration is included in the transaction price only to the extent that it is probable that a significant revenue reversal will not occur when the uncertainty associated with the variable consideration is resolved. Payment terms for these types of contracts generally fall within
30
to
90
days of invoicing. Our most significant components of variable consideration are further described below. Our estimates for these components are based on factors such as historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our direct and indirect customers and other competitive factors.
Returns and Allowances.
Consistent with industry practice, we maintain a return policy that allows our customers to return products within a specified period of time both subsequent to and, in certain cases, prior to the products’ expiration date. Our return policy generally allows customers to receive credit for expired products within six months prior to expiration and within one year after expiration. Our provision for returns and allowances consists of our estimates for future product returns, pricing adjustments and delivery errors.
Rebates.
Our provision for rebates, sales incentives and other allowances can generally be categorized into the following four types:
|
|
•
|
governmental rebates, including those for Medicaid, Medicare and TRICARE, among others; and
|
We establish contracts with wholesalers, chain stores and indirect customers that provide for rebates, sales incentives, DSA fees and other allowances. Some customers receive rebates upon attaining established sales volumes. Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases from us, including fees paid to wholesalers under our DSAs, as described above. Indirect rebates are rebates paid to indirect customers which have purchased our products from a wholesaler under a contract with us.
We are subject to rebates on sales made under governmental and managed-care pricing programs based on relevant statutes with respect to governmental pricing programs and contractual sales terms with respect to managed-care providers and group purchasing organizations. For example, we are required to provide a
50%
discount on our brand-name drugs to patients who fall within the Medicare Part D coverage gap, also referred to as the donut hole.
We participate in various federal and state government-managed programs whereby discounts and rebates are provided to participating government entities. For example, Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers after the final dispensing of the product by a pharmacy to a benefit plan participant.
Chargebacks.
We market and sell products to both: (i) direct customers including wholesalers, distributors, warehousing pharmacy chains and other direct purchasing groups and (ii) indirect customers including independent pharmacies, non-warehousing chains, managed-care organizations, group purchasing organizations and government entities. We enter into agreements with certain of our indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler’s invoice price. Such credit is called a chargeback.
New Significant Accounting Policies Added since December 31, 2017
Contract Assets and Contract Liabilities
.
Contract assets represent the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditioned on something other than the passage of time including, for example, the entity’s future performance. The Company records revenue and a corresponding contract asset when it fulfills a contractual performance obligation, but must also fulfill one or more additional performance obligations before being entitled to payment. Once the Company’s right to consideration becomes unconditional, the contract asset amount is reclassified as Accounts receivable.
Contract liabilities represent the Company’s obligation to transfer goods or services to a customer. The Company records a contract liability generally upon receipt of consideration in advance of fulfilling one or more of its contractual performance obligations. Upon completing the corresponding performance obligation, the contract liability amount is reversed and revenue is recognized.
Contract assets and liabilities related to rights and obligations arising from a single contract, or a series of contracts combined and accounted for as a single contract, are generally presented on a net basis. Contract assets and liabilities are further described in
Note 11. Contract Assets and Liabilities
.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted as of
September 30, 2018
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02,
“Leases (Topic 842)”
(ASU 2016-02) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. In July 2018, the FASB issued ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases”
(ASU 2018-10), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11,
“Leases (Topic 842) - Targeted Improvements”
(ASU 2018-11), which addresses implementation issues related to the new lease standard. This guidance will be effective for the Company beginning in the first quarter of 2019, with early application permitted. The Company plans to adopt this guidance in the first quarter of 2019 using the modified retrospective approach and will recognize a cumulative-effect adjustment to the opening balance of Accumulated deficit in that period. This guidance includes a number of optional practical expedients that the Company may elect to apply, including an expedient that permits lease agreements that are twelve months or less to be excluded from the balance sheet. The Company is continuing to evaluate the impact that this new guidance will have on its consolidated financial statements, including its disclosures. It is expected that the primary impact upon adoption will be the recognition, on a discounted basis, of the Company’s minimum commitments under noncancelable operating leases as right of use assets and obligations on the consolidated balance sheets. This will result in a significant increase in assets and liabilities on the Company’s consolidated balance sheets. In preparation for the adoption of this guidance, the Company is continuing the process of identifying and validating the Company’s lease information and evaluating the impact that this new guidance will have on its processes and controls.
In February 2018, the FASB issued ASU No. 2018-02,
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
” (ASU 2018-02). ASU 2018-02 allows for a reclassification from accumulated other comprehensive income or loss to retained earnings or accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (TCJA). ASU 2018-02 also requires certain related disclosures. ASU 2018-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-02 on the Company’s consolidated results of operations and financial position.
In July 2018, the FASB issued ASU No. 2018-09,
“Codification Improvements”
(ASU 2018-09). ASU 2018-09 makes changes to a variety of topics to clarify, correct errors in or make minor improvements to the Accounting Standards Codification. Certain of these provisions are effective immediately; however, these provisions did not have a material impact on the Company’s financial statements or disclosures. The remaining provisions are generally effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company is currently evaluating the impact of these remaining provisions of ASU 2018-09 on the Company’s consolidated results of operations and financial position.
In August 2018, the FASB issued ASU No. 2018-13, “
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
” (ASU 2018-13). ASU 2018-13 modifies the disclosure requirements on fair value measurements in
Topic 820, Fair Value Measurement
. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain aspects of ASU 2018-13 require prospective treatment, while others require retrospective treatment. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 on the Company’s disclosures.
In August 2018, the FASB issued ASU No. 2018-15, “
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
” (ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (including hosting arrangements where a software license is deemed to exist). ASU 2018-15 also requires the customer to expense any such capitalized implementation costs over the term of the hosting arrangement and to apply the existing impairment guidance for long-lived assets to such capitalized costs. Additionally, ASU 2018-15 sets forth required disclosures and guidance on financial statement classification for expenses, cash flows and balances related to implementation costs within the scope of ASU 2018-15. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-15 may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption and early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-15 on the Company’s consolidated results of operations, financial position and disclosures.
In November 2018, the FASB issued ASU No. 2018-18, “
Clarifying the Interaction Between Topic 808 and Topic 606”
(ASU 2018-18). The main provisions of ASU 2018-18 include: (i) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and (ii) precluding the presentation of transactions with collaborative arrangement participants that are not directly related to sales to third parties together with revenue. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-18 should generally be applied retrospectively to the date of initial application of Topic 606 (January 1, 2018 for the Company) and early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-18 on the Company’s consolidated results of operations, financial position and disclosures.
Recent Accounting Pronouncements Adopted or Otherwise Effective as of
September 30, 2018
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers”
(ASU 2014-09), which was subsequently amended and supplemented by several additional ASUs including:
|
|
•
|
ASU No. 2015-14, “
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,”
(issued in August 2015), which deferred the effective date of ASU 2014-09 by one year, such that ASU 2014-09 became effective for Endo for annual and interim reporting periods beginning after December 15, 2017;
|
|
|
•
|
ASU No. 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)”
(issued in March 2016)
,
which clarified the guidance on reporting revenue as a principal versus agent;
|
|
|
•
|
ASU No. 2016-10,
“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”
(issued in April 2016)
,
which clarified the guidance on identifying performance obligations and accounting for intellectual property licenses; and
|
|
|
•
|
ASU No. 2016-12,
“Revenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients”
and ASU No. 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,”
(issued in May 2016 and December 2016, respectively), which amended certain narrow aspects of Topic 606.
|
These ASUs have generally been codified in Accounting Standards Codification Topic 606 “
Revenue from Contracts with Customers
”, and are collectively referred to herein as ASC 606. ASC 606 supersedes the revenue recognition requirements in Topic 605
“Revenue Recognition”
(ASC 605), and requires entities to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which entities expect to be entitled in exchange for those goods or services.
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. Under the modified retrospective method, results beginning on January 1, 2018 are presented under ASC 606, while the comparative prior period results continue to be presented under ASC 605 based on the accounting standards originally in effect for such periods. As a result of adopting ASC 606, the Company recorded a net decrease of
$3.1 million
to its accumulated deficit at January 1, 2018, representing the cumulative impact of adopting ASC 606.
The current period impact of adoption on our
Condensed Consolidated Statements of Operations
and
Condensed Consolidated Balance Sheets
is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
Statement of Operations:
|
Amounts reported under ASC 606
|
|
Amounts assuming continued application of ASC 605
|
|
Effect of adoption of ASC 606 (1)
|
|
Amounts reported under ASC 606
|
|
Amounts assuming continued application of ASC 605
|
|
Effect of adoption of ASC 606 (1)
|
Total revenues
|
$
|
745,466
|
|
|
$
|
747,571
|
|
|
$
|
(2,105
|
)
|
|
$
|
2,160,689
|
|
|
$
|
2,160,132
|
|
|
$
|
557
|
|
Cost of revenues
|
$
|
412,965
|
|
|
$
|
414,430
|
|
|
$
|
(1,465
|
)
|
|
$
|
1,198,468
|
|
|
$
|
1,199,042
|
|
|
$
|
(574
|
)
|
Other income, net
|
$
|
(1,507
|
)
|
|
$
|
(1,507
|
)
|
|
$
|
—
|
|
|
$
|
(33,216
|
)
|
|
$
|
(32,216
|
)
|
|
$
|
(1,000
|
)
|
Loss from continuing operations
|
$
|
(146,071
|
)
|
|
$
|
(145,431
|
)
|
|
$
|
(640
|
)
|
|
$
|
(696,288
|
)
|
|
$
|
(698,419
|
)
|
|
$
|
2,131
|
|
Net loss
|
$
|
(173,205
|
)
|
|
$
|
(172,565
|
)
|
|
$
|
(640
|
)
|
|
$
|
(739,561
|
)
|
|
$
|
(741,692
|
)
|
|
$
|
2,131
|
|
Net loss per share—Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.65
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
—
|
|
|
$
|
(3.11
|
)
|
|
$
|
(3.12
|
)
|
|
$
|
0.01
|
|
Total basic
|
$
|
(0.77
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
—
|
|
|
$
|
(3.30
|
)
|
|
$
|
(3.31
|
)
|
|
$
|
0.01
|
|
Net loss per share—Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.65
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
—
|
|
|
$
|
(3.11
|
)
|
|
$
|
(3.12
|
)
|
|
$
|
0.01
|
|
Total diluted
|
$
|
(0.77
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
—
|
|
|
$
|
(3.30
|
)
|
|
$
|
(3.31
|
)
|
|
$
|
0.01
|
|
__________
|
|
(1)
|
Amounts may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
2018
|
Balance Sheet:
|
Amounts reported under ASC 606
|
|
Amounts assuming continued application of ASC 605
|
|
Effect of adoption of ASC 606
|
Assets:
|
|
|
|
|
|
Inventories, net
|
$
|
332,787
|
|
|
$
|
341,189
|
|
|
$
|
(8,402
|
)
|
Prepaid expenses and other current assets
|
$
|
50,697
|
|
|
$
|
40,368
|
|
|
$
|
10,329
|
|
Other assets
|
$
|
67,934
|
|
|
$
|
64,972
|
|
|
$
|
2,962
|
|
Liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
1,019,004
|
|
|
$
|
1,019,322
|
|
|
$
|
(318
|
)
|
Shareholders' (defici
t) equity:
|
|
|
|
|
|
Accumulated deficit
|
$
|
(8,833,024
|
)
|
|
$
|
(8,838,231
|
)
|
|
$
|
5,207
|
|
In May 2017, the FASB issued ASU No. 2017-09
“Compensation - Stock Compensation”
(ASU 2017-09). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It is intended to reduce both (1) diversity in practice and (2) cost and complexity when accounting for changes to the terms or conditions of share-based payment awards. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the new standard on January 1, 2018 and the amendments in this update will be applied prospectively to any award modified on or after the adoption date.
NOTE 3. DISCONTINUED OPERATIONS AND DIVESTITURES
Astora
The Company’s Astora business ceased business operations on March 31, 2016. The operating results of Astora are reported as Discontinued operations, net of tax in the
Condensed Consolidated Statements of Operations
for all periods presented. The following table provides the operating results of Astora for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Litigation-related and other contingencies, net
|
$
|
19,000
|
|
|
$
|
—
|
|
|
$
|
19,000
|
|
|
$
|
775,684
|
|
Loss from discontinued operations before income taxes
|
$
|
(27,134
|
)
|
|
$
|
(8,957
|
)
|
|
$
|
(43,273
|
)
|
|
$
|
(813,442
|
)
|
Income tax benefit
|
$
|
—
|
|
|
$
|
(11,974
|
)
|
|
$
|
—
|
|
|
$
|
(107,556
|
)
|
Discontinued operations, net of tax
|
$
|
(27,134
|
)
|
|
$
|
3,017
|
|
|
$
|
(43,273
|
)
|
|
$
|
(705,886
|
)
|
Amounts reported in the table above as Litigation-related and other contingencies, net relate to charges for vaginal-mesh-related matters.
Loss from discontinued operations before income taxes
also includes mesh-related legal defense costs and certain other items.
The cash flows from discontinued operating activities related to Astora included the impact of net losses of
$43.3 million
and
$705.9 million
for the
nine months ended September 30, 2018 and 2017
, respectively, and the impact of cash activity related to vaginal mesh cases. There was
no
net cash used in discontinued investing activities related to Astora during the
nine months ended September 30, 2018
or
2017
. There was
no
depreciation or amortization during the
nine months ended September 30, 2018
or
2017
related to Astora.
Refer to
Note 14. Commitments and Contingencies
for amounts and additional information relating to vaginal mesh-related matters.
Litha
During the fourth quarter of 2016, the Company initiated a process to sell its Litha Healthcare Group Limited and related Sub-Sahara African business assets (Litha) and, on February 27, 2017, the Company entered into a definitive agreement to sell Litha to Acino Pharma AG (Acino). The sale closed on July 3, 2017 and the Company received net cash proceeds of approximately
$94.2 million
, after giving effect to cash and net working capital purchase price adjustments, as well as a short-term receivable of
$4.4 million
, which was subsequently collected in October 2017.
No
additional gain or loss was recognized upon sale. However, in December 2017, Acino became obligated to pay
$10.1 million
of additional consideration to the Company related to the settlement of certain contingencies set forth in the purchase agreement, which was subsequently paid to the Company in January 2018. In December 2017, the Company recorded a short-term receivable and a gain on the sale of Litha for this amount. The gain was recorded in
Other income, net
in the
Condensed Consolidated Statements of Operations
. Litha was part of the Company’s
International Pharmaceuticals
segment. Litha does not meet the requirements for treatment as a discontinued operation.
Somar
On June 30, 2017, the Company entered into a definitive agreement to sell Grupo Farmacéutico Somar, S.A.P.I. de C.V. (Somar) and all of the securities thereof, to AI Global Investments (Netherlands) PCC Limited acting for and on behalf of the Soar Cell (the Purchaser). The sale closed on October 25, 2017 and the Purchaser paid an aggregate purchase price of approximately
$124 million
in cash, after giving effect to estimated cash, debt and net working capital purchase price adjustments. The Company recognized a
$1.3 million
loss upon sale. Somar was part of the Company’s
International Pharmaceuticals
segment. Somar does not meet the requirements for treatment as a discontinued operation.
NOTE 4. RESTRUCTURING
January 2017 Restructuring Initiative
On January 26, 2017, the Company announced a restructuring initiative implemented as part of its ongoing organizational review (the
January 2017 Restructuring Initiative
). This restructuring was intended to further integrate, streamline and optimize the Company’s operations by aligning certain corporate and research and development (R&D) functions with its recently restructured U.S. generics and U.S. branded business units in order to create efficiencies and cost savings. As part of this restructuring, the Company undertook certain cost reduction initiatives, including a reduction of approximately
90
positions of its workforce, primarily related to corporate and branded R&D functions in Malvern, Pennsylvania and Chestnut Ridge, New York, a streamlining of general and administrative expenses, an optimization of commercial spend and a refocusing of research and development efforts.
The Company did not incur any pre-tax charges during the
three and nine months ended September 30, 2018
as a result of the
January 2017 Restructuring Initiative
. During the
nine months ended September 30, 2017
, the Company incurred total pre-tax charges of approximately
$15.1 million
related to employee separation and other benefit-related costs. Of the total charges incurred,
$6.9 million
was included in the
U.S. Branded - Specialty & Established Pharmaceuticals
segment,
$4.9 million
was included in Corporate unallocated costs and
$3.3 million
was included in the
U.S. Generic Pharmaceuticals
segment. These charges were included in
Selling, general and administrative
expenses in the
Condensed Consolidated Statements of Operations
. There were
no
charges related to this restructuring initiative for the
three months ended September 30, 2017
. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments were made by the end of 2017 and substantially all of the actions associated with this restructuring were completed by the end of April 2017.
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
On July 21, 2017, the Company announced that after completing a comprehensive review of its manufacturing network, the Company would be ceasing operations and closing its manufacturing and distribution facilities in Huntsville, Alabama (the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
). The closure of the facilities was completed in June 2018. Employee separation, retention and certain other employee benefit-related costs are expensed ratably over the requisite service period. Other costs including, but not limited to, contract termination fees and product technology transfer costs, are expensed as incurred.
As a result of the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
, the Company incurred pre-tax charges of
$4.8 million
and
$59.6 million
during the
three and nine months ended September 30, 2018
, respectively. During the
three months ended September 30, 2018
, the expenses consisted of employee separation and other benefit-related costs of
$2.1 million
and certain other charges of
$2.7 million
. During the
nine months ended September 30, 2018
, the expenses consisted of charges relating to accelerated depreciation of
$35.2 million
, employee separation, retention and other benefit-related costs of
$9.8 million
, asset impairment charges of
$2.6 million
and certain other charges of
$12.0 million
.
During the
three and nine months ended September 30, 2017
, the Company incurred pre-tax charges of
$94.2 million
and
$203.7 million
, respectively, related to the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
. The amounts incurred during the
three months ended September 30, 2017
included accelerated depreciation charges of
$59.8 million
, employee separation, retention and other benefit-related costs of
$19.5 million
, certain property, plant and equipment impairment charges of
$14.2 million
and certain other charges of
$0.6 million
. The amounts incurred during the
nine months ended September 30, 2017
included accelerated depreciation charges of
$59.8 million
, employee separation, retention and other benefit-related costs of
$19.5 million
, certain intangible asset and property, plant and equipment impairment charges of
$103.7 million
, charges to increase excess inventory reserves of
$7.9 million
and certain other charges of
$12.7 million
. In the third quarter of 2017, the Company recorded a correcting entry to increase Property, plant and equipment impairment charges resulting from certain assets that should have been impaired during the second quarter of 2017. The pre-tax impact for the three months ended September 30, 2017 includes a correcting adjustment of
$14.2 million
, which had a corresponding decrease to Property, plant and equipment, net. The Company determined that the impact to the prior period and the current period are not material to the quarterly periods presented and have no impact on 2017 full year results.
These charges are included in the
U.S. Generic Pharmaceuticals
segment. Accelerated depreciation and employee separation, retention and other benefit-related costs are included in Cost of revenues. Certain other charges are included in both Cost of revenues and
Selling, general and administrative
expenses in the
Condensed Consolidated Statements of Operations
. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments are expected to be made by the end of the third quarter in 2019.
The liability related to the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
is primarily included in Accounts payable and accrued expenses in the
Condensed Consolidated Balance Sheets
. Changes to this liability during the
nine months ended September 30, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation and Other Benefit-Related Costs
|
|
Other Restructuring Costs
|
|
Total
|
Liability balance as of January 1, 2018
|
$
|
22,975
|
|
|
$
|
1,610
|
|
|
$
|
24,585
|
|
Expenses
|
9,779
|
|
|
9,341
|
|
|
19,120
|
|
Cash distributions
|
(22,518
|
)
|
|
(10,951
|
)
|
|
(33,469
|
)
|
Liability balance as of September 30, 2018
|
$
|
10,236
|
|
|
$
|
—
|
|
|
$
|
10,236
|
|
January 2018 Restructuring Initiative
In January 2018, the Company initiated a restructuring initiative that included a reorganization of its
U.S. Generic Pharmaceuticals
segment’s research and development network, a further simplification of the Company’s manufacturing networks and a company-wide unification of certain corporate functions (the
January 2018 Restructuring Initiative
).
As a result of the
January 2018 Restructuring Initiative
, the Company incurred pre-tax charges of
$23.8 million
during the
nine months ended September 30, 2018
. The expenses consisted primarily of employee separation, retention and other benefit-related costs of
$22.1 million
and certain other charges of
$1.7 million
. Of the total charges incurred,
$10.8 million
are included in the
U.S. Generic Pharmaceuticals
segment,
$5.2 million
are included in Corporate unallocated costs,
$4.0 million
are included in the
U.S. Branded - Sterile Injectables
segment,
$3.1 million
are included in the
International Pharmaceuticals
segment and
$0.7 million
are included in the
U.S. Branded - Specialty & Established Pharmaceuticals
segment. The Company did not incur material charges related to this restructuring initiative during the
three months ended September 30, 2018
.
Employee separation, retention and other benefit-related costs are included in Cost of revenues, Selling, general and administrative and Research and development expenses in the
Condensed Consolidated Statements of Operations
. Certain other charges are primarily included in Selling, general and administrative expenses in the
Condensed Consolidated Statements of Operations
. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments are expected to be made by the end of the second quarter in 2019.
The liability related to the
January 2018 Restructuring Initiative
is primarily included in Accounts payable and accrued expenses in the
Condensed Consolidated Balance Sheets
. Changes to this liability during the
nine months ended September 30, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation and Other Benefit-Related Costs
|
|
Other Restructuring Costs
|
|
Total
|
Liability balance as of January 1, 2018
|
$
|
—
|
|
|
$
|
650
|
|
|
$
|
650
|
|
Expenses
|
22,087
|
|
|
1,705
|
|
|
23,792
|
|
Cash distributions
|
(18,439
|
)
|
|
(1,949
|
)
|
|
(20,388
|
)
|
Liability balance as of September 30, 2018
|
$
|
3,648
|
|
|
$
|
406
|
|
|
$
|
4,054
|
|
NOTE 5. ACQUISITIONS
On April 26, 2018, the Company entered into a Membership Interest and Asset Purchase Agreement (the Somerset Purchase Agreement) with Mendham Holdings, LLC (the Seller) and certain other Seller related parties in connection with the acquisition of all of the limited liability company membership interests (the LLC Interests) of Somerset Therapeutics, LLC (Somerset) and certain of Somerset’s assets, including intellectual property, product Abbreviated New Drug Applications (ANDAs) and inventory (the Somerset Assets). Somerset is a specialty pharmaceutical company that develops and markets sterile injectable and ophthalmic drugs for the U.S. market. The Somerset acquisition is contingent upon the closing of the acquisition of the Indian-based Wintac business (as defined below).
Pursuant to the terms of the Somerset Purchase Agreement, the Company will acquire
100%
of the LLC Interests of Somerset and the Somerset Assets for an aggregate cash purchase price of approximately
$160 million
, subject to customary adjustments for cash, net working capital and indebtedness as described in the Somerset Purchase Agreement. The Somerset Purchase Agreement contains certain customary representations, warranties and covenants and provides for indemnification rights of the parties in respect of inaccuracies or breaches of certain representations, warranties and covenants, subject to the limitations set forth in the Somerset Purchase Agreement.
The Somerset acquisition is expected to close in the first quarter of 2019, subject to satisfaction of customary closing conditions, including required regulatory approvals and the closing of the acquisition of the Wintac business. In connection with the Somerset acquisition, the Company’s Indian subsidiary has entered into separate agreements to acquire the entire business of Somerset’s Indian-based contract development and manufacturing affiliate, Wintac Limited (Wintac), including certain real property in Bangalore, India and the manufacturing plants thereon and to assume certain debt of Wintac for the expected aggregate amount of the rupee equivalent of approximately
$30 million
, subject to customary adjustments for net working capital.
NOTE 6. SEGMENT RESULTS
As of January 1, 2018, we made changes to our reportable segments. Following these changes, the
four
reportable business segments in which we operate are: (1)
U.S. Branded - Specialty & Established Pharmaceuticals
, (2)
U.S. Branded - Sterile Injectables
, (3)
U.S. Generic Pharmaceuticals
and (4)
International Pharmaceuticals
. Previously, we had
three
reportable segments: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. The updates to our reportable segments were made based on first quarter 2018 changes to the way we manage and evaluate our business.
Our new
U.S. Branded - Sterile Injectables
segment consists of our sterile injectables product portfolio, which was previously part of our former U.S. Generic Pharmaceuticals segment. Our new
U.S. Generic Pharmaceuticals
segment represents the remainder of our former U.S. Generic Pharmaceuticals segment. Additionally, our former U.S. Branded Pharmaceuticals segment has been renamed “
U.S. Branded - Specialty & Established Pharmaceuticals
.”
Our segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s
adjusted income from continuing operations before income tax
, which we define as
Loss from continuing operations before income tax
and before
certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs, earn-out payments or adjustments, changes in the fair value of contingent consideration and bridge financing costs; cost reduction and integration-related initiatives such as separation benefits, retention payments, other exit costs and certain costs associated with integrating an acquired company’s operations; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; gains or losses from early termination of debt; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items
.
Certain of the corporate expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated costs.” Interest income and expense are also considered corporate items and not allocated to any of the Company’s segments. The Company’s consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segments less these unallocated corporate items.
U.S. Branded - Specialty & Established Pharmaceuticals
Our
U.S. Branded - Specialty & Established Pharmaceuticals
segment
includes a variety of branded prescription products to treat and manage conditions in urology, urologic oncology, endocrinology, pain and orthopedics. The products in this segment include XIAFLEX
®
, SUPPRELIN
®
LA, TESTOPEL
®
, NASCOBAL
®
Nasal Spray, AVEED
®
, PERCOCET
®
, VOLTAREN
®
Gel, LIDODERM
®
, EDEX
®
, TESTIM
®
and FORTESTA
®
Gel, among others.
U.S. Branded - Sterile Injectables
Our
U.S. Branded - Sterile Injectables
segment consists primarily of branded sterile injectable products such as VASOSTRICT
®
, ADRENALIN
®
and APLISOL
®
, among others, and certain generic sterile injectable products, including ertapenem for injection and ephedrine sulfate injection, among others.
U.S. Generic Pharmaceuticals
Our
U.S. Generic Pharmaceuticals
segment consists of a differentiated product portfolio including solid oral extended-release, solid oral immediate-release, abuse-deterrent products, liquids, semi-solids, patches, powders, ophthalmics and sprays and includes products in the pain management, urology, central nervous system disorders, immunosuppression, oncology, women’s health and cardiovascular disease markets, among others.
International Pharmaceuticals
Our
International Pharmaceuticals
segment
includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). This segment’s key products serve growing therapeutic areas, including attention deficit hyperactivity disorder (ADHD), pain, women’s health and oncology.
This segment also included: (i) our South African Litha business, which was sold in July 2017
,
and (ii) our Latin American Somar business, which was sold in October 2017.
The following represents selected information for the Company’s reportable segments for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net revenues from external customers:
|
|
|
|
|
|
|
|
U.S. Branded - Specialty & Established Pharmaceuticals
|
$
|
220,100
|
|
|
$
|
233,803
|
|
|
$
|
632,972
|
|
|
$
|
729,150
|
|
U.S. Branded - Sterile Injectables
|
237,150
|
|
|
201,905
|
|
|
670,847
|
|
|
554,365
|
|
U.S. Generic Pharmaceuticals
|
257,969
|
|
|
294,749
|
|
|
748,445
|
|
|
1,227,584
|
|
International Pharmaceuticals (1)
|
30,247
|
|
|
56,430
|
|
|
108,425
|
|
|
189,119
|
|
Total net revenues from external customers
|
$
|
745,466
|
|
|
$
|
786,887
|
|
|
$
|
2,160,689
|
|
|
$
|
2,700,218
|
|
Adjusted income from continuing operations before income tax:
|
|
|
|
|
|
|
|
U.S. Branded - Specialty & Established Pharmaceuticals
|
$
|
84,891
|
|
|
$
|
123,754
|
|
|
$
|
262,454
|
|
|
$
|
380,841
|
|
U.S. Branded - Sterile Injectables
|
170,329
|
|
|
150,531
|
|
|
513,082
|
|
|
417,060
|
|
U.S. Generic Pharmaceuticals
|
82,555
|
|
|
86,236
|
|
|
247,137
|
|
|
415,172
|
|
International Pharmaceuticals
|
13,377
|
|
|
17,434
|
|
|
45,594
|
|
|
47,128
|
|
Total segment adjusted income from continuing operations before income tax
|
$
|
351,152
|
|
|
$
|
377,955
|
|
|
$
|
1,068,267
|
|
|
$
|
1,260,201
|
|
__________
|
|
(1)
|
Revenues generated by our
International Pharmaceuticals
segment are primarily attributable to external customers located in Canada and, prior to the sale of Litha on July 3, 2017 and Somar on October 25, 2017, South Africa and Latin America.
|
There were
no
material revenues from external customers attributed to an individual country outside of the United States during any of the periods presented. There were
no
material tangible long-lived assets in an individual country other than the United States as of
September 30, 2018
or
December 31, 2017
.
The table below provides reconciliations of our consolidated
Loss from continuing operations before income tax
, which is determined in accordance with U.S. generally accepted accounting principles (U.S. GAAP), to our
total segment adjusted income from continuing operations before income tax
for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Total consolidated loss from continuing operations before income tax
|
$
|
(143,068
|
)
|
|
$
|
(127,796
|
)
|
|
$
|
(671,559
|
)
|
|
$
|
(1,058,647
|
)
|
Interest expense, net
|
131,847
|
|
|
127,521
|
|
|
385,896
|
|
|
361,267
|
|
Corporate unallocated costs (1)
|
49,187
|
|
|
33,035
|
|
|
144,693
|
|
|
114,655
|
|
Amortization of intangible assets
|
161,275
|
|
|
161,413
|
|
|
471,662
|
|
|
615,490
|
|
Inventory step-up
|
71
|
|
|
66
|
|
|
261
|
|
|
281
|
|
Upfront and milestone payments to partners
|
4,731
|
|
|
775
|
|
|
43,027
|
|
|
6,952
|
|
Separation benefits and other cost reduction initiatives (2)
|
4,001
|
|
|
80,693
|
|
|
82,141
|
|
|
127,977
|
|
Certain litigation-related and other contingencies, net (3)
|
(1,750
|
)
|
|
(12,352
|
)
|
|
15,370
|
|
|
(14,016
|
)
|
Asset impairment charges (4)
|
142,217
|
|
|
94,924
|
|
|
613,400
|
|
|
1,023,930
|
|
Acquisition-related and integration items (5)
|
1,288
|
|
|
16,641
|
|
|
13,284
|
|
|
31,711
|
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
51,734
|
|
Foreign currency impact related to the remeasurement of intercompany debt instruments
|
1,528
|
|
|
3,005
|
|
|
(1,560
|
)
|
|
(2,922
|
)
|
Other, net (6)
|
(175
|
)
|
|
30
|
|
|
(28,348
|
)
|
|
1,789
|
|
Total segment adjusted income from continuing operations before income tax
|
$
|
351,152
|
|
|
$
|
377,955
|
|
|
$
|
1,068,267
|
|
|
$
|
1,260,201
|
|
__________
|
|
(1)
|
Amounts include certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses.
|
|
|
(2)
|
Amounts for the
three and nine months ended September 30, 2018
relate to employee separation costs of
$2.1 million
and
$32.7 million
, respectively, charges to increase excess inventory reserves of
$0.2 million
and
$2.8 million
, respectively, and other charges of
$1.7 million
and
$11.4 million
, respectively, each of which related primarily to our restructuring initiatives. Also included in the amount for the
nine months ended September 30, 2018
is accelerated depreciation of
$35.2 million
, which related to the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
. During the
three and nine months ended September 30, 2017
, amounts primarily relate to employee separation costs of
$19.8 million
and
$41.3 million
, accelerated depreciation of
$59.8 million
and
$60.2 million
, other charges of
$1.1 million
and
$18.5 million
, respectively, and charges to increase excess inventory reserves of
$7.9 million
during the
nine months ended September 30, 2017
. These charges were related primarily to the 2017 U.S. Generics Pharmaceuticals restructuring initiative. See
Note 4. Restructuring
for discussion of our material restructuring initiatives.
|
|
|
(3)
|
Amounts include adjustments for Litigation-related and other contingencies, net as further described in
Note 14. Commitments and Contingencies
.
|
|
|
(4)
|
Amounts primarily relate to charges to impair goodwill and intangible assets as further described in
Note 9. Goodwill and Other Intangibles
as well as charges to write down certain property, plant and equipment as further described in
Note 7. Fair Value Measurements
.
|
|
|
(5)
|
Amounts during the
three and nine months ended September 30, 2018
are primarily related to
charge
s due to changes in the fair value of contingent consideration of
$0.8 million
and
$11.7 million
, respectively. Amounts during the
three and nine months ended September 30, 2017
include
charge
s due to changes in the fair value of contingent consideration of
$15.4 million
and
$23.6 million
, respectively. All other amounts are directly related to costs associated with acquisition and integration efforts.
|
|
|
(6)
|
Amounts during the
three and nine months ended September 30, 2018
primarily relate to gains on sales of businesses and other assets, as further described in
Note 17. Other income, net
.
|
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
The Company disaggregates its revenue from contracts with customers into the categories included in the table below (in thousands). The Company believes these categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
U.S. Branded - Specialty & Established Pharmaceuticals:
|
|
|
|
|
|
|
|
Specialty Products:
|
|
|
|
|
|
|
|
XIAFLEX®
|
$
|
64,214
|
|
|
$
|
52,511
|
|
|
$
|
184,855
|
|
|
$
|
152,113
|
|
SUPPRELIN® LA
|
20,408
|
|
|
20,638
|
|
|
60,948
|
|
|
63,468
|
|
Other Specialty (1)
|
43,576
|
|
|
40,634
|
|
|
114,202
|
|
|
113,407
|
|
Total Specialty Products
|
$
|
128,198
|
|
|
$
|
113,783
|
|
|
$
|
360,005
|
|
|
$
|
328,988
|
|
Established Products:
|
|
|
|
|
|
|
|
PERCOCET®
|
$
|
30,730
|
|
|
$
|
31,349
|
|
|
$
|
93,539
|
|
|
$
|
93,183
|
|
VOLTAREN® Gel
|
15,057
|
|
|
19,102
|
|
|
44,185
|
|
|
53,646
|
|
OPANA® ER
|
—
|
|
|
14,756
|
|
|
—
|
|
|
82,056
|
|
Other Established (2)
|
46,115
|
|
|
54,813
|
|
|
135,243
|
|
|
171,277
|
|
Total Established Products
|
$
|
91,902
|
|
|
$
|
120,020
|
|
|
$
|
272,967
|
|
|
$
|
400,162
|
|
Total U.S. Branded - Specialty & Established Pharmaceuticals (3)
|
$
|
220,100
|
|
|
$
|
233,803
|
|
|
$
|
632,972
|
|
|
$
|
729,150
|
|
U.S. Branded - Sterile Injectables:
|
|
|
|
|
|
|
|
VASOSTRICT®
|
$
|
112,333
|
|
|
$
|
105,741
|
|
|
$
|
332,387
|
|
|
$
|
300,649
|
|
ADRENALIN®
|
35,460
|
|
|
25,335
|
|
|
101,858
|
|
|
50,464
|
|
Ertapenem for injection
|
25,798
|
|
|
—
|
|
|
25,798
|
|
|
—
|
|
Other Sterile Injectables (4)
|
63,559
|
|
|
70,829
|
|
|
210,804
|
|
|
203,252
|
|
Total U.S. Branded - Sterile Injectables (3)
|
$
|
237,150
|
|
|
$
|
201,905
|
|
|
$
|
670,847
|
|
|
$
|
554,365
|
|
Total U.S. Generic Pharmaceuticals (5)
|
$
|
257,969
|
|
|
$
|
294,749
|
|
|
$
|
748,445
|
|
|
$
|
1,227,584
|
|
Total International Pharmaceuticals (6)
|
$
|
30,247
|
|
|
$
|
56,430
|
|
|
$
|
108,425
|
|
|
$
|
189,119
|
|
Total Revenues
|
$
|
745,466
|
|
|
$
|
786,887
|
|
|
$
|
2,160,689
|
|
|
$
|
2,700,218
|
|
__________
|
|
(1)
|
Products included within Other Specialty include TESTOPEL
®
, NASCOBAL
®
Nasal Spray and AVEED
®
.
|
|
|
(2)
|
Products included within Other Established include, but are not limited to, LIDODERM
®
, EDEX
®
, TESTIM
®
and FORTESTA
®
Gel, including the authorized generics.
|
|
|
(3)
|
Individual products presented above represent the top two performing products in each product category and/or any product having revenues in excess of
$25 million
during any quarterly period in
2018
or
2017
.
|
|
|
(4)
|
Products included within Other Sterile Injectables include, but are not limited to, APLISOL
®
and ephedrine sulfate injection.
|
|
|
(5)
|
The U.S. Generic Pharmaceuticals segment is comprised of a portfolio of products that are generic versions of branded products, are distributed primarily through the same wholesalers, generally have no intellectual property protection and are sold within the U.S. During the
nine months
ended
September 30, 2017
, combined sales of ezetimibe tablets and quetiapine ER tablets, for which we lost temporary marketing exclusivity during the second quarter of 2017, made up
9%
of consolidated total revenue. No other individual product within this segment has exceeded
5%
of consolidated total revenues for the periods presented.
|
|
|
(6)
|
The International Pharmaceuticals segment, which accounted for
4%
and
5%
of consolidated total revenues during the
three and nine months ended September 30, 2018
, respectively, and
7%
of consolidated total revenues during both the
three and nine months ended September 30, 2017
, includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs, Inc. (Paladin). This segment also included: (i) our South African business, which was sold in July 2017 and consisted of Litha and certain assets acquired from Aspen Holdings in October 2015 and (ii) our Latin American business consisting of Somar, which was sold in October 2017.
|
NOTE 7. FAIR VALUE MEASUREMENTS
Financial Instruments
The financial instruments recorded in our
Condensed Consolidated Balance Sheets
include cash and cash equivalents (including money market funds and time deposits), restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds pay dividends that generally reflect short-term interest rates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds and time deposits), accounts receivable, accounts payable and accrued expenses approximate their fair values.
At
September 30, 2018
and
December 31, 2017
, the Company had combined restricted cash and cash equivalents of
$312.0 million
and
$324.4 million
, respectively, of which
$289.7 million
and
$320.5 million
, respectively, are classified as current assets and reported in our
Condensed Consolidated Balance Sheets
as Restricted cash and cash equivalents. The remaining amounts, which are classified as non-current assets, are reported in our
Condensed Consolidated Balance Sheets
as Other assets. Approximately
$283.8 million
and
$313.8 million
of our restricted cash and cash equivalents are held in qualified settlement funds (QSFs) for mesh-related matters at
September 30, 2018
and
December 31, 2017
, respectively. The remaining amount of restricted cash and cash equivalents at
September 30, 2018
primarily relates to other litigation-related matters. See
Note 14. Commitments and Contingencies
for further information.
Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Marketable Securities
Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the above-defined fair value hierarchy. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in
Marketable securities
in our
Condensed Consolidated Balance Sheets
at
September 30, 2018
and
December 31, 2017
.
Acquisition-Related Contingent Consideration
The fair value of contingent consideration liabilities is determined using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. Changes in any of these estimated inputs used as of the date of this report could have resulted in significant adjustments to fair value. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.
Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at
September 30, 2018
and
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date using:
|
September 30, 2018
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
691,579
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
691,579
|
|
Equity securities
|
1,693
|
|
|
—
|
|
|
—
|
|
|
1,693
|
|
Total
|
$
|
693,272
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
693,272
|
|
Liabilities:
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration—short-term
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,261
|
|
|
$
|
42,261
|
|
Acquisition-related contingent consideration—long-term
|
—
|
|
|
—
|
|
|
86,209
|
|
|
86,209
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
128,470
|
|
|
$
|
128,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date using:
|
December 31, 2017
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
439,831
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
439,831
|
|
Time deposits
|
—
|
|
|
303,410
|
|
|
—
|
|
|
303,410
|
|
Equity securities
|
1,456
|
|
|
—
|
|
|
—
|
|
|
1,456
|
|
Total
|
$
|
441,287
|
|
|
$
|
303,410
|
|
|
$
|
—
|
|
|
$
|
744,697
|
|
Liabilities:
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration—short-term
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,543
|
|
|
$
|
70,543
|
|
Acquisition-related contingent consideration—long-term
|
—
|
|
|
—
|
|
|
119,899
|
|
|
119,899
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,442
|
|
|
$
|
190,442
|
|
At
September 30, 2018
and
December 31, 2017
, money market funds include
$57.0 million
and
$35.6 million
, respectively, in QSFs to be disbursed to mesh-related or other product liability claimants. Amounts in QSFs are considered restricted cash equivalents. See
Note 14. Commitments and Contingencies
for further discussion of our product liability cases. The differences between the amortized cost and fair value of our money market funds and equity securities were not material, individually or in the aggregate, at
September 30, 2018
or
December 31, 2017
, nor were any of the related gross unrealized gains or losses.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Beginning of period
|
$
|
152,098
|
|
|
$
|
210,460
|
|
|
$
|
190,442
|
|
|
$
|
262,113
|
|
Amounts settled
|
(24,564
|
)
|
|
(31,617
|
)
|
|
(73,298
|
)
|
|
(91,927
|
)
|
Changes in fair value recorded in earnings
|
769
|
|
|
15,440
|
|
|
11,731
|
|
|
23,574
|
|
Effect of currency translation
|
167
|
|
|
504
|
|
|
(405
|
)
|
|
1,027
|
|
End of period
|
$
|
128,470
|
|
|
$
|
194,787
|
|
|
$
|
128,470
|
|
|
$
|
194,787
|
|
At
September 30, 2018
, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from approximately
10%
to
22%
(weighted average rate of approximately
14.1%
).
Changes in fair value recorded in earnings
related to acquisition-related contingent consideration are included in our
Condensed Consolidated Statements of Operations
as
Acquisition-related and integration items
, and amounts recorded for the short-term and long-term portions of acquisition-related contingent consideration are included in
Accounts payable and accrued expenses
and Other liabilities, respectively, in our
Condensed Consolidated Balance Sheets
.
The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the
nine months ended September 30, 2018
by acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
Fair Value Adjustments and Accretion
|
|
Payments and Other
|
|
Balance as of September 30, 2018
|
Auxilium acquisition
|
$
|
13,061
|
|
|
$
|
(263
|
)
|
|
$
|
(1,844
|
)
|
|
$
|
10,954
|
|
Lehigh Valley Technologies, Inc. acquisitions
|
63,001
|
|
|
11,169
|
|
|
(39,469
|
)
|
|
34,701
|
|
VOLTAREN
®
Gel acquisition
|
98,124
|
|
|
3,839
|
|
|
(30,923
|
)
|
|
71,040
|
|
Other
|
16,256
|
|
|
(3,014
|
)
|
|
(1,467
|
)
|
|
11,775
|
|
Total
|
$
|
190,442
|
|
|
$
|
11,731
|
|
|
$
|
(73,703
|
)
|
|
$
|
128,470
|
|
Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the
nine months ended September 30, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date using:
|
|
Total Expense for the Nine Months Ended September 30, 2018
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
Intangible assets, excluding goodwill (Note 9)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
239,857
|
|
|
$
|
(217,576
|
)
|
Certain property, plant and equipment (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,824
|
)
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
239,857
|
|
|
$
|
(222,400
|
)
|
__________
|
|
(1)
|
Amount includes
$2.6 million
related to the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
, which is described further in
Note 4. Restructuring
.
|
Additionally, the Company recorded aggregate goodwill impairment charges during the
nine months ended September 30, 2018
of
$391.0 million
. Refer to
Note 9. Goodwill and Other Intangibles
for further description, including the valuation methodologies utilized.
NOTE 8. INVENTORIES
Inventories consist of the following at
September 30, 2018
and December 31,
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Raw materials (1)
|
$
|
119,627
|
|
|
$
|
124,685
|
|
Work-in-process (1)
|
83,665
|
|
|
109,897
|
|
Finished goods (1)
|
129,495
|
|
|
156,855
|
|
Total
|
$
|
332,787
|
|
|
$
|
391,437
|
|
__________
(1) The components of inventory shown in the table above are net of allowance for obsolescence.
Inventory that is in excess of the amount expected to be sold within one year, which relates primarily to XIAFLEX
®
inventory, is classified as long-term inventory and is not included in the table above. At
September 30, 2018
and
December 31, 2017
,
$13.3 million
and
$17.1 million
, respectively, of long-term inventory was included in Other assets in the
Condensed Consolidated Balance Sheets
. As of
September 30, 2018
and
December 31, 2017
, the Company’s
Condensed Consolidated Balance Sheets
included approximately
$13.6 million
and
$5.9 million
, respectively, of capitalized pre-launch inventories related to generic products that were not yet available to be sold.
NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the
nine months ended September 30, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Branded - Specialty & Established Pharmaceuticals
|
|
U.S. Branded - Sterile Injectables
|
|
U.S. Generic Pharmaceuticals
|
|
International Pharmaceuticals
|
|
Total
|
Goodwill as of December 31, 2017
|
$
|
828,818
|
|
|
$
|
—
|
|
|
$
|
3,531,301
|
|
|
$
|
89,963
|
|
|
$
|
4,450,082
|
|
Allocation to current segments (1)
|
—
|
|
|
2,731,193
|
|
|
(2,731,193
|
)
|
|
—
|
|
|
—
|
|
Effect of currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,414
|
)
|
|
(2,414
|
)
|
Goodwill impairment charges
|
—
|
|
|
—
|
|
|
(391,000
|
)
|
|
—
|
|
|
(391,000
|
)
|
Goodwill as of September 30, 2018
|
$
|
828,818
|
|
|
$
|
2,731,193
|
|
|
$
|
409,108
|
|
|
$
|
87,549
|
|
|
$
|
4,056,668
|
|
__________
|
|
(1)
|
This allocation relates to the change in segments described in
Note 6. Segment Results
. The amount of goodwill initially attributed to the new
U.S. Branded - Sterile Injectables
and
U.S. Generic Pharmaceuticals
segments was determined using a relative fair value methodology in accordance with U.S. GAAP.
|
The carrying amounts of goodwill at
September 30, 2018
and December 31,
2017
are net of the following accumulated impairments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Branded - Specialty & Established Pharmaceuticals
|
|
U.S. Branded - Sterile Injectables
|
|
U.S. Generic Pharmaceuticals
|
|
International Pharmaceuticals
|
|
Total
|
Accumulated impairment losses as of December 31, 2017
|
$
|
855,810
|
|
|
$
|
—
|
|
|
$
|
2,342,549
|
|
|
$
|
463,545
|
|
|
$
|
3,661,904
|
|
Accumulated impairment losses as of September 30, 2018
|
$
|
855,810
|
|
|
$
|
—
|
|
|
$
|
2,733,549
|
|
|
$
|
451,209
|
|
|
$
|
4,040,568
|
|
Other Intangible Assets
Changes in the amount of other intangible assets for the
nine months ended September 30, 2018
are set forth in the table below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost basis:
|
Balance as of December 31, 2017
|
|
Acquisitions
|
|
Impairments
|
|
Other (1)
|
|
Effect of Currency Translation
|
|
Balance as of September 30, 2018
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
347,200
|
|
|
$
|
—
|
|
|
$
|
(87,900
|
)
|
|
$
|
(165,400
|
)
|
|
$
|
—
|
|
|
$
|
93,900
|
|
Total indefinite-lived intangibles
|
$
|
347,200
|
|
|
$
|
—
|
|
|
$
|
(87,900
|
)
|
|
$
|
(165,400
|
)
|
|
$
|
—
|
|
|
$
|
93,900
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
Licenses (weighted average life of 12 years)
|
$
|
457,402
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
457,402
|
|
Tradenames
|
6,409
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,409
|
|
Developed technology (weighted average life of 11 years)
|
6,187,764
|
|
|
—
|
|
|
(129,676
|
)
|
|
154,753
|
|
|
(7,447
|
)
|
|
6,205,394
|
|
Total finite-lived intangibles (weighted average life of 11 years)
|
$
|
6,651,575
|
|
|
$
|
—
|
|
|
$
|
(129,676
|
)
|
|
$
|
154,753
|
|
|
$
|
(7,447
|
)
|
|
$
|
6,669,205
|
|
Total other intangibles
|
$
|
6,998,775
|
|
|
$
|
—
|
|
|
$
|
(217,576
|
)
|
|
$
|
(10,647
|
)
|
|
$
|
(7,447
|
)
|
|
$
|
6,763,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
Balance as of December 31, 2017
|
|
Amortization
|
|
Impairments
|
|
Other (1)
|
|
Effect of Currency Translation
|
|
Balance as of September 30, 2018
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
$
|
(370,221
|
)
|
|
$
|
(21,262
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(391,483
|
)
|
Tradenames
|
(6,409
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,409
|
)
|
Developed technology
|
(2,304,461
|
)
|
|
(450,400
|
)
|
|
—
|
|
|
10,647
|
|
|
3,217
|
|
|
(2,740,997
|
)
|
Total other intangibles
|
$
|
(2,681,091
|
)
|
|
$
|
(471,662
|
)
|
|
$
|
—
|
|
|
$
|
10,647
|
|
|
$
|
3,217
|
|
|
$
|
(3,138,889
|
)
|
Net other intangibles
|
$
|
4,317,684
|
|
|
|
|
|
|
|
|
|
|
$
|
3,624,216
|
|
__________
|
|
(1)
|
Other adjustments relate to reclassification adjustments of
$165.4 million
for certain developed technology intangible assets, previously classified as in-process research and development, that were placed in service during the
nine months ended September 30, 2018
and the removal of certain fully amortized intangible assets.
|
Amortization expense for the
three and nine months ended September 30, 2018
totaled
$161.3 million
and
$471.7 million
, respectively. Amortization expense for the
three and nine months ended September 30, 2017
totaled
$161.4 million
and
$615.5 million
, respectively. Amortization expense is included in Cost of revenues in the
Condensed Consolidated Statements of Operations
. Estimated amortization of intangibles for the five fiscal years subsequent to December 31,
2017
is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
622,384
|
|
2019
|
$
|
552,516
|
|
2020
|
$
|
481,300
|
|
2021
|
$
|
447,157
|
|
2022
|
$
|
420,786
|
|
Impairments
Endo tests goodwill and indefinite-lived intangible assets for impairment annually, or more frequently whenever events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1st.
As part of our goodwill and intangible asset impairment assessments, we estimate the fair values of our reporting units and our intangible assets using an income approach that utilizes a discounted cash flow model or, where appropriate, a market approach. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. These estimates of future cash flows involve assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, tax rates, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions. 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 rates applied to the estimated cash flows are based on the overall risk associated with the particular assets and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to
Asset impairment charges
in our
Condensed Consolidated Statements of Operations
.
During the
three and nine months ended September 30, 2018
and
2017
, the Company incurred the following goodwill and other intangible asset impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Goodwill impairment charges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
391,000
|
|
|
$
|
288,745
|
|
Other intangible asset impairment charges
|
$
|
140,609
|
|
|
$
|
78,300
|
|
|
$
|
217,576
|
|
|
$
|
674,177
|
|
A summary of significant goodwill and other intangible asset impairment tests and related charges is included below. Other intangible asset impairment charges that are not included in the below narrative totaled
$140.6 million
and
$78.3 million
during the
three months ended September 30, 2018
and
2017
, respectively, and
$217.6 million
and
$461.1 million
during the
nine months ended September 30, 2018
and
2017
, respectively. These charges relate primarily to certain in-process research and development and/or developed technology intangible assets that were tested for impairment following changes in market conditions and certain other factors impacting recoverability.
Our first quarter 2018 change in segments described in
Note 6. Segment Results
resulted in changes to our reporting units for goodwill impairment testing purposes, including the creation of a new
U.S. Branded - Sterile Injectables
reporting unit, which was previously part of our Generics reporting unit. As a result of these changes, under U.S. GAAP, we tested the goodwill of the former Generics reporting unit immediately before the segment realignment and the goodwill of both the new
U.S. Branded - Sterile Injectables
and
U.S. Generic Pharmaceuticals
reporting units immediately after the segment realignment. These goodwill tests were performed using an income approach that utilizes a discounted cash flow model. The results of these goodwill impairment tests were as follows:
|
|
•
|
The former Generics reporting unit’s estimated fair value (determined using a discount rate of
9.5%
) exceeded its carrying amount, resulting in
no
related goodwill impairment charge.
|
|
|
•
|
The new
U.S. Branded - Sterile Injectables
reporting unit’s estimated fair value (determined using a discount rate of
9.5%
) exceeded its carrying amount, resulting in
no
related goodwill impairment charge.
|
|
|
•
|
The new
U.S. Generic Pharmaceuticals
reporting unit’s carrying amount exceeded its estimated fair value (determined using a discount rate of
9.5%
), resulting in a pre-tax non-cash goodwill impairment charge of
$391.0 million
.
|
In March 2017, we announced that the Food and Drug Administration’s (FDA) Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA
®
ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA
®
ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA
®
ER from the market. As a result of our decision, the Company determined that the carrying amount of its OPANA
®
ER intangible asset was no longer recoverable, resulting in a pre-tax, non-cash impairment charge of
$20.6 million
in the second quarter of 2017, representing the remaining carrying amount.
As a result of the withdrawal of OPANA
®
ER from the market and the continued erosion of our U.S. Branded Pharmaceuticals segment’s Established Products portfolio, we initiated an interim goodwill impairment analysis of our Branded reporting unit during the second quarter of 2017. We recorded a pre-tax, non-cash goodwill impairment charge of
$180.4 million
during the three months ended June 30, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. We estimated the fair value of the Branded reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Branded goodwill impairment test was
9.5%
.
As further described in
Note 4. Restructuring
, the Company announced the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
in July 2017, which includes the discontinuation of certain commercial products. As a result, the Company assessed the recoverability of the impacted products, resulting in pre-tax, non-cash intangible asset impairment charges of approximately
$57.5 million
during the second quarter of 2017. The Company also initiated an interim goodwill impairment analysis of its Generics reporting unit during the second quarter of 2017 as a result of the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
and determined that the estimated fair value of the Generics reporting unit exceeded its carrying amount. Accordingly,
no
related goodwill impairment was recorded. The Company estimated the fair value of the Generics reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Generics goodwill impairment test was
9.0%
.
Pursuant to an existing agreement with a wholly owned subsidiary of Novartis AG (Novartis), Paladin licensed the Canadian rights to commercialize serelaxin, an investigational drug for the treatment of acute heart failure (AHF). In March 2017, Novartis announced that a Phase 3 study of serelaxin in patients with AHF failed to meet its primary endpoints. As a result, we concluded that the full carrying amount of our serelaxin in-process research and development intangible asset was impaired, resulting in a
$45.5 million
pre-tax non-cash impairment charge for the three months ended March 31, 2017. In addition and as a result of the serelaxin impairment, we assessed the recoverability of our Paladin goodwill balance and determined that the estimated fair value of the Paladin reporting unit was below its carrying amount. We recorded a pre-tax, non-cash goodwill impairment charge of
$82.6 million
during the three months ended March 31, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. We estimated the fair value of the Paladin reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Paladin goodwill impairment test was
10.0%
.
As further discussed in
Note 3. Discontinued Operations and Divestitures
, we entered into a definitive agreement to sell Somar on June 30, 2017, which resulted in Somar’s assets and liabilities being classified as held for sale. The initiation of held-for-sale accounting, together with the agreed upon sale price, triggered an impairment review. Accordingly, we performed an impairment analysis using a market approach and determined that impairment charges were required. We recorded pre-tax, non-cash impairment charges of
$25.7 million
and
$89.5 million
related to Somar’s goodwill and other intangible assets, respectively, during the second quarter of 2017, each of which represented the remaining carrying amounts of the corresponding assets.
NOTE 10. LICENSE AND COLLABORATION AGREEMENTS
Our subsidiaries have entered into certain license, collaboration and discovery agreements with third parties for product development. These agreements require our subsidiaries to share in the development costs of such products and the third parties grant marketing rights to our subsidiaries for such products.
Generally, under these agreements: (i) we are required to make upfront payments and other payments upon successful completion of regulatory or sales milestones, (ii) we are required to pay royalties on sales of the products arising from these agreements and (iii) termination is permitted with no significant continuing obligation.
During the second quarter of 2018, we entered into a development, license and commercialization agreement with a third party pharmaceutical company related to
five
sterile injectable product candidates. Pursuant to this agreement, the third party will generally be responsible, at its expense, to develop and seek regulatory approval for these product candidates, and the Company will generally be responsible, at its expense, to launch and distribute any products that are approved. The Company will have exclusive license rights to all of these products launched in the U.S. and a first right of refusal for the Canadian territory. Upon entering into this agreement, the Company became obligated to make an upfront payment, which was recorded as Research and development expense in the
Condensed Consolidated Statements of Operations
during the three months ended June 30, 2018. The Company could become obligated to make additional payments based on certain potential future milestones being achieved.
There have been no other significant changes to our license, collaboration and discovery agreements since our Annual Report on Form 10-K for the year ended
December 31, 2017
.
NOTE 11. CONTRACT ASSETS AND LIABILITIES
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship products to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. At
September 30, 2018
, the unfulfilled performance obligations for these types of contracts relate to ordered but undelivered products. We generally expect to fulfill the performance obligations and recognize revenue within
one
week of entering into the underlying contract. Based on the short-term initial contract duration, additional disclosure about the remaining performance obligations is not required.
Certain of our other revenue-generating contracts, including license and collaboration agreements, may result in contract assets and/or contract liabilities. For example, we may recognize contract liabilities upon receipt of certain upfront and milestone payments from customers when there are remaining performance obligations.
The following table shows the opening and closing balances of contract assets and contract liabilities from contracts with customers (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
January 1, 2018
|
|
$ Change
|
|
% Change
|
Contract assets, net (1)
|
$
|
13,291
|
|
|
$
|
11,287
|
|
|
$
|
2,004
|
|
|
18
|
%
|
Contract liabilities, net (2)
|
$
|
19,635
|
|
|
$
|
20,954
|
|
|
$
|
(1,319
|
)
|
|
(6
|
)%
|
__________
|
|
(1)
|
At
September 30, 2018
and
January 1, 2018
, approximately
$10.3 million
and
$8.2 million
, respectively, of these contract asset amounts are classified as current assets and are included in Prepaid expenses and other current assets in the Company’s
Condensed Consolidated Balance Sheets
. The remaining amounts are classified as non-current and are included in Other assets. The net
increase
in contract assets during the
nine months
ended
September 30, 2018
was primarily due to certain sales activity during the period, partially offset by reclassifications to accounts receivable following the resolution of certain conditions other than the passage of time affecting the Company’s rights to consideration for the sale of certain goods.
|
|
|
(2)
|
At
September 30, 2018
and
January 1, 2018
, approximately
$1.7 million
and
$1.9 million
, respectively, of these contract liability amounts are classified as current liabilities and are included in Accounts payable and accrued expenses in the Company’s
Condensed Consolidated Balance Sheets
. The remaining amounts are classified as non-current and are included in Other liabilities. During the
nine months
ended
September 30, 2018
, the Company recognized revenue of
$1.3 million
that was included in the contract liability balance at
January 1, 2018
, resulting in a corresponding
decrease
in contract liabilities.
|
During the
nine months
ended
September 30, 2018
, we recognized
revenue
of
$4.6 million
relating to performance obligations satisfied, or partially satisfied, in prior periods. Such revenue generally relates to changes in estimates with respect to our variable consideration.
NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses
include the following at
September 30, 2018
and December 31,
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Trade accounts payable
|
$
|
106,321
|
|
|
$
|
85,348
|
|
Returns and allowances
|
250,637
|
|
|
291,034
|
|
Rebates
|
152,297
|
|
|
168,333
|
|
Chargebacks
|
2,022
|
|
|
14,604
|
|
Accrued interest
|
64,647
|
|
|
130,257
|
|
Accrued payroll and related benefits
|
84,240
|
|
|
113,908
|
|
Accrued royalties and other distribution partner payables
|
103,673
|
|
|
63,114
|
|
Acquisition-related contingent consideration—short-term
|
42,261
|
|
|
70,543
|
|
Other
|
212,906
|
|
|
159,684
|
|
Total
|
$
|
1,019,004
|
|
|
$
|
1,096,825
|
|
NOTE 13. DEBT
The following table presents information about the Company’s total indebtedness at
September 30, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Effective Interest Rate
|
|
Principal Amount
|
|
Carrying Amount
|
|
Effective Interest Rate
|
|
Principal Amount
|
|
Carrying Amount
|
7.25% Senior Notes due 2022
|
7.91
|
%
|
|
$
|
400,000
|
|
|
$
|
392,439
|
|
|
7.91
|
%
|
|
$
|
400,000
|
|
|
$
|
390,974
|
|
5.75% Senior Notes due 2022
|
6.04
|
%
|
|
700,000
|
|
|
694,053
|
|
|
6.04
|
%
|
|
700,000
|
|
|
692,855
|
|
5.375% Senior Notes due 2023
|
5.62
|
%
|
|
750,000
|
|
|
743,083
|
|
|
5.62
|
%
|
|
750,000
|
|
|
742,048
|
|
6.00% Senior Notes due 2023
|
6.28
|
%
|
|
1,635,000
|
|
|
1,615,955
|
|
|
6.28
|
%
|
|
1,635,000
|
|
|
1,613,446
|
|
5.875% Senior Secured Notes due 2024
|
6.14
|
%
|
|
300,000
|
|
|
295,922
|
|
|
6.14
|
%
|
|
300,000
|
|
|
295,513
|
|
6.00% Senior Notes due 2025
|
6.27
|
%
|
|
1,200,000
|
|
|
1,182,859
|
|
|
6.27
|
%
|
|
1,200,000
|
|
|
1,181,243
|
|
Term Loan B Facility Due 2024
|
5.46
|
%
|
|
3,372,313
|
|
|
3,338,451
|
|
|
5.46
|
%
|
|
3,397,925
|
|
|
3,360,103
|
|
Other debt
|
|
|
—
|
|
|
—
|
|
|
1.50
|
%
|
|
55
|
|
|
55
|
|
Total long-term debt, net
|
|
|
$
|
8,357,313
|
|
|
$
|
8,262,762
|
|
|
|
|
$
|
8,382,980
|
|
|
$
|
8,276,237
|
|
Less current portion, net
|
|
|
34,150
|
|
|
34,150
|
|
|
|
|
34,205
|
|
|
34,205
|
|
Total long-term debt, less current portion, net
|
|
|
$
|
8,323,163
|
|
|
$
|
8,228,612
|
|
|
|
|
$
|
8,348,775
|
|
|
$
|
8,242,032
|
|
The senior unsecured notes are unsecured and effectively subordinated in right of priority to our credit agreement (the 2017 Credit Agreement) and our senior secured notes, in each case to the extent of the value of the collateral securing such instruments, which collateral represents substantially all of the assets of the issuers or borrowers and the guarantors party thereto.
The aggregate estimated fair value of the Company’s long-term debt, which was estimated using inputs based on quoted market prices for the same or similar debt issuances, was
$7.9 billion
and
$7.5 billion
at
September 30, 2018
and
December 31, 2017
, respectively. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
Credit Facility
We have
$997.2 million
of remaining credit available through our revolving credit facility as of
September 30, 2018
. As of
September 30, 2018
, we were in compliance with all covenants contained in our credit agreement.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings and Investigations
We and certain of our subsidiaries are involved in various claims, legal proceedings and internal and governmental investigations (collectively, proceedings) that arise from time to time in the ordinary course of our business, including, among others, those relating to product liability, intellectual property, regulatory compliance, consumer protection and commercial matters. While we cannot predict the outcome of these proceedings and we intend to vigorously prosecute or defend our position as appropriate, there can be no assurance that we will be successful or obtain any requested relief, and an adverse outcome in any of these proceedings could have a material adverse effect on our current and future financial position, results of operations and cash flows. Matters that are not being disclosed herein are, in the opinion of our management, immaterial both individually and in the aggregate with respect to our financial position, results of operations and cash flows. If and when such matters, in the opinion of our management, become material, either individually or in the aggregate, we will disclose such matters.
We believe that certain settlements and judgments, as well as legal defense costs, relating to certain product liability or other matters are or may be covered in whole or in part under our insurance policies with a number of insurance carriers. In certain circumstances, insurance carriers reserve their rights to contest or deny coverage. We intend to contest vigorously any and all such disputes with our insurance carriers and to enforce our rights under the terms of our insurance policies. Accordingly, we will record receivables with respect to amounts due under these policies only when the resolution of any dispute has been reached and realization of the potential claim for recovery is considered probable. Amounts recovered under our insurance policies could be less than the stated coverage limits and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available.
As of
September 30, 2018
, our accrual for loss contingencies totaled
$1,002.1 million
, of which
$845.6 million
relates to our liability accrual for vaginal mesh cases and other mesh-related matters. During the fourth quarter of 2017, the Company recorded a total increase to its liability accrual of approximately
$200 million
related to testosterone-related product liability matters and LIDODERM
®
-related antitrust matters. The accrual for LIDODERM
®
-related matters includes an estimated loss for, among other matters, settlement of all remaining claims filed against EPI in multidistrict litigation (MDL) No. 2521, which is further discussed below under the heading “
Other Antitrust Matters
.” The testosterone-related accrual includes an estimated loss for, among other matters, all testosterone-related product liability cases filed in MDL No. 2545 and in other courts. These cases are further discussed below under the heading “
Product Liability and Related Matters
.” Although we believe there is a reasonable possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.
Product Liability and Related Matters
We and certain of our subsidiaries have been named as defendants in numerous lawsuits in various U.S. federal and state courts, as well as in Canada and other countries, alleging personal injury resulting from the use of certain products of our subsidiaries. These and other related matters are described below in more detail.
Vaginal Mesh.
Since 2008, we and certain of our subsidiaries, including American Medical Systems Holdings, Inc. (subsequently converted to Astora Women’s Health Holding LLC and merged into Astora Women’s Health LLC and referred to herein as AMS) and/or Astora, have been named as defendants in multiple lawsuits in various state and federal courts in the U.S. (including a federal MDL pending in the U.S. District Court for the Southern District of West Virginia (MDL No. 2325)), and in Canada and other countries, alleging personal injury resulting from the use of transvaginal surgical mesh products designed to treat pelvic organ prolapse (POP) and stress urinary incontinence (SUI). In January 2018, a representative proceeding (class action) was filed in the Federal Court of Australia against American Medical Systems, LLC. In the various class action and individual complaints, plaintiffs claim a variety of personal injuries, including chronic pain, incontinence, inability to control bowel function and permanent deformities, and seek compensatory and punitive damages, where available.
We and certain plaintiffs’ counsel representing mesh-related product liability claimants have entered into various Master Settlement Agreements (MSAs) and other agreements to resolve up to approximately
71,000
filed and unfiled mesh claims handled or controlled by the participating counsel. These MSAs and other agreements were entered into at various times between June 2013 and the present, were solely by way of compromise and settlement and were not in any way an admission of liability or fault by us or any of our subsidiaries.
All MSAs are subject to a process that includes guidelines and procedures for administering the settlements and the release of funds. In certain cases, the MSAs provide for the creation of QSFs into which funds may be deposited pursuant to certain schedules set forth in those agreements. All MSAs have participation requirements regarding the claims represented by each law firm party to the MSA. In addition, one agreement gives us a unilateral right of approval regarding which claims may be eligible to participate under that settlement. To the extent fewer claims than are authorized under an agreement participate, the total settlement payment under that agreement will be reduced by an agreed-upon amount for each such non-participating claim. Funds deposited in QSFs are considered restricted cash and/or restricted cash equivalents.
Distribution of funds to any individual claimant is conditioned upon the receipt of documentation substantiating the validity of the claim, a full release and dismissal of the entire action or claim as to all AMS parties and affiliates. Prior to receiving funds, an individual claimant is required to represent and warrant that liens, assignment rights or other claims identified in the claims administration process have been or will be satisfied by the individual claimant. Confidentiality provisions apply to the amount of settlement awards to participating claimants, the claims evaluation process and procedures used in conjunction with award distributions, and the negotiations leading to the settlements.
In June 2017, the MDL court entered a case management order which, among other things, requires plaintiffs in newly-filed MDL cases to provide expert disclosures on specific causation within one hundred twenty (120) days of filing a claim (the Order). Under the Order, a plaintiff's failure to meet the foregoing deadline may be grounds for the entry of judgment against such plaintiff. In July 2017, a similar order was entered in Minnesota state court. In June 2018, at the request of the MDL court, the Judicial Panel on Multidistrict Litigation entered a minute order suspending the transfer of cases into the MDL. Subsequently, the MDL court issued a pretrial order discontinuing the direct filing of claims in MDL No. 2325. The MDL court also issued similar orders in other MDLs involving claims against other mesh manufacturers.
Although the Company believes it has appropriately estimated the probable total amount of loss associated with all matters as of the date of this report, fact and expert discovery is ongoing in certain cases that have not settled, and it is reasonably possible that further claims may be filed or asserted and that adjustments to our liability accrual may be required. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The following table presents the changes in the QSFs and mesh liability accrual balance during the
nine months ended September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
Qualified Settlement Funds
|
|
Mesh Liability Accrual
|
Balance as of January 1, 2018
|
$
|
313,814
|
|
|
$
|
1,087,172
|
|
Additional charges
|
—
|
|
|
19,000
|
|
Cash contributions to Qualified Settlement Funds
|
216,770
|
|
|
—
|
|
Cash distributions to settle disputes from Qualified Settlement Funds
|
(248,485
|
)
|
|
(248,485
|
)
|
Cash distributions to settle disputes
|
—
|
|
|
(17,114
|
)
|
Other (1)
|
1,653
|
|
|
5,038
|
|
Balance as of September 30, 2018
|
$
|
283,752
|
|
|
$
|
845,611
|
|
__________
|
|
(1)
|
Amounts deposited in the QSFs may earn interest, which is generally used to pay administrative costs of the fund and is reflected in the table above as an increase to the QSF and Mesh Liability Accrual balances. Any interest remaining after all claims have been paid will generally be distributed to the claimants who participated in that settlement. The
$5.0 million
in the table above also includes a second quarter 2018 reclassification adjustment of
$4.4 million
for accrued interest amounts previously recorded in Accounts payable and accrued expenses in the
Condensed Consolidated Balance Sheets
.
|
As of
September 30, 2018
,
$820.2 million
of the mesh liability accrual amount shown above is classified in the Current portion of the legal settlement accrual in the
Condensed Consolidated Balance Sheets
, with the remainder classified as Long-term legal settlement accrual, less current portion. Charges related to vaginal mesh liability and associated legal fees and other expenses for all periods presented are reported in Discontinued operations, net of tax in our
Condensed Consolidated Statements of Operations
.
To date, the Company has made total mesh liability payments of approximately
$3.1 billion
,
$283.8 million
of which remains in the QSFs as of
September 30, 2018
. We expect to fund into the QSFs the remaining payments under all settlement agreements during the remainder of 2018 and 2019. As the funds are disbursed out of the QSFs from time to time, the liability accrual will be reduced accordingly with a corresponding reduction to restricted cash and cash equivalents. In addition, we may pay cash distributions to settle disputes separate from the QSFs, which will also decrease the liability accrual and decrease cash and cash equivalents.
We were contacted in October 2012 regarding a civil investigation initiated by a number of state attorneys general into mesh products, including transvaginal surgical mesh products designed to treat POP and SUI. In November 2013, we received a subpoena relating to this investigation from the state of California, and we have subsequently received additional subpoenas from California and other states. We are cooperating with these investigations.
We will continue to vigorously defend any unresolved claims and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred.
Testosterone.
Various manufacturers of prescription medications containing testosterone, including our subsidiaries Endo Pharmaceuticals Inc. (EPI) and Auxilium Pharmaceuticals, Inc. (subsequently converted to Auxilium Pharmaceuticals, LLC and hereinafter referred to as Auxilium), have been named as defendants in multiple lawsuits alleging personal injury resulting from the use of such medications, including FORTESTA
®
Gel, DELATESTRYL
®
, TESTIM
®
, TESTOPEL
®
, AVEED
®
and STRIANT
®
. Plaintiffs in these suits generally allege various personal injuries, including pulmonary embolism, stroke or other vascular and/or cardiac injuries, and seek compensatory and/or punitive damages, where available.
As of
November 1, 2018
, we were aware of approximately
1,205
testosterone cases (some of which may have been filed on behalf of multiple plaintiffs) pending against one or more of our subsidiaries in federal or state court. Many of these cases have been coordinated in a federal MDL pending in the U.S. District Court for the Northern District of Illinois (MDL No. 2545). In November 2015, the MDL court entered an order granting defendants’ motion to dismiss claims involving certain testosterone products that were approved pursuant to ANDAs, including TESTOPEL
®
. Plaintiffs filed a motion for reconsideration and clarification of this order. In March 2016, the MDL court granted plaintiffs’ motion in part and entered an order permitting certain claims to go forward to the extent they are based on allegations of fraudulent off-label marketing. An MDL trial against Auxilium involving TESTIM
®
took place in November 2017 and resulted in a defense verdict. A trial against Auxilium involving TESTIM
®
was scheduled for January 2018 in the Philadelphia Court of Common Pleas (PCCP) but resolved prior to trial.
In June 2018, counsel for plaintiffs, on the one hand, and Auxilium and EPI, on the other, executed an MSA allowing for the resolution of all known testosterone replacement therapy product liability claims against our subsidiaries. The MSA was solely by way of compromise and settlement and was not in any way an admission of fault by us or any of our subsidiaries.
The MSA is subject to a process that includes guidelines and procedures for administering the settlement and the release of funds. Among other things, the MSA provides for the creation of a QSF into which the settlement funds will be deposited, establishes participation requirements, and allows for a reduction of the total settlement payment in the event the participation threshold is not met. Distribution of funds to any individual claimant is conditioned upon the receipt of documentation substantiating product use and injury as determined by a third-party special master, the dismissal of any lawsuit and the release of the claim as to us and all affiliates. Prior to receiving funds, an individual claimant must represent and warrant that liens, assignment rights or other claims identified in the claims administration process have been or will be satisfied by the individual claimant. Confidentiality provisions apply to the settlement funds, amounts allocated to individual claimants and other terms of the agreement.
Although the Company believes it has appropriately estimated the probable total amount of loss associated with testosterone-related product liability matters as of the date of this report, it is reasonably possible that further claims may be filed or asserted and that adjustments to our liability accrual may be required. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The MDL also includes a lawsuit filed in November 2014 in the U.S. District for the Northern District of Illinois against EPI, Auxilium and various other manufacturers of testosterone products on behalf of a proposed class of health insurance companies and other third party payers that claim to have paid for certain testosterone products. After a series of motions to dismiss, plaintiff filed a third amended complaint in April 2016, asserting civil claims for alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and negligent misrepresentation based on defendants’ marketing of certain testosterone products. The court denied a motion to dismiss this complaint in August 2016. In July 2018, the court denied plaintiff’s motion for class certification. In October 2018, defendants moved for summary judgment. This lawsuit is not part of the settlement described above.
We will continue to vigorously defend any unresolved claims and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred.
Unapproved Drug Litigation
In September 2013, the state of Louisiana filed a petition for damages against certain of our subsidiaries, including EPI, and more than
50
other pharmaceutical companies in Louisiana state court (19th Judicial District) alleging that the defendants or their subsidiaries marketed products that were not approved by the FDA and seeking damages, fines, penalties, attorneys’ fees and costs under various causes of action. In October 2015, the district court entered judgment for defendants on their exception for no right of action. The state appealed, and in October 2016 the Louisiana First Circuit Court of Appeals reversed the dismissal as to the state’s Medicaid Assistance Program Integrity Law (MAPIL) and Louisiana Unfair Trade Practices Act (LUTPA) claims but affirmed the dismissal as to the state’s other claims. The state’s petition for rehearing was denied in December 2016. Both sides applied to the Louisiana Supreme Court for a writ of certiorari to review the First Circuit’s decision. Those writs were denied in March 2017. In May 2017, defendants filed exceptions for no cause of action in the district court. In August 2017, the court sustained defendants’ exception as to the MAPIL claim but overruled defendants’ exception as to the LUTPA claim. The state then filed a motion seeking reconsideration with respect to the MAPIL claim, and defendants filed a motion for clarification with respect to the court’s ruling on the LUTPA claim. In October 2017, the court denied the state’s motion and entered final judgment against the state with respect to the MAPIL claim. The court also granted defendants’ motion for clarification and dismissed the state’s LUTPA claim insofar as it sought civil penalties for alleged violations occurring before June 2, 2006. In October 2017, defendants applied for a supervisory writ of certiorari to the Louisiana First Circuit Court of Appeals on the district court’s August 2017 order overruling defendants’ exception on the state’s LUTPA claim. The First Circuit Court of Appeals denied defendants’ writ application in July 2018. In August 2018, the defendants filed an application for a supervisory writ of certiorari to the Louisiana Supreme Court. That writ application is fully briefed.
In March 2017, the state of Mississippi filed a complaint against our subsidiary EPI in Mississippi state court (Hinds County Chancery Court) alleging that EPI marketed products that were not approved by the FDA and seeking damages, penalties, attorneys’ fees, costs and other relief under various causes of action. In April 2017, EPI removed the case to the U.S. District Court for the Southern District of Mississippi. In May 2017, the state moved to remand the case to state court, and that motion was granted in October 2017. In November 2017, EPI filed a motion to dismiss the state’s complaint on various grounds. In January 2018, the state filed a motion for leave to amend its complaint. In February 2018, following an unopposed motion by the state, the court consolidated the state’s case against EPI with
five
substantially similar cases brought by the state against other defendants. The consolidation is solely for purposes of coordinated pretrial proceedings and discovery, not for trial. In March 2018, the court signed an agreed order dismissing EPI and granting the state leave to file a first amended complaint. The first amended complaint names our subsidiary Generics International (US), Inc. (Generics) as the defendant. In April 2018, Generics moved to dismiss on various grounds. The case is currently stayed by agreement of the parties.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred.
Opioid-Related Matters
Since 2014, multiple U.S. states, counties, other governmental persons or entities and private plaintiffs have filed suit against certain of our subsidiaries, including Endo Health Solutions Inc. (EHSI), EPI, Par Pharmaceutical, Inc. (PPI), Par Pharmaceutical Companies, Inc. (Par), Vintage Pharmaceuticals, LLC and/or Generics Bidco I, LLC and, in some instances, the Company, as well as various other manufacturers, distributors and/or others, asserting claims relating to defendants’ alleged sales, marketing and/or distribution practices with respect to prescription opioid medications, including certain of our products. As of
November 1, 2018
, the cases of which we were aware include, but are not limited to, approximately
11
cases filed by or on behalf of states; approximately
1,505
cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately
112
cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers; and approximately
48
cases filed by individuals. Certain of the cases have been filed as putative class actions. In addition to the litigation in the U.S., in September 2018, an action against Paladin Labs, EPI, the Company and various other manufacturers and distributors was commenced in British Columbia on behalf of all federal, provincial and territorial governments and agencies in Canada that paid healthcare, pharmaceutical and treatment costs related to opioids.
Many of the U.S. cases have been coordinated in a federal MDL pending in the U.S. District Court for the Northern District of Ohio (MDL No. 2804). In March 2018, the U.S. Department of Justice (DOJ) filed a statement of interest in the case, and in April 2018 it filed a motion to participate in settlement discussions and as a friend of the court, which the MDL court has granted. The MDL court has issued a series of case management orders permitting motions to dismiss addressing threshold legal issues in certain cases, setting a trial date in September 2019 for
three
cases originally filed in the Northern District of Ohio, allowing certain discovery and establishing certain other deadlines and procedures, among other things.
Other cases remain pending in various state courts. In some jurisdictions, such as Connecticut, Illinois, New York, Pennsylvania and Texas, certain state court cases have been transferred to a single court within their respective state court systems for coordinated pretrial proceedings. The state cases are generally at the pleading and/or discovery stage.
The complaints in the cases assert a variety of claims including, but not limited to, claims for alleged violations of public nuisance, consumer protection, unfair trade practices, racketeering, Medicaid fraud and/or drug dealer liability statutes and/or common law claims for public nuisance, fraud/misrepresentation, strict liability, negligence and/or unjust enrichment. The claims are generally based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent abuse and diversion. Plaintiffs generally seek declaratory and/or injunctive relief; compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees, costs and/or other relief.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred.
In addition to the lawsuits described above, the Company and/or its subsidiaries have received certain subpoenas, civil investigative demands (CIDs) and informal requests for information concerning the sale, marketing and/or distribution of prescription opioid medications, including the following:
In September 2017, the Department of Justice for the state of Oregon and the Office of the Attorney General for the Commonwealth of Massachusetts issued CIDs to EHSI and EPI on behalf of a multistate group which we understand currently includes approximately 30 states. Our subsidiaries are cooperating with this investigation. Certain states participating in the multistate investigation had issued their own CIDs, subpoenas or requests for information to the Company prior to their participation in the multistate investigation.
Other states are conducting their own investigations outside of the multistate group. These states include New Hampshire (subpoenas received by EPI in August 2015 and December 2017); New Jersey (subpoena received by EPI in March 2017); Washington (CID received by the Company, EHSI and EPI in August 2017); Montana (CID received by EHSI and EPI in January 2018); Alaska (CID received by EPI in February 2018); and South Carolina (CID received by EHSI and EPI in February 2018). We are cooperating with these investigations.
In January 2018, our subsidiary EPI received a federal grand jury subpoena from the U.S. District Court for the Southern District of Florida in connection with an investigation being conducted by the U.S. Attorney’s Office for the Southern District of Florida in conjunction with the U.S. Food and Drug Administration. The subpoena seeks information related to OPANA
®
ER and other oxymorphone products. EPI is cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred.
Generic Drug Pricing Matters
In December 2014, we received a grand jury subpoena from the Antitrust Division of the DOJ issued by the U.S. District Court for the Eastern District of Pennsylvania to Par Pharmaceuticals. The subpoena requested documents and information focused primarily on product and pricing information relating to Par’s authorized generic version of Lanoxin (digoxin) oral tablets and Par’s generic doxycycline products, and on communications with competitors and others regarding those products. We are cooperating with the investigation.
In December 2015, EPI received interrogatories and a subpoena from the Connecticut Attorney General’s Office requesting documents and information regarding pricing of certain of generic products, including doxycycline hyclate, amitriptyline hydrochloride, doxazosin mesylate, methotrexate sodium and oxybutynin chloride. EPI is cooperating with this investigation.
In May 2018, we and our subsidiary Par each received a CID from the U.S. Department of Justice in relation to a False Claims Act investigation concerning whether generic pharmaceutical manufacturers engaged in price fixing and market allocation agreements, paid illegal remuneration and caused the submission of false claims. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred.
Certain cases alleging price-fixing and other anticompetitive conduct with respect to various generic pharmaceutical products have been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Eastern District of Pennsylvania under the caption
In re Generic Pharmaceuticals Pricing Antitrust Litigation
(MDL No. 2724). Among the lawsuits consolidated and/or coordinated in the MDL, the earliest lawsuits naming the Company and/or its subsidiaries were filed in November 2016 and related to digoxin and doxycycline.
The private plaintiffs in the MDL include alleged direct purchasers, end-payers and indirect purchaser resellers who purport to represent not only themselves but also all others similarly situated. At the MDL court’s direction, in August 2017, each group of private plaintiffs (direct purchasers, end-payers and indirect purchaser resellers) filed separate consolidated amended class action complaints as to each of
18
products, except with respect to
one
product (propranolol) direct purchaser plaintiffs stated their intention to proceed on a consolidated amended complaint filed in the U.S. District Court for the Southern District of New York prior to MDL transfer (the Southern District of New York had denied a motion to dismiss this complaint). Each of the consolidated amended complaints filed in August 2017 relates to
one
product, and our subsidiary PPI was named as a defendant in complaints relating to the following
six
products: digoxin, doxycycline hyclate, divalproex ER, propranolol, baclofen and amitriptyline hydrochloride. The MDL court divided the various cases into
three
separate product-based tranches for certain administrative and scheduling purposes, including briefing on motions to dismiss, and allowed certain targeted discovery. As to the
six
products in the first tranche (including digoxin, doxycycline hyclate and divalproex ER), defendants filed motions to dismiss in October 2017. In October 2018, the MDL court denied portions of these motions and has yet to rule on other aspects.
In December 2016, the Attorney General for the state of Connecticut, leading a coalition of
20
state attorneys general, filed a complaint in the U.S. District Court for the District of Connecticut alleging price-fixing and other anticompetitive conduct with respect to doxycycline hyclate delayed release and glyburide against certain manufacturers of those products. The Company and its subsidiaries were not named in that complaint, or in an amended complaint filed on behalf of
40
states in March 2017, or in a separate lawsuit filed by
four
more states and the District of Columbia in the same court in July 2017. In August 2017, the state cases were transferred to MDL No. 2724. In October 2017, the state plaintiffs filed a motion for leave to (1) consolidate their
two
cases, (2) add Alaska and the Commonwealth of Puerto Rico as plaintiffs and (3) assert additional claims against existing and new defendants. In June 2018, the MDL court granted this motion, and the state plaintiffs filed their amended complaint. The amended complaint adds new allegations and claims against
14
new defendants, including our subsidiary Par, relating to
13
additional products. The amended complaint alleges anticompetitive conduct by our subsidiary with respect to doxycycline monohydrate. It also alleges that all defendants engaged in an overarching conspiracy to restrain trade across the generic pharmaceutical industry and seeks to hold all defendants, including our subsidiary, jointly and severally liable for harm caused by alleged anticompetitive activity concerning each of the
15
drugs at issue. The amended complaint seeks declaratory and injunctive relief, disgorgement and other equitable relief, compensatory and treble damages, civil penalties, costs and attorneys’ fees.
In January 2018, The Kroger Co., Albertsons Companies, LLC, and H.E. Butt Grocery Company LP filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against PPI, as well as numerous other manufacturers of generic pharmaceuticals, alleging anticompetitive conduct relating to
30
separate generic pharmaceutical products, including
seven
products allegedly manufactured by PPI: digoxin, doxycycline hyclate, doxycycline monohydrate, divalproex ER, propranolol, baclofen and amitriptyline hydrochloride. This lawsuit has been assigned to the MDL court. The complaint alleges an overarching conspiracy among all named defendants to engage in price-fixing for all
30
products, as well as product-specific conspiracies relating to each individual product, in violation of federal antitrust law. The complaint seeks monetary damages, including treble damages, attorneys’ fees and injunctive relief.
In June 2018, direct purchaser, end-payer and indirect purchaser reseller plaintiffs filed additional class action complaints in the U.S. District Court for the Eastern District of Pennsylvania, alleging anticompetitive conduct relating to approximately
15
generic pharmaceuticals (generally those that were the subject of the state plaintiffs’ amended complaint). These lawsuits have also been assigned to the MDL court. The end payer and indirect purchaser reseller complaints name our subsidiaries PPI, Generics Bidco I, LLC and DAVA Pharmaceuticals, LLC, as well as other companies, as defendants. The direct purchaser complaint names our subsidiary Par and other companies as defendants. As to our subsidiaries, these complaints allege anticompetitive conduct with respect to doxycycline hyclate, doxycycline monohydrate, nystatin cream and/or zoledronic acid. These complaints also seek to hold all defendants jointly and severally liable for alleged anticompetitive conduct relating to all products identified in the complaints on the basis of an “overarching conspiracy” theory similar to that asserted by the state plaintiffs.
In August 2018, Humana Inc. filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against the Company, PPI and Par, as well as numerous other manufacturers of generic pharmaceuticals, alleging anticompetitive conduct relating to approximately
16
generic pharmaceutical products, including amitriptyline, baclofen, digoxin, divalproex, doxycycline (both doxycycline hyclate and doxycycline monohydrate) and propranolol. The complaint alleges an overarching conspiracy among all named defendants to engage in price-fixing for all
16
products, as well as product-specific conspiracies relating to each individual product. The complaint asserts claims under state and federal law and seeks monetary damages, including treble damages, attorneys’ fees and equitable relief. The lawsuit has been assigned to the MDL court.
In September 2018, Marion Diagnostic Center, LLC and Marion HealthCare, LLC filed a class action complaint in the U.S. District Court for the Eastern District of Pennsylvania against Par, as well as other manufacturers and
one
distributor of generic pharmaceuticals, McKesson Corporation (McKesson), on behalf of all direct purchasers of all generic drugs from McKesson. The complaint alleges an overarching conspiracy among all named defendants to engage in price-fixing and market allocation with respect to all generic drugs sold by McKesson, seeking to hold all defendants jointly and severally liable. The complaint asserts claims under state and federal law and seeks monetary damages, including treble damages, attorneys’ fees and equitable relief.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred.
Other Antitrust Matters
Beginning in November 2013, multiple direct and indirect purchasers of LIDODERM
®
filed a number of cases against our subsidiary EPI and co-defendants Teikoku Seiyaku Co., Ltd. and Teikoku Pharma USA, Inc. (collectively, Teikoku), and Actavis plc and certain of its subsidiaries (collectively, Actavis, which was subsequently acquired by Teva Pharmaceuticals Industries Ltd and its subsidiaries from Allergan plc). Plaintiffs generally alleged that EPI, Teikoku and Actavis entered into an anticompetitive conspiracy to restrain trade through the settlement of patent infringement litigation concerning U.S. Patent No. 5,827,529 (the ‘529 patent) and other patents. Some complaints also alleged that Teikoku wrongfully listed the ‘529 patent in FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) as related to LIDODERM
®
,
that EPI and Teikoku commenced sham patent litigation against Actavis and that EPI abused the FDA citizen petition process by filing a citizen petition and amendments solely to interfere with generic companies’ efforts to obtain FDA approval of their versions of LIDODERM
®
. The complaints asserted claims under Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2), and/or various state antitrust and consumer protection statutes, as well as common law claims, and generally sought damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. The cases were consolidated and/or coordinated in April 2014 in a federal MDL in the U.S. District Court for the Northern District of California (MDL No. 2521). The MDL court certified classes of direct and indirect purchasers in February 2017. In June 2017, defendants moved for summary judgment on all claims, and plaintiffs also moved for partial summary judgment on certain elements of their claims. In November 2017, the court granted defendants’ motion in part, ruling in defendants’ favor on the issues of infringement and derivation and also limiting the time period at issue. Defendants’ motions for summary judgment were denied in all other respects. The court also granted plaintiffs’ motions for summary judgment on the issues of agreement and relevant market. EPI settled with certain opt-out retailer plaintiffs in October 2017. EPI reached agreements to settle with the class plaintiffs in March 2018. In connection with the settlements, several indirect purchasers which previously had opted out were permitted to rejoin the class. The class settlement agreements provide for aggregate payments of approximately
$100 million
. In September 2018, the court approved the class settlement agreements and entered judgment dismissing the class cases with prejudice.
Beginning in June 2014, multiple direct and indirect purchasers of OPANA
®
ER filed cases against our subsidiaries EHSI and EPI and other pharmaceutical companies, including Impax Laboratories Inc. (Impax) and Penwest Pharmaceuticals Co., which our subsidiary EPI had acquired. Some cases were filed on behalf of putative classes of direct and indirect purchasers, while others were filed on behalf of individual retailers or health care benefit plans. All cases have been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Illinois (MDL No. 2580). Plaintiffs generally allege that an agreement reached by EPI and Impax to settle patent infringement litigation concerning multiple patents pertaining to OPANA
®
ER and EPI’s introduction of reformulated OPANA
®
ER violated antitrust laws. The complaints assert claims under Sections 1 and 2 of the Sherman Act, various state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. In February 2016, the MDL court issued orders (i) denying defendants’ motion to dismiss the claims of the direct purchasers, (ii) denying in part and granting in part defendants’ motion to dismiss the claims of the indirect purchasers, but giving them permission to file amended complaints and (iii) granting defendants’ motion to dismiss the complaints filed by certain retailers, but giving them permission to file amended complaints. In response to the MDL court’s orders, the indirect purchasers filed an amended complaint to which the defendants filed a renewed motion to dismiss certain claims, and certain retailers also filed amended complaints. The court has dismissed the indirect purchaser unjust enrichment claims arising under the laws of the states of California, Rhode Island and Illinois. The cases are currently in discovery. We will continue to vigorously defend these matters and to explore other options as appropriate in our best interests.
Beginning in February 2009, the FTC and certain private plaintiffs, including distributors and retailers, filed suit against our subsidiary Par Pharmaceutical Companies, Inc. (since June 2016, Endo Generics Holdings, Inc., and referred to in this Commitments and Contingencies note as EGHI) and others alleging violations of antitrust law arising out of EGHI’s settlement of certain patent litigation concerning the generic version of AndroGel
®
. Generally, the complaints seek damages, treble damages, equitable relief and attorneys’ fees and costs. The cases have been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Georgia (MDL No. 2084). In September 2012, the MDL court granted summary judgment to defendants on plaintiffs’ claims of sham litigation. In May 2016, plaintiffs representing a putative class of indirect purchasers voluntarily dismissed their claims with prejudice. In February 2017, the FTC voluntarily dismissed its claims against EGHI with prejudice. Claims by certain alleged direct purchasers or their assignees are still pending. In June 2018, the MDL court granted in part and denied in part various summary judgment and evidentiary motions filed by defendants. In particular, the court rejected
two
of direct purchasers’
three
causation theories, rejected damages claims related to AndroGel
®
1.62% and granted in part a motion seeking to exclude part of plaintiffs’ proposed manufacturing expert’s opinions. The motions were denied in all other respects, and the court denied a motion for reconsideration, or in the alternative leave to file an interlocutory appeal, in October 2018. In July 2018, the district court denied certain plaintiffs’ motion for certification of a direct purchaser class. We will continue to vigorously defend these matters and to explore other options as appropriate in our best interests.
Beginning in February 2018, several alleged indirect purchasers filed proposed class actions against our subsidiary PPI and others alleging a conspiracy to delay generic competition and monopolize the market for Zetia
®
(ezetimibe) and its generic equivalents. The complaints generally asserted claims under Sections 1 and 2 of the Sherman Act, various state antitrust and consumer protection statutes and state common law and seek injunctive relief, damages, treble damages, attorneys’ fees and costs. In June 2018, the cases were consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Eastern District of Virginia (MDL No. 2836). In September 2018, plaintiffs voluntarily dismissed without prejudice all claims against PPI.
Beginning in May 2018, multiple alleged direct and indirect purchasers filed complaints in the U.S. District Court for the Southern District of New York against PPI, EPI and/or us, as well as others, alleging a conspiracy to delay generic competition and monopolize the market for Exforge
®
(amlodipine/valsartan) and its generic equivalents. Some cases were filed on behalf of putative classes of direct and indirect purchasers; another was filed on behalf of individual retailers. The plaintiffs generally assert claims under Sections 1 and 2 of the Sherman Act, various state antitrust and consumer protection statutes and state common law and seek damages, treble damages, equitable relief and attorneys’ fees and costs. In September 2018, the putative class plaintiffs stipulated to the dismissal without prejudice of their claims against EPI and us, and the retailer plaintiffs did the same in November 2018. PPI filed a partial motion to dismiss certain claims in September 2018. We intend to vigorously defend these matters and to explore other options as appropriate in our best interests.
In November 2014, EPI received a CID from Florida’s Office of the Attorney General seeking documents and other information concerning EPI’s agreement with Actavis settling the LIDODERM
®
patent litigation, as well as information concerning marketing and sales of LIDODERM
®
. EPI received similar CIDs from South Carolina’s Office of the Attorney General in February 2016 and from Alaska’s Office of the Attorney General in February 2015. The Alaska CID was also directed to EHSI and included requests for documents and information concerning agreements with Actavis and Impax settling the OPANA
®
ER patent litigation. We are cooperating with these investigations.
In February 2015, EGHI and affiliates received a CID from the Office of the Attorney General for the state of Alaska seeking production of certain documents and information regarding EGHI’s settlement of the AndroGel
®
patent litigation as well as documents produced in the aforementioned litigation filed by the FTC. We are cooperating with this investigation.
Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred.
Securities Litigation
In May 2016, a putative class action entitled
Craig Friedman v. Endo International plc, Rajiv Kanishka Liyanaarchchie de Silva and Suketu P. Upadhyay
was filed in the U.S. District Court for the Southern District of New York by an individual shareholder on behalf of himself and all similarly situated shareholders. In August 2016, the court appointed Steamfitters’ Industry Pension Fund and Steamfitters’ Industry Security Benefit Fund as lead plaintiffs in the action. In October 2016, plaintiffs filed a second amended complaint that, among other things, added Paul Campanelli as a defendant, and we filed a motion to dismiss. In response, and without resolving the motion, the court permitted lead plaintiffs to file a third amended complaint. The amended complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act based on the Company’s revision of its 2016 earnings guidance and certain disclosures about its generics business, the integration of Par Pharmaceutical Holdings, Inc. and its subsidiaries, certain other alleged business issues and the receipt of a CID from the U.S. Attorney’s Office for the Southern District of New York regarding contracts with pharmacy benefit managers concerning FROVA
®
. Lead plaintiffs sought class certification, damages in an unspecified amount and attorneys’ fees and costs. We filed a motion to dismiss the third amended complaint in December 2016. In January 2018, the court granted our motion and dismissed the case with prejudice. In February 2018, lead plaintiffs filed a motion for relief from the judgment and leave to file a fourth amended complaint; the court denied this motion in April 2018. Lead plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit; that appeal is still pending.
In February 2017, a putative class action entitled
Public Employees’ Retirement System of Mississippi v. Endo International plc
was filed in the Court of Common Pleas of Chester County, Pennsylvania by an institutional purchaser of shares in our June 2, 2015 public offering, on behalf of itself and all similarly situated purchasers. The lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 against Endo, certain of its current and former directors and officers, and the underwriters who participated in the offering, based on certain disclosures about Endo’s generics business. In March 2017, defendants removed the case to the U.S. District Court for the Eastern District of Pennsylvania. In August 2017, the court remanded the case back to the Chester County Court of Common Pleas. In October 2017, plaintiff filed an amended complaint. In December 2017, defendants filed preliminary objections to the amended complaint. The court denied those preliminary objections in April 2018. The case is currently in discovery. Plaintiff filed its motion for class certification in July 2018.
In April 2017, a putative class action entitled
Phaedra A. Makris v. Endo International plc, Rajiv Kanishka Liyanaarchchie de Silva and Suketu P. Upadhyay
was
filed in the Superior Court of Justice in Ontario, Canada by an individual shareholder on behalf of herself and similarly-situated Canadian-based investors who purchased Endo’s securities between January 11 and May 5, 2016. The statement of claim generally seeks class certification, declaratory relief, damages, interest and costs based on alleged violations of the Ontario Securities Act. The statement of claim alleges negligent misrepresentations concerning the Company’s revenues, profit margins and earnings per share; its receipt of a subpoena from the state of Connecticut regarding doxycycline hyclate, amitriptyline hydrochloride, doxazosin mesylate, methotrexate sodium and oxybutynin chloride; and the erosion of the Company’s U.S. generic pharmaceuticals business.
In August 2017, a putative class action entitled
Bier v. Endo International plc, et al.
was filed in the U.S. District Court for the Eastern District of Pennsylvania by an individual shareholder on behalf of himself and all similarly situated shareholders. The original complaint alleged violations of Section 10(b) and 20(a) of the Exchange Act against Endo and
four
current and former directors and officers, based on the Company’s decision to remove reformulated OPANA
®
ER from the market. In December 2017, the court appointed SEB Investment Management AB lead plaintiff in the action. In February 2018, the lead plaintiff filed an amended complaint, which added claims alleging violations of Sections 11 and 15 of the Securities Act in connection with the June 2015 offering. The amended complaint named the Company, EHSI and
20
current and former directors, officers and employees of Endo as defendants. In April 2018, the defendants moved to dismiss the amended complaint. That motion remains pending.
In November 2017, a putative class action entitled
Pelletier v. Endo International plc, Rajiv Kanishka Liyanaarchchie De Silva, Suketu P. Upadhyay, and Paul V. Campanelli
was filed in the U.S. District Court for the Eastern District of Pennsylvania by an individual shareholder on behalf of himself and all similarly situated shareholders. The lawsuit alleges violations of Section 10(b) and 20(a) of the Exchange Act relating to the pricing of various generic pharmaceutical products. In June 2018, the court appointed Park Employees’ Annuity and Benefit Fund of Chicago lead plaintiff in the action. In August 2018, the lead plaintiff filed an amended complaint. In September 2018, the defendants moved to dismiss the amended complaint. That motion remains pending.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred.
VASOSTRICT
®
Related Matters
In July 2016, Fresenius Kabi USA, LLC (Fresenius) filed a complaint against Par and its affiliate Par Sterile Products, LLC (PSP) in the U.S. District Court for the District of New Jersey alleging that Par and its affiliate engaged in an anticompetitive scheme to exclude competition from the market for vasopressin solution for intravenous injection in view of Par’s VASOSTRICT
®
(vasopressin) product. The complaint alleges violations of Sections 1 and 2 of the Sherman Antitrust Act, as well as state antitrust and common law, based on assertions that Par and its affiliate entered into exclusive supply agreements with one or more active pharmaceutical ingredient (API) manufacturers and that, as a result, Fresenius has been unable to obtain vasopressin API in order to file an ANDA to obtain FDA approval for its own vasopressin product. Fresenius seeks actual, treble and punitive damages, attorneys’ fees and costs, and injunctive relief. In September 2016, Par and its affiliate filed a motion to dismiss, which the district court denied in February 2017. The case is currently in discovery.
In August 2017, our subsidiaries PPI and PSP filed a complaint for actual, exemplary and punitive damages, injunctive relief and other relief against QuVa Pharma, Inc. (QuVa), Stuart Hinchen, Peter Jenkins, and Mike Rutkowski in the U.S. District Court for the District of New Jersey. The complaint alleges misappropriation in violation of the federal Defend Trade Secrets Act, New Jersey’s Trade Secrets Act and New Jersey common law, as well as unfair competition, breach of contract, breach of fiduciary duty, breach of the duty of loyalty, tortious interference with contractual relations and breach of the duty of confidence in connection with VASOSTRICT
®
, a vasopressin-based cardiopulmonary drug. In October 2017, defendants answered the complaint and QuVa asserted counterclaims against PPI and PSP alleging unfair competition under New Jersey common law and seeking declaratory judgment of non-infringement as to
five
U.S. Patents assigned to PPI that are listed in FDA’s Orange Book for VASOSTRICT
®
. The counterclaims seek actual, exemplary and punitive damages, injunctive relief and other relief. We filed a motion to dismiss the unfair competition counterclaim in November 2017. This motion is still pending. Also in November 2017, we filed a motion for preliminary injunction seeking various forms of relief. In January 2018, we filed a first amended complaint adding
five
former employees of PSP as defendants and numerous causes of action against some or all of those former employees, including misappropriation under the federal Defend Trade Secrets Act, New Jersey’s Trade Secrets Act and New Jersey common law, as well as breach of contract, breach of the duty of loyalty and breach of the duty of confidence. In March 2018, the court granted in part our motion for preliminary injunction and enjoined QuVa from marketing and releasing its planned vasopressin product through the conclusion of trial. We subsequently deposited a bond to the court’s interest-bearing account to secure the preliminary injunction. Defendants have filed a motion asking the court to reconsider the bond amount, which remains pending. Also in March 2018, QuVa and
seven
of the individual defendants filed a motion to dismiss the New Jersey common law claims,
four
of the individual defendants filed a motion to dismiss for lack of personal jurisdiction and
one
of the individuals filed a motion to dismiss the breach of contract claim. In April 2018, another individual defendant filed a motion to dismiss asserting numerous arguments, including lack of personal jurisdiction, improper venue and choice of law. These motions are still pending. Full discovery began in May 2018, but the court has not yet set a trial date. Also in May 2018, defendants filed a notice of appeal to the Third Circuit Court of Appeal indicating intent to appeal the court’s preliminary injunction, and in October 2018, defendants filed their opening appellate brief.
In October 2017, Endo Par Innovation Company, LLC (EPIC) and PSP filed a complaint in the United States District Court for the District of Columbia challenging the legality of the FDA’s
Interim Policy on Compounding Using Bulk Drug Substances Under Section 503B of the Federal Food, Drug, and Cosmetic Act
(January 2017) with respect to the listing of vasopressin in Category 1 of the
Interim Policy
. The complaint contends that the
Interim Policy
is unlawful because it is inconsistent with the Federal Food, Drug, and Cosmetic Act, including, but not limited to, Section 503B of that Act. The complaint seeks (i) a declaration that FDA’s
Interim Policy
and its listing of vasopressin in Category 1 of the
Interim Policy
are unlawful, and (ii) an order enjoining and vacating the
Interim Policy
and FDA’s listing of vasopressin in Category 1 of the
Interim Policy
. In January 2018, EPIC and PSP agreed to a temporary
60
-day stay of the litigation in light of the FDA’s announcement that forthcoming guidance would address the concerns set forth in the Company’s complaint. In March 2018, the FDA released new draft guidance for industry entitled “Evaluation of Bulk Drug Substances Nominated for Use in Compounding Under Section 503B of the Federal Food, Drug, and Cosmetic Act.” Shortly thereafter, the parties agreed to extend the temporary stay for an additional
180
days. In August 2018, before the
180
-day stay period expired, Athenex Pharma Solutions, LLC and Athenex Pharmaceutical Division, LLC announced they had commenced bulk compounding of vasopressin, and moved to intervene in EPIC and PSP’s case against the FDA. Later that month, EPIC and PSP invoked their ability to terminate the stay and filed a Motion for Preliminary Injunction. Before responding to the Motion for Preliminary Injunction, the FDA issued a notice containing a proposed finding that there is no clinical need to bulk compound vasopressin under Section 503B in August 2018. In September 2018, the FDA advised EPIC and PSP that it would agree to use its best efforts to finalize the vasopressin clinical need rulemaking by December 31, 2018, if the case were again stayed. As a result of the preliminary finding and the FDA’s commitment to use best efforts to finalize the rulemaking by December 31, 2018, EPIC and PSP agreed to again stay the case until December 31, 2018. In a related action, in August 2018, Athenex filed a declaratory judgment action in the U.S. District Court for the Western District of New York, a case styled
Athenex v. Par
, alleging non-infringement and/or invalidity of the patents the Company has listed in the Orange Book in view of VASOSTRICT
®
. The Company also moved to dismiss Athenex’s case on multiple grounds in October 2018.
In April 2018, PSP and PPI received a notice letter from Eagle Pharmaceuticals, Inc. (Eagle) advising of the filing by such company of an ANDA for a generic version of VASOSTRICT
®
(vasopressin IV solution (infusion)) 20 units/ml. In May 2018, PSP and PPI received a second notice letter from Eagle advising of the same filing, but adding an additional patent. The Paragraph IV Notices refer to U.S. Patent Nos. 9,375,478; 9,687,526; 9,744,209; 9,744,239; 9,750,785; and 9,937,223, which variously cover either vasopressin-containing pharmaceutical compositions or methods of using a vasopressin-containing dosage form to increase blood pressure in humans. In May 2018, PPI, PSP and EPIC filed a lawsuit against Eagle in the United States District Court for the District of Delaware within the
45
-day deadline to invoke a
30
-month stay of FDA approval pursuant to the Hatch-Waxman legislative scheme. In August 2018, Eagle filed an answer and a counterclaim for non-infringement and invalidity of asserted patents.
In September 2018, PSP and PPI received a notice letter from Sandoz Inc. (Sandoz) advising of the filing by such company of an ANDA for a generic version of VASOSTRICT
®
(vasopressin IV solution (infusion)) 200 units/10 ml. In October 2018, PPI, PSP and EPIC filed a lawsuit against Sandoz in the United States District Court for the District of New Jersey within the
45
-day deadline to invoke a
30
-month stay of FDA approval pursuant to the Hatch-Waxman legislative scheme. In October 2018, PSP and PPI received an additional notice letter from Sandoz advising of the filing by such company of an ANDA for a generic version of the 20 units/1 ml presentation for VASOSTRICT
®
. The
45
-day deadline to invoke a
30
-month stay of FDA approval pursuant to the Hatch-Waxman legislative scheme with respect to the additional notice letter has not yet expired. The Company continues to vigorously defend its intellectual property.
The Company’s legal reserves include, among other things, an estimated accrual for certain VASOSTRICT
®
-related matters. We will continue to vigorously defend or prosecute the foregoing matters as appropriate, to protect our intellectual property rights, to pursue all available legal and regulatory avenues and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional accruals that could be required.
Paragraph IV Certifications on OPANA
®
ER
In August 2014 and October 2014, the U.S. Patent Office issued U.S. Patent Nos. 8,808,737 and 8,871,779 respectively, which cover a method of using OPANA
®
ER and a highly pure version of the API of OPANA
®
ER. In November 2014, EPI filed lawsuits against Teva, ThoRx, Actavis, Impax, Ranbaxy, Roxane, Amneal and Sandoz Inc. based on their ANDAs filed against both the INTAC
®
technology and non-INTAC
®
technology versions of OPANA
®
ER. Those lawsuits were filed in the U.S. District Court for the District of Delaware alleging infringement of these new patents, which expire in 2027 and 2029, respectively. On November 17, 2015, the District Court held the ‘737 patent invalid for claiming unpatentable subject matter. That patent has been dismissed from all suits and the suits administratively closed as to that patent, subject to appeal at the end of the case on the ‘779 patent. In July 2016, a three-day trial was held in the U.S. District Court for the District of Delaware against Teva and Amneal for infringement of the ‘779 patent. In October 2016, the District Court issued an Opinion holding that the defendants infringed the claims of U.S. Patent No. 8,871,779. The Opinion also held that the defendants had failed to show that U.S. Patent No. 8,871,779 was invalid. The District Court issued an Order enjoining the defendants from launching their generic products until the expiration of U.S. Patent No. 8,871,779 in November 2029. A trial for infringement of the ‘799 patent by Actavis was held in February 2017 in the same court (U.S. District Court for the District of Delaware) in front of the same judge. In August 2017, the District Court issued an Opinion holding that Actavis infringed the claims of U.S. Patent No. 8,871,779, and that Actavis had failed to show that U.S. Patent No. 8,871,779 was invalid. Teva, Amneal and Actavis have appealed these holdings. We have appealed the holding that the ‘737 patent is invalid. A hearing on that appeal has been set for December 2018.
We will continue to vigorously defend or prosecute the foregoing matter as appropriate, to protect our intellectual property rights, to pursue all available legal and regulatory avenues and to explore other options as appropriate in our best interests in defense of our intellectual property, including enforcement of the product’s intellectual property rights and approved labeling. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred.
Other Proceedings and Investigations
Proceedings similar to those described above may also be brought in the future. Additionally, we are involved in, or have been involved in, arbitrations or various other proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these other proceedings. Currently, neither we nor our subsidiaries are involved in any other proceedings that we expect to have a material effect on our business, financial condition, results of operations and cash flows.
NOTE 15. OTHER COMPREHENSIVE INCOME (LOSS)
Set forth below are the tax effects allocated to each component of
Other comprehensive income (loss)
for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
Net unrealized gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain arising during the period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
$
|
(107
|
)
|
|
$
|
188
|
|
Less: reclassification adjustments for (gain) loss realized in net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized gains on securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
$
|
(107
|
)
|
|
$
|
188
|
|
Net unrealized gain on foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain arising during the period
|
4,735
|
|
|
—
|
|
|
4,735
|
|
|
9,941
|
|
|
—
|
|
|
9,941
|
|
Less: reclassification adjustments for loss realized in net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
29,325
|
|
|
—
|
|
|
29,325
|
|
Foreign currency translation gain
|
$
|
4,735
|
|
|
$
|
—
|
|
|
$
|
4,735
|
|
|
$
|
39,266
|
|
|
$
|
—
|
|
|
$
|
39,266
|
|
Other comprehensive income
|
$
|
4,735
|
|
|
$
|
—
|
|
|
$
|
4,735
|
|
|
$
|
39,561
|
|
|
$
|
(107
|
)
|
|
$
|
39,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
|
Before-Tax Amount
|
|
Tax (Expense) Benefit
|
|
Net-of-Tax Amount
|
Net unrealized gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain arising during the period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
522
|
|
|
$
|
(189
|
)
|
|
$
|
333
|
|
Less: reclassification adjustments for (gain) loss realized in net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized gains on securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
522
|
|
|
$
|
(189
|
)
|
|
$
|
333
|
|
Net unrealized (loss) gain on foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain arising during the period
|
(7,033
|
)
|
|
—
|
|
|
(7,033
|
)
|
|
35,415
|
|
|
—
|
|
|
35,415
|
|
Less: reclassification adjustments for loss realized in net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
29,325
|
|
|
—
|
|
|
29,325
|
|
Foreign currency translation (loss) gain
|
$
|
(7,033
|
)
|
|
$
|
—
|
|
|
$
|
(7,033
|
)
|
|
$
|
64,740
|
|
|
$
|
—
|
|
|
$
|
64,740
|
|
Other comprehensive (loss) income
|
$
|
(7,033
|
)
|
|
$
|
—
|
|
|
$
|
(7,033
|
)
|
|
$
|
65,262
|
|
|
$
|
(189
|
)
|
|
$
|
65,073
|
|
Reclassification adjustments out of Other comprehensive income related to foreign currency translation were recorded upon the liquidation of Litha in the third quarter of 2017.
Substantially all of the Company’s
Accumulated other comprehensive loss
at
September 30, 2018
and
December 31, 2017
consists of
Foreign currency translation loss
.
NOTE 16. SHAREHOLDERS' (DEFICIT) EQUITY
Changes in Shareholders' (Deficit) Equity
The following table displays a reconciliation of our beginning and ending balances in
Total shareholders' equity (deficit)
for the
nine months ended September 30, 2018
(in thousands):
|
|
|
|
|
|
Total Shareholders' Equity (Deficit)
|
Shareholders' equity at January 1, 2018, prior to the adoption of ASC 606
|
$
|
484,880
|
|
Effect of adopting ASC 606 (1)
|
3,076
|
|
Shareholders' equity at January 1, 2018
|
$
|
487,956
|
|
Net loss
|
(739,561
|
)
|
Other comprehensive loss
|
(7,033
|
)
|
Compensation related to share-based awards
|
43,722
|
|
Tax withholding for restricted shares
|
(5,082
|
)
|
Exercise of options
|
473
|
|
Other
|
66
|
|
Shareholders' deficit at September 30, 2018
|
$
|
(219,459
|
)
|
__________
|
|
(1)
|
Refer to
Note 2. Summary of Significant Accounting Policies
for further description of ASC 606.
|
Share-Based Compensation
During the second quarter of 2018, the Company’s shareholders approved an amendment to the Endo International plc Amended and Restated 2015 Stock Incentive Plan (the Plan). The Plan was amended and restated to increase the number of the Company’s ordinary shares that may be issued with respect to awards under the Plan by
5.0 million
ordinary shares and to make certain other changes to the Plan’s terms.
The Company recognized share-based compensation expense of
$13.7 million
and
$13.2 million
during the
three months ended September 30, 2018
and
2017
, respectively, and
$43.7 million
and
$40.3 million
during the
nine months ended September 30, 2018
and
2017
, respectively. As of
September 30, 2018
, the total remaining unrecognized compensation cost related to non-vested share-based compensation awards amounted to
$45.6 million
.
During the third quarter of 2017, the Company issued approximately
1.0 million
stock options and
0.1 million
restricted stock units that were initially subject to shareholder approval and were subsequently approved by shareholders on June 7, 2018 at the Company’s Annual General Meeting of Shareholders. The options have an exercise price equal to the closing share price on their issuance date in August 2017.
There are
0.5 million
performance share units outstanding as of
September 30, 2018
, representing target amounts, for which a grant date has not been established.
No
fair value has been ascribed to these awards as no grant date has been established. Accordingly, they are not reflected in the remaining unrecognized compensation cost above or the weighted average remaining requisite service period below.
Beginning in 2017, long-term cash incentive (LTCI) awards were provided to certain employees. LTCI awards were designed to vest ratably, in equal amounts, over a
three
-year service period. Upon vesting, each vested LTCI unit would be settled in cash in an amount equal to the price of Endo’s ordinary shares on the vest date. As of September 30, 2018, approximately
3.0 million
unvested LTCI awards were outstanding with a weighted average remaining requisite service period of
2.3 years
. A corresponding liability of
$14.9 million
was recorded as of September 30, 2018 in
Accounts payable and accrued expenses
and Other liabilities in the Company’s
Condensed Consolidated Balance Sheets
. On October 1, 2018, the Compensation Committee of the Company’s Board of Directors authorized the Company to settle each of the outstanding unvested LTCI awards in shares, rather than cash, upon vesting in accordance with the original vesting terms of the awards. With the authorization of the Compensation Committee, management’s intent to settle the awards in shares rather than cash is a modification that changes the awards’ classification from liability to equity, effective October 1, 2018. The accounting for the modification will occur in the fourth quarter of 2018. As of September 30, 2018, the LTCI awards are not reflected in the remaining unrecognized compensation cost above or the weighted average remaining requisite service period below.
As of
September 30, 2018
, the weighted average remaining requisite service period for non-vested stock options was
1.8 years
and for non-vested restricted stock units was
2.0 years
.
NOTE 17. OTHER INCOME, NET
The components of
Other income, net
for the
three and nine months ended September 30, 2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net gain on sale of business and other assets
|
$
|
(2,866
|
)
|
|
$
|
(2,763
|
)
|
|
$
|
(29,859
|
)
|
|
$
|
(5,074
|
)
|
Foreign currency loss (gain), net
|
1,354
|
|
|
2,549
|
|
|
(734
|
)
|
|
(4,305
|
)
|
Net loss (gain) from our investments in the equity of other companies
|
842
|
|
|
(1,075
|
)
|
|
3,163
|
|
|
(1,163
|
)
|
Other miscellaneous, net
|
(837
|
)
|
|
(808
|
)
|
|
(5,786
|
)
|
|
(301
|
)
|
Other income, net
|
$
|
(1,507
|
)
|
|
$
|
(2,097
|
)
|
|
$
|
(33,216
|
)
|
|
$
|
(10,843
|
)
|
Net gain on sale of business and other assets
primarily relates to proceeds received from the sale of various ANDAs during the
three and nine months ended September 30, 2018
.
Foreign currency loss (gain), net
results from the remeasurement of the Company’s foreign currency denominated assets and liabilities.
Net loss (gain) from our investments in the equity of other companies
includes the income statement impacts of our investments in the equity of other companies, including those accounted for under the equity method and those classified as marketable securities.
NOTE 18. INCOME TAXES
The following table displays our
Loss from continuing operations before income tax
,
Income tax expense (benefit)
and Effective tax rate for the
three and nine months ended September 30, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Loss from continuing operations before income tax
|
$
|
(143,068
|
)
|
|
$
|
(127,796
|
)
|
|
$
|
(671,559
|
)
|
|
$
|
(1,058,647
|
)
|
Income tax expense (benefit)
|
$
|
3,003
|
|
|
$
|
(28,109
|
)
|
|
$
|
24,729
|
|
|
$
|
(97,517
|
)
|
Effective tax rate
|
(2.1
|
)%
|
|
22.0
|
%
|
|
(3.7
|
)%
|
|
9.2
|
%
|
The income tax
expense
for the
three months ended September 30, 2018
primarily relates to
the geographic mix of pre-tax earnings.
As of
September 30, 2018
, we had
valuation allowances established against our deferred tax assets in most
jurisdictions in which we operate, with the exception of Canada and India
. The income tax
benefit
for the comparable
2017
period primarily relates to
the geographic mix of pre-tax earnings and a discrete tax benefit primarily associated with the filing of the Company’s 2016 U.S. federal income tax return and an intangible asset impairment.
The income tax
expense
for the
nine months ended September 30, 2018
primarily relates to
the geographic mix of pre-tax earnings and discrete tax expense incurred in connection with an intercompany asset restructuring.
The income tax
benefit
for the comparable
2017
period relates primarily to
the geographic mix of pre-tax earnings and the discrete tax benefits associated with goodwill and intangible asset impairments and the favorable return to provision adjustments resulting from the filing of the Company’s 2016 U.S. federal income tax return.
During the year ended December 31, 2017, we recorded a benefit of
$36.2 million
as our estimate of the impact of the TCJA. This benefit, which is primarily related to the remeasurement of deferred tax liabilities related to tax deductible goodwill, was recorded in our Consolidated Statements of Operations as Income tax benefit during the three months ended December 31, 2017.
We recorded the aforementioned net benefit based on currently available information and interpretations of the TCJA. In accordance with authoritative guidance issued by the SEC, the income tax effect for certain aspects of the TCJA may represent provisional amounts for which our accounting is incomplete but a reasonable estimate could be determined. We consider amounts related to the various transition rules and interpretations of the TCJA to be provisional. Accordingly, we will continue to evaluate the impacts of the TCJA, including administrative and regulatory guidance as it becomes available. The measurement and existence of current and non-current income tax payables and/or the remeasurement of deferred tax assets and liabilities may change upon finalization of our analysis, which is expected to occur no later than one year from December 22, 2017, the date of the TCJA’s enactment. Any adjustment to a provisional amount identified during the one-year measurement period will be recorded as an income tax expense or benefit in the period the adjustment is determined.
During the
nine months ended September 30, 2018
, we did not record any adjustments to the provisional amounts recognized in 2017. We will continue to monitor for any significant impact on the Company’s consolidated financial statements with respect to the TCJA as more refined information and further guidance become available.
NOTE 19. NET LOSS PER SHARE
The following is a reconciliation of the numerator and denominator of basic and diluted net
loss per share
for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(146,071
|
)
|
|
$
|
(99,687
|
)
|
|
$
|
(696,288
|
)
|
|
$
|
(961,130
|
)
|
(Loss) income from discontinued operations, net of tax
|
(27,134
|
)
|
|
3,017
|
|
|
(43,273
|
)
|
|
(705,886
|
)
|
Net loss
|
$
|
(173,205
|
)
|
|
$
|
(96,670
|
)
|
|
$
|
(739,561
|
)
|
|
$
|
(1,667,016
|
)
|
Denominator:
|
|
|
|
|
|
|
|
For basic per share data—weighted average shares
|
224,132
|
|
|
223,299
|
|
|
223,829
|
|
|
223,157
|
|
Dilutive effect of ordinary share equivalents
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
For diluted per share data—weighted average shares
|
224,132
|
|
|
223,299
|
|
|
223,829
|
|
|
223,157
|
|
Basic net
loss per share
data is computed based on the weighted average number of ordinary shares outstanding during the period. Diluted
loss per share
data is computed based on the weighted average number of ordinary shares outstanding and, if there is net income from continuing operations attributable to Endo ordinary shareholders during the period, the dilutive impact of ordinary share equivalents outstanding during the period.
Stock options and awards that have been issued but for which a grant date has not yet been established, such as the performance share units discussed in
Note 16. Shareholders' (Deficit) Equity
, are not considered in the calculation of basic or diluted weighted average shares.
All
potentially dilutive items were excluded from the diluted share calculation for the
three and nine months ended September 30, 2018
and
2017
because their effect would have been anti-dilutive, as the Company was in a loss position.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources and critical accounting estimates of Endo International plc. This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements and our Annual Report on Form 10-K for the year ended December 31, 2017 (Annual Report). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial and operating results. Except for the historical information contained in this report, including the following discussion, this report contains forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" beginning on page i of this report.
Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to financial information and transactions of Endo International plc and its subsidiaries.
RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past, and may continue to fluctuate. These fluctuations are primarily due to (1) the timing of new product launches, (2) purchasing patterns of our customers, (3) market acceptance of our products, (4) the impact of competitive products and products we recently acquired, (5) pricing of our products, (6) the timing of mergers, acquisitions, divestitures and other related activity and (7) other actions taken by the Company which may impact the availability of our products. These fluctuations are also attributable to charges incurred for compensation related to share-based payments, amortization of intangible assets, asset impairment charges, litigation-related charges, restructuring charges and certain upfront, milestone and other payments made or accrued pursuant to acquisition or licensing agreements. Additionally, the Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. Under the modified retrospective method, results beginning on January 1, 2018 are presented under ASC 606, while the comparative prior period results continue to be presented under ASC 605 based on the accounting standards originally in effect for such periods. Refer to
Note 2. Summary of Significant Accounting Policies
of the Condensed Consolidated Financial Statements included in
Part I, Item 1
for additional information, including the impact of adoption on 2018 results.
Consolidated Results Review
The following table displays our revenue, gross margin, gross margin percentage and other pre-tax expense or income for the
three and nine months ended September 30, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
% Change
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
Total revenues
|
$
|
745,466
|
|
|
$
|
786,887
|
|
|
(5
|
)%
|
|
$
|
2,160,689
|
|
|
$
|
2,700,218
|
|
|
(20
|
)%
|
Cost of revenues
|
412,965
|
|
|
514,522
|
|
|
(20
|
)%
|
|
1,198,468
|
|
|
1,722,885
|
|
|
(30
|
)%
|
Gross margin
|
$
|
332,501
|
|
|
$
|
272,365
|
|
|
22
|
%
|
|
$
|
962,221
|
|
|
$
|
977,333
|
|
|
(2
|
)%
|
Gross margin percentage
|
44.6
|
%
|
|
34.6
|
%
|
|
|
|
44.5
|
%
|
|
36.2
|
%
|
|
|
Selling, general and administrative
|
$
|
163,791
|
|
|
$
|
135,880
|
|
|
21
|
%
|
|
$
|
478,615
|
|
|
$
|
468,675
|
|
|
2
|
%
|
Research and development
|
39,683
|
|
|
39,644
|
|
|
—
|
%
|
|
160,431
|
|
|
123,522
|
|
|
30
|
%
|
Litigation-related and other contingencies, net
|
(1,750
|
)
|
|
(12,352
|
)
|
|
(86
|
)%
|
|
15,370
|
|
|
(14,016
|
)
|
|
NM
|
|
Asset impairment charges
|
142,217
|
|
|
94,924
|
|
|
50
|
%
|
|
613,400
|
|
|
1,023,930
|
|
|
(40
|
)%
|
Acquisition-related and integration items
|
1,288
|
|
|
16,641
|
|
|
(92
|
)%
|
|
13,284
|
|
|
31,711
|
|
|
(58
|
)%
|
Interest expense, net
|
131,847
|
|
|
127,521
|
|
|
3
|
%
|
|
385,896
|
|
|
361,267
|
|
|
7
|
%
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
NM
|
|
|
—
|
|
|
51,734
|
|
|
(100
|
)%
|
Other income, net
|
(1,507
|
)
|
|
(2,097
|
)
|
|
(28
|
)%
|
|
$
|
(33,216
|
)
|
|
(10,843
|
)
|
|
NM
|
|
Loss from continuing operations before income tax
|
$
|
(143,068
|
)
|
|
$
|
(127,796
|
)
|
|
12
|
%
|
|
$
|
(671,559
|
)
|
|
$
|
(1,058,647
|
)
|
|
(37
|
)%
|
__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
Total Revenues.
The
decrease
s for both the
three and nine months ended September 30, 2018
are primarily due to competitive pressure on commoditized generic products, generic product rationalization initiatives, actions taken with respect to OPANA
®
ER that are further described below, generic competition on our
U.S. Branded - Specialty & Established Pharmaceuticals
segment’s Established Products portfolio, our July 3, 2017 divestiture of Litha and our October 25, 2017 divestiture of Somar. Also contributing to the
decrease
for the
nine months ended September 30, 2018
was the impact of the second quarter 2017 loss of marketing exclusivity for both ezetimibe tablets and quetiapine ER tablets. These declines were partially offset by continued strong performance from our
U.S. Branded - Sterile Injectables
segment, including VASOSTRICT
®
, ADRENALIN
®
and other products, and our
U.S. Branded - Specialty & Established Pharmaceuticals
segment’s Specialty Products portfolio, which includes XIAFLEX
®
.
In March 2017, we announced that the Food and Drug Administration’s (FDA) Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA
®
ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA
®
ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA
®
ER from the market.
During the second quarter of 2017, we began to work with the FDA to coordinate an orderly withdrawal of the product from the market. By September 1, 2017, we ceased shipments of OPANA
®
ER to customers and we expect the New Drug Application will be withdrawn. These actions had an adverse effect on the revenues and results of operations of our
U.S. Branded - Specialty & Established Pharmaceuticals
segment during the
three and nine months ended September 30, 2018
compared to the prior year periods.
Cost of revenues
and gross margin percentage.
During the
three and nine months ended September 30, 2018
and
2017
, we incurred certain charges that impact the comparability of total Cost of revenues, including those related to amortization expense and separation benefits and other cost reduction initiatives, including restructurings. The following table summarizes such amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Amortization of intangible assets (1)
|
$
|
161,275
|
|
|
$
|
161,413
|
|
|
$
|
471,662
|
|
|
$
|
615,490
|
|
Separation benefits and other cost reduction initiatives (2)
|
$
|
3,833
|
|
|
$
|
78,680
|
|
|
$
|
60,254
|
|
|
$
|
93,266
|
|
__________
|
|
(1)
|
Amortization expense fluctuates based on changes in the total amount of amortizable intangible assets and the rate of amortization in effect for each intangible asset, both of which can vary based on factors such as the amount and timing of acquisitions, dispositions, asset impairment charges, transfers between indefinite- and finite-lived intangibles assets, changes in foreign currency rates and changes in the composition of our intangible assets impacting the weighted average useful lives and amortization methodologies being utilized. The
decrease
during the
nine months ended September 30, 2018
was primarily driven by the impact of 2017 amortization expense for both ezetimibe tablets and quetiapine ER tablets, which were fully amortized prior to January 1, 2018, and asset impairment charges. This
decrease
was partially offset by the impact of certain in-process research and development assets put into service.
|
|
|
(2)
|
Amounts primarily relate to certain accelerated depreciation charges, employee separation costs, charges to increase excess inventory reserves related to restructurings and other cost reduction and restructuring charges. See
Note 4. Restructuring
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
for discussion of our material restructuring initiatives.
|
The previously described
decrease
s in total revenues, the
decrease
s to amortization expense and
decrease
d restructuring charges were the primary factors leading to the overall period-over-period
decrease
s in
Cost of revenues
for the
three and nine months ended September 30, 2018
. Restructuring costs incurred during the periods presented primarily relate to the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
and the
January 2018 Restructuring Initiative
. Our material restructuring initiatives are described more fully in
Note 4. Restructuring
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
The
increase
s in gross margin percentage for both the
three and nine months ended September 30, 2018
were primarily attributable to the gross margin effects of the net
Cost of revenues
decrease
s included in the table above and the favorable margin impact of product rationalization efforts. Additionally, changes in the
mix of total revenues, including a shift from generic to branded products
,
contributed to the overall
increase
s in gross margin percentage.
Selling, general and administrative
expenses.
The
increase
s for both the
three and nine months ended September 30, 2018
were primarily a result of increased legal costs related to certain litigation matters and higher long-term cash incentive compensation expenses as a result of recent increases in our share price. Our material legal proceedings and other contingent matters are described in more detail in
Note 14. Commitments and Contingencies
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
. The
increase
during the
nine months ended September 30, 2018
was partially offset by cost reductions that were implemented throughout 2017 and 2018, including the impact of those related to various restructuring initiatives. Our material restructuring initiatives are described more fully in
Note 4. Restructuring
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
Research and development
expenses.
During the first quarter of 2018, we initiated two Phase 3 trials for the treatment of cellulite in the buttocks, as well as the
January 2018 Restructuring Initiative
, which included a reorganization of our
U.S. Generic Pharmaceuticals
segment’s research and development network. The
January 2018 Restructuring Initiative
is described more fully in
Note 4. Restructuring
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
. During the second quarter of 2018, we entered into a development, license and commercialization agreement related to five sterile injectable product candidates, at which time we became obligated to make an upfront payment, which was recorded as Research and development expense in the
Condensed Consolidated Statements of Operations
. This agreement is described more fully in
Note 10. License and Collaboration Agreements
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
The
increase
for the
nine months ended September 30, 2018
was primarily a result of increased costs related to our cellulite treatment development program and the upfront payment discussed above. This
increase
was partially offset by cost savings related to the
January 2018 Restructuring Initiative
and other cost reduction initiatives.
In November 2018, we announced positive results from the two Phase 3 trials for the treatment of cellulite in the buttocks, where treated subjects showed highly statistically significant levels of improvement in the appearance of cellulite at day 71 as measured by the trials’ primary endpoint. In addition, the RELEASE-1 trial passed 8 out of 8 key secondary endpoints and the RELEASE-2 trial passed 7 out of 8 key secondary endpoints. Finally, CCH was well-tolerated in the actively-treated subjects with most adverse events being mild to moderate in severity and primarily limited to the local injection area.
We expect to continue to incur expenses in 2018 related to the cellulite treatment development program. We also expect our
U.S. Generic Pharmaceuticals
R&D costs to continue to decline compared to 2017 as a result of decreases in costs associated with offshoring certain of our R&D activities to India and prioritizing assets within our portfolio. There can be no assurance that we will achieve these results.
Litigation-related and other contingencies, net
.
Included within
Litigation-related and other contingencies, net
are changes to our accruals for litigation-related settlement charges, reimbursements and certain settlements proceeds related to suits filed by our subsidiaries. Our material legal proceedings and other contingent matters are described in more detail in
Note 14. Commitments and Contingencies
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
Asset impairment charges
.
The following table presents the components of our total Asset impairment charges for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Goodwill impairment charges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
391,000
|
|
|
$
|
288,745
|
|
Other intangible asset impairment charges
|
140,609
|
|
|
78,300
|
|
|
217,576
|
|
|
674,177
|
|
Property, plant and equipment impairment charges
|
1,608
|
|
|
16,624
|
|
|
4,824
|
|
|
61,008
|
|
Total asset impairment charges
|
$
|
142,217
|
|
|
$
|
94,924
|
|
|
$
|
613,400
|
|
|
$
|
1,023,930
|
|
The factors leading to our material goodwill and intangible asset impairment tests, as well as the results of these tests, are further described in
Note 9. Goodwill and Other Intangibles
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
. A discussion of critical accounting estimates made in connection with certain of our impairment tests is included below under the caption “
CRITICAL ACCOUNTING ESTIMATES
.”
Acquisition-related and integration items
.
The following table presents the components of our total
Acquisition-related and integration items
for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net expense from changes in the fair value of acquisition-related contingent consideration
|
$
|
769
|
|
|
$
|
15,440
|
|
|
$
|
11,731
|
|
|
$
|
23,574
|
|
Other
|
519
|
|
|
1,201
|
|
|
1,553
|
|
|
8,137
|
|
Acquisition-related and integration items
|
$
|
1,288
|
|
|
$
|
16,641
|
|
|
$
|
13,284
|
|
|
$
|
31,711
|
|
Net expense from changes in the fair value of acquisition-related contingent consideration
resulted from changes in market conditions impacting the commercial potential of the underlying products. See
Note 7. Fair Value Measurements
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
for further discussion of our acquisition-related contingent consideration.
The
decrease
s in other
Acquisition-related and integration items
during both the
three and nine months ended September 30, 2018
were primarily attributable to costs incurred in 2017 associated with prior acquisitions compared to lower costs in 2018, which related primarily to the pending acquisitions of Somerset and Wintac, which are further discussed in
Note 5. Acquisitions
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
Interest expense, net
.
The components of
Interest expense, net
for the
three and nine months ended September 30, 2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Interest expense
|
$
|
134,829
|
|
|
$
|
128,672
|
|
|
$
|
395,681
|
|
|
$
|
365,479
|
|
Interest income
|
(2,982
|
)
|
|
(1,151
|
)
|
|
(9,785
|
)
|
|
(4,212
|
)
|
Interest expense, net
|
$
|
131,847
|
|
|
$
|
127,521
|
|
|
$
|
385,896
|
|
|
$
|
361,267
|
|
The
increase
s in interest expense for both the
three and nine months ended September 30, 2018
were primarily attributable to increased interest rates, including the effects of both increases in LIBOR, which impact our variable-rate debt, and the refinancing that occurred on April 27, 2017. Interest income varies primarily based on the amounts of our investments in money market funds and time deposits, as well as changes in the corresponding interest rates.
Loss on extinguishment of debt.
Loss on extinguishment of debt totaled
$51.7 million
for the
nine months ended September 30, 2017
, with no such amounts recorded in any of the other periods presented. The amount during the
nine months ended September 30, 2017
related to certain previously unamortized debt issuance costs that were charged to expense in connection with the refinancing that occurred on April 27, 2017.
Other income, net
.
The components of
Other income, net
for the
three and nine months ended September 30, 2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net gain on sale of business and other assets
|
$
|
(2,866
|
)
|
|
$
|
(2,763
|
)
|
|
$
|
(29,859
|
)
|
|
$
|
(5,074
|
)
|
Foreign currency loss (gain), net
|
1,354
|
|
|
2,549
|
|
|
(734
|
)
|
|
(4,305
|
)
|
Net loss (gain) from our investments in the equity of other companies
|
842
|
|
|
(1,075
|
)
|
|
3,163
|
|
|
(1,163
|
)
|
Other miscellaneous, net
|
(837
|
)
|
|
(808
|
)
|
|
(5,786
|
)
|
|
(301
|
)
|
Other income, net
|
$
|
(1,507
|
)
|
|
$
|
(2,097
|
)
|
|
$
|
(33,216
|
)
|
|
$
|
(10,843
|
)
|
Net gain on sale of business and other assets
primarily relates to proceeds received from the sale of various ANDAs during the
three and nine months ended September 30, 2018
.
Foreign currency loss (gain), net
results from the remeasurement of the Company’s foreign currency denominated assets and liabilities.
Net loss (gain) from our investments in the equity of other companies
includes the income statement impacts of our investments in the equity of other companies, including those accounted for under the equity method and those classified as marketable securities.
Income tax expense (benefit)
. The following table displays our
Loss from continuing operations before income tax
,
Income tax expense (benefit)
and Effective tax rate for the
three and nine months ended September 30, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Loss from continuing operations before income tax
|
$
|
(143,068
|
)
|
|
$
|
(127,796
|
)
|
|
$
|
(671,559
|
)
|
|
$
|
(1,058,647
|
)
|
Income tax expense (benefit)
|
$
|
3,003
|
|
|
$
|
(28,109
|
)
|
|
$
|
24,729
|
|
|
$
|
(97,517
|
)
|
Effective tax rate
|
(2.1
|
)%
|
|
22.0
|
%
|
|
(3.7
|
)%
|
|
9.2
|
%
|
Our tax rate is affected by recurring items, such as tax rates in non-U.S. jurisdictions as compared to the notional U.S. federal statutory tax rate, and the relative amount of income or loss in those various jurisdictions. It is also impacted by certain items that may occur in any given period, but are not consistent from period to period.
The income tax
expense
for the
three months ended September 30, 2018
primarily relates to
the geographic mix of pre-tax earnings.
The income tax
benefit
for the comparable
2017
period primarily relates to
the geographic mix of pre-tax earnings and a discrete tax benefit primarily associated with the filing of the Company’s 2016 U.S. federal income tax return and an intangible asset impairment.
The income tax
expense
for the
nine months ended September 30, 2018
primarily relates to
the geographic mix of pre-tax earnings and discrete tax expense incurred in connection with an intercompany asset restructuring.
The income tax
benefit
for the comparable
2017
period relates primarily to
the geographic mix of pre-tax earnings and the discrete tax benefits associated with goodwill and intangible asset impairments and the favorable return to provision adjustments resulting from the filing of the Company’s 2016 U.S. federal income tax return.
Although the TCJA reduced the notional U.S. federal statutory tax rate, because the Company has valuation allowances established against its U.S. federal deferred tax assets, as of
September 30, 2018
, we do not expect a significant reduction in our future tax expense. Moreover, we have
valuation allowances established against our deferred tax assets in most
other
jurisdictions in which we operate, with the exception of Canada and India
. Accordingly, it would be unlikely for future pre-tax losses to create a tax benefit that would be more likely than not to be realized.
In addition, the Internal Revenue Service (IRS)
presently is examining certain of our subsidiaries’ United States income tax returns for fiscal years ending between December 31, 2011 and December 31, 2015 and, in connection with those examinations, is reviewing our tax positions related to, among other things, certain intercompany arrangements, including the level of profit earned by our United States subsidiaries pursuant to such arrangements, and a worthless stock deduction directly attributable to product liability losses. The IRS may examine our tax returns for other fiscal years. Such examinations may lead to proposed or actual adjustments to our taxes that may be material, individually or in the aggregate.
An adverse outcome of these tax examinations could have a material adverse effect on our business, financial position, results of operations and growth prospects. See the risk factor “
We may not be able to successfully maintain our low tax rates or other tax positions, which could adversely affect our businesses and financial condition, results of operations and growth prospects
” in
Part II, Item 1A
of this document for more information.
For additional information on our income taxes, see
Note 18. Income Taxes
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
Discontinued operations, net of tax.
The operating results of our Astora business are reported as Discontinued operations, net of tax in the
Condensed Consolidated Statements of Operations
for all periods presented. The results of our discontinued operations, net of tax, totaled
$27.1 million
and
$43.3 million
of
loss
during the
three and nine months ended September 30, 2018
, respectively, compared to
$3.0 million
of
income
and
$705.9 million
of
loss
, respectively, in the comparable
2017
periods.
The primary driver of the period-over-period changes for both the
three and nine months ended September 30, 2018
was the after-tax impact of charges related to mesh litigation. Mesh-related charges during the
three and nine months ended September 30, 2018
totaled
$19.0 million
. This compares to
$775.5 million
during the
nine months ended September 30, 2017
, with no comparable charges taken during the
three months ended September 30, 2017
. Additionally, following the settlement strategy we pursued in 2017, there were decreases in mesh-related legal defense costs during both the
three and nine months ended September 30, 2018
. For additional discussion of mesh-related matters, refer to
Note 14. Commitments and Contingencies
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
2018
Outlook
We estimate that our
2018
total revenues will be between
$2.87 billion
and
$2.92 billion
. This estimate reflects an anticipated decline in our
U.S. Generic Pharmaceuticals
segment driven by the expiration of the marketing exclusivity periods for both ezetimibe tablets and quetiapine ER tablets in the second quarter of 2017, the impact of product rationalization initiatives resulting from the 2016 and 2017
U.S. Generic Pharmaceuticals
segment restructuring initiatives and continued competitive pressure on commoditized generic products; a decline in our
U.S. Branded - Specialty & Established Pharmaceuticals
segment resulting from the continued decline in the Established Products portfolio partly driven by the ceasing of shipments of OPANA
®
ER by September 1, 2017, partially offset by growth in the Specialty Products portfolio primarily driven by XIAFLEX
®
; a decline in the
International Pharmaceuticals
segment primarily due to the divestitures of Litha and Somar; partially offset by growth in the
U.S. Branded - Sterile Injectables
segment. The Company anticipates continued margin improvement in 2018 compared to 2017 driven by cost efficiencies associated with our
U.S. Generic Pharmaceuticals
segment restructuring initiatives, a continued shift in product mix to higher margin products and targeted cost reductions in selling, general and administrative expenses. We will continue to invest in XIAFLEX
®
and other core products to position the Company for long-term success. There can be no assurance that we will achieve these results.
Business Segment Results Review
The
four
reportable business segments in which we operate are: (1)
U.S. Branded - Specialty & Established Pharmaceuticals
(2)
U.S. Branded - Sterile Injectables
, (3)
U.S. Generic Pharmaceuticals
and (4)
International Pharmaceuticals
. Our segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s
adjusted income from continuing operations before income tax
, a financial measure not determined in accordance with U.S. GAAP, which we define as
Loss from continuing operations before income tax
and before
certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs, earn-out payments or adjustments, changes in the fair value of contingent consideration and bridge financing costs; cost reduction and integration-related initiatives such as separation benefits, retention payments, other exit costs and certain costs associated with integrating an acquired company’s operations; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; gains or losses from early termination of debt; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items
.
Certain of the corporate expenses incurred by us are not attributable to any specific segment. Accordingly, these costs are not allocated to any of our segments and are included in the results below as “Corporate unallocated costs.” Interest income and expense are also considered corporate items and not allocated to any of our segments. Our consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of our segments less these unallocated corporate items.
We refer to
adjusted income from continuing operations before income tax
in making operating decisions because we believe it provides meaningful supplemental information regarding our operational performance. For instance, we believe that this measure facilitates internal comparisons to our historical operating results and comparisons to competitors’ results. We believe this measure is useful to investors in allowing for greater transparency related to supplemental information used in our financial and operational decision-making. In addition, we have historically reported similar financial measures to our investors and believe that the inclusion of comparative numbers provides consistency in our current financial reporting. Further, we believe that
adjusted income from continuing operations before income tax
may be useful to investors as we are aware that certain of our significant shareholders utilize
adjusted income from continuing operations before income tax
to evaluate our financial performance. Finally,
adjusted income from continuing operations before income tax
is utilized in the calculation of adjusted diluted income per share, which is used by the Compensation Committee of Endo’s Board of Directors in assessing the performance and compensation of substantially all of our employees, including our executive officers.
There are limitations to using financial measures such as
adjusted income from continuing operations before income tax
. Other companies in our industry may define
adjusted income from continuing operations before income tax
differently than we do. As a result, it may be difficult to use
adjusted income from continuing operations before income tax
or similarly named adjusted financial measures that other companies may use to compare the performance of those companies to our performance. Because of these limitations,
adjusted income from continuing operations before income tax
is not intended to represent cash flow from operations as defined by U.S. GAAP and should not be used as alternatives to net income as indicators of operating performance or to cash flows as measures of liquidity. We compensate for these limitations by providing reconciliations of our
total segment adjusted income from continuing operations before income tax
to our consolidated
Loss from continuing operations before income tax
, which is determined in accordance with U.S. GAAP and included in our
Condensed Consolidated Statements of Operations
.
Revenues.
The following table displays our revenue by reportable segment for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
% Change
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
U.S. Branded - Specialty & Established Pharmaceuticals
|
$
|
220,100
|
|
|
$
|
233,803
|
|
|
(6
|
)%
|
|
$
|
632,972
|
|
|
$
|
729,150
|
|
|
(13
|
)%
|
U.S. Branded - Sterile Injectables
|
237,150
|
|
|
201,905
|
|
|
17
|
%
|
|
670,847
|
|
|
554,365
|
|
|
21
|
%
|
U.S. Generic Pharmaceuticals
|
257,969
|
|
|
294,749
|
|
|
(12
|
)%
|
|
748,445
|
|
|
1,227,584
|
|
|
(39
|
)%
|
International Pharmaceuticals (1)
|
30,247
|
|
|
56,430
|
|
|
(46
|
)%
|
|
108,425
|
|
|
189,119
|
|
|
(43
|
)%
|
Total net revenues from external customers
|
$
|
745,466
|
|
|
$
|
786,887
|
|
|
(5
|
)%
|
|
$
|
2,160,689
|
|
|
$
|
2,700,218
|
|
|
(20
|
)%
|
__________
|
|
(1)
|
Revenues generated by our
International Pharmaceuticals
segment are primarily attributable to external customers located in Canada and, prior to the sale of Litha on July 3, 2017 and Somar on October 25, 2017, South Africa and Latin America, respectively.
|
U.S. Branded - Specialty & Established Pharmaceuticals
. The following table displays the significant components of our
U.S. Branded - Specialty & Established Pharmaceuticals
revenues from external customers for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
% Change
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
Specialty Products:
|
|
|
|
|
|
|
|
|
|
|
|
XIAFLEX®
|
$
|
64,214
|
|
|
$
|
52,511
|
|
|
22
|
%
|
|
$
|
184,855
|
|
|
$
|
152,113
|
|
|
22
|
%
|
SUPPRELIN® LA
|
20,408
|
|
|
20,638
|
|
|
(1
|
)%
|
|
60,948
|
|
|
63,468
|
|
|
(4
|
)%
|
Other Specialty (1)
|
43,576
|
|
|
40,634
|
|
|
7
|
%
|
|
114,202
|
|
|
113,407
|
|
|
1
|
%
|
Total Specialty Products
|
$
|
128,198
|
|
|
$
|
113,783
|
|
|
13
|
%
|
|
$
|
360,005
|
|
|
$
|
328,988
|
|
|
9
|
%
|
Established Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERCOCET®
|
$
|
30,730
|
|
|
$
|
31,349
|
|
|
(2
|
)%
|
|
$
|
93,539
|
|
|
$
|
93,183
|
|
|
—
|
%
|
VOLTAREN® Gel
|
15,057
|
|
|
19,102
|
|
|
(21
|
)%
|
|
44,185
|
|
|
53,646
|
|
|
(18
|
)%
|
OPANA® ER
|
—
|
|
|
14,756
|
|
|
(100
|
)%
|
|
—
|
|
|
82,056
|
|
|
(100
|
)%
|
Other Established (2)
|
46,115
|
|
|
54,813
|
|
|
(16
|
)%
|
|
135,243
|
|
|
171,277
|
|
|
(21
|
)%
|
Total Established Products
|
$
|
91,902
|
|
|
$
|
120,020
|
|
|
(23
|
)%
|
|
$
|
272,967
|
|
|
$
|
400,162
|
|
|
(32
|
)%
|
Total U.S. Branded - Specialty & Established Pharmaceuticals (3)
|
$
|
220,100
|
|
|
$
|
233,803
|
|
|
(6
|
)%
|
|
$
|
632,972
|
|
|
$
|
729,150
|
|
|
(13
|
)%
|
__________
|
|
(1)
|
Products included within Other Specialty include TESTOPEL
®
, NASCOBAL
®
Nasal Spray and AVEED
®
.
|
|
|
(2)
|
Products included within Other Established include, but are not limited to, LIDODERM
®
, EDEX
®
, TESTIM
®
and FORTESTA
®
Gel, including the authorized generics.
|
|
|
(3)
|
Individual products presented above represent the top two performing products in each product category and/or any product having revenues in excess of
$25 million
during any quarterly period in
2018
or
2017
.
|
Specialty Products
The
increase
s in net sales of XIAFLEX
®
for both the
three and nine months ended September 30, 2018
were primarily attributable to demand growth driven by the continued investment and promotional efforts behind XIAFLEX
®
.
The
decrease
s in net sales of SUPPRELIN
®
LA for both the
three and nine months ended September 30, 2018
were primarily attributable to decreases in volume.
The
increase
s in net sales of Other Specialty Products for both the
three and nine months ended September 30, 2018
were primarily attributable to increased sales of NASCOBAL
®
Nasal Spray and AVEED
®
, partially offset by lower sales of TESTOPEL
®
. When compared to 2017, this product portfolio generally benefited from increased volumes, offset by decreases in price.
Established Products
The
decrease
in net sales of PERCOCET
®
for the
three months ended September 30, 2018
was primarily attributable to volume decreases, partially offset by price increases.
The
decrease
s in net sales of VOLTAREN
®
Gel for both the
three and nine months ended September 30, 2018
were primarily attributable to volume and price decreases as a result of ongoing competitive pressure from generic competition. To the extent additional competitors are able to launch generic versions of VOLTAREN
®
Gel, our revenues could decline further.
The
decrease
s in net sales of OPANA
®
ER for both the
three and nine months ended September 30, 2018
relate to our cessation of shipments of OPANA
®
ER to customers by September 1, 2017, as further described above.
Net sales of Other Established Products for both the
three and nine months ended September 30, 2018
were negatively impacted primarily by volume decreases resulting from generic competition.
U.S. Branded - Sterile Injectables
.
The following table displays the significant components of our
U.S. Branded - Sterile Injectables
revenues from external customers for the
three and nine months ended September 30, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
% Change
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
VASOSTRICT®
|
$
|
112,333
|
|
|
$
|
105,741
|
|
|
6
|
%
|
|
$
|
332,387
|
|
|
$
|
300,649
|
|
|
11
|
%
|
ADRENALIN®
|
35,460
|
|
|
25,335
|
|
|
40
|
%
|
|
101,858
|
|
|
50,464
|
|
|
NM
|
|
Ertapenem for injection
|
25,798
|
|
|
—
|
|
|
NM
|
|
|
25,798
|
|
|
—
|
|
|
NM
|
|
Other Sterile Injectables (1)
|
63,559
|
|
|
70,829
|
|
|
(10
|
)%
|
|
210,804
|
|
|
203,252
|
|
|
4
|
%
|
Total U.S. Branded - Sterile Injectables (2)
|
$
|
237,150
|
|
|
$
|
201,905
|
|
|
17
|
%
|
|
$
|
670,847
|
|
|
$
|
554,365
|
|
|
21
|
%
|
__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
|
|
(1)
|
Products included within Other Sterile Injectables include, but are not limited to, APLISOL
®
and ephedrine sulfate injection.
|
|
|
(2)
|
Individual products presented above represent the top two performing products within the
U.S. Branded - Sterile Injectables
segment and/or any product having revenues in excess of
$25 million
during any quarterly period in
2018
or
2017
.
|
Net sales of VASOSTRICT
®
and ADRENALIN
®
increase
d during both the
three and nine months ended September 30, 2018
due to increases in both price and volume. Sales of ADRENALIN
®
also benefited from the market withdrawal of competing unapproved sources beginning in May of 2017. VASOSTRICT
®
is currently the first and only vasopressin injection with an NDA approved by the FDA. We have been issued six patents relating to VASOSTRICT
®
by the U.S. Patent and Trademark Office (PTO). These patents are listed in the Orange Book. The FDA requires any applicant seeking FDA approval for vasopressin prior to patent expiry and relying on VASOSTRICT
®
as the Reference Listed Drug to notify us of filing before the FDA will issue an approval.
We are aware of certain competitive actions taken by other pharmaceutical companies related to VASOSTRICT
®
, which include the filing of ANDAs for generic versions of VASOSTRICT
®
and the commencement of bulk compounding of vasopressin, the active ingredient of VASOSTRICT
®
. These matters are further discussed in
Note 14. Commitments and Contingencies
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
under the heading “VASOSTRICT
®
Related Matters.” We have taken and plan to continue to take action in our best interest to protect our rights with respect to VASOSTRICT
®
. The introduction of any compounded or generic of versions of VASOSTRICT
®
could result in reductions to our market share, profitability and cash flows.
Ertapenem for injection, the authorized generic of Invanz
®
, launched during the third quarter of 2018 and had no sales in 2017.
The
decrease
in Other Sterile Injectables for the
three months ended September 30, 2018
was primarily driven by generic competition on certain products within this category. During the
nine months ended September 30, 2018
, Other Sterile Injectables benefited from increased net sales from a number of products, including the impacts of new product launches, increased market share and certain price increases.
U.S. Generic Pharmaceuticals
.
Continued competitive pressure on commoditized generic products and the impact of product rationalization initiatives resulting from prior restructurings resulted in revenue
decrease
s for both the
three and nine months ended September 30, 2018
. Additionally, included within this segment’s revenues for the
nine months ended September 30, 2017
are ezetimibe tablets and quetiapine ER tablets, both of which are first-to-file products launched in the fourth quarter of 2016. Combined net sales for these two products for the
nine months ended September 30, 2017
were
$253.3 million
. The marketing exclusivity periods for both ezetimibe tablets and quetiapine ER tablets expired in the second quarter of 2017. As a result, combined revenues for these products declined significantly during the second quarter of 2017 and beyond. Partially offsetting the
decrease
s for both the
three and nine months ended September 30, 2018
was the impact of certain recent product launches including, among others, colchicine tablets, the authorized generic of Colcrys
®
, which launched in July 2018.
International Pharmaceuticals
. The
decrease
s in revenue for the
International Pharmaceuticals
segment for both the
three and nine months ended September 30, 2018
were primarily attributable to the combined impact of our divestitures of Litha in July 2017 and Somar in October 2017. Additionally, certain other products within this segment decreased during the
three months ended September 30, 2018
and increased during the
nine months ended September 30, 2018
. For additional detail regarding the divestitures of Litha and Somar refer to
Note 3. Discontinued Operations and Divestitures
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
Adjusted income from continuing operations before income tax.
The following table displays our Adjusted income from continuing operations before income tax by reportable segment for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
% Change
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
|
2018
|
|
2017
|
|
2018 vs. 2017
|
U.S. Branded - Specialty & Established Pharmaceuticals
|
$
|
84,891
|
|
|
$
|
123,754
|
|
|
(31
|
)%
|
|
$
|
262,454
|
|
|
$
|
380,841
|
|
|
(31
|
)%
|
U.S. Branded - Sterile Injectables
|
170,329
|
|
|
150,531
|
|
|
13
|
%
|
|
513,082
|
|
|
417,060
|
|
|
23
|
%
|
U.S. Generic Pharmaceuticals
|
82,555
|
|
|
86,236
|
|
|
(4
|
)%
|
|
247,137
|
|
|
415,172
|
|
|
(40
|
)%
|
International Pharmaceuticals
|
13,377
|
|
|
17,434
|
|
|
(23
|
)%
|
|
45,594
|
|
|
47,128
|
|
|
(3
|
)%
|
Total segment adjusted income from continuing operations before income tax
|
$
|
351,152
|
|
|
$
|
377,955
|
|
|
(7
|
)%
|
|
$
|
1,068,267
|
|
|
$
|
1,260,201
|
|
|
(15
|
)%
|
U.S. Branded - Specialty & Established Pharmaceuticals
.
Amounts were negatively impacted during both the
three and nine months ended September 30, 2018
as a result of decreased revenues and gross margins related to generic competition and the cessation of shipments of OPANA
®
ER by September 1, 2017. Additionally, R&D expenses increased as a result of our cellulite treatment development program and legal costs related to certain litigation matters also increased. Our material legal proceedings and other contingent matters are described in more detail in
Note 14. Commitments and Contingencies
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
U.S. Branded - Sterile Injectables
.
The
increase
s for both the
three and nine months ended September 30, 2018
were primarily driven by increased revenues and gross margins resulting from strong performance of a variety of products in this segment as described above.
U.S. Generic Pharmaceuticals
.
The
decrease
s for both the
three and nine months ended September 30, 2018
were primarily attributable to decreased revenues as described above and the resulting reduction to gross margin. Partially offsetting the
decrease
s were cost reductions, including the impact of the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
and the
January 2018 Restructuring Initiative
, which are described more fully in
Note 4. Restructuring
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
.
International Pharmaceuticals
.
The
decrease
s for both the
three and nine months ended September 30, 2018
were primarily attributable to the combined impact of the July 3, 2017 divestiture of Litha and October 25, 2017 divestiture of Somar. Also contributing to respective changes were the gross margin effects of the revenue results of certain other
International Pharmaceuticals
products, as described above.
The table below provides reconciliations of our consolidated
Loss from continuing operations before income tax
, which is determined in accordance with U.S. GAAP, to our
total segment adjusted income from continuing operations before income tax
for the
three and nine months ended September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Total consolidated loss from continuing operations before income tax
|
$
|
(143,068
|
)
|
|
$
|
(127,796
|
)
|
|
$
|
(671,559
|
)
|
|
$
|
(1,058,647
|
)
|
Interest expense, net
|
131,847
|
|
|
127,521
|
|
|
385,896
|
|
|
361,267
|
|
Corporate unallocated costs (1)
|
49,187
|
|
|
33,035
|
|
|
144,693
|
|
|
114,655
|
|
Amortization of intangible assets
|
161,275
|
|
|
161,413
|
|
|
471,662
|
|
|
615,490
|
|
Inventory step-up
|
71
|
|
|
66
|
|
|
261
|
|
|
281
|
|
Upfront and milestone payments to partners
|
4,731
|
|
|
775
|
|
|
43,027
|
|
|
6,952
|
|
Separation benefits and other cost reduction initiatives (2)
|
4,001
|
|
|
80,693
|
|
|
82,141
|
|
|
127,977
|
|
Certain litigation-related and other contingencies, net (3)
|
(1,750
|
)
|
|
(12,352
|
)
|
|
15,370
|
|
|
(14,016
|
)
|
Asset impairment charges (4)
|
142,217
|
|
|
94,924
|
|
|
613,400
|
|
|
1,023,930
|
|
Acquisition-related and integration items (5)
|
1,288
|
|
|
16,641
|
|
|
13,284
|
|
|
31,711
|
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
51,734
|
|
Foreign currency impact related to the remeasurement of intercompany debt instruments
|
1,528
|
|
|
3,005
|
|
|
(1,560
|
)
|
|
(2,922
|
)
|
Other, net (6)
|
(175
|
)
|
|
30
|
|
|
(28,348
|
)
|
|
1,789
|
|
Total segment adjusted income from continuing operations before income tax
|
$
|
351,152
|
|
|
$
|
377,955
|
|
|
$
|
1,068,267
|
|
|
$
|
1,260,201
|
|
__________
|
|
(1)
|
Amounts include certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses.
|
|
|
(2)
|
Amounts for the
three and nine months ended September 30, 2018
relate to employee separation costs of
$2.1 million
and
$32.7 million
, respectively, charges to increase excess inventory reserves of
$0.2 million
and
$2.8 million
, respectively, and other charges of
$1.7 million
and
$11.4 million
, respectively, each of which related primarily to our restructuring initiatives. Also included in the amount for the
nine months ended September 30, 2018
is accelerated depreciation of
$35.2 million
, which related to the
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
. During the
three and nine months ended September 30, 2017
, amounts primarily relate to employee separation costs of
$19.8 million
and
$41.3 million
, accelerated depreciation of
$59.8 million
and
$60.2 million
, other charges of
$1.1 million
and
$18.5 million
, respectively, and charges to increase excess inventory reserves of
$7.9 million
during the
nine months ended September 30, 2017
. These charges were related primarily to the 2017 U.S. Generics Pharmaceuticals restructuring initiative. See
Note 4. Restructuring
of the Condensed Consolidated Financial Statements included in Part I, Item 1 for discussion of our material restructuring initiatives.
|
|
|
(3)
|
Amounts include adjustments for Litigation-related and other contingencies, net as further described in
Note 14. Commitments and Contingencies
.
|
|
|
(4)
|
Amounts primarily relate to charges to impair goodwill and intangible assets as further described in
Note 9. Goodwill and Other Intangibles
as well as charges to write down certain property, plant and equipment as further described in
Note 7. Fair Value Measurements
.
|
|
|
(5)
|
Amounts during the
three and nine months ended September 30, 2018
are primarily related to
charge
s due to changes in the fair value of contingent consideration of
$0.8 million
and
$11.7 million
, respectively. Amounts during the
three and nine months ended September 30, 2017
include
charge
s due to changes in the fair value of contingent consideration of
$15.4 million
and
$23.6 million
, respectively. All other amounts are directly related to costs associated with acquisition and integration efforts.
|
|
|
(6)
|
Amounts during the
three and nine months ended September 30, 2018
primarily relate to gains on sales of businesses and other assets, as further described in
Note 17. Other income, net
.
|
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is cash generated from operations. Our principal liquidity requirements are primarily for working capital for operations, licenses, milestone payments, capital expenditures, acquisitions, contingent liabilities, vaginal mesh liability payments and debt service payments. The Company’s
working capital
was
$254.1 million
at
September 30, 2018
compared to
working capital
of
$50.2 million
at
December 31, 2017
. The amounts at
September 30, 2018
and
December 31, 2017
include restricted cash and cash equivalents of
$283.8 million
and
$313.8 million
, respectively, held in Qualified Settlement Funds (QSFs) for mesh-related matters. Although these amounts in QSFs are included in working capital, they are required to be used for mesh product liability settlement agreements that are expected to be paid to qualified claimants within the next twelve months.
Cash and cash equivalents
, which primarily consisted of bank deposits, time deposits and money market accounts, totaled
$1,118.9 million
at
September 30, 2018
compared to
$986.6 million
at
December 31, 2017
. We expect cash generated from operations together with our cash, cash equivalents, restricted cash, restricted cash equivalents and the revolving credit facilities to be sufficient to cover our principal liquidity requirements over the next year. However, on a longer term basis, we may not be able to accurately predict the effect of certain developments on our sales and gross margins, such as the degree of market acceptance, patent protection and exclusivity of our products, pricing pressures (including those due to the impact of competition), the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates. We may also face unexpected expenses in connection with our business operations, including expenses related to our ongoing and future legal proceedings and governmental investigations and other contingent liabilities. Furthermore, we may not be successful in implementing, or may face unexpected changes or expenses in connection with our strategic direction, including the potential for opportunistic corporate development transactions. Any of the above could adversely affect our future cash flows.
We may need to obtain additional funding to repay our outstanding indebtedness, for our future operational needs or for future transactions. We have historically had broad access to financial markets that provide liquidity; however, we cannot be certain that funding will be available on terms acceptable to us, or at all. Any issuances of equity securities or convertible securities could have a dilutive effect on the ownership interest of our current shareholders and may adversely impact net income per share in future periods. An acquisition may be accretive or dilutive and, by its nature, involves numerous risks and uncertainties. As a result of acquisition efforts, if any, we are likely to experience significant charges to earnings for merger and related expenses (whether or not the acquisitions are consummated) that may include transaction costs, closure costs or costs of restructuring activities.
Borrowings
.
At
September 30, 2018
, under the 2017 Credit Agreement, the Company had outstanding borrowings with an aggregate principal amount of
$3,372.3 million
and additional availability of approximately
$997.2 million
under its revolving credit facility.
The 2017 Credit Agreement contains affirmative and negative covenants that the Company believes to be usual and customary for a senior secured credit facility. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends and other restrictive payments, investments and transactions with the Company’s affiliates. As of
September 30, 2018
, we were in compliance with all such covenants.
At
September 30, 2018
, the Company’s indebtedness also includes senior notes with aggregate principal amounts totaling
$5.0 billion
. These notes mature between 2022 and 2025, subject to earlier repurchase or redemption in accordance with the terms of the respective indentures. Interest rates on these notes range from 5.375% to 7.25%. Other than the 5.875% Senior Secured Notes due 2024, these notes are senior unsecured obligations of the Company’s subsidiaries party to the applicable indenture governing such notes. These notes are issued by certain of our subsidiaries and are guaranteed on a senior unsecured basis by the subsidiaries of Endo International plc that also guarantee our 2017 Credit Agreement, except for a de minimis amount of the 7.25% Senior Notes due 2022, which are issued by Endo Health Solutions Inc. and guaranteed on a senior unsecured basis by the guarantors named in the Fifth Supplemental Indenture relating to such notes. The 5.875% Senior Secured Notes due 2024 are senior secured obligations of Endo International plc and its subsidiaries that are party to the indenture governing such notes. These notes are issued by certain of our subsidiaries and are guaranteed on a senior secured basis by Endo International plc and its subsidiaries that also guarantee our 2017 Credit Agreement.
The indentures governing our various senior notes contain affirmative and negative covenants that the Company believes to be usual and customary for similar indentures. The negative covenants, among other things, restrict the Company’s ability, and the ability of its restricted subsidiaries, to incur certain additional indebtedness and issue preferred stock, make certain investments and restricted payments, sell certain assets, enter into sale and leaseback transactions, agree to payment restrictions on the ability of restricted subsidiaries to make certain payments to Endo International plc or any of its restricted subsidiaries, create certain liens, merge, consolidate or sell all or substantially all of the Company’s assets or enter into certain transactions with affiliates. As of
September 30, 2018
, we were in compliance with all covenants.
The obligations of the borrowers under the 2017 Credit Agreement are guaranteed by the Company and the subsidiaries of the Company (with certain customary exceptions) (the Guarantors and, together with the Borrowers, the Loan Parties). The obligations (i) under the 2017 Credit Agreement and related loan documents and (ii) the indenture governing the 5.875% Senior Secured Notes due 2024 and related documents are secured on a
pari passu
basis by a perfected first priority (subject to permitted liens) lien on substantially all of the assets of the Loan Parties (subject to customary exceptions).
Credit ratings.
The Company’s corporate credit ratings assigned by Moody’s Investors Service and Standard & Poor’s are
B2
with a
negative
outlook and
B
with a
stable
outlook, respectively.
Working capital
.
The components of our working capital and our liquidity at
September 30, 2018
and December 31,
2017
are below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Total current assets
|
$
|
2,275,599
|
|
|
$
|
2,271,077
|
|
Less: total current liabilities
|
(2,021,468
|
)
|
|
(2,220,909
|
)
|
Working capital
|
$
|
254,131
|
|
|
$
|
50,168
|
|
Current ratio
|
1.1:1
|
|
|
1.0:1
|
|
Net working capital
increase
d by
$204.0 million
from
December 31, 2017
to
September 30, 2018
. This
increase
reflects the favorable impact to net current assets resulting from operations during the
nine months ended September 30, 2018
, partially offset by certain items including, but not limited to, the working capital effect of net decreases in long-term litigation-related liabilities of
$175.0 million
, purchases of property, plant and equipment, excluding capitalized interest, of
$56.5 million
and net decreases in the aggregate principal amount of noncurrent debt of
$25.7 million
.
The following table summarizes our
Condensed Consolidated Statements of Cash Flows
for the
nine months ended September 30, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Net cash flow provided by (used in):
|
|
|
|
Operating activities
|
$
|
196,992
|
|
|
$
|
422,162
|
|
Investing activities
|
(13,682
|
)
|
|
8,964
|
|
Financing activities
|
(62,808
|
)
|
|
(135,353
|
)
|
Effect of foreign exchange rate
|
(608
|
)
|
|
3,983
|
|
Movement in cash held for sale
|
—
|
|
|
(1,450
|
)
|
Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents
|
$
|
119,894
|
|
|
$
|
298,306
|
|
Operating activities.
Net cash provided by operating activities
represents the cash receipts and cash disbursements from all of our activities other than investing activities and financing activities. Changes in cash from operating activities reflect, among other things, the timing of cash collections from customers, payments to suppliers, managed care organizations, government agencies, collaborative partners and employees, as well as tax payments and refunds in the ordinary course of business.
The
$225.2 million
decrease
in
Net cash provided by operating activities
for the
nine months
ended
September 30, 2018
compared to the prior year period was primarily the result of the timing of cash collections and cash payments related to our operations. In particular, net sales of ezetimibe tablets and quetiapine ER tablets, which were launched in the fourth quarter of 2016 and for which the marketing exclusivity periods expired in the second quarter of 2017, generated significant cash receipts during the
nine months
ended
September 30, 2017
that did not reoccur during the same period in 2018. Additionally, cash paid for interest for the
nine months
ended
September 30, 2018
increased from the prior year period as a result of the April 2017 refinancing and changes in interest rates. These
decrease
s were partially offset by a decline in cash outlays for mesh settlements, which
decrease
d
$283.4 million
during the
nine months
September 30, 2018
from the prior year period.
Investing activities.
The
$22.6 million
change
in
Net cash (used in) provided by investing activities
for the
nine months
ended
September 30, 2018
compared to the prior year period reflects
a decrease
in net proceeds from the sales of businesses and other assets of
$52.3 million
. Amounts during the
nine months
ended
September 30, 2018
primarily relate to proceeds from the sales of various ANDAs, as well as additional proceeds received in 2018 from our 2017 sale of Litha. Amounts during the comparable prior year period primarily relate to our sales of Litha and our Charlotte, North Carolina manufacturing facilities. Also contributing to the
change
in
Net cash (used in) provided by investing activities
was a decrease in proceeds from notes receivable of
$7.0 million
during the
nine months
ended
September 30, 2018
compared to the
nine months
ended
September 30, 2017
. These items were partially offset by
a decrease
in purchases of property, plant and equipment, excluding capitalized interest of
$37.6 million
.
Financing activities.
The
$72.5 million
decrease
in
Net cash used in financing activities
for the
nine months
ended
September 30, 2018
compared to the prior year period reflects
a decrease
in principal payments on term loans of
$3,696.8 million
,
a decrease
in deferred financing fees of
$57.4 million
and
a decrease
in payments for contingent consideration of
$35.0 million
, partially offset by
a decrease
in proceeds from issuance of term loans of
$3,415.0 million
and
a decrease
in proceeds from issuance of notes of
$300.0 million
.
Contractual Obligations.
As of
September 30, 2018
, there were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2017
, filed with the Securities and Exchange Commission on
February 27, 2018
.
Fluctuations.
Our quarterly results have fluctuated in the past and may continue to fluctuate. These fluctuations may be due to the timing of new product launches, purchasing patterns of our customers, market acceptance of our products, the impact of competitive products and pricing, certain actions taken by us which may impact the availability of our products, asset impairment charges, litigation-related charges, restructuring costs, including separation benefits, business combination transaction costs, upfront, milestone and certain other payments made or accrued pursuant to licensing agreements and changes in the fair value of financial instruments and contingent assets and liabilities recorded as part of business combinations. Further, a substantial portion of our total revenues are through three wholesale drug distributors who in turn supply our products to pharmacies, hospitals and physicians. Accordingly, we are potentially subject to a concentration of credit risk with respect to our trade receivables.
Inflation.
We do not believe that inflation had a material adverse effect on our financial statements for the periods presented.
Off-balance sheet arrangements.
We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
CRITICAL ACCOUNTING ESTIMATES
Significant changes to our critical accounting estimates since December 31, 2017 are detailed below. For additional discussion of the Company’s critical accounting estimates, see “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on
February 27, 2018
.
Revenue recognition
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. For further discussion of the impact of adoption, refer to
Note 2. Summary of Significant Accounting Policies
of the
Condensed Consolidated Financial Statements
included in Part I, Item 1. ASC 606 applies to contracts with commercial substance that establish the payment terms and each party’s rights regarding the goods or services to be transferred, to the extent collection of substantially all of the related consideration is probable. Under ASC 606, we recognize revenue for contracts meeting these criteria when (or as) we satisfy our performance obligations for such contracts by transferring control of the underlying promised goods or services to our customers. The amount of revenue we recognize reflects our estimate of the consideration we expect to be entitled to receive, subject to certain constraints, in exchange for such goods or services. This amount is referred to as the transaction price.
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship products to a customer pursuant to a purchase order. For contracts such as these, revenue is recognized when our contractual performance obligations have been fulfilled and control has been transferred to the customer pursuant to the contract’s terms, which is generally upon delivery to the customer. The amount of revenue we recognize is equal to the fixed amount of the transaction price, adjusted for our estimates of a number of significant variable components including, but not limited to, estimates for chargebacks, rebates, sales incentives and allowances, distribution service agreement and other fees for services, returns and allowances. The Company utilizes the expected value method when estimating the amount of variable consideration to include in the transaction price with respect to each of the foregoing variable components and the most likely amount method when estimating the amount of variable consideration to include in the transaction price with respect to future potential milestone payments that do not qualify for the sales- and usage-based royalty exception. The variable component of the transaction price is estimated based on historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our direct and indirect customers and other competitive factors. Variable consideration is included in the transaction price only to the extent that it is probable that a significant revenue reversal will not occur when the uncertainty associated with the variable consideration is resolved.
We believe that speculative buying of product, particularly in anticipation of possible price increases, has been the historical practice of certain of our customers. The timing of purchasing decisions made by wholesaler and large retail chain customers can materially affect the level of our sales in any particular period. Accordingly, our sales may not correlate to the number of prescriptions written for our products based on external third-party data.
We have entered into distribution service agreements with certain of our significant wholesaler customers that obligate the wholesalers, in exchange for fees paid by us, to: (i) manage the variability of their purchases and inventory levels within specified limits based on product demand and (ii) provide us with specific services, including the provision of periodic retail demand information and current inventory levels for our pharmaceutical products held at their warehouse locations.
Goodwill and indefinite-lived intangible assets
As further described in
Note 9. Goodwill and Other Intangibles
of the
Condensed Consolidated Financial Statements
included in
Part I, Item 1
, as a result of the first quarter 2018 change in reportable segments and resulting goodwill impairment tests performed during the three months ended March 31, 2018, we recorded a pre-tax, non-cash goodwill impairment charge relating to our new
U.S. Generic Pharmaceuticals
reporting unit of
$391.0 million
. A
50
basis point increase in the assumed discount rate used in the impairment test would have increased this goodwill impairment charge by approximately
$60 million
. Additionally, with respect to the first quarter 2018 goodwill impairment tests performed related to our former Generics and new
U.S. Branded - Sterile Injectables
reporting units, which did not result in impairment charges, a
50
basis point increase in the assumed discount rates would not have changed the results of these tests.
We have not made any substantial changes to our methodology used in our impairment tests since our previous assessment. Determination of the fair value of a reporting unit is a matter of judgment and involves the use of estimates and assumptions, which are based on management’s best estimates at the time. The use of different assumptions would increase or decrease our estimated discounted future cash flows and the resulting estimated fair value of our reporting units, and could result in the fair value of a reporting unit being less than its carrying amount in the impairment test. Any resulting non-cash impairment charges could be material.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, refer to
Note 2. Summary of Significant Accounting Policies
in the
Condensed Consolidated Financial Statements
in
Part I, Item 1
.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in the financial markets, including interest rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable rate indebtedness associated with our term loan and revolving credit facilities. At
September 30, 2018
, our variable-rate debt borrowings related to our term loan facilities and had an aggregate principal amount of
$3.4 billion
. Borrowings under our credit facilities bear interest at a LIBOR-based variable rate. A hypothetical 1% increase in the applicable rate over the floor would result in
$33.7 million
in incremental annual interest expense related to our variable-rate debt borrowings.
To the extent that we utilize amounts under our revolving credit facilities or take on additional variable rate indebtedness, we will be exposed to additional interest rate risk.
As of
September 30, 2018
and
December 31, 2017
, we had no other assets or liabilities with significant interest rate sensitivity.
Foreign Currency Exchange Risk
We operate and transact business in various foreign countries and are therefore subject to risks associated with foreign currency exchange rate fluctuations. The Company manages this foreign currency risk, in part, through operational means including managing foreign currency revenues in relation to same currency costs as well as managing foreign currency assets in relation to same currency liabilities. The Company is also exposed to the potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans. Additionally, certain of the Company’s subsidiaries maintain their books of record in currencies other than their respective functional currencies. These subsidiaries’ financial statements are remeasured into their respective functional currencies using current or historic exchange rates. Such remeasurement adjustments could have an adverse effect on the Company’s results of operations.
All assets and liabilities of our international subsidiaries, which maintain their financial statements in local currency, are translated to U.S. dollars at period-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in Accumulated other comprehensive loss in
shareholders' (deficit) equity
. Gains and losses on foreign currency transactions and short-term intercompany receivables from foreign subsidiaries are included in
Other income, net
in the
Condensed Consolidated Statements of Operations
. Refer to
Note 17. Other income, net
in
Part I, Item 1
for the amount of
Foreign currency loss (gain), net
.
Based on the Company’s significant foreign currency denominated intercompany loans existing at
September 30, 2018
, we estimate that a 10% change in the underlying currencies of our foreign currency denominated intercompany loans, relative to the U.S. Dollar, could result in approximately
$4.5 million
in incremental foreign currency losses.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of
September 30, 2018
. Based on that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of
September 30, 2018
.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended
September 30, 2018
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.