Endo International plc - Quarter Report: 2017 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-36326
____________________________________________________________________________________________
ENDO INTERNATIONAL PLC
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________________
Ireland | 68-0683755 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
First Floor, Minerva House, Simmonscourt Road, Ballsbridge, Dublin 4, Ireland | Not Applicable |
(Address of Principal Executive Offices) | (Zip Code) |
011-353-1-268-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Ordinary shares, nominal value $0.0001 per share | The NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o | ||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | Emerging Growth Company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of ordinary shares, as of the latest practicable date.
Ordinary shares, $0.0001 par value | Number of ordinary shares outstanding as of July 31, 2017: | 223,292,068 |
ENDO INTERNATIONAL PLC
INDEX
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FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this document contain information that includes or is based on “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These statements, including estimates of future revenues, future expenses, future net income and future net income per share, contained in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in this document, are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed results of operations. We have tried, whenever possible, to identify such statements by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plan,” “projected,” “forecast,” “will,” “may” or similar expressions. We have based these forward-looking statements on our current expectations and projections about the growth of our business, our financial performance, and the development of our industry. Because these statements reflect our current views concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption “Risk Factors” in Part II, Item 1A of this document and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 under the caption “Risk Factors,” and as otherwise enumerated herein, could affect our future financial results and could cause our actual results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document.
We do not undertake any obligation to update our forward-looking statements after the date of this document for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities law. You are advised to consult any further disclosures we make on related subjects in our reports filed with the Securities and Exchange Commission (SEC) and with securities regulators in Canada on the System for Electronic Document Analysis and Retrieval (SEDAR). Also note that, in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and as otherwise enumerated herein, we provide a cautionary discussion of the risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 27A of the Securities Act and Section 21E of the Exchange Act. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this to be a complete discussion of all potential risks or uncertainties.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
June 30, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 616,534 | $ | 517,250 | |||
Restricted cash and cash equivalents | 364,796 | 282,074 | |||||
Accounts receivable | 580,123 | 992,153 | |||||
Inventories, net | 489,752 | 555,671 | |||||
Prepaid expenses and other current assets | 33,325 | 77,523 | |||||
Income taxes receivable | 24,295 | 47,803 | |||||
Assets held for sale | 166,190 | 116,985 | |||||
Total current assets | $ | 2,275,015 | $ | 2,589,459 | |||
MARKETABLE SECURITIES | 2,494 | 2,267 | |||||
PROPERTY, PLANT AND EQUIPMENT, NET | 637,820 | 669,596 | |||||
GOODWILL | 4,447,314 | 4,729,395 | |||||
OTHER INTANGIBLES, NET | 4,836,087 | 5,859,297 | |||||
DEFERRED INCOME TAXES | 799 | 7,817 | |||||
OTHER ASSETS | 78,561 | 417,278 | |||||
TOTAL ASSETS | $ | 12,278,090 | $ | 14,275,109 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Accounts payable and accrued expenses | $ | 1,233,336 | $ | 1,454,084 | |||
Current portion of legal settlement accrual | 909,831 | 1,015,932 | |||||
Current portion of long-term debt | 34,150 | 131,125 | |||||
Income taxes payable | 5,263 | 9,266 | |||||
Liabilities held for sale | 44,367 | 24,338 | |||||
Total current liabilities | $ | 2,226,947 | $ | 2,634,745 | |||
DEFERRED INCOME TAXES | 79,805 | 192,297 | |||||
LONG-TERM DEBT, LESS CURRENT PORTION, NET | 8,251,289 | 8,141,378 | |||||
LONG-TERM LEGAL SETTLEMENT ACCRUAL, LESS CURRENT PORTION, NET | 425,756 | — | |||||
OTHER LIABILITIES | 485,187 | 605,100 | |||||
COMMITMENTS AND CONTINGENCIES (NOTE 11) | |||||||
SHAREHOLDERS’ EQUITY: | |||||||
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized and issued at both June 30, 2017 and December 31, 2016 | 46 | 42 | |||||
Ordinary shares, $0.0001 par value; 1,000,000,000 shares authorized; 223,284,141 and 222,954,175 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively | 22 | 22 | |||||
Additional paid-in capital | 8,768,305 | 8,743,240 | |||||
Accumulated deficit | (7,631,452 | ) | (5,688,281 | ) | |||
Accumulated other comprehensive loss | (327,815 | ) | (353,434 | ) | |||
Total shareholders’ equity | $ | 809,106 | $ | 2,701,589 | |||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 12,278,090 | $ | 14,275,109 | |||
See Notes to Condensed Consolidated Financial Statements.
1
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
TOTAL REVENUES | $ | 875,731 | $ | 920,887 | $ | 1,913,331 | $ | 1,884,426 | |||||||
COSTS AND EXPENSES: | |||||||||||||||
Cost of revenues | 539,401 | 632,218 | 1,208,363 | 1,320,923 | |||||||||||
Selling, general and administrative | 155,555 | 193,070 | 332,795 | 371,425 | |||||||||||
Research and development | 40,869 | 50,589 | 83,878 | 92,281 | |||||||||||
Litigation-related and other contingencies, net | (2,600 | ) | 5,259 | (1,664 | ) | 10,459 | |||||||||
Asset impairment charges | 725,044 | 39,951 | 929,006 | 169,576 | |||||||||||
Acquisition-related and integration items | 4,190 | 48,171 | 15,070 | 60,725 | |||||||||||
OPERATING LOSS FROM CONTINUING OPERATIONS | $ | (586,728 | ) | $ | (48,371 | ) | $ | (654,117 | ) | $ | (140,963 | ) | |||
INTEREST EXPENSE, NET | 121,747 | 111,919 | 233,746 | 228,712 | |||||||||||
LOSS ON EXTINGUISHMENT OF DEBT | 51,734 | — | 51,734 | — | |||||||||||
OTHER (INCOME) EXPENSE, NET | (6,709 | ) | 5,175 | (8,746 | ) | 3,268 | |||||||||
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX | $ | (753,500 | ) | $ | (165,465 | ) | $ | (930,851 | ) | $ | (372,943 | ) | |||
INCOME TAX BENEFIT | (57,480 | ) | (555,277 | ) | (69,408 | ) | (673,992 | ) | |||||||
(LOSS) INCOME FROM CONTINUING OPERATIONS | $ | (696,020 | ) | $ | 389,812 | $ | (861,443 | ) | $ | 301,049 | |||||
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3) | (700,498 | ) | (46,216 | ) | (708,903 | ) | (91,324 | ) | |||||||
CONSOLIDATED NET (LOSS) INCOME | $ | (1,396,518 | ) | $ | 343,596 | $ | (1,570,346 | ) | $ | 209,725 | |||||
Less: Net income attributable to noncontrolling interests | — | 18 | — | 16 | |||||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO ENDO INTERNATIONAL PLC | $ | (1,396,518 | ) | $ | 343,578 | $ | (1,570,346 | ) | $ | 209,709 | |||||
NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—BASIC: | |||||||||||||||
Continuing operations | $ | (3.12 | ) | $ | 1.75 | $ | (3.86 | ) | $ | 1.35 | |||||
Discontinued operations | (3.14 | ) | (0.21 | ) | (3.18 | ) | (0.41 | ) | |||||||
Basic | $ | (6.26 | ) | $ | 1.54 | $ | (7.04 | ) | $ | 0.94 | |||||
NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—DILUTED: | |||||||||||||||
Continuing operations | $ | (3.12 | ) | $ | 1.75 | $ | (3.86 | ) | $ | 1.35 | |||||
Discontinued operations | (3.14 | ) | (0.21 | ) | (3.18 | ) | (0.41 | ) | |||||||
Diluted | $ | (6.26 | ) | $ | 1.54 | $ | (7.04 | ) | $ | 0.94 | |||||
WEIGHTED AVERAGE SHARES: | |||||||||||||||
Basic | 223,158 | 222,667 | 223,086 | 222,485 | |||||||||||
Diluted | 223,158 | 222,863 | 223,086 | 223,021 | |||||||||||
See Notes to Condensed Consolidated Financial Statements.
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ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
CONSOLIDATED NET (LOSS) INCOME | $ | (1,396,518 | ) | $ | 343,596 | $ | (1,570,346 | ) | $ | 209,725 | |||||||||||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | |||||||||||||||||||||||||||||||
Net unrealized gain (loss) on securities: | |||||||||||||||||||||||||||||||
Unrealized gain (loss) arising during the period | $ | 491 | $ | (147 | ) | $ | 145 | $ | (1,007 | ) | |||||||||||||||||||||
Less: reclassification adjustments for loss realized in net (loss) income | — | 491 | — | (147 | ) | — | 145 | — | (1,007 | ) | |||||||||||||||||||||
Foreign currency translation gain (loss): | |||||||||||||||||||||||||||||||
Foreign currency gain (loss) arising during the period | 10,340 | (21,609 | ) | $ | 25,474 | $ | 59,154 | ||||||||||||||||||||||||
Less: reclassification adjustments for loss realized in net (loss) income | — | 10,340 | — | (21,609 | ) | — | 25,474 | — | 59,154 | ||||||||||||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | $ | 10,831 | $ | (21,756 | ) | $ | 25,619 | $ | 58,147 | ||||||||||||||||||||||
CONSOLIDATED COMPREHENSIVE (LOSS) INCOME | $ | (1,385,687 | ) | $ | 321,840 | $ | (1,544,727 | ) | $ | 267,872 | |||||||||||||||||||||
Less: Net income attributable to noncontrolling interests | — | 18 | — | 16 | |||||||||||||||||||||||||||
Less: Other comprehensive income (loss) attributable to noncontrolling interests | — | (18 | ) | — | 38 | ||||||||||||||||||||||||||
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO ENDO INTERNATIONAL PLC | $ | (1,385,687 | ) | $ | 321,840 | $ | (1,544,727 | ) | $ | 267,818 | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
3
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
OPERATING ACTIVITIES: | |||||||
Consolidated net (loss) income | $ | (1,570,346 | ) | $ | 209,725 | ||
Adjustments to reconcile consolidated net (loss) income to Net cash provided by operating activities: | |||||||
Depreciation and amortization | 499,656 | 476,911 | |||||
Inventory step-up | 215 | 87,970 | |||||
Share-based compensation | 27,005 | 29,585 | |||||
Amortization of debt issuance costs and discount | 12,757 | 14,483 | |||||
(Benefit) provision for bad debts | (498 | ) | 8,082 | ||||
Provision for inventory reserve | 85,806 | 84,590 | |||||
Deferred income taxes | (179,775 | ) | (670,615 | ) | |||
Change in fair value of contingent consideration | 8,134 | 13,204 | |||||
Loss on extinguishment of debt | 51,734 | — | |||||
Asset impairment charges | 929,006 | 190,904 | |||||
(Gain) loss on sale of business and other assets | (2,311 | ) | 575 | ||||
Changes in assets and liabilities which (used) provided cash: | |||||||
Accounts receivable | 409,790 | 133,654 | |||||
Inventories | (47,513 | ) | (54,760 | ) | |||
Prepaid and other assets | 16,322 | 21,846 | |||||
Accounts payable and accrued expenses | 110,057 | (282,419 | ) | ||||
Other liabilities | (24,707 | ) | (395,126 | ) | |||
Income taxes payable/receivable | 15,654 | 690,002 | |||||
Net cash provided by operating activities | $ | 340,986 | $ | 558,611 | |||
INVESTING ACTIVITIES: | |||||||
Purchases of property, plant and equipment | (59,729 | ) | (53,705 | ) | |||
Patent acquisition costs and license fees | — | (13,000 | ) | ||||
Proceeds from sale of business and other assets, net | 18,531 | 6,631 | |||||
Increase in restricted cash and cash equivalents | (522,772 | ) | (327,359 | ) | |||
Decrease in restricted cash and cash equivalents | 440,190 | 524,438 | |||||
Net cash (used in) provided by investing activities | $ | (123,780 | ) | $ | 137,005 | ||
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Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
FINANCING ACTIVITIES: | |||||||
Proceeds from issuance of notes | 300,000 | — | |||||
Proceeds from issuance of term loans | 3,415,000 | — | |||||
Principal payments on term loans | (3,713,875 | ) | (48,375 | ) | |||
Repayments of revolving debt | — | (225,000 | ) | ||||
Principal payments on other indebtedness, net | (3,675 | ) | (3,365 | ) | |||
Deferred financing fees | (53,954 | ) | (500 | ) | |||
Payment for contingent consideration | (41,240 | ) | (18,646 | ) | |||
Payments of tax withholding for restricted shares | (1,839 | ) | (10,396 | ) | |||
Exercise of options | — | 1,952 | |||||
Issuance of ordinary shares related to the employee stock purchase plan | — | 2,729 | |||||
Net cash used in financing activities | $ | (99,583 | ) | $ | (301,601 | ) | |
Effect of foreign exchange rate | 2,786 | 1,459 | |||||
Movement in cash held for sale | (21,125 | ) | — | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | $ | 99,284 | $ | 395,474 | |||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 517,250 | 272,348 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 616,534 | $ | 667,822 | |||
SUPPLEMENTAL INFORMATION: | |||||||
Cash received from income taxes, net | $ | 8,931 | $ | 698,584 | |||
Cash paid into Qualified Settlement Funds for mesh legal settlements | $ | 522,770 | $ | 326,795 | |||
Cash paid out of Qualified Settlement Funds for mesh legal settlements | $ | 440,190 | $ | 524,438 | |||
Other cash distributions for mesh legal settlements | $ | 3,794 | $ | 5,438 | |||
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||
Accrual for purchases of property, plant and equipment | $ | 1,325 | $ | 2,363 | |||
See Notes to Condensed Consolidated Financial Statements.
5
ENDO INTERNATIONAL PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017
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 consolidated 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 June 30, 2017 and the results of our operations and our cash flows for the periods presented. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2016 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, 2016.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled to receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year, but permits companies to adopt one year earlier if they choose (i.e., the original effective date). As such, ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2017. In March and April 2016, the FASB issued ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)” and ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” respectively, which clarifies the guidance on reporting revenue as a principal versus agent, identifying performance obligations and accounting for intellectual property licenses. In addition, in May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends certain narrow aspects of Topic 606, and in December 2016, the FASB issued ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which amends certain narrow aspects of Topic 606.
6
The Company will adopt the new revenue recognition standard on January 1, 2018. The Company is currently evaluating the impact of ASU 2014-09 on its consolidated results of operations and financial position. The Company’s cross-functional implementation team consisting of representatives from across its business segments is progressing towards the completion of the diagnostic assessment of the impact of the standard on its contract portfolio, including review of customer contracts, as well as the Company’s current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to its revenue contracts. The majority of the Company’s revenue is generated from product sales and the Company currently does not anticipate a significant impact to revenue related to these arrangements; however, this analysis is preliminary and remains subject to change. In certain limited situations, under current GAAP, the Company has deferred revenue for certain product sales because the sales price was not deemed to be fixed or determinable. Under the new standard, the Company will be required to estimate the variable consideration associated with these transactions and record revenue at the point of sale. The Company continues to evaluate the impact on certain less significant transactions, including certain licensing arrangements, and expects to substantially complete its diagnostic assessment during the third quarter of 2017. The Company is also continuing to evaluate the internal control implications associated with the adoption of the new standard, including the identification and implementation, if necessary, of changes to its business processes, systems and controls to support recognition and disclosure under the new standard.
The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company will utilize the modified retrospective method of adoption.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-02 on the Company’s consolidated results of operations and financial position.
In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period but all of ASU 2016-15 must be adopted in the same period. The Company is currently evaluating the impact of ASU 2016-15 on the Company’s consolidated statement of cash flows.
In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230) - Restricted Cash” (ASU 2016-18). ASU 2016-18 states that a statement of cash flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, and all updates should be applied using a retrospective transition method. Subsequent to the adoption of ASU 2016-18 the mesh-related qualified settlement funds and other restricted cash accounts will be included in the beginning-of-period and end-of-period Cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows and transfers into and out of the qualified settlement funds will therefore no longer result in separate investing cash flows in the Condensed Consolidated Statements of Cash Flows.
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. Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of ASU 2017-09 on the Company’s consolidated results of operations and financial position.
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Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (ASU 2015-11). ASU 2015-11 states that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2015-11 on January 1, 2017 and the adoption did not impact the Company’s consolidated results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of share-based payments to employees including: (a) requiring all income tax effects of awards to be recognized in the income statement, rather than in additional paid in capital, when the awards vest or are settled, (b) eliminating the requirement that excess tax benefits be realized before companies can recognize them, (c) requiring companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, (d) increasing the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation, (e) requiring an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows and (f) electing whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new guidance on January 1, 2017 on a prospective basis, except for the provision requiring companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, which was adopted retrospectively. As a result of the adoption, during the three and six months ended June 30, 2017, the Company recognized tax expense of $0.4 million and $4.8 million, respectively, in its Condensed Consolidated Statement of Operations that would have been recorded as additional paid-in capital prior to adoption. In addition, the Company retrospectively adjusted its statement of cash flows for the six months ended June 30, 2016 to present an inflow of $3.9 million related to excess tax benefits as an operating activity, rather than as a financing activity. The adoption of ASU 2016-09 did not impact beginning retained earnings and the Company will continue to estimate forfeitures to determine the amount of compensation cost to be recognized in each period. None of the other provisions in this amended guidance had a significant impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory” (ASU 2016-16). ASU 2016-16 states that an entity should recognize the income tax consequences when an intra-entity transfer of an asset other than inventory occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted as long as it is adopted in the first interim period of a fiscal year beginning after December 15, 2016. The Company early adopted ASU 2016-16 on January 1, 2017, resulting in the elimination of previously recorded deferred charges that were established in 2016. Specifically, the Company eliminated a $24.1 million current deferred charge and a $348.8 million non-current deferred charge that were reflected in our Condensed Consolidated Balance Sheet at December 31, 2016 as Prepaid expenses and other current assets and Other assets, respectively. The eliminations of these deferred charges were recorded as adjustments to retained earnings as of January 1, 2017. On adoption, the Company also recorded net deferred tax assets, primarily related to certain intangibles and tax deductible goodwill, of $479.7 million, fully offset by a corresponding valuation allowance.
In January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”), is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this update should be applied prospectively on or after the effective date. Early application of the amendments in this update is allowed. The Company adopted this new standard on January 1, 2017.
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In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment” (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider the income tax effects of any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this standard on January 1, 2017. Refer to Note 8. Goodwill and Other Intangibles for a description of goodwill impairment charges taken during the six months ended June 30, 2017.
NOTE 3. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE
American Medical Systems
On February 24, 2015, the Company’s Board of Directors (Board of Directors) approved a plan to sell the Company’s American Medical Systems Holdings, Inc. (AMS) business. The AMS business included the Men’s Health and Prostate Health businesses, which were sold to Boston Scientific Corporation on August 3, 2015, as well as the Women’s Health business (Astora). On February 24, 2016, the Company’s Board of Directors resolved to wind-down the remaining Astora business as it did not align with the Company’s strategic direction and to reduce Astora’s exposure to the mesh-related product liability. Astora ceased business operations on March 31, 2016.
The operating results of this business are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented.
The following table provides the operating results of AMS Discontinued operations, net of tax for the three and six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue | $ | 179 | $ | 863 | $ | 179 | $ | 29,714 | |||||||
Litigation-related and other contingencies, net | $ | 775,474 | $ | — | $ | 775,684 | $ | 2,450 | |||||||
Asset impairment charges | $ | — | $ | 149 | $ | — | $ | 21,328 | |||||||
Loss from discontinued operations before income taxes | $ | (791,588 | ) | $ | (22,492 | ) | $ | (804,485 | ) | $ | (91,324 | ) | |||
Income tax benefit | $ | (91,090 | ) | $ | 23,724 | $ | (95,582 | ) | $ | — | |||||
Discontinued operations, net of tax | $ | (700,498 | ) | $ | (46,216 | ) | $ | (708,903 | ) | $ | (91,324 | ) | |||
Amounts reported in the table above as Litigation-related and other contingencies, net primarily relate to charges for vaginal-mesh-related matters, which are further described in Note 11. Commitments and Contingencies.
The cash flows from discontinued operating activities related to AMS included the impact of net losses of $708.9 million and $91.3 million for the six months ended June 30, 2017 and 2016, respectively, and the impact of cash activity related to vaginal mesh cases, which is further described in Note 11. Commitments and Contingencies. Net cash used in discontinued investing activities related to AMS consisted of purchases of property, plant and equipment of $0.1 million for the six months ended June 30, 2016, with no comparable amount during the six months ended June 30, 2017. There was no depreciation or amortization during the three and six months ended June 30, 2017 or 2016 related to AMS.
Astora Restructuring
The Astora wind-down process included a restructuring initiative implemented during the three months ended March 31, 2016, which included a reduction of the Astora workforce consisting of approximately 250 employees.
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The Company did not incur any pre-tax charges during the three and six months ended June 30, 2017 as a result of the Astora restructuring initiative. The Company incurred expenses of $6.0 million and $66.6 million during the three and six months ended June 30, 2016, consisting of employee separation and other benefit-related costs, asset impairment charges, contract termination charges and other general restructuring costs. The Company anticipates there will be no significant additional pre-tax restructuring expenses related to this initiative. The majority of these actions were completed as of September 30, 2016 and substantially all cash payments were made by June 30, 2017. These restructuring costs are included in Discontinued operations in the Condensed Consolidated Statements of Operations.
A summary of expenses related to the Astora restructuring initiative is included below for the three and six months ended June 30, 2016 (in thousands):
Three Months Ended June 30, 2016 | Six Months Ended June, 2016 | ||||||
Employee separation, retention and other benefit-related costs | $ | 5,317 | $ | 21,466 | |||
Asset impairment charges | 149 | 21,328 | |||||
Contract termination-related items | (424 | ) | 9,800 | ||||
Other wind down costs | 909 | 14,030 | |||||
Total | $ | 5,951 | $ | 66,624 | |||
The liability related to the Astora restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the six months ended June 30, 2017 were as follows (in thousands):
Employee Separation and Other Benefit-Related Costs | Contract Termination Charges | Total | |||||||||
Liability balance as of January 1, 2017 | $ | 3,855 | $ | 1,661 | $ | 5,516 | |||||
Cash distributions | (3,175 | ) | (952 | ) | (4,127 | ) | |||||
Liability balance as of June 30, 2017 | $ | 680 | $ | 709 | $ | 1,389 | |||||
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. The sale closed on July 3, 2017. At closing, the Company received approximately $97 million in cash, after giving effect to initial cash and net working capital purchase price adjustments, and may receive up to an additional $11 million in contingent consideration. The assets and liabilities of Litha are classified as held for sale in the Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016. Litha is part of the Company’s International Pharmaceuticals segment.
The following table provides the components of Assets and Liabilities held for sale of Litha as of June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Current assets | $ | 59,221 | $ | 50,167 | |||
Property, plant and equipment | 3,617 | 3,527 | |||||
Other intangibles, net | 21,893 | 29,950 | |||||
Other assets | 14,877 | 11,343 | |||||
Assets held for sale | $ | 99,608 | $ | 94,987 | |||
Current liabilities | 26,059 | 18,642 | |||||
Other liabilities | 4,375 | 5,696 | |||||
Liabilities held for sale | $ | 30,434 | $ | 24,338 | |||
Litha does not meet the requirements for treatment as a discontinued operation.
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Somar
During the first quarter of 2017, the Company announced that it was assessing strategic alternatives for its Somar business. On June 30, 2017, the Company entered into a definitive agreement to sell Grupo Farmacéutico Somar, S.A.P.I. de C.V., together with its subsidiaries (Somar), to AI Global Investments (Netherlands) PCC Limited (AI Global) acting for and on behalf of the Soar Cell. AI Global will pay an aggregate purchase price of approximately $124 million in cash, subject to certain cash, debt and working capital adjustments. The transaction is expected to close in the second half of 2017, pending customary regulatory approvals and satisfaction of other customary closing conditions. The assets and liabilities of Somar are classified as held for sale in the Condensed Consolidated Balance Sheets as of June 30, 2017. Somar is part of the Company’s International Pharmaceuticals segment.
The following table provides the components of Assets and Liabilities held for sale of Somar as of June 30, 2017 (in thousands):
June 30, 2017 | |||
Current assets | $ | 63,780 | |
Property, plant and equipment | 2,347 | ||
Other assets | 455 | ||
Assets held for sale | $ | 66,582 | |
Current liabilities | 13,933 | ||
Liabilities held for sale | $ | 13,933 | |
Somar does not meet the requirements for treatment as a discontinued operation.
NOTE 4. RESTRUCTURING
2016 U.S. Generic Pharmaceuticals Restructuring
As part of the ongoing U.S. Generic Pharmaceuticals integration efforts initiated in connection with the acquisition of Par Pharmaceutical Holdings Inc. in September 2015, the Company announced a restructuring initiative in May 2016 to optimize its product portfolio and rationalize its manufacturing sites to expand product margins (the 2016 U.S. Generic Pharmaceuticals restructuring initiative). These measures included certain cost savings initiatives, including a reduction in headcount and the disposal of our Charlotte, North Carolina manufacturing facility (the Charlotte facility). On October 31, 2016, we entered into a definitive agreement to sell the Charlotte facility for cash proceeds of $14 million. The transaction closed in January 2017. The assets of the Charlotte facility were classified as held for sale in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2016.
As a result of the 2016 U.S. Generic Pharmaceuticals restructuring initiative, the Company incurred pre-tax charges of $1.1 million during the six months ended June 30, 2017. These charges related primarily to employee separation and other benefit-related costs. The Company did not incur charges related to this restructuring initiative during the three months ended June 30, 2017.
The Company incurred pre-tax charges of $18.9 million and $146.2 million during the three and six months ended June 30, 2016, respectively. These charges consisted of certain intangible asset impairment charges of $100.3 million during the six months ended June 30, 2016, which were recorded in the first quarter of 2016, charges to increase excess inventory reserves of $6.4 million and $33.3 million during the three and six months ended June 30, 2016, respectively, charges relating to employee separation, retention and other benefit-related costs of $6.4 million, accelerated depreciation of $3.4 million and other charges of $2.7 million during both the three and six months ended June 30, 2016. These charges are included in the U.S. Generic Pharmaceuticals segment and are included in Asset impairment charges, Cost of revenues and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The Company does not expect to incur additional significant expenses related to this restructuring initiative. The Company anticipates substantially all related cash payments will be made by the end of 2017. Under this restructuring initiative, separation costs were expensed ratably over the requisite service period, as applicable.
The liability related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets and is entirely related to employee separation and other benefit-related costs. Changes to this liability during the six months ended June 30, 2017 were as follows (in thousands):
Total | |||
Liability balance as of January 1, 2017 | $ | 9,939 | |
Expenses | 1,117 | ||
Cash distributions | (8,621 | ) | |
Liability balance as of June 30, 2017 | $ | 2,435 | |
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2016 U.S. Branded Pharmaceutical Restructuring
In December 2016, the Company announced that it was terminating its worldwide license and development agreement with BioDelivery Sciences International, Inc. (BDSI) for BELBUCA™ and returning the product to BDSI. This termination was completed on January 6, 2017. As a result of this announcement and a comprehensive assessment of its product portfolio, the Company restructured its U.S. Branded Pharmaceuticals segment sales organization during the fourth quarter of 2016 (the 2016 U.S. Branded restructuring initiative), which included the elimination of an approximate 375-member U.S. Branded Pharmaceuticals pain field sales force and the termination of certain contracts.
The Company did not incur any significant pre-tax charges during the three and six months ended June 30, 2017 or 2016 as a result of the 2016 U.S. Branded restructuring initiative. Actions related to this initiative were completed by December 31, 2016 and substantially all of the cash payments are anticipated to be made by the end of 2017. The Company does not expect to incur any additional material pre-tax restructuring expenses related to this initiative.
The liability related to the 2016 U.S. Branded Pharmaceutical restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the six months ended June 30, 2017 were as follows (in thousands):
Employee Separation and Other Benefit-Related Costs | Contract Termination Charges | Total | |||||||||
Liability balance as of January 1, 2017 | $ | 16,544 | $ | 5,224 | $ | 21,768 | |||||
Cash distributions | (13,890 | ) | (5,224 | ) | (19,114 | ) | |||||
Liability balance as of June 30, 2017 | $ | 2,654 | $ | — | $ | 2,654 | |||||
January 2017 Restructuring
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 is intended to further integrate, streamline and optimize the Company’s operations by aligning certain corporate and R&D functions with its recently restructured U.S. Generics Pharmaceutical and U.S. Branded Pharmaceutical 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 U.S. Branded Pharmaceutical R&D functions in Malvern, PA and Chestnut Ridge, NY, a streamlining of general and administrative expenses, an optimization of commercial spend and a refocusing of research and development efforts.
As a result of the January 2017 restructuring initiative, the Company incurred total pre-tax charges of approximately $15.1 million during the six months ended June 30, 2017 related to employee separation and other benefit-related costs. There were no expenses related to this restructuring initiative for the three months ended June 30, 2017. Of the total charges incurred, $6.9 million are included in the U.S. Branded Pharmaceuticals segment, $4.9 million are included in Corporate unallocated costs and $3.3 million are included in the U.S. Generic Pharmaceuticals segment for six months ended June 30, 2017, respectively. These charges are 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. Substantially all cash payments are anticipated to be made by the end of 2017 and substantially all of the actions associated with this restructuring were completed by the end of April 2017.
The liability related to the January 2017 restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets and is entirely related to employee separation and other benefit-related costs. Changes to this liability during the six months ended June 30, 2017 were as follows (in thousands):
Total | |||
Liability balance as of January 1, 2017 | $ | — | |
Expenses | 15,060 | ||
Cash distributions | (5,141 | ) | |
Liability balance as of June 30, 2017 | $ | 9,919 | |
2017 U.S. Generics Pharmaceuticals Restructuring
On July 21, 2017, the Company announced that after completing a comprehensive review of its manufacturing network, the Company will be ceasing operations and closing its manufacturing and distribution facilities in Huntsville, Alabama (the 2017 U.S. Generics Pharmaceuticals restructuring initiative). The closure of the facilities is expected to occur by the end of 2018.
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As a result of the 2017 U.S. Generics Pharmaceuticals restructuring initiative, the Company’s workforce is expected to be reduced by approximately 875 positions, including approximately 35 open positions, and the Company expects to incur total pre-tax charges of approximately $325 million, including total estimated cash outlays of approximately $60 million, substantially all of which will be paid by the end of 2018. The estimated restructuring charges consist of accelerated depreciation charges of approximately $165 million, asset impairment charges related to identifiable intangible assets and certain property, plant and equipment of approximately $90 million, charges to increase excess inventory reserves of approximately $10 million, employee separation, retention and other benefit-related costs of approximately $40 million and certain other charges of approximately $20 million. Employee separation, retention and certain other employee benefit-related costs will be expensed ratably over the requisite service period. Other costs that will be incurred including, but not limited to, contract termination fees and product technology transfer costs, will be expensed as incurred.
As a result of the 2017 U.S. Generics Pharmaceuticals restructuring initiative, the Company incurred pretax charges of $109.3 million during the three and six months ended June 30, 2017, consisting of certain intangible asset and property, plant and equipment impairment charges of $89.5 million, charges to increase excess inventory reserves of $7.9 million and certain other charges of $11.9 million. These charges are included in the U.S. Generic Pharmaceuticals segment and are included in Asset impairment charges, Cost of revenues and both Cost of revenues and Selling, general and administrative, respectively, in the Condensed Consolidated Statements of Operations.
The liability related to the 2017 U.S. Generics Pharmaceuticals restructuring initiative, which relates to certain other restructuring charges, is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the six months ended June 30, 2017 were as follows (in thousands):
Total | |||
Liability balance as of January 1, 2017 | $ | — | |
Expenses | 8,871 | ||
Cash distributions | — | ||
Liability balance as of June 30, 2017 | $ | 8,871 | |
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NOTE 5. SEGMENT RESULTS
The three reportable business segments in which the Company operates are: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. These segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s adjusted income 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; excess costs that will be eliminated pursuant to integration plans; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; certain non-cash interest expense; litigation-related and other contingent matters; gains or losses from early termination of debt; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate general and administrative expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated 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.
The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net revenues to external customers: | |||||||||||||||
U.S. Generic Pharmaceuticals | $ | 563,312 | $ | 565,358 | $ | 1,285,295 | $ | 1,148,748 | |||||||
U.S. Branded Pharmaceuticals | 245,188 | 288,342 | 495,347 | 597,155 | |||||||||||
International Pharmaceuticals (1) | 67,231 | 67,187 | 132,689 | 138,523 | |||||||||||
Total net revenues to external customers | $ | 875,731 | $ | 920,887 | $ | 1,913,331 | $ | 1,884,426 | |||||||
Adjusted income from continuing operations before income tax: | |||||||||||||||
U.S. Generic Pharmaceuticals | $ | 253,866 | $ | 214,968 | $ | 595,465 | $ | 426,736 | |||||||
U.S. Branded Pharmaceuticals | 127,595 | 122,420 | 257,087 | 291,201 | |||||||||||
International Pharmaceuticals | 14,812 | 20,615 | 29,694 | 42,369 | |||||||||||
Total segment adjusted income from continuing operations before income tax | $ | 396,273 | $ | 358,003 | $ | 882,246 | $ | 760,306 | |||||||
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(1) | Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada, Latin America and South Africa. |
There were no material revenues from external customers attributed to an individual country outside of the United States during the three and six months ended June 30, 2017 and 2016. There were no material tangible long-lived assets in an individual country other than the United States as of June 30, 2017 or December 31, 2016.
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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 six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Total consolidated loss from continuing operations before income tax | $ | (753,500 | ) | $ | (165,465 | ) | $ | (930,851 | ) | $ | (372,943 | ) | |||
Interest expense, net | 121,747 | 111,919 | 233,746 | 228,712 | |||||||||||
Corporate unallocated costs (1) | 34,152 | 49,818 | 81,620 | 86,098 | |||||||||||
Amortization of intangible assets | 190,943 | 212,844 | 454,077 | 424,513 | |||||||||||
Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans | 100 | 29,103 | 215 | 97,579 | |||||||||||
Upfront and milestone payments to partners | 3,082 | 2,688 | 6,177 | 4,105 | |||||||||||
Separation benefits and other cost reduction initiatives (2) | 24,614 | 22,174 | 47,284 | 60,630 | |||||||||||
Impact of VOLTAREN® Gel generic competition | — | — | — | (7,750 | ) | ||||||||||
Certain litigation-related and other contingencies, net (3) | (2,600 | ) | 5,259 | (1,664 | ) | 10,459 | |||||||||
Asset impairment charges (4) | 725,044 | 39,951 | 929,006 | 169,576 | |||||||||||
Acquisition-related and integration items (5) | 4,190 | 48,171 | 15,070 | 60,725 | |||||||||||
Loss on extinguishment of debt | 51,734 | — | 51,734 | — | |||||||||||
Foreign currency impact related to the remeasurement of intercompany debt instruments | (3,233 | ) | 417 | (5,927 | ) | 1,672 | |||||||||
Other, net | — | 1,124 | 1,759 | (3,070 | ) | ||||||||||
Total segment adjusted income from continuing operations before income tax | $ | 396,273 | $ | 358,003 | $ | 882,246 | $ | 760,306 | |||||||
__________
(1) | Amounts include certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses. |
(2) | Amounts primarily relate to employee separation costs of $0.7 million and $21.5 million during the three and six months ended June 30, 2017, respectively, charges to increase excess inventory reserves of $7.9 million during both periods and other charges of $16.0 million and $17.5 million, related primarily to the 2017 U.S. Generics Pharmaceuticals restructuring initiative, during the three and six months ended June 30, 2017, respectively. Amounts during the three and six months ended June 30, 2016 include charges to increase excess inventory reserves of $6.4 million and $33.3 million related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative, employee separation costs of $8.4 million and $15.2 million and other restructuring costs of $7.1 million and $11.8 million, respectively. These amounts were primarily recorded as Cost of revenues and Selling, general and administrative expense in our Condensed Consolidated Statements of Operations. 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 11. Commitments and Contingencies. |
(4) | Amounts primarily relate to charges to write down goodwill and intangible assets as further described in Note 8. Goodwill and Other Intangibles as well as charges to write down certain property, plant and equipment as further described in Note 6. Fair Value Measurements. |
(5) | Amounts during the three and six months ended June 30, 2017 include costs directly associated with previous acquisitions of $2.2 million and $6.9 million, respectively, and charges due to changes in fair value of contingent consideration of $2.0 million and $8.1 million, respectively. Amounts during the three and six months ended June 30, 2016 include costs directly associated with previous acquisitions of $24.3 million and $47.5 million, respectively, and charges due to changes in fair value of contingent consideration of $23.9 million and $13.2 million, respectively. |
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
NOTE 6. 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.
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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 June 30, 2017 and December 31, 2016.
At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. The Company reviews any unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
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 the inputs may result in a significant adjustment 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 June 30, 2017 and December 31, 2016 were as follows (in thousands):
Fair Value Measurements at Reporting Date using: | |||||||||||||||
June 30, 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 | $ | 96,888 | $ | — | $ | — | $ | 96,888 | |||||||
Time deposits | — | 100,000 | — | 100,000 | |||||||||||
Equity securities | 2,494 | — | — | 2,494 | |||||||||||
Total | $ | 99,382 | $ | 100,000 | $ | — | $ | 199,382 | |||||||
Liabilities: | |||||||||||||||
Acquisition-related contingent consideration—short-term | $ | — | $ | — | $ | 94,460 | $ | 94,460 | |||||||
Acquisition-related contingent consideration—long-term | — | — | 116,000 | 116,000 | |||||||||||
Total | $ | — | $ | — | $ | 210,460 | $ | 210,460 | |||||||
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At June 30, 2017, money market funds include $21.9 million in QSFs to be disbursed to mesh-related product liability claimants. See Note 11. Commitments and Contingencies for further discussion of our product liability cases.
Fair Value Measurements at Reporting Date using: | |||||||||||||||
December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||
Assets: | |||||||||||||||
Money market funds | $ | 26,210 | $ | — | $ | — | $ | 26,210 | |||||||
Time deposits | — | 100,000 | — | 100,000 | |||||||||||
Equity securities | 2,267 | — | — | 2,267 | |||||||||||
Total | $ | 28,477 | $ | 100,000 | $ | — | $ | 128,477 | |||||||
Liabilities: | |||||||||||||||
Acquisition-related contingent consideration—short-term | $ | — | $ | — | $ | 109,373 | $ | 109,373 | |||||||
Acquisition-related contingent consideration—long-term | — | — | 152,740 | 152,740 | |||||||||||
Total | $ | — | $ | — | $ | 262,113 | $ | 262,113 | |||||||
At December 31, 2016, money market funds include $26.2 million in QSFs to be disbursed to mesh-related product liability claimants. See Note 11. Commitments and Contingencies for further discussion of our product liability cases.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Beginning of period | $ | 234,391 | $ | 124,511 | $ | 262,113 | $ | 143,502 | |||||||
Amounts settled | (26,219 | ) | (12,646 | ) | (60,310 | ) | (22,120 | ) | |||||||
Changes in fair value recorded in earnings | 1,950 | 23,892 | 8,134 | 13,204 | |||||||||||
Effect of currency translation | 338 | 39 | 523 | 1,210 | |||||||||||
End of period | $ | 210,460 | $ | 135,796 | $ | 210,460 | $ | 135,796 | |||||||
The fair value measurements of the contingent consideration obligations at June 30, 2017 were determined using risk-adjusted discount rates ranging from 3% to 22%. 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 six months ended June 30, 2017 by acquisition (in thousands):
Balance as of December 31, 2016 | Acquisitions | Fair Value Adjustments and Accretion | Payments and Other | Balance as of June 30, 2017 | |||||||||||||||
Auxilium acquisition | $ | 21,097 | $ | — | $ | (1,720 | ) | $ | (4,219 | ) | $ | 15,158 | |||||||
Lehigh Valley Technologies, Inc. acquisitions | 96,000 | — | 16,755 | (36,754 | ) | 76,001 | |||||||||||||
VOLTAREN® Gel acquisition | 118,395 | — | 4,384 | (17,909 | ) | 104,870 | |||||||||||||
Other | 26,621 | — | (11,285 | ) | (905 | ) | 14,431 | ||||||||||||
Total | $ | 262,113 | $ | — | $ | 8,134 | $ | (59,787 | ) | $ | 210,460 | ||||||||
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The following is a summary of available-for-sale securities held by the Company at June 30, 2017 and December 31, 2016 (in thousands):
Available-for-sale | |||||||||||||||
June 30, 2017 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||
Money market funds | $ | 96,888 | $ | — | $ | — | $ | 96,888 | |||||||
Total included in cash and cash equivalents | $ | 75,000 | $ | — | $ | — | $ | 75,000 | |||||||
Total included in restricted cash and cash equivalents | $ | 21,888 | $ | — | $ | — | $ | 21,888 | |||||||
Equity securities | $ | 1,766 | $ | 728 | $ | — | $ | 2,494 | |||||||
Long-term available-for-sale securities | $ | 1,766 | $ | 728 | $ | — | $ | 2,494 | |||||||
Available-for-sale | |||||||||||||||
December 31, 2016 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||
Money market funds | $ | 26,210 | $ | — | $ | — | $ | 26,210 | |||||||
Total included in cash and cash equivalents | $ | — | $ | — | $ | — | $ | — | |||||||
Total included in restricted cash and cash equivalents | $ | 26,210 | $ | — | $ | — | $ | 26,210 | |||||||
Equity securities | $ | 1,766 | $ | 501 | $ | — | $ | 2,267 | |||||||
Long-term available-for-sale securities | $ | 1,766 | $ | 501 | $ | — | $ | 2,267 | |||||||
Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2017 were as follows (in thousands):
Fair Value Measurements at Reporting Date using: | Total Expense for the Six Months Ended June 30, 2017 | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | |||||||||||||||
Certain U.S. Branded Pharmaceuticals intangible assets (Note 8) | $ | — | $ | — | $ | 17,781 | $ | (52,096 | ) | ||||||
Certain U.S. Generic Pharmaceuticals intangible assets (Note 8) | — | — | 409,874 | (398,423 | ) | ||||||||||
Certain International Pharmaceuticals intangible assets (Note 8) | — | — | 21,772 | (145,359 | ) | ||||||||||
Branded reporting unit goodwill (Note 8) | — | — | 828,818 | (180,430 | ) | ||||||||||
Paladin reporting unit goodwill (Note 8) | — | — | 84,881 | (82,602 | ) | ||||||||||
Somar reporting unit goodwill (Note 8) | — | — | — | (25,712 | ) | ||||||||||
Certain property, plant and equipment (1) | — | — | — | (44,384 | ) | ||||||||||
Total | $ | — | $ | — | $ | 1,363,126 | $ | (929,006 | ) | ||||||
__________
(1) | Amounts relate primarily to an aggregate charge of $32.0 million recorded in connection with the 2017 U.S. Generics Pharmaceuticals restructuring initiative, which is described further in Note 4. Restructuring, and $9.9 million recorded following the initiation of held-for-sale accounting resulting from the Company’s June 30, 2017 definitive agreement to sell Somar, which is described in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale. |
NOTE 7. INVENTORIES
Inventories consist of the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Raw materials (1) | $ | 138,686 | $ | 175,240 | |||
Work-in-process (1) | 96,618 | 100,494 | |||||
Finished goods (1) | 254,448 | 279,937 | |||||
Total | $ | 489,752 | $ | 555,671 | |||
__________
(1) The components of inventory shown in the table above are net of allowance for obsolescence.
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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 June 30, 2017 and December 31, 2016, $27.2 million and $22.9 million, respectively, of long-term inventory was included in Other assets in the Condensed Consolidated Balance Sheets. As of June 30, 2017 and December 31, 2016, the Company’s Condensed Consolidated Balance Sheets included approximately $5.3 million and $16.8 million, respectively, of capitalized pre-launch inventories related to generic products that were not yet available to be sold.
NOTE 8. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the six months ended June 30, 2017 were as follows (in thousands):
Carrying Amount | |||||||||||||||
U.S. Generic Pharmaceuticals | U.S. Branded Pharmaceuticals | International Pharmaceuticals | Total | ||||||||||||
Goodwill as of December 31, 2016 | $ | 3,531,301 | $ | 1,009,248 | $ | 188,846 | $ | 4,729,395 | |||||||
Effect of currency translation on gross balance | — | — | 26,646 | 26,646 | |||||||||||
Effect of currency translation on accumulated impairment | — | — | (19,983 | ) | (19,983 | ) | |||||||||
Goodwill impairment charges | — | (180,430 | ) | (108,314 | ) | (288,744 | ) | ||||||||
Goodwill as of June 30, 2017 | $ | 3,531,301 | $ | 828,818 | $ | 87,195 | $ | 4,447,314 | |||||||
The carrying amount of goodwill at June 30, 2017 and December 31, 2016 is net of the following accumulated impairments:
Accumulated Impairment | |||||||||||||||
U.S. Generic Pharmaceuticals | U.S. Branded Pharmaceuticals | International Pharmaceuticals | Total | ||||||||||||
Accumulated impairment losses as of December 31, 2016 | $ | 2,342,549 | $ | 675,380 | $ | 408,280 | $ | 3,426,209 | |||||||
Accumulated impairment losses as of June 30, 2017 | $ | 2,342,549 | $ | 855,810 | $ | 536,577 | $ | 3,734,936 | |||||||
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Other Intangible Assets
The following is a summary of other intangible assets held by the Company at June 30, 2017 and December 31, 2016 (in thousands):
Cost basis: | Balance as of December 31, 2016 | Acquisitions | Impairments (1) | Other (1) (2) | Effect of Currency Translation (1) | Balance as of June 30, 2017 | |||||||||||||||||
Indefinite-lived intangibles: | |||||||||||||||||||||||
In-process research and development | $ | 1,123,581 | $ | — | $ | (167,889 | ) | $ | (177,200 | ) | $ | 209 | $ | 778,701 | |||||||||
Total indefinite-lived intangibles | $ | 1,123,581 | $ | — | $ | (167,889 | ) | $ | (177,200 | ) | $ | 209 | $ | 778,701 | |||||||||
Finite-lived intangibles: | |||||||||||||||||||||||
Licenses (weighted average life of 12 years) | $ | 465,720 | $ | — | $ | (8,179 | ) | $ | — | $ | — | $ | 457,541 | ||||||||||
Tradenames (weighted average life of 12 years) | 7,345 | — | (808 | ) | (262 | ) | 134 | 6,409 | |||||||||||||||
Developed technology (weighted average life of 11 years) | 6,223,004 | — | (409,356 | ) | 144,158 | 24,617 | 5,982,423 | ||||||||||||||||
Total finite-lived intangibles (weighted average life of 11 years) | $ | 6,696,069 | $ | — | $ | (418,343 | ) | $ | 143,896 | $ | 24,751 | $ | 6,446,373 | ||||||||||
Total other intangibles | $ | 7,819,650 | $ | — | $ | (586,232 | ) | $ | (33,304 | ) | $ | 24,960 | $ | 7,225,074 | |||||||||
Accumulated amortization: | Balance as of December 31, 2016 | Amortization | Impairments | Other (2) | Effect of Currency Translation | Balance as of June 30, 2017 | |||||||||||||||||
Finite-lived intangibles: | |||||||||||||||||||||||
Licenses | $ | (341,600 | ) | $ | (14,586 | ) | $ | — | $ | — | $ | — | $ | (356,186 | ) | ||||||||
Tradenames | (6,599 | ) | (42 | ) | — | 262 | (30 | ) | (6,409 | ) | |||||||||||||
Developed technology | (1,612,154 | ) | (439,449 | ) | — | 33,042 | (7,831 | ) | (2,026,392 | ) | |||||||||||||
Total other intangibles | $ | (1,960,353 | ) | $ | (454,077 | ) | $ | — | $ | 33,304 | $ | (7,861 | ) | $ | (2,388,987 | ) | |||||||
Net other intangibles | $ | 5,859,297 | $ | 4,836,087 | |||||||||||||||||||
__________
(1) | Changes in the net carrying amount of our other intangible assets presented in the table above exclude changes related to businesses classified as held for sale, to the extent such changes occurred after the business was classified as held for sale. As such, asset impairment charges of $9.6 million and net increases resulting from currency translation of $1.6 million related to our Litha business are excluded from the table above. |
Additional information on the changes in the total gross carrying amount of our other intangible assets is presented below (in thousands):
Gross Carrying Amount | |||
December 31, 2016 | $ | 7,819,650 | |
Impairment of certain U.S. Branded Pharmaceuticals intangible assets | (52,096 | ) | |
Impairment of certain U.S. Generic Pharmaceuticals intangible assets | (398,423 | ) | |
Impairment of certain International Pharmaceuticals intangible assets | (135,713 | ) | |
Transfer of intangible assets to Assets held for sale (NOTE 3) | (33,304 | ) | |
Effect of currency translation | 24,960 | ||
June 30, 2017 | $ | 7,225,074 | |
(2) | Includes reclassification adjustments of $177.2 million for certain developed technology intangible assets, previously classified as in-process research and development, that were placed in service during the six months ended June 30, 2017. The remaining amounts in this column relate to the transfer of Somar intangible assets to Assets held for sale. |
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Amortization expense for the three and six months ended June 30, 2017 totaled $191.0 million and $454.1 million, respectively. Amortization expense for the three and six months ended June 30, 2016 totaled $212.8 million and $424.5 million, respectively. Estimated amortization of intangibles for the five fiscal years subsequent to December 31, 2016 is as follows (in thousands):
2017 | $ | 764,409 | |
2018 | $ | 544,485 | |
2019 | $ | 473,230 | |
2020 | $ | 442,265 | |
2021 | $ | 427,558 | |
Impairments
As part of the Company’s goodwill and intangible asset impairment assessments, the Company estimates the fair values of its reporting units 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 the Company’s 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, 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. The Company believes 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 impairments charges on the Company’s Condensed Consolidated Statements of Operations.
A summary of significant goodwill and other intangible asset impairment charges by reportable segment for the six months ended June 30, 2017 and 2016 is included below.
U.S. Generic Pharmaceuticals Segment
During the first and second quarters of 2017, the Company identified certain market conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in its U.S. Generic Pharmaceuticals segment. Accordingly, the Company tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $72.7 million and $268.2 million during the three months ended March 31, 2017 and June 30, 2017, respectively.
In addition, 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 utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Generics goodwill impairment test was 9.0%. The goodwill balance for the Company’s Generics reporting unit was approximately $3,531 million as of June 30, 2017.
During the first and second quarters of 2016, the Company identified certain market and regulatory conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in our U.S. Generic Pharmaceuticals segment. Accordingly, we tested these assets for impairment and determined that the carrying amounts of certain of these assets was no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges of $29.3 million and $40.0 million during the first and second quarters of 2016, respectively. The Company also recognized pre-tax, non-cash asset impairment charges of $100.3 million during the first quarter of 2016 related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative, which resulted from the discontinuation of certain commercial products and the abandonment of certain IPR&D projects. See Note 4. Restructuring for discussion of our material restructuring initiatives.
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U.S. Branded Pharmaceuticals Segment
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. In addition, during the second quarter of 2017, the Company identified certain market conditions impacting the recoverability of certain other finite-lived intangible assets in its U.S. Branded Pharmaceuticals segment. Accordingly, the Company tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $31.5 million during the three months ended June 30, 2017.
In addition, as a result of the withdrawal of OPANA® ER from the market and the continued erosion of its U.S. Branded Pharmaceuticals segment’s Established Products portfolio, the Company initiated an interim goodwill impairment analysis of its Branded reporting unit during the second quarter of 2017. Based on the provisions of ASU 2017-04, which the Company adopted as of January 1, 2017, the Company recorded a pre-tax, non-cash asset 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. The Company estimated the fair value of the Branded reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Branded goodwill impairment test was 9.5%. The remaining goodwill for the Company’s Branded reporting unit was approximately $829 million as of June 30, 2017.
International Pharmaceuticals Segment
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 III study of serelaxin in patients with AHF failed to meet its primary endpoints. As a result, Endo has concluded that the full carrying amount of its serelaxin in-process research and development intangible asset is 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, the Company assessed the recoverability of its Paladin goodwill balance and determined that the estimated fair value of the Paladin reporting unit was below its carrying amount. The Company recorded a pre-tax, non-cash asset 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. The Company estimated the fair value of the Paladin reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Paladin goodwill impairment test was 10.0%. The remaining goodwill for the Company’s Paladin reporting unit was approximately $87 million as of June 30, 2017.
As further discussed in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale, the Company 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, the Company performed an impairment analysis using a market approach and determined that impairment charges were required. The Company 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.
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NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Trade accounts payable | $ | 114,710 | $ | 126,712 | |||
Returns and allowances | 310,852 | 332,455 | |||||
Rebates | 218,166 | 227,706 | |||||
Chargebacks | 18,426 | 33,092 | |||||
Accrued interest | 129,208 | 128,254 | |||||
Accrued payroll and related benefits | 79,942 | 115,224 | |||||
Accrued royalties and other distribution partner payables | 63,807 | 191,433 | |||||
Acquisition-related contingent consideration—short-term | 94,460 | 109,373 | |||||
Other | 203,765 | 189,835 | |||||
Total | $ | 1,233,336 | $ | 1,454,084 | |||
NOTE 10. DEBT
The following table presents the carrying amounts of the Company’s total indebtedness at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | ||||||||||||||||||||
Effective Interest Rate | Principal Amount | Carrying Amount | Effective Interest Rate | Principal Amount | Carrying Amount | ||||||||||||||||
7.25% Senior Notes due 2022 | 7.91 | % | $ | 400,000 | $ | 390,044 | 7.91 | % | $ | 400,000 | $ | 389,150 | |||||||||
5.75% Senior Notes due 2022 | 6.04 | % | 700,000 | 692,085 | 6.04 | % | 700,000 | 691,339 | |||||||||||||
5.375% Senior Notes due 2023 | 5.62 | % | 750,000 | 741,381 | 5.62 | % | 750,000 | 740,733 | |||||||||||||
6.00% Senior Notes due 2023 | 6.28 | % | 1,635,000 | 1,611,838 | 6.28 | % | 1,635,000 | 1,610,280 | |||||||||||||
5.875% Senior Secured Notes due 2024 | 6.14 | % | 300,000 | 295,251 | — | — | — | ||||||||||||||
6.00% Senior Notes due 2025 | 6.27 | % | 1,200,000 | 1,180,207 | 6.27 | % | 1,200,000 | 1,179,203 | |||||||||||||
Term Loan A Facility Due 2019 | — | — | — | 2.95 | % | 941,875 | 932,824 | ||||||||||||||
Term Loan B Facility Due 2022 | — | — | — | 4.06 | % | 2,772,000 | 2,728,919 | ||||||||||||||
Term Loan B Facility Due 2024 | 5.46 | % | 3,415,000 | 3,374,578 | — | — | — | ||||||||||||||
Other debt | 1.50 | % | 55 | 55 | 1.50 | % | 55 | 55 | |||||||||||||
Total long-term debt, net | $ | 8,400,055 | $ | 8,285,439 | $ | 8,398,930 | $ | 8,272,503 | |||||||||||||
Less current portion, net | 34,150 | 34,150 | 131,125 | 131,125 | |||||||||||||||||
Total long-term debt, less current portion, net | $ | 8,365,905 | $ | 8,251,289 | $ | 8,267,805 | $ | 8,141,378 | |||||||||||||
The senior notes are unsecured and subordinated in right of payment to our credit facility.
The aggregate estimated fair value of the Company’s long-term debt, which was estimated using the quoted market prices for the same or similar debt issuances, was $7.8 billion at both June 30, 2017 and December 31, 2016. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
Credit Facility
We have $995.8 million of remaining credit available through our revolving credit facility as of June 30, 2017. As of June 30, 2017, we were in compliance with all covenants contained in our credit agreement that are described below under the heading “April 2017 Refinancing”.
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April 2017 Refinancing
On April 27, 2017, Endo International plc entered into a new credit agreement (the 2017 Credit Agreement) as parent, together with its subsidiaries Endo Luxembourg Finance Company I S.à r.l., and Endo LLC as co-borrowers, the guarantors party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender. The 2017 Credit Agreement provides for (i) a five-year revolving credit facility in a principal amount of $1,000.0 million (the 2017 Revolving Credit Facility) and (ii) a seven-year term loan facility in a principal amount of $3,415.0 million (the 2017 Term Loan Facility and, together with the 2017 Revolving Credit Facility, the 2017 Credit Facility). Any outstanding amounts borrowed pursuant to the 2017 Credit Facility will immediately mature if any of the following of our senior notes are not refinanced or repaid in full prior to the date that is 91 days prior to the stated maturity date thereof:
Instrument | Maturity Date | |
7.25% Senior Notes due 2022 | January 15, 2022 | |
5.75% Senior Notes due 2022 | January 15, 2022 | |
5.375% Senior Notes due 2023 | January 15, 2023 | |
6.00% Senior Notes due 2023 | July 15, 2023 | |
The obligations under the 2017 Credit Agreement are guaranteed by Endo International plc and its material subsidiaries, as defined in the 2017 Credit Agreement, and certain other subsidiaries of the Company from time to time and secured by a lien on substantially all the assets (with certain exceptions) of the borrowers and the guarantors. The 2017 Credit Agreement contains affirmative and negative covenants that the Company believes to be usual and customary for a senior secured credit facility of this type. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with the Company’s affiliates. Borrowings under the 2017 Revolving Credit Facility bear interest, at the borrower’s election, at a rate equal to (i) an applicable margin between 1.50% and 3.00% plus the London Interbank Offered Rate (LIBOR) or (ii) an applicable margin between 0.50% and 2.00% plus the Alternate Base Rate (as defined in the 2017 Credit Agreement). In addition, borrowings under our 2017 Term Loan Facility bear interest, at the borrower’s election, at a rate equal to (i) 4.25% plus LIBOR, subject to a LIBOR floor of 0.75%, or (ii) 3.75% plus the Alternate Base Rate, subject to an Alternate Base Rate floor of 1.75%.
Also on April 27, 2017, Endo Designated Activity Company (Endo DAC), Endo Finance LLC and Endo Finco Inc. (collectively, the Issuers) issued $300.0 million in aggregate principal amount of 5.875% senior secured notes due 2024 (the 2024 Notes). The 2024 Notes were issued in a private offering for resale to “qualified institutional buyers” (as defined in Rule 144A under the Securities Act) and outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act. The 2024 Notes are senior secured obligations of the Issuers and are: (i) guaranteed by Endo International plc and its subsidiaries that also guarantee the 2017 Credit Agreement and certain other material indebtedness and (ii) secured by a lien on the same collateral that secures the 2017 Credit Agreement. Interest on the 2024 Notes is payable semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2017. The 2024 Notes will mature on October 15, 2024, subject to earlier repurchase or redemption in accordance with the terms of the 2024 Notes indenture. On or after April 15, 2020, the Issuers may on any one or more occasions redeem all or a part of the 2024 Notes, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and additional interest, if any, on the notes redeemed if such notes are redeemed during the twelve-month period beginning on April 15 of the years indicated below:
Year | Percentage | ||
2020 | 102.938 | % | |
2021 | 101.469 | % | |
2022 and thereafter | 100.000 | % | |
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At any time prior to April 15, 2020, the Issuers may on any one or more occasions redeem all or a part of the 2024 Notes at a redemption price equal to 100% of the principal amount of the notes redeemed, plus the applicable make-whole premium as described in the 2024 Notes indenture, plus accrued and unpaid interest and additional interest, if any. In addition, prior to April 15, 2020, the Issuers may, subject to certain restrictions and limitations, redeem up to 35% of the aggregate principal amount of the 2024 Notes with the net cash proceeds from specified equity offerings at a redemption price equal to 105.875% of the aggregate principal amount of the 2024 Notes redeemed, plus accrued and unpaid interest and additional interest, if any. If the Company experiences certain changes of control events, the Issuers must offer to repurchase the 2024 Notes at 101% of their principal amount, plus accrued and unpaid interest and additional interest, if any. The 2024 Notes indenture contains covenants that, 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 dividends, distributions, 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, enter into certain transactions with affiliates or designate subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions and qualifications, including the fall away or revision of certain of these covenants and release of the collateral upon the 2024 Notes receiving investment grade credit ratings.
The Company used the net proceeds under the 2017 Term Loan Facility, together with the net proceeds of the 2024 Notes and cash on hand, to repay all of its outstanding loans under its prior credit facilities and to pay related fees and expenses. We intend to use the proceeds of the 2017 Revolving Credit Facility from time to time for general corporate purposes.
In connection with the April 2017 Refinancing, we incurred new debt issuance costs of approximately $56.7 million, which were allocated among the new debt instruments as follows: (i) $41.3 million to the 2017 Term Loan Facility, (ii) $10.5 million to the 2017 Revolving Credit Facility and (iii) $4.9 million to the 2024 Notes. These costs, together with $10.1 million of the previously deferred debt issuance costs associated with our prior revolving credit facility, have been deferred and will be amortized as interest expense over the terms of the respective instruments. The remaining $51.7 million of deferred debt issuance costs associated with our prior revolving and term loan facilities were charged to expense in the second quarter of 2017. These expenses were included in the Condensed Consolidated Statements of Operations as Loss on extinguishment of debt.
Maturities
The following table presents, subsequent to the closing of the April 2017 Refinancing, the maturities on our long-term debt for each of the five fiscal years subsequent to December 31, 2016 (in thousands):
Maturities (1) | |||
2017 (2) | $ | 44,700 | |
2018 | $ | 34,150 | |
2019 | $ | 34,150 | |
2020 | $ | 34,150 | |
2021 | $ | 34,150 | |
__________
(1) | Any outstanding amounts borrowed pursuant to the 2017 Credit Facility will immediately mature if certain of our senior notes (enumerated above under the heading “April 2017 Refinancing”) are not refinanced or repaid in full prior to the date that is 91 days prior to the respective stated maturity dates thereof. Accordingly, we may be required to repay or refinance senior notes with an aggregate principal amount of $1,100.0 million in 2021, despite such notes having stated maturities in 2022. The amounts in this maturities table do not reflect any such early payment; rather, they reflect stated maturity dates. |
(2) | Includes payments related to: (i) our existing credit facilities prior to the April 2017 Refinancing and (ii) our 2017 Term Loan Facility thereafter. |
NOTE 11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings and Investigations
We and certain of our subsidiaries are involved in various claims, legal proceedings, 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 and commercial matters. While we cannot predict the outcome of these proceedings and we intend to defend vigorously our position, an adverse outcome in any of these proceedings could have a material adverse effect on our current and future financial position, results of operations and cash flows. 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.
As of June 30, 2017, our reserve for loss contingencies totaled $1,335.6 million, of which $1,294.6 million relates to our liability accrual for vaginal mesh cases and other mesh-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.
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Product Liability
We and certain of our subsidiaries have been named as defendants in numerous lawsuits in various U.S. federal and state courts, as well as in Canada and other countries, alleging personal injury resulting from the use of certain products of our subsidiaries. These matters are described below in more detail.
We believe that certain settlements and judgments, as well as legal defense costs, relating to certain product liability matters are or may be covered in whole or in part under our product liability insurance policies with a number of insurance carriers. In certain circumstances, insurance carriers reserve their rights to contest or deny coverage. We intend to contest vigorously any and all such disputes with our insurance carriers and to enforce our rights under the terms of our insurance policies. Accordingly, we will record receivables with respect to amounts due under these policies only when the resolution of any dispute has been reached and realization of the potential claim for recovery is considered probable. Amounts recovered under our product liability insurance policies will likely be less than the stated coverage limits and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available.
Vaginal Mesh Cases. In October 2008, the FDA issued a Public Health Notification (October 2008 Public Health Notification) regarding potential complications associated with transvaginal placement of surgical mesh to treat pelvic organ prolapse (POP) and stress urinary incontinence (SUI). The notification provided recommendations and encouraged physicians to seek specialized training in mesh procedures, to advise their patients about the risks associated with these procedures and to be diligent in diagnosing and reporting complications.
In July 2011, the FDA issued an update to the October 2008 Public Health Notification regarding mesh to further advise the public and the medical community of the potential complications associated with transvaginal placement of surgical mesh to treat POP and SUI. In the July 2011 update, the FDA stated that adverse events are not rare. Furthermore, the FDA questioned the relative effectiveness of transvaginal mesh as a treatment for POP as compared to non-mesh surgical repair. The July 2011 notification continued to encourage physicians to seek specialized training in mesh procedures, to consider and to advise their patients about the risks associated with these procedures and to be diligent in diagnosing and reporting complications. In January 2016, the FDA issued a statement reclassifying surgical mesh for transvaginal POP repair from Class II to Class III. Surgical mesh for SUI repair remains a Class II device.
Since 2008, we and certain of our subsidiaries, including AMS and/or Astora, have been named as defendants in multiple lawsuits in the U.S. in various state and federal courts, including a multidistrict litigation (MDL) in the U.S. District Court for the Southern District of West Virginia (MDL No. 2325), and in Canada and other countries, where various class action and individual complaints are pending alleging personal injury resulting from the use of transvaginal surgical mesh products designed to treat POP and SUI. Plaintiffs in these suits allege various personal injuries including chronic pain, incontinence and inability to control bowel function and permanent deformities, and seek compensatory and punitive damages, where available.
We and certain plaintiffs’ counsel representing mesh-related product liability claimants have entered into various Master Settlement Agreements (MSAs) and other 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 August 2017, 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 qualified settlement funds (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. If certain participation requirements are not met, then we will have the right to terminate the settlement with that law firm. In addition, one agreement gives us a unilateral right of approval regarding which claims may be eligible to participate under that settlement. To the extent fewer claims than are authorized under an agreement participate, the total settlement payment under that agreement will be reduced by an agreed-upon amount for each such non-participating claim. Funds deposited in QSFs are included in restricted cash and cash equivalents in the Condensed Consolidated Balance Sheets.
Distribution of funds to any individual claimant is conditioned upon the receipt of documentation substantiating the validity of the claim, a full release and a dismissal of the entire action or claim as to all AMS parties and affiliates. Prior to receiving funds, an individual claimant 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 Hon. Joseph R. Goodwin, U.S. District Court Judge for the Southern District of West Virginia, entered a case management order in MDL 2325 that includes a provision requiring 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.
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Beginning in the second quarter of 2017, we aggressively pursued a settlement strategy in connection with our mesh litigation. Consequently, the Company increased its mesh liability accrual by $775.5 million in the second quarter of 2017, which is expected to cover approximately 22,000 known U.S. mesh claims, subject to a claims validation process for all resolved claims, as well as all of the international mesh liability claims of which the Company is aware and other mesh-related matters. This increase reflects the Company’s conclusion that a loss was probable with respect to all unsettled mesh-related matters of which we are aware as of the date of this report and our current liability accrual applies to such matters. 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, it is reasonably possible that further claims may be filed or asserted and 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 six months ended June 30, 2017 (in thousands):
Qualified Settlement Funds | Mesh Liability Accrual | ||||||
Balance as of January 1, 2017 | $ | 275,987 | $ | 963,117 | |||
Additional charges | — | 775,474 | |||||
Cash contributions to Qualified Settlement Funds | 522,770 | — | |||||
Cash distributions to settle disputes from Qualified Settlement Funds | (440,190 | ) | (440,190 | ) | |||
Cash distributions to settle disputes | — | (3,794 | ) | ||||
Other | 510 | — | |||||
Balance as of June 30, 2017 | $ | 359,077 | $ | 1,294,607 | |||
As of June 30, 2017, $868.9 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 $2.8 billion, $359.1 million of which remains in the QSFs as of June 30, 2017. We expect to fund into the QSFs the remaining payments under all settlement agreements during 2017, 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 currently cooperating with this investigation. At this time, we cannot predict the ultimate outcome of these matters and we are unable to estimate the possible range of any additional losses that could be incurred, which could be material to the Company’s operating results and cash flows for the period in which they are resolved or become estimable.
Testosterone Cases. We and certain of our subsidiaries, including Endo Pharmaceuticals Inc. (EPI) and Auxilium Pharmaceuticals, Inc. (subsequently converted to Auxilium Pharmaceuticals, LLC and hereinafter referred to as Auxilium), along with other pharmaceutical manufacturers, have been named as defendants in lawsuits alleging personal injury resulting from the use of prescription medications containing testosterone, including FORTESTA® Gel, DELATESTRYL®, TESTIM®, TESTOPEL®, AVEED® and STRAINT®. Plaintiffs in these suits allege various personal injuries, including pulmonary embolism, stroke and other vascular and/or cardiac injuries and seek compensatory and/or punitive damages, where available. In June 2014, an MDL was formed to include claims involving all testosterone replacement therapies filed against EPI, Auxilium and other manufacturers of such products, and certain transferable cases pending in federal court were coordinated in the U.S. District Court for the Northern District of Illinois as part of MDL No. 2545. In addition, litigation has also been filed against EPI in the Court of Common Pleas for Philadelphia County and in certain other state courts. Litigation similar to that described above may also be brought by other plaintiffs in various jurisdictions, and we expect cases brought in federal court to be transferred to the U.S. District Court for the Northern District of Illinois as tag-along actions to MDL No. 2545. However, we cannot predict the timing or outcome of any such litigation, or whether any such additional litigation will be brought against us. We intend to contest the litigation vigorously and to explore all options as appropriate in our best interests. As of July 31, 2017, approximately 1,285 cases are currently pending against us; some of which may have been filed on behalf of multiple plaintiffs. The first MDL trial against Auxilium involving TESTIM® is set to begin in November 2017; the first trial against Auxilium in the Court of Common Pleas for Philadelphia County involving TESTIM® is set to begin in January 2018; and the first MDL trial against EPI involving FORTESTA® Gel is set to begin in September 2018.
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In November 2015, the U.S. District Court for the Northern District of Illinois entered an order granting defendants’ motion to dismiss claims involving certain testosterone products that were approved pursuant to ANDAs, including TESTOPEL®. Plaintiffs filed a motion for reconsideration and clarification of this order. In March 2016, the District Court granted plaintiffs’ motion in part and entered an order permitting certain claims to go forward to the extent they are based on allegations of fraudulent off-label marketing.
In November 2014, a civil class action complaint was filed in the 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 payors that had paid for certain testosterone products, alleging that the marketing efforts of EPI, Auxilium and other defendant manufacturers with respect to certain testosterone products constituted racketeering activity in violation of 18 U.S.C. §1962(c), and other civil Racketeer Influenced and Corrupt Organizations Act claims. Further, the complaint alleged that EPI, Auxilium and other defendant manufacturers violated various state consumer protection laws through their marketing of certain testosterone products and raised other state law claims. In March 2015, defendants filed a motion to dismiss the complaint and plaintiffs responded by filing amended complaints, which defendants also moved to dismiss. In February 2016, the District Court granted in part and denied in part defendants’ motion to dismiss. The District Court declined to dismiss plaintiffs’ claims for conspiracy to commit racketeering activity in violation of 18 U.S.C. §1962(d) and claims for negligent misrepresentation. In April 2016, plaintiffs filed a third amended complaint, which defendants moved to dismiss in June 2016. In August 2016, the court denied the motion to dismiss, and we filed a response to the third amended complaint in September 2016. In October 2015, a similar civil class action complaint was filed against EPI and other defendant manufacturers in the U.S. District for the Northern District of Illinois. Similar litigation may be brought by other plaintiffs. We are unable to predict the outcome of these matters or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for these matters, if any, but we intend to contest this litigation vigorously and will explore all options as appropriate in our best interests.
Unapproved Drug Litigation
In September 2013, the State of Louisiana filed a petition for damages against certain of our subsidiaries, including EPI, and over 50 other pharmaceutical companies alleging the defendants or their subsidiaries marketed products that were not approved by the FDA. See State of Louisiana v. Abbott Laboratories, Inc., et al., C624522 (19th Jud. Dist. La.). The State of Louisiana sought damages, fines, penalties, attorneys’ fees and costs under various causes of action. In October 2015, the District Court ordered judgment for defendants on their exception for no right of action. The State of Louisiana appealed that decision and in October 2016, the Louisiana Court of Appeals, First Circuit, issued a decision affirming the dismissal as to certain counts and reversing the dismissal as to others. The State filed a petition for rehearing, which was denied by the court in December 2016. Both sides applied to Louisiana Supreme Court for a writ of certiorari to review the First Circuit’s decision. Those writs were denied in March 2017. Defendants filed exceptions for no cause of action in May 2017. A hearing on Defendants’ exceptions was held in July 2017.
In March 2017, the State of Mississippi filed a complaint against our subsidiary EPI in the Chancery Court for the First Judicial District of Hinds County, Mississippi, alleging that EPI marketed products that were not approved by the FDA. The State of Mississippi seeks damages, penalties, attorneys’ fees, costs and other relief under various causes of action. In April 2017, EPI removed this case to the U.S. District Court for the Southern District of Mississippi. See State of Mississippi v. Endo Pharmaceuticals Inc., No. 3:17-CV-277 (S.D. Miss.). In May 2017, the State of Mississippi filed a motion to remand and the case was consolidated for purposes of the remand motion with five other nearly identical cases brought by the State of Mississippi against other manufacturers. That motion is fully briefed and remains pending.
We intend to contest the above cases vigorously and to explore other options as appropriate in our best interests. Litigation similar to that described above may also be brought by other plaintiffs in various jurisdictions. However, we cannot predict the timing or outcome of any such litigation, or whether any such litigation will be brought against us. We are unable to predict the outcome of these matters or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for these matters, if any.
Opioid-Related Litigations, Subpoenas and Document Requests
In June 2014, Corporation Counsel for the City of Chicago filed suit in Illinois state court against multiple defendants, including our subsidiaries Endo Health Solutions Inc. (EHSI) and EPI, for alleged violations of city ordinances and other laws relating to defendants’ alleged opioid sales and marketing practices. In June 2014, the case was removed to the U.S. District Court for the Northern District of Illinois. In December 2014, defendants moved to dismiss the amended complaint and in May 2015, the District Court issued an order granting that motion in part, dismissing the case as to EHSI and EPI. In August 2015, plaintiff filed its second amended complaint against multiple defendants, including EPI and EHSI. In November 2015, defendants moved to dismiss the second amended complaint. In September 2016, the District Court granted in part and denied in part defendants’ motions to dismiss and provided plaintiff an opportunity to amend its complaint. Plaintiff filed the third amended complaint in October 2016. In December 2016, defendants moved to dismiss the re-pled claims in the third amended complaint, and filed their answers as to the claims not previously dismissed by the Court. Defendants are currently awaiting a ruling on their motions to dismiss.
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In May 2014, a lawsuit was filed in California Superior Court (Orange County) in the name of the People of the State of California, acting by and through County Counsel for Santa Clara County and the Orange County District Attorney, against multiple defendants, including our subsidiaries EHSI and EPI (with EPI being added as part of the first amended complaint in June 2014). The complaint asserted violations of California’s statutory Unfair Competition and False Advertising laws, as well as asserting a claim for public nuisance, based on alleged misrepresentations in connection with sales and marketing of opioids, including OPANA® ER. Plaintiff sought declaratory relief, restitution, civil penalties (including treble damages), abatement, an injunction and attorneys’ fees and costs. Defendants, including our subsidiaries, filed various motions attacking the pleadings, including one requesting that the Superior Court refrain from proceeding under the doctrines of primary jurisdiction and equitable abstention. That motion was granted in August 2015, and the case was stayed pending further proceedings and findings by the FDA. In June 2016, plaintiffs filed a motion to lift the stay and to amend the complaint. Defendants, including EHSI and EPI, opposed that motion. Following a hearing in July 2016, the court provided plaintiffs an opportunity to seek leave to file another amended complaint. In August 2016, plaintiffs filed a renewed motion to lift the stay and amend the complaint. In October 2016, the court granted, in part, plaintiffs’ renewed motion to lift the stay and the plaintiffs filed their third amended complaint. Defendants were not required to respond to this complaint. In July 2017, plaintiffs filed a fourth amended complaint, to which defendants’ response is not yet due.
In December 2015, a lawsuit was filed in the Chancery Court of the First Judicial District of Hinds County, Mississippi by the State of Mississippi against multiple defendants, including our subsidiaries EHSI and EPI. The complaint alleges violations of Mississippi’s Consumer Protection Act and various other claims arising out of defendants’ alleged opioid sales and marketing practices. Plaintiff seeks declaratory relief, restitution, civil penalties, abatement, an injunction and attorneys’ fees and costs. In March 2016, defendants moved to dismiss the complaint and to transfer the case from Hinds County to Rankin County. The motion to transfer was denied in February 2017. In March 2017, Defendants petitioned for an interlocutory appeal of that ruling, and in May 2017 the Mississippi Supreme Court agreed to hear the appeal and stayed proceedings in the Hinds County Chancery Court until resolution of the appeal. The motion to dismiss also remains pending.
In August 2016, the County of Suffolk, New York filed suit in New York Supreme Court (Suffolk County) against multiple defendants, including our subsidiaries EHSI and EPI, for alleged violations of state false and deceptive advertising and other statutes, public nuisance, common law fraud and unjust enrichment based on opioid sales and marketing practices. The County of Suffolk is seeking compensatory damages, interest, costs, disbursements, punitive damages, treble damages, penalties and attorneys’ fees. Defendants, including our subsidiaries, filed motions to dismiss and to stay in January 2017. The hearing on those motions is scheduled for September 2017. In February 2017, Broome County, New York, and Erie County, New York, filed similar suits in New York Supreme Court (Broome County and Erie County, respectively). Defendants also filed motions to dismiss in Broome and Erie Counties. Between May and June 2017, several other New York counties also filed similar suits in New York Supreme Court within their respective counties. Those counties are: Orange County, Dutchess County, Seneca County, Sullivan County, Nassau County and Schenectady County. In July 2017, the pharmaceutical defendants, including our subsidiaries, moved to coordinate the nine New York county suits within the Supreme Court of the State of New York, County of Suffolk for pre-trial purposes. The State of New York Supreme Court Litigation Coordinating Panel granted the motion in July 2017.
In March 2017, the Boone County Commission filed suit in the U.S. District Court for the Southern District of West Virginia against multiple defendants, including our subsidiary Generics Bidco I, LLC, for the alleged violation of federal and state safety laws designed to monitor, detect and prevent the diversion of controlled substances. The complaint generally seeks compensatory and punitive damages for the alleged creation of a public nuisance. That case is currently stayed as to Generics Bidco I, LLC, pending resolution of motions to dismiss filed by certain other pharmaceutical distributor defendants.
In May 2017, San Joaquin County, the City of Stockton, California and the Montezuma Fire Protection District filed suit in California Superior Court (San Joaquin County) against multiple defendants, including our subsidiaries EHSI and EPI, asserting various claims arising out of defendants’ alleged misrepresentations in connection with sales and marketing of opioids. The plaintiffs in that case seek compensatory damages, punitive damages and attorneys’ fees and costs. In July 2017, our subsidiaries removed the case to the U.S. District Court for the Eastern District of California.
In May 2017, the State of Ohio filed suit in the Ohio state court (Ross County) against multiple defendants, including EPI and EHSI. The complaint asserts that defendants, including our subsidiaries, violated the Ohio Consumer Sales Practices Act, the Ohio Medicaid Fraud Act and the Ohio Corrupt Practices Act. The complaint also asserts other statutory and common law claims against the defendants, including our subsidiaries. The State’s claims arise out of defendants’ alleged misrepresentations in connection with sales and marketing of opioids. The State of Ohio seeks declaratory and injunctive relief, compensatory, punitive and treble damages, restitution, civil penalties and attorneys’ fees and costs.
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In June 2017, the City of Dayton, Ohio filed suit in Ohio state court (Montgomery County) against our subsidiaries EPI and EHSI and other defendants, asserting claims for violation of Ohio’s consumer sales practice statute, violation of Ohio’s deceptive trade practices statute, public nuisance, unjust enrichment and fraud arising from alleged misrepresentations in connection with sales and marketing of opioids. The complaint also asserts a claim for negligence against pharmaceutical distributors named as defendants, but does not assert that claim as to EPI or EHSI. The City of Dayton seeks compensatory damages, treble damages, penalties, punitive damages, interest, costs and disbursements. In July 2017, our subsidiaries removed the case to the U.S. District Court for the Southern District of Ohio. In August 2017, the City of Dayton filed a motion to remand the case to state court, which remains pending. The City of Lorain, Ohio filed a similar suit in Ohio state court (Lorain County) in June 2017, which also names our subsidiaries, along with other defendants. In August 2017, our subsidiaries removed the case to the U.S. District Court for the Northern District of Ohio.
In June 2017, Barry Staubus in his official capacity as the District Attorney General for the Second Judicial District, TN, Tony Clark, in his official capacity as the District Attorney General for the First Judicial District, TN, and Dan Armstrong, in his official capacity as the District Attorney General for the Third Judicial District, TN, along with plaintiff “Baby Doe,” filed suit against EPI, EHSI and other defendants in Tennessee Circuit Court (Sullivan County). The suit asserts claims for violation of the Tennessee Drug Dealer Liability Act and public nuisance and also seeks a declaration that Tennessee’s statutory caps on personal injury and punitive damages violate Tennessee’s state constitution. The plaintiffs also seek compensatory and punitive damages, restitution, injunctive relief and attorneys’ fees and costs. In July 2017, our subsidiaries removed the case to the U.S. District Court for the Eastern District of Tennessee. In August 2017, the plaintiffs filed a motion to remand the case to state court, which remains pending.
In June 2017, the State of Missouri filed suit against EPI, EHSI and other defendants in the Circuit Court of St. Louis City, Missouri asserting claims for violations of the Missouri Merchandising Practices Act and other state law claims based on defendants’ alleged misrepresentations in connection with sales and marketing of opioids. The state seeks civil penalties, damages, restitution, attorneys’ fees and costs and punitive damages.
In June 2017, a lawsuit was filed in the Illinois Circuit Court of the First Judicial Circuit (Union County) in the name of the People of the State of Illinois, the People of Union County and Union County against EPI, EHSI and other defendants. The complaint asserts state statutory claims based on alleged misrepresentations in connection with sales and marketing of opioids. A similar lawsuit was also filed in the Illinois Circuit Court of the Seventh Judicial Circuit (Jersey County) in the name of the People of the State of Illinois, the People of Jersey County and Jersey County against EPI, EHSI and other defendants. Both complaints seek injunctive relief, restitution, disgorgement, civil penalties, attorneys’ fees and costs.
In June 2017, a class action complaint was filed in the United States District Court of the Western District of Arkansas against our subsidiaries EPI and EHSI and other defendants. The complaint alleges that defendants violated Arkansas deceptive trade practices law and have been unjustly enriched by their alleged opioid sales and marketing practices, and seeks an order requiring defendants to fund a medical monitoring program to identify problematic opioid use. The complaint also seeks damages, restitution, disgorgement, other injunctive relief and attorneys’ fees and costs.
In August 2017, the County of Multnomah, Oregon filed suit in Oregon state court against our subsidiaries EPI and EHSI and other defendants, asserting claims for public nuisance, abnormally dangerous activity, gross negligence, fraud and deceit, and negligence. The plaintiff seeks damages, interest and costs.
We intend to contest the lawsuits identified above vigorously.
In addition to the lawsuits described above, the Company and/or its subsidiaries have received subpoenas, civil investigative demands and informal requests for information concerning the sale and marketing of opioids, including the following:
In September 2014, our subsidiaries EHSI and EPI received a Request for Information from the State of Tennessee Office of the Attorney General and Reporter seeking documents and information regarding the sales and marketing of opioids, including OPANA® ER.
In August 2015, our subsidiaries EHSI and EPI received a subpoena from the State of New Hampshire Office of the Attorney General seeking documents and information regarding the sales and marketing of opioids, including OPANA® ER. We were cooperating with the State of New Hampshire Office of the Attorney General in its investigation until we learned it was being assisted by outside counsel hired on a contingent fee basis. The New Hampshire Attorney General initiated an action in the Superior Court for the State of New Hampshire to enforce the subpoena despite this contingent fee arrangement, and we (along with other companies that had received similar subpoenas) responded by filing a motion for protective order to preclude the use of contingent fee counsel. In addition, we filed a separate motion seeking declaratory relief. In March 2016, the Superior Court granted the motion for protective order on the grounds that the contingent fee agreement was invalid as ultra vires and that the office of the Attorney General had acted outside of its statutory authority in entering into the agreement with the contingent fee counsel. In April 2016, both the New Hampshire Attorney General and the companies that received subpoenas from the New Hampshire Attorney General, including EHSI and EPI, appealed, in part, the March 2016 Superior Court order to the New Hampshire Supreme Court. In June 2017, the New Hampshire Supreme Court issued its decision on the appeals, reversing the Superior Court’s protective order ruling and remanding the case to the Superior Court.
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In April 2016, EHSI and EPI received a Civil Investigative Demand (CID) from the Department of Justice (DOJ) for the State of Oregon seeking documents and information regarding the sales and marketing of OPANA® ER.
In November 2016, Endo International plc and EPI received an Administrative Subpoena from the Office of the Attorney General of Maryland seeking documents and information regarding the sales and marketing of opioid products.
In March 2017, EPI received a subpoena from the Office of the Attorney General of New Jersey seeking documents and information regarding the sales and marketing of opioid products.
In May 2017, EPI received an Investigative Demand from the State of North Carolina Department of Justice seeking documents and information regarding the sales and marketing of opioid products.
We are currently cooperating with each of the investigations described above.
Investigations and lawsuits similar to the foregoing matters may be brought by others. We are unable to predict the outcome of these investigations or litigations, which may involve additional requests for information. We are also unable to predict the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for these investigations or litigations, if any, but will explore all options as appropriate in our best interests.
Antitrust Litigation and Investigations
Multiple direct and indirect purchasers of LIDODERM® have filed a number of cases against our subsidiary EPI and co-defendants Teikoku Seiyaku Co., Ltd., Teikoku Pharma USA, Inc. (collectively, Teikoku) and Actavis plc and certain of its subsidiaries (collectively, Actavis), which was subsequently acquired by Teva Pharmaceuticals Industries Ltd and its subsidiaries (collectively, Teva) from Allergan plc (Allergan). Certain of these actions have been asserted on behalf of classes of direct and indirect purchasers, while others are individual cases brought by one or more alleged direct or indirect purchasers. The complaints in these cases generally allege that EPI, Teikoku and Actavis entered into an anticompetitive conspiracy to restrain trade through the settlement of patent infringement litigation concerning U.S. Patent No. 5,827,529 (the ‘529 patent) and other patents. Some of the complaints also allege that Teikoku wrongfully listed the ‘529 patent in the Orange Book as related to LIDODERM®, that EPI and Teikoku commenced sham patent litigation against Actavis and that EPI abused the FDA citizen petition process by filing a citizen petition and amendments solely to interfere with generic companies’ efforts to obtain FDA approval of their versions of LIDODERM®. The cases allege violations of Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2) and various state antitrust and consumer protection statutes as well as common law remedies in some states. These cases generally seek damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees.
The U.S. Judicial Panel on Multidistrict Litigation, pursuant to 28 U.S.C. § 1407, issued an order in April 2014 transferring these cases as In Re Lidoderm Antitrust Litigation, MDL No. 2521, to the U.S. District Court for the Northern District of California. The court granted plaintiffs’ motions for class certification filed on behalf of classes of direct and indirect purchasers in February 2017. In June 2017, we filed a motion for summary judgment on all claims against all defendants, and plaintiffs filed a motion for partial summary judgment on certain elements of their claims. Trial is currently scheduled to begin in late 2017. We cannot predict whether or not additional cases similar to those described above will be filed by other plaintiffs or the timing or outcome of any such litigation. We expect any such cases brought in federal court to be transferred to the Northern District of California as tag-along actions to In Re Lidoderm Antitrust Litigation.
Multiple direct and indirect purchasers of OPANA® ER have filed cases against our subsidiaries EHSI and EPI and other pharmaceutical companies, including Penwest Pharmaceuticals Co., which we subsequently acquired, and Impax Laboratories Inc. (Impax), all of which have been transferred and coordinated for pretrial proceedings in the U.S. District Court for the Northern District of Illinois by the Judicial Panel on Multidistrict Litigation. Some of these cases have been filed on behalf of putative classes of direct and indirect purchasers, while others have been filed on behalf of individual retailers or health care benefit plans. These cases generally allege that the agreement reached by EPI and Impax to settle patent infringement litigation concerning multiple patents pertaining to OPANA® ER and EPI’s introduction of the re-formulation of OPANA® ER violated antitrust laws. The complaints allege violations of Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2), various state antitrust and consumer protection statutes, as well as state common law. These cases generally seek damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. In February 2016, the District Court issued orders (i) denying defendants’ motion to dismiss the claims of the direct purchasers, (ii) denying in part and granting in part defendants’ motion to dismiss the claims of the indirect purchasers, 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 District 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 defendants successfully moved to dismiss the indirect purchaser unjust enrichment claims arising under the laws of the states of California, Rhode Island and Illinois.
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Beginning in February 2009, certain private plaintiffs, including distributors and retailers, filed a lawsuit against our subsidiary, Par Pharmaceutical Companies, Inc. (Par), in the U.S. District Court for the Central District of California, which was subsequently transferred to the U.S. District Court for the Northern District of Georgia, and which alleged violations of antitrust law arising out of Par’s settlement of certain patent litigation concerning the generic version of AndroGel®. Generally, the complaints in the remaining private plaintiff suits seek equitable relief, unspecified damages and costs.
In September 2012, the District Court granted a motion for summary judgment against the private plaintiffs’ claims of sham litigation. In May 2016, those private plaintiffs representing the putative class of indirect purchasers voluntarily dismissed their case against Par with prejudice. Claims by the direct purchasers are still pending.
In July 2016, Fresenius Kabi USA, LLC (Fresenius) filed a complaint against Par and its affiliate Par Sterile Products, LLC 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, 15 U.S.C. §§ 1, 2, as well as the antitrust law and common law of the state of New Jersey, alleging that Par and its affiliate entered into exclusive supply agreements with one or more active pharmaceutical ingredient (API) manufacturers and that 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 in an unspecified amount, attorneys’ fees and costs and injunctive relief. In September 2016, Par and its affiliate filed a motion to dismiss the case for Fresenius’ failure to properly state a claim under the antitrust laws. In February 2017, the District Court denied the motion to dismiss.
We intend to contest the lawsuits identified above vigorously.
In addition to the lawsuits described above, the Company and/or its subsidiaries have received subpoenas, civil investigative demands and informal requests for information concerning antitrust matters, including the following:
In November 2014, EPI received a CID from the State of Florida Office of the Attorney General issued pursuant to the Florida Antitrust Act of 1980, Section 542.28 seeking documents and other information concerning EPI’s settlement agreement with Actavis settling the LIDODERM® patent litigation, as well as information concerning the marketing and sales of LIDODERM®.
In February 2015, EHSI and EPI received CIDs for Production of Documents and Information from the State of Alaska Office of Attorney General issued pursuant to Alaska’s Antitrust and Unfair Trade Practices and Consumer Protection law seeking documents and other information concerning settlement agreements with Actavis and Impax settling the OPANA® ER patent litigation as well as information concerning EPI’s settlement agreement with Actavis settling the LIDODERM® patent litigation, as well as information concerning the marketing and sales of LIDODERM®.
In February 2016, EPI received a CID from the State of South Carolina Office of the Attorney General seeking documents and other information concerning EPI’s settlement agreement with Actavis settling the LIDODERM® patent litigation, as well as information concerning the marketing and sales of LIDODERM®.
In February 2015, Par 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 Par’s settlement of the AndroGel® patent litigation as well as documents produced in the aforementioned litigation filed by the FTC.
We are currently cooperating with the State of Florida Office of the Attorney General, the State of Alaska Office of the Attorney General and the State of South Carolina Office of the Attorney General in their respective investigations. Investigations and lawsuits similar to these antitrust matters described above may be brought by others.
In certain of these matters, the Company believes that a loss is probable and we have incorporated our best estimate of this loss into our reserve for loss contingencies. However, we are unable to predict the outcome of certain of these investigations or litigations. Except for the amount included in our reserve for loss contingencies, the ultimate legal and financial liability and the possible loss or range of loss for these investigations or litigations cannot be reasonably estimated at this time. It is reasonably possible that additional losses could be incurred and those losses could be material. Investigations and lawsuits similar to the foregoing matters may be brought by others. The Company will explore all options as appropriate in our best interests.
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False Claims Act Litigation
The Attorneys General of Florida, Indiana and Virginia and the U.S. Office of Personnel Management (the USOPM) have issued subpoenas, and the Attorneys General of Michigan, Tennessee, Texas and Utah have issued CIDs, to our subsidiary Par, among other companies. The demands generally request documents and information pertaining to allegations that certain of Par’s sales and marketing practices caused pharmacies to substitute ranitidine capsules for ranitidine tablets, fluoxetine tablets for fluoxetine capsules and two 7.5 mg buspirone tablets for one 15 mg buspirone tablet, under circumstances in which some state Medicaid programs at various times reimbursed the new dosage form at a higher rate than the dosage form being substituted. Par has provided documents in response to these subpoenas to the respective Attorneys General and the USOPM. The aforementioned subpoenas and CIDs culminated in the federal and state law qui tam action brought on behalf of the U.S. and several states by Bernard Lisitza. The complaint was unsealed in August 2011. Lisitza’s corrected second amended complaint generally seeks (i) a finding that defendants violated and be enjoined from future violations of the federal False Claims Act and state false claims acts; (ii) treble damages and maximum civil penalties for each violation of the federal False Claims Act and state false claims acts; (iii) an applicable percentage share of the proceeds; and (iv) expenses, fees and costs. The U.S. intervened in this action and filed a separate complaint in September 2011, alleging claims for violations of the Federal False Claims Act and common law fraud. The U.S.’s second corrected complaint generally seeks (i) treble damages and civil penalties for violations under the federal False Claims Act and (ii) compensatory and punitive damages for common law fraud. The states of Michigan and Indiana have also intervened as to claims arising under their respective state false claim acts, common law fraud and unjust enrichment. Michigan’s complaint generally seeks (i) treble damages and civil penalties and (ii) common law compensatory and punitive damages. Indiana’s amended complaint generally seeks treble damages, costs and attorney’s fees. A motion for summary judgment is pending. Similar litigation may be brought by other plaintiffs. We intend to vigorously defend this lawsuit. At this time, we are unable to predict the outcome of this matter or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for this matter, if any.
Pricing Matters
In December 2014, our subsidiary Par received a Subpoena to testify before Grand Jury from the Antitrust Division of the DOJ and issued by the U.S. District Court for the Eastern District of Pennsylvania. The subpoena 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. Par is currently cooperating with the investigation.
In December 2015, EPI received Interrogatories and Subpoena Duces Tecum from the State of Connecticut Office of Attorney General requesting information regarding pricing of certain of its generic products, including doxycycline hyclate, amitriptyline hydrochloride, doxazosin mesylate, methotrexate sodium and oxybutynin chloride. We are currently cooperating with this investigation.
In March 2016, EPI received a CID from the U.S. Attorney’s Office for the Southern District of New York. The CID requested documents and information regarding contracts with Pharmacy Benefit Managers regarding FROVA®. We are currently cooperating with this investigation.
We are unable to predict the outcome of the foregoing investigations, which may involve additional requests for information. In addition, investigations similar to these matters described above may be brought by others. We are also unable to predict the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss, if any, for these matters but will explore all options as appropriate in our best interests.
Beginning in December 2015, two complaints, including a class action complaint, were filed in the Philadelphia Court of Common Pleas against us and certain of our subsidiaries, including Par, along with other manufacturers of generic pharmaceutical products, seeking compensatory and punitive or treble damages, as well as injunctive relief, and alleging that certain marketing and pricing practices by the defendant companies violated state law, including consumer protection law. The class action complaint was subsequently removed to the U.S. District Court for the Eastern District of Pennsylvania, and the plaintiff filed an amended complaint. In January 2017, defendants moved to dismiss the amended class action complaint, and that motion remains pending. The case in the Philadelphia Court of Common Pleas is stayed pending resolution of the class action.
Beginning in March 2016, several class action complaints were filed in the U.S. District Courts for the Eastern District of Pennsylvania and the District of Rhode Island against us and certain of our subsidiaries, including Par and Par Pharmaceutical, Inc. (PPI), and other manufacturers seeking compensatory and punitive or treble damages, as well as injunctive relief, and alleging that certain marketing and pricing practices regarding digoxin and doxycycline violated federal and/or state antitrust laws and/or gave rise to state consumer protection and/or unjust enrichment claims. The U.S. Judicial Panel on Multidistrict Litigation, pursuant to 28 U.S.C. §1407, issued an order in August 2016 establishing coordinated or consolidated pretrial proceedings for these cases in the U.S. District Court for the Eastern District of Pennsylvania under the caption In Re Generic Digoxin and Doxycycline Antitrust Litigation, MDL No. 2724. The direct purchaser plaintiffs and indirect purchaser plaintiffs filed consolidated amended class action complaints in January 2017, and defendants moved to dismiss those complaints in March 2017. An independent pharmacy plaintiff filed a similar class action complaint in the U.S. District Court for the Eastern District of Pennsylvania in March 2017.
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Since November 2016, several class action complaints have been filed in the U.S. District Court for the Eastern District of Pennsylvania against certain of our subsidiaries, including Par and PPI, and other manufacturers seeking compensatory and punitive or treble damages, as well as injunctive relief, and alleging that certain marketing and pricing practices regarding divalproex ER violated federal and/or state antitrust laws and/or gave rise to state consumer protection and/or unjust enrichment claims.
Beginning in December 2016, multiple class action complaints were filed in the U.S. District Court for the Eastern District of Pennsylvania and U.S. District Court for the Southern District of New York against us and certain of our subsidiaries, including PPI, and other manufacturers seeking compensatory and punitive or treble damages, as well as injunctive relief, and alleging that certain marketing and pricing practices regarding propranolol violated federal and/or state antitrust laws and/or gave rise to state consumer protection and/or unjust enrichment claims. Defendants moved to dismiss one direct purchaser complaint pending in the Eastern District of Pennsylvania in March 2017. The remaining Eastern District of Pennsylvania actions relating to propranolol were stayed pending a ruling from the U.S. Judicial Panel on Multidistrict Litigation on the motion to transfer described below. In the Southern District of New York actions, the indirect purchasers filed a consolidated amended complaint in February 2017, and the direct purchasers filed a consolidated amended complaint in March 2017. Defendants moved to dismiss both consolidated amended complaints, and those motions were denied in April 2017, except as to certain state law claims brought by the indirect purchaser plaintiffs.
Beginning in March 2017, several class action complaints were filed in the U.S. District Court for the Eastern District of Pennsylvania against our subsidiary PPI and other manufacturers seeking compensatory and punitive or treble damages, as well as injunctive relief, and alleging that certain marketing and pricing practices regarding baclofen violated federal and/or state antitrust laws and/or gave rise to state consumer protection and/or unjust enrichment claims.
Also beginning in March 2017, several class action complaints were filed in the U.S. District Courts for the Eastern District of Pennsylvania and the Southern District of New York against us and certain of our subsidiaries, including PPI, and other manufacturers seeking compensatory and punitive or treble damages, as well as injunctive relief, and alleging that certain marketing and pricing practices regarding amitriptyline or amitriptyline hydrochloride violated federal and/or state antitrust laws and/or gave rise to state consumer protection and/or unjust enrichment claims.
In January 2017, Rochester Drug Co-Operative, Inc. filed a motion with the U.S. Judicial Panel on Multidistrict Litigation seeking to transfer certain of the foregoing antitrust complaints to the U.S. District Court for the Eastern District of Pennsylvania for inclusion in MDL No. 2724, which would then be renamed In re Generic Pharmaceuticals Pricing Antitrust Litigation. In April 2017, the U.S. Judicial Panel on Multidistrict Litigation issued an order renaming MDL No. 2724 as requested and expanding it to include actions in which: (a) plaintiffs assert claims for price fixing of generic drugs in violation of the Sherman Act and/or state antitrust laws on behalf of overlapping putative nationwide classes of direct or indirect purchasers of generic pharmaceuticals; (b) the average market price of the subject generic pharmaceutical is alleged to have increased between 2012 and the present; (c) defendants are alleged to have effectuated the alleged conspiracy through direct company-to-company contacts and through joint activities undertaken through trade associations, in particular meetings of the Generic Pharmaceutical Association; and (d) the allegations stem from the same government investigation into anticompetitive conduct in the generic pharmaceuticals industry. Pursuant to this order, the propranolol and amitriptyline hydrochloride cases filed in the U.S. District Court for the Southern District of New York were transferred to the U.S. District Court for the Eastern District of Pennsylvania as part of MDL No. 2724. As noted above, the digoxin and doxycycline, divalproex ER and baclofen cases were already pending in the U.S. District Court for the Eastern District of Pennsylvania, and they all have been consolidated into MDL No. 2724. We expect consolidated amended class action complaints to be filed in August 2017.
We intend to contest these litigations vigorously and to explore all options as appropriate in our best interests. Lawsuits similar to these pricing matters described above may be brought by others. We are unable to predict the outcome of these litigations or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for these litigations, if any.
Securities Related Class Action 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 Steamfitters’ Industry Pension Fund and Steamfitters’ Industry Security Benefit Fund were appointed lead plaintiffs in the action. In October 2016, a second amended complaint was filed, which added Paul Campanelli as a defendant, and we filed a motion to dismiss the case. In response, and without resolving the motion, the Court permitted lead plaintiffs to file a third amended complaint. The lawsuit alleges 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 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 seek 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. Briefing on that motion has been completed but no ruling has been issued.
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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 Endo’s 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 May 2017, the plaintiff moved to remand the case back to Pennsylvania state court; briefing on their motion has been completed, but no ruling has been issued.
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 pharmaceutical business.
We intend to contest these litigations vigorously and to explore all options as appropriate in our best interests. Lawsuits similar to these securities related class action matters described above may be brought by others. We are unable to predict the outcome of these litigations or the ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for these litigations, if any.
Paragraph IV Certifications on OPANA® ER
In late 2012, two patents (U.S. Patent Nos. 8,309,122 and 8,329,216) were issued to EPI covering OPANA® ER (oxymorphone hydrochloride extended-release tablets CII). In December 2012, EPI filed a complaint against Actavis in U.S. District Court for the Southern District of New York for patent infringement based on its ANDA for a non-INTAC® technology version of OPANA® ER. In May 2013 and June 2013, EPI filed similar suits in the U.S. District Court for the Southern District of New York against the following applicants for non-INTAC® technology OPANA® ER: Roxane Laboratories, Inc. (Roxane) and Ranbaxy Laboratories Limited, which was acquired by Sun Pharmaceutical Industries Ltd. (Ranbaxy). Those suits allege infringement of U.S. Patent Nos. 7,851,482, 8,309,122 and 8,329,216. In July 2013, Actavis and Roxane were granted FDA approval to market all strengths of their respective non-INTAC® technology formulations of OPANA® ER. A trial in this case was held from March 2015 through April 2015 in the U.S. District Court for the Southern District of New York. In August 2015, the District Court ruled that all defendants infringed the claims of U.S. Patent Nos. 8,309,122 and 8,329,216. The District Court also ruled that the defendants failed to show that U.S. Patent Nos. 8,309,122 and 8,329,216 were invalid, enjoined the defendants from launching their generic products until the expiration of those patents and directed Actavis to withdraw its generic product within 60 days. In October 2015, the District Court tolled the 60-day period until it decided two pending post-trial motions. In April 2016, the District Court issued an order upholding its August 2015 ruling in EPI’s favor and confirming the prior injunction against the manufacture or sale of the generic version of the non-INTAC® technology OPANA® ER currently offered by Actavis and the additional approved but not yet marketed generic version of the product developed by Roxane. The defendants filed appeals to the Court of Appeals for the Federal Circuit. We intend to continue vigorously asserting our intellectual property rights and to oppose any such appeal.
From September 21, 2012 through October 30, 2013, EPI and its partner Grünenthal received Paragraph IV Notices from each of Teva Pharmaceuticals USA, Inc., Amneal Pharmaceuticals, LLC (Amneal), ThoRx Laboratories, Inc. (ThoRx), Actavis, Impax and Ranbaxy (now Sun Pharmaceutical Industries Ltd.), advising of the filing by each such company of an ANDA for a generic version of the formulation of OPANA® ER with INTAC® technology. These Paragraph IV Notices refer to U.S. Patent Nos. 7,851,482, 8,075,872, 8,114,383, 8,192,722, 8,309,060, 8,309,122 and 8,329,216, which variously cover the formulation of OPANA® ER, a highly pure version of the active pharmaceutical ingredient and the release profile of OPANA® ER. EPI filed lawsuits against each of these filers in the U.S. District Court for the Southern District of New York. Each lawsuit was filed within the 45-day deadline to invoke a 30-month stay of FDA approval pursuant to the Hatch-Waxman legislative scheme. A trial in this case was held from March 2015 through April 2015 in the U.S. District Court for the Southern District of New York against the remaining filers. In August 2015, the District Court issued an Opinion holding that all defendants infringed the claims of U.S. Patent Nos. 8,309,060, 8,309,122 and 8,329,216. The Opinion also held that the defendants had shown that U.S. Patent No. 8,309,060 was invalid, but that the defendants had failed to show that U.S. Patent Nos. 8,309,122 and 8,329,216 were invalid. The District Court also issued an Order enjoining the defendants from launching their generic products until the expiration of U.S. Patent Nos. 8,309,122 and 8,329,216. The defendants filed appeals to the Court of Appeals for the Federal Circuit. We intend to continue to vigorously assert our intellectual property and oppose appeals by the defendants. However, there can be no assurance that we and/or Grünenthal will be successful. If we are unsuccessful and Teva, Amneal, ThoRx, Actavis or Impax is able to obtain FDA approval of its product, generic versions of OPANA® ER INTAC® technology may be launched prior to the applicable patents’ expirations in 2023. Additionally, we cannot predict or determine the timing or outcome of this defense but will explore all options as appropriate in our best interests.
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In August 2014 and October 2014, the U.S. Patent Office issued U.S. Patent Nos. 8,808,737 and 8,871,779 respectively, which cover a method of using OPANA® ER and a highly pure version of the active pharmaceutical ingredient of OPANA® ER. In November 2014, EPI filed lawsuits against Teva, ThoRx, Actavis, Impax, Ranbaxy, Roxane, Amneal and Sandoz Inc. 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. Beginning July 11, 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.
We intend to defend vigorously our intellectual property rights and to pursue all available legal and regulatory avenues in defense of both the non-INTAC® technology formulation OPANA® ER and the INTAC® technology formulation OPANA® ER, including enforcement of the product’s intellectual property rights and approved labeling. However, there can be no assurance that we will be successful. If we are unsuccessful, competitors that already have obtained, or are able to obtain, FDA approval of their products may be able to launch their generic versions of OPANA® ER prior to the applicable patents’ expirations. Additionally, we cannot predict or determine the timing or outcome of related litigation but will explore all options as appropriate in our best interests. In addition to the above litigation, it is possible that another generic manufacturer may also seek to launch a generic version of OPANA® ER and challenge the applicable patents.
Other Proceedings and Investigations
In addition to the above proceedings, proceedings similar to those described above may also be brought in the future. Additionally, we are involved in, or have been involved in, arbitrations or various other 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 12. OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the tax effects allocated to each component of Other comprehensive income (loss) for the three months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | |||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||
Before-Tax Amount | Tax (Expense) Benefit | Net-of-Tax Amount | Before-Tax Amount | Tax Benefit (Expense) | Net-of-Tax Amount | ||||||||||||||||||
Net unrealized gain (loss) on securities: | |||||||||||||||||||||||
Unrealized gain (loss) arising during the period | $ | 771 | $ | (280 | ) | $ | 491 | $ | (234 | ) | $ | 87 | $ | (147 | ) | ||||||||
Less: reclassification adjustments for (gain) loss realized in net (loss) income | — | — | — | — | — | — | |||||||||||||||||
Net unrealized gains (losses) | $ | 771 | $ | (280 | ) | $ | 491 | $ | (234 | ) | $ | 87 | $ | (147 | ) | ||||||||
Net unrealized gain (loss) on foreign currency: | |||||||||||||||||||||||
Foreign currency translation gain (loss) arising during the period | 10,340 | — | 10,340 | (7,866 | ) | (13,743 | ) | (21,609 | ) | ||||||||||||||
Less: reclassification adjustments for (gain) loss realized in net (loss) income | — | — | — | — | — | — | |||||||||||||||||
Foreign currency translation gain (loss) | $ | 10,340 | $ | — | $ | 10,340 | $ | (7,866 | ) | $ | (13,743 | ) | $ | (21,609 | ) | ||||||||
Other comprehensive income (loss) | $ | 11,111 | $ | (280 | ) | $ | 10,831 | $ | (8,100 | ) | $ | (13,656 | ) | $ | (21,756 | ) | |||||||
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The following table presents the tax effects allocated to each component of Other comprehensive income for the six months ended June 30, 2017 and 2016 (in thousands):
Six Months Ended June 30, | |||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||
Before-Tax Amount | Tax (Expense) Benefit | Net-of-Tax Amount | Before-Tax Amount | Tax Benefit (Expense) | Net-of-Tax Amount | ||||||||||||||||||
Net unrealized gain (loss) on securities: | |||||||||||||||||||||||
Unrealized gain (loss) arising during the period | $ | 227 | $ | (82 | ) | $ | 145 | $ | (1,620 | ) | $ | 613 | $ | (1,007 | ) | ||||||||
Less: reclassification adjustments for (gain) loss realized in net (loss) income | — | — | — | — | — | — | |||||||||||||||||
Net unrealized gains (losses) | $ | 227 | $ | (82 | ) | $ | 145 | $ | (1,620 | ) | $ | 613 | $ | (1,007 | ) | ||||||||
Net unrealized gain (loss) on foreign currency: | |||||||||||||||||||||||
Foreign currency translation gain arising during the period | 25,474 | — | 25,474 | 46,706 | 12,448 | 59,154 | |||||||||||||||||
Less: reclassification adjustments for gain realized in net loss | — | — | — | — | — | — | |||||||||||||||||
Foreign currency translation gain | $ | 25,474 | $ | — | $ | 25,474 | $ | 46,706 | $ | 12,448 | $ | 59,154 | |||||||||||
Other comprehensive income | $ | 25,701 | $ | (82 | ) | $ | 25,619 | $ | 45,086 | $ | 13,061 | $ | 58,147 | ||||||||||
The following is a summary of the accumulated balances related to each component of Other comprehensive income, net of taxes, at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Net unrealized gains | $ | 1,040 | $ | 895 | |||
Foreign currency translation loss | (328,855 | ) | (354,329 | ) | |||
Accumulated other comprehensive loss | $ | (327,815 | ) | $ | (353,434 | ) | |
NOTE 13. SHAREHOLDERS' EQUITY
Changes in Shareholders’ Equity
The following table displays a reconciliation of our beginning and ending balances in shareholders’ equity for the six months ended June 30, 2017 (in thousands):
Total Shareholders’ Equity | |||
Shareholders’ equity at January 1, 2017, prior to the adoption of ASU 2016-16 | $ | 2,701,589 | |
Effect of adopting ASU 2016-16 (1) | (372,825 | ) | |
Shareholders' equity at January 1, 2017 | $ | 2,328,764 | |
Net loss | (1,570,346 | ) | |
Other comprehensive income | 25,619 | ||
Compensation related to share-based awards | 27,005 | ||
Tax withholding for restricted shares | (1,839 | ) | |
Other | (97 | ) | |
Shareholders’ equity at June 30, 2017 | $ | 809,106 | |
__________
(1) | Refer to Note 2. Recent Accounting Pronouncements for further description of ASU 2016-16. |
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The following table displays a reconciliation of our beginning and ending balances in shareholders’ equity for the six months ended June 30, 2016 (in thousands):
Attributable to: | |||||||||||
Endo International plc | Noncontrolling interests | Total Shareholders’ Equity | |||||||||
Shareholders’ equity at January 1, 2016 | $ | 5,968,030 | $ | (54 | ) | $ | 5,967,976 | ||||
Net income | 209,709 | 16 | 209,725 | ||||||||
Other comprehensive income | 58,109 | 38 | 58,147 | ||||||||
Compensation related to share-based awards | 29,585 | — | 29,585 | ||||||||
Tax withholding for restricted shares | (10,396 | ) | — | (10,396 | ) | ||||||
Exercise of options | 1,952 | — | 1,952 | ||||||||
Issuance of ordinary shares related to the employee stock purchase plan | 2,729 | — | 2,729 | ||||||||
Other | 1,820 | — | 1,820 | ||||||||
Shareholders’ equity at June 30, 2016 | $ | 6,261,538 | $ | — | $ | 6,261,538 | |||||
Share-Based Compensation
In February 2017, the Compensation Committee of the Company’s Board of Directors approved modifications to the Company’s performance stock unit (PSU) program, effective with the 2017 annual grants. The plan is based upon two discrete measures, relative total shareholder return (TSR) and a free cash flow metric. The addition of the free cash flow performance metric, which accounts for 50% of the PSU award at grant, will be measured annually over the performance cycle, which spans a 3-year period. The remaining 50% of the PSU award is tied exclusively to relative TSR performance, which will be measured against the 3-year TSR of a custom index of companies. In addition to meeting the conditions required by both the TSR and free cash flow portions of the awards, grant recipients are also subject to being employed by the Company following the completion of the 3-year period in order to receive the awards.
During the second quarter of 2017, 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 10.0 million ordinary shares and to make certain other changes to the Plan’s terms. None of the additional ordinary shares reserved were issued during the six months ended June 30, 2017.
The Company recognized share-based compensation expense of $27.0 million and $29.6 million during the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, the total remaining unrecognized compensation cost related to all non-vested share-based compensation awards amounted to $66.6 million. For the PSUs that are based on a free cash flow metric and are measured against annual performance targets, performance targets with respect to future annual performance periods have not yet been established. As a result, no fair value has been ascribed to these future annual performance periods and these performance periods are not reflected in the remaining unrecognized compensation cost.
As of June 30, 2017, the weighted average remaining requisite service period of the non-vested stock options was 2.9 years and for non-vested restricted stock units was 2.3 years.
NOTE 14. OTHER (INCOME) EXPENSE, NET
The components of Other (income) expense, net for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Foreign currency (gain) loss, net | $ | (3,870 | ) | $ | 1,554 | $ | (6,854 | ) | $ | 2,550 | |||||
Equity (earnings) loss from investments accounted for under the equity method, net | (1,090 | ) | 3,828 | (88 | ) | 1,484 | |||||||||
Other miscellaneous, net | (1,749 | ) | (207 | ) | (1,804 | ) | (766 | ) | |||||||
Other (income) expense, net | $ | (6,709 | ) | $ | 5,175 | $ | (8,746 | ) | $ | 3,268 | |||||
Foreign currency (gain) loss, net results from the remeasurement of the Company’s foreign currency denominated assets and liabilities.
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NOTE 15. INCOME TAXES
During the three months ended June 30, 2017, the Company recognized income tax benefit of $57.5 million on $753.5 million of loss from continuing operations before income tax, compared to $555.3 million of income tax benefit on $165.5 million of loss from continuing operations before income tax during the comparable 2016 period. The income tax benefit for the current period is primarily related to the geographic mix of pretax earnings, the discrete tax benefits associated with goodwill and intangible asset impairments in the U.S. Branded Pharmaceuticals segment, and the net discrete tax benefit associated with intangible asset impairments in the International Pharmaceuticals segment. During the second quarter of 2016, the Company implemented a legal entity restructuring as part of its continuing integration of its businesses that resulted in the realization of a $644.0 million discrete tax benefit arising from outside basis differences, reduced by a $196.0 million valuation allowance. The reorganization also provided operating flexibility and benefits and reduced the impact related to potential future limits that could apply to the use of tax attributes by utilizing most of the Company’s attributes to offset the gain in the intercompany sale that stepped-up the tax basis of the U.S. Generic Pharmaceuticals business assets. The Company also benefited from an improved mix of jurisdictional pre-tax income and losses.
During the six months ended June 30, 2017, the Company recognized income tax benefit of $69.4 million on $930.9 million of loss from continuing operations before income tax, compared to $674.0 million of income tax benefit on $372.9 million of loss from continuing operations before income tax during the comparable 2016 period. The income tax benefit for the current period is primarily related to the geographic mix of pretax earnings and the discrete tax benefits associated with goodwill and intangible asset impairments in the U.S. Branded Pharmaceuticals segment and intangible asset impairments in the International Pharmaceuticals segment. The income tax benefit for the comparable 2016 period was primarily related to benefits arising from losses from continued operations and the net discrete tax benefit recorded in the second quarter discussed above.
As further discussed in Note 2. Recent Accounting Pronouncements, the Company adopted ASU 2016-16, effective January 1, 2017, resulting in the elimination of previously recorded deferred charges that were established in 2016. Specifically, the Company eliminated a $24.1 million current deferred charge and a $348.8 million non-current deferred charge that were reflected in our Condensed Consolidated Balance Sheet at December 31, 2016 as Prepaid expenses and other current assets and Other assets, respectively. The eliminations of these deferred charges were recorded as adjustments to retained earnings as of January 1, 2017. On adoption, the Company also recorded net deferred tax assets, primarily related to certain intangibles and tax deductible goodwill, of $479.7 million, fully offset by a corresponding valuation allowance.
NOTE 16. NET (LOSS) INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of basic and diluted net (loss) income per share for the three and six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Numerator: | |||||||||||||||
(Loss) income from continuing operations | $ | (696,020 | ) | $ | 389,812 | $ | (861,443 | ) | $ | 301,049 | |||||
Less: Net income from continuing operations attributable to noncontrolling interests | — | 18 | — | 16 | |||||||||||
(Loss) income from continuing operations attributable to Endo International plc ordinary shareholders | $ | (696,020 | ) | $ | 389,794 | $ | (861,443 | ) | $ | 301,033 | |||||
Loss from discontinued operations attributable to Endo International plc ordinary shareholders, net of tax | (700,498 | ) | (46,216 | ) | (708,903 | ) | (91,324 | ) | |||||||
Net (loss) income attributable to Endo International plc ordinary shareholders | $ | (1,396,518 | ) | $ | 343,578 | $ | (1,570,346 | ) | $ | 209,709 | |||||
Denominator: | |||||||||||||||
For basic per share data—weighted average shares | 223,158 | 222,667 | 223,086 | 222,485 | |||||||||||
Dilutive effect of ordinary share equivalents | — | 195 | — | 535 | |||||||||||
Dilutive effect of various convertible notes and warrants | — | 1 | — | 1 | |||||||||||
For diluted per share data—weighted average shares | 223,158 | 222,863 | 223,086 | 223,021 | |||||||||||
Basic net (loss) income per share data is computed based on the weighted average number of ordinary shares outstanding during the period. Diluted (loss) income per share data is computed based on the weighted average number of ordinary shares outstanding and, if there is net income from continuing operations attributable to Endo ordinary shareholders during the period, the dilutive impact of ordinary share equivalents outstanding during the period. Ordinary share equivalents are measured under the treasury stock method.
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Due to the Company’s adoption of ASU 2016-09, effective January 1, 2017, the Company will no longer consider excess tax benefits resulting from share-based compensation awards when applying the treasury stock method to calculate diluted weighted average shares outstanding. Therefore, the adoption of this ASU will have the effect of increasing dilution in periods where there is net income from continuing operations attributable to Endo ordinary shareholders and there are weighted average dilutive awards outstanding.
All stock options and stock awards were excluded from the diluted share calculation for the three and six months ended June 30, 2017 because their effect would have been anti-dilutive, as the Company was in a loss position. During the three and six months ended June 30, 2016, aggregate stock options and stock awards of 5.9 million and 4.7 million, respectively, were excluded from the diluted share calculation because their effect would have been anti-dilutive.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources and critical accounting estimates at Endo International plc. This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements and our Annual Report on Form 10-K, for the year ended December 31, 2016 (Annual Report). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial and operating results. Except for the historical information contained in this Report, including the following discussion, this Report contains forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" beginning on page i of this Report.
Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to financial information and transactions of Endo International plc and its consolidated subsidiaries.
RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past, and may continue to fluctuate. These fluctuations are primarily due to (1) the timing of 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.
Consolidated Results Review
Total Revenues. Total revenues for the three and six months ended June 30, 2017 decreased 5% to $875.7 million and increased 2% to $1,913.3 million, respectively, from $920.9 million and $1,884.4 million in the comparable 2016 periods.
Throughout the first half of 2017, our U.S. Generic Pharmaceuticals segment benefited from fourth quarter 2016 launches, including ezetimibe tablets (generic version of Zetia®) and quetiapine ER tablets (generic version of Seroquel® XR), as well as strong performance of its Sterile Injectables portfolio, including VASOSTRICT®, ADRENALIN® and other products. The U.S. Generics Base portfolio continued to decline driven by overall market trends and product rationalization in our U.S. Generic Pharmaceuticals segment. Our U.S. Branded Pharmaceuticals segment’s Specialty Products portfolio, which includes XIAFLEX®, continued to grow during the first half of 2017. However, this growth was more than offset by declines in its Established Products portfolio, resulting primarily from the impact of generic competition and the divestiture of STENDRA® in the third quarter of 2016.
The decrease for the three months ended June 30, 2017 primarily related to the declines in the U.S. Generics Base and U.S. Branded Pharmaceuticals Established Products portfolios described above, partially offset by revenue increases related to new generic launches, Sterile Injectables and our U.S. Branded Pharmaceuticals segment’s Specialty Products portfolio. The increase for the six months ended June 30, 2017 primarily related to revenue increases described above related to new generic launches, Sterile Injectables and our U.S. Branded Pharmaceuticals segment’s Specialty Products portfolio, partially offset by the declines in the U.S. Generics Base and U.S. Branded Pharmaceuticals Established Products portfolios. Our revenues are further described below under the heading “Business Segment Results Review”.
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 began to decline significantly during the second quarter of 2017 and will continue to decline leading into the third quarter of 2017.
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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. We plan to work with the FDA to coordinate an orderly withdrawal of the product from the market and plan to cease shipments to customers by September 1, 2017. We expect the withdrawal of OPANA® ER will have an adverse effect on the future revenues and results of operations of our U.S. Branded Pharmaceuticals segment.
Gross margin, costs and expenses. The following table sets forth costs and expenses for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||
$ | % of Revenue | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | ||||||||||||||||||
Cost of revenues | $ | 539,401 | 62 | $ | 632,218 | 69 | $ | 1,208,363 | 63 | $ | 1,320,923 | 70 | |||||||||||||
Selling, general and administrative | 155,555 | 18 | 193,070 | 21 | 332,795 | 17 | 371,425 | 20 | |||||||||||||||||
Research and development | 40,869 | 5 | 50,589 | 5 | 83,878 | 4 | 92,281 | 5 | |||||||||||||||||
Litigation-related and other contingencies, net | (2,600 | ) | — | 5,259 | 1 | (1,664 | ) | — | 10,459 | 1 | |||||||||||||||
Asset impairment charges | 725,044 | 83 | 39,951 | 4 | 929,006 | 49 | 169,576 | 9 | |||||||||||||||||
Acquisition-related and integration items | 4,190 | — | 48,171 | 5 | 15,070 | 1 | 60,725 | 3 | |||||||||||||||||
Total costs and expenses* | $ | 1,462,459 | 167 | $ | 969,258 | 105 | $ | 2,567,448 | 134 | $ | 2,025,389 | 107 | |||||||||||||
__________
* | Percentages may not add due to rounding. |
Cost of revenues and gross margin. Cost of revenues for the three and six months ended June 30, 2017 decreased 15% to $539.4 million and decreased 9% to $1,208.4 million, respectively, from the comparable 2016 periods.
Product rationalization resulting from the U.S. Generic Pharmaceuticals restructuring initiative announced in May 2016 and decreases to inventory step-up expense based on the timing of prior acquisitions each contributed to period-over-period decreases in Cost of revenues during both the three and six months ended June 30, 2017 when compared to the same periods in 2016. These savings were partially offset by charges of $12.8 million recorded during the three months ended June 30, 2017 related to the 2017 U.S. Generics Pharmaceuticals restructuring initiative.
Also contributing to the decrease in cost of revenues for the three months ended June 30, 2017 were period-over-period decreases in amortization expense and total revenues.
Partially offsetting the decrease in cost of revenues for the six months ended June 30, 2017 was a period-over-period increase in amortization expense, which resulted from certain generic product launches, and increased revenues.
Gross margin for the three and six months ended June 30, 2017 increased to 38% from 31% and increased to 37% from 30%, respectively, in the comparable 2016 periods. The increase for both the three and six months ended June 30, 2017 was primarily attributable to reductions in inventory step-up and fluctuations in amortization expenses and the impact of changes in the mix of revenues resulting from the product rationalization initiative described above.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three and six months ended June 30, 2017 decreased 19% to $155.6 million and decreased 10% to $332.8 million, respectively, from the comparable 2016 periods.
The decrease for both the three and six months ended June 30, 2017 was primarily a result of cost reductions that were implemented during 2016 and in the first half of 2017, including the impact of those related to various restructuring initiatives. These savings were partially offset by charges related to our restructuring initiatives. Total charges related to our January 2017 restructuring initiative and 2017 U.S. Generics Pharmaceuticals restructuring initiative during the three and six months ended June 30, 2017 totaled $6.9 million and $22.0 million, respectively. Our restructuring initiatives are described more fully in Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Research and development expenses. Research and development (R&D) expenses for the three and six months ended June 30, 2017 decreased 19% to $40.9 million and decreased 9% to $83.9 million, respectively, from the comparable 2016 periods.
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These decreases were primarily attributable to lower development costs and filing fees in 2017 compared to 2016 related to new product launches in our U.S. Generic Pharmaceuticals segment. Additionally, our U.S. Branded Pharmaceuticals segment’s costs decreased as a result of cost savings generated from the January 2017 Restructuring, as well as the timing of a 2016 Phase 2 clinical trial for the development of XIAFLEX® for the treatment of cellulite, the results of which were announced in November 2016. We currently expect to initiate Phase 3 trials in cellulite towards the end of 2017.
Litigation-related and other contingencies, net. Litigation-related and other contingencies, net for the three and six months ended June 30, 2017 totaled a net benefit of $2.6 million and $1.7 million, respectively, which included the impact of certain reimbursements. This compared to charges of $5.3 million and $10.5 million, respectively, in the comparable 2016 periods. Our material legal proceedings and other contingent matters are described in more detail in Note 11. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Asset impairment charges. Asset impairment charges for the three and six months ended June 30, 2017 totaled $725.0 million and $929.0 million, respectively, compared to $40.0 million and $169.6 million in the comparable 2016 periods. A summary of significant goodwill and other intangible asset impairment charges by reportable segment for the six months ended June 30, 2017 and 2016 is included below.
U.S. Generic Pharmaceuticals Segment
During the first and second quarters of 2017, the Company identified certain market conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in its U.S. Generic Pharmaceuticals segment. Accordingly, the Company tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $72.7 million and $268.2 million during the three months ended March 31, 2017 and June 30, 2017, respectively.
In addition, 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 and certain property, plant and equipment, resulting in pre-tax, non-cash asset impairment charges of approximately $57.5 million related to intangible assets and $32.0 million related to property, plant and equipment 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 utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Generics goodwill impairment test was 9.0%. The goodwill balance for the Company’s Generics reporting unit was approximately $3,531 million as of June 30, 2017.
During the first and second quarters of 2016, the Company identified certain market and regulatory conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in our U.S. Generic Pharmaceuticals segment. Accordingly, we tested these assets for impairment and determined that the carrying amounts of certain of these assets was no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges of $29.3 million and $40.0 million during the first and second quarters of 2016, respectively. The Company also recognized pre-tax, non-cash asset impairment charges of $100.3 million during the first quarter of 2016 related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative, which resulted from the discontinuation of certain commercial products and the abandonment of certain IPR&D projects. See Note 4. Restructuring for discussion of our material restructuring initiatives.
U.S. Branded Pharmaceuticals Segment
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. In addition, during the second quarter of 2017, the Company identified certain market conditions impacting the recoverability of certain other finite-lived intangible assets in its U.S. Branded Pharmaceuticals segment. Accordingly, the Company tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $31.5 million during the three months ended June 30, 2017.
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In addition, as a result of the withdrawal of OPANA® ER from the market and the continued erosion of its U.S. Branded Pharmaceuticals segment’s Established Products portfolio, the Company initiated an interim goodwill impairment analysis of its Branded reporting unit during the second quarter of 2017. Based on the provisions of ASU 2017-04, which the Company adopted as of January 1, 2017, the Company recorded a pre-tax, non-cash asset 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. The Company estimated the fair value of the Branded reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Branded goodwill impairment test was 9.5%. The remaining goodwill for the Company’s Branded reporting unit was approximately $829 million as of June 30, 2017.
International Pharmaceuticals Segment
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 III study of serelaxin in patients with AHF failed to meet its primary endpoints. As a result, Endo has concluded that the full carrying amount of its serelaxin in-process research and development intangible asset is 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, the Company assessed the recoverability of its Paladin goodwill balance and determined that the estimated fair value of the Paladin reporting unit was below its carrying amount. The Company recorded a pre-tax, non-cash asset 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. The Company estimated the fair value of the Paladin reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Paladin goodwill impairment test was 10.0%. The remaining goodwill for the Company’s Paladin reporting unit was approximately $87 million as of June 30, 2017.
As further discussed in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale, the Company 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, the Company performed an impairment analysis using a market approach and determined that impairment charges were required. The Company recorded pre-tax non-cash impairment charges of $25.7 million, $89.5 million and $9.9 million related to Somar’s goodwill, other intangible assets and property, plant and equipment, respectively, during the second quarter of 2017. The goodwill and other intangibles asset impairment charges each represented the remaining carrying amounts of the corresponding assets.
Acquisition-related and integration items. Acquisition-related and integration items for the three and six months ended June 30, 2017 totaled $4.2 million and $15.1 million of expense, respectively, compared to $48.2 million and $60.7 million of expense, respectively, in the comparable 2016 periods.
Acquisition-related and integration items, excluding amounts related to contingent consideration, for the three and six months ended June 30, 2017 decreased 91% to $2.2 million and decreased 85% to $6.9 million, respectively, from the comparable 2016 periods. The decreases were primarily attributable to lower costs incurred associated with our 2015 Auxilium and Par acquisitions.
Net adjustments related to acquisition-related contingent consideration, which resulted from changes in market conditions impacting the commercial potential of the underlying products, included charges of $2.0 million and $8.1 million for the three and six months ended June 30, 2017, respectively, compared to charges of $23.9 million and $13.2 million in the comparable 2016 periods. See Note 6. Fair Value Measurements of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of our acquisition-related contingent consideration.
Interest expense, net. The components of Interest expense, net for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest expense | $ | 123,354 | $ | 113,097 | $ | 236,807 | $ | 230,567 | |||||||
Interest income | (1,607 | ) | (1,178 | ) | (3,061 | ) | (1,855 | ) | |||||||
Interest expense, net | $ | 121,747 | $ | 111,919 | $ | 233,746 | $ | 228,712 | |||||||
Interest expense for the three and six months ended June 30, 2017 increased 9% to $123.4 million and increased 3% to $236.8 million from the comparable 2016 periods. The increase for both the three and six months ended June 30, 2017 was primarily attributable to increased interest rates as a result of the refinancing that occurred on April 27, 2017, which is further described in Note 10. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Loss on extinguishment of debt. Loss on extinguishment of debt totaled $51.7 million for both the three and six months ended June 30, 2017, with no such amounts recorded in the comparable 2016 periods. The 2017 amounts related to certain previously unamortized debt issuance costs that were charged to expense in connection with the April 2017 refinancing.
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Other (income) expense, net. The components of Other (income) expense, net for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Foreign currency (gain) loss, net | $ | (3,870 | ) | $ | 1,554 | $ | (6,854 | ) | $ | 2,550 | |||||
Equity (earnings) loss from investments accounted for under the equity method, net | (1,090 | ) | 3,828 | (88 | ) | 1,484 | |||||||||
Other miscellaneous, net | (1,749 | ) | (207 | ) | (1,804 | ) | (766 | ) | |||||||
Other (income) expense, net | $ | (6,709 | ) | $ | 5,175 | $ | (8,746 | ) | $ | 3,268 | |||||
Foreign currency (gain) loss, net results from the remeasurement of our foreign currency denominated assets and liabilities.
Income tax benefit. During the three months ended June 30, 2017, the Company recognized income tax benefit of $57.5 million on $753.5 million of loss from continuing operations before income tax, compared to $555.3 million of income tax benefit on $165.5 million of loss from continuing operations before income tax during the comparable 2016 period. The income tax benefit for the current period is primarily related to the geographic mix of pretax earnings, the discrete tax benefits associated with goodwill and intangible asset impairments in the U.S. Branded Pharmaceuticals segment, and the net discrete tax benefit associated with intangible asset impairments in the International Pharmaceuticals segment. During the second quarter of 2016, the Company implemented a legal entity restructuring as part of its continuing integration of its businesses that resulted in the realization of a $644.0 million discrete tax benefit arising from outside basis differences, reduced by a $196.0 million valuation allowance. The reorganization also provided operating flexibility and benefits and reduced the impact related to potential future limits that could apply to the use of tax attributes by utilizing most of the Company’s attributes to offset the gain in the intercompany sale that stepped-up the tax basis of the U.S. Generic Pharmaceuticals business assets. The Company also benefited from an improved mix of jurisdictional pre-tax income and losses.
During the six months ended June 30, 2017, the Company recognized income tax benefit of $69.4 million on $930.9 million of loss from continuing operations before income tax, compared to $674.0 million of income tax benefit on $372.9 million of loss from continuing operations before income tax during the comparable 2016 period. The income tax benefit for the current period is primarily related to the geographic mix of pretax earnings and the discrete tax benefits associated with goodwill and intangible asset impairments in the U.S. Branded Pharmaceuticals segment and intangible asset impairments in the International Pharmaceuticals segment. The income tax benefit for the comparable 2016 period was primarily related to benefits arising from losses from continued operations and the net discrete tax benefit recorded in the second quarter discussed above.
Discontinued operations, net of tax. As a result of the decision to sell our AMS business and wind down our Astora business, the operating results of this business are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The results of our discontinued operations, net of tax, totaled $700.5 million and $708.9 million of loss, respectively, during the three and six months ended June 30, 2017 compared to $46.2 million and $91.3 million of loss, respectively, in the comparable 2016 periods.
The primary drivers of the period-over-period changes for both the three and six months ended June 30, 2017 included the after-tax impact of a second quarter 2017 charge of $775.5 million related to mesh litigation that is further described in Note 11. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and decreases in revenue and overall spending resulting from the wind-down of our Astora business following discontinuation of business operations on March 31, 2016.
The change for the six months ended June 30, 2017 also includes the impact of a decrease in asset impairment charges of $21.3 million.
2017 Outlook
We estimate that our 2017 total revenues will be between $3.38 billion and $3.53 billion. This estimate reflects an anticipated decline in our U.S. Generic Pharmaceuticals segment driven by a decline in the base business partially offset by growth in our Sterile Injectables and new launch revenues; a decline in our U.S. Branded Pharmaceuticals segment resulting from the annualization of the loss of exclusivity for VOLTAREN® Gel and FROVA®, our previously announced decision to voluntarily withdraw OPANA® ER from the market and the continued decline in the legacy pain portfolio, partially offset by the growth of XIAFLEX® and our other Specialty business products; the divestiture of the Litha and Somar businesses in the second half of 2017 and competitive pressures in our International Pharmaceuticals segment. The Company anticipates improved margins in 2017 driven by product rationalization in our U.S. Generic Pharmaceuticals segment 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.
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Business Segment Results Review
The three reportable business segments in which we operate are: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. These segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s adjusted income 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; excess costs that will be eliminated pursuant to integration plans; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; certain non-cash interest expense; litigation-related and other contingent matters; gains or losses from early termination of debt; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate general and administrative 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 its 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 six months ended June 30, 2017 and 2016 (dollars in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net revenues to external customers: | |||||||||||||||
U.S. Generic Pharmaceuticals | $ | 563,312 | $ | 565,358 | $ | 1,285,295 | $ | 1,148,748 | |||||||
U.S. Branded Pharmaceuticals | 245,188 | 288,342 | 495,347 | 597,155 | |||||||||||
International Pharmaceuticals (1) | 67,231 | 67,187 | 132,689 | 138,523 | |||||||||||
Total net revenues to external customers | $ | 875,731 | $ | 920,887 | $ | 1,913,331 | $ | 1,884,426 | |||||||
__________
(1) | Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada, Latin America and South Africa. |
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U.S. Generic Pharmaceuticals. The following table displays the significant components of our U.S. Generic Pharmaceuticals revenues to external customers for the three and six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
U.S. Generic Pharmaceuticals: | |||||||||||||||
U.S. Generics Base (1) | $ | 218,935 | $ | 331,095 | $ | 455,082 | $ | 678,524 | |||||||
Sterile Injectables | 160,597 | 126,245 | 311,946 | 249,934 | |||||||||||
New Launches and Alternative Dosages (2) | 183,780 | 108,018 | 518,267 | 220,290 | |||||||||||
Total U.S. Generic Pharmaceuticals | $ | 563,312 | $ | 565,358 | $ | 1,285,295 | $ | 1,148,748 | |||||||
__________
(1) | U.S. Generics Base includes solid oral-extended release, solid oral-immediate release and pain/controlled substances products. |
(2) | New Launches and Alternative Dosages includes liquids, semi-solids, patches, powders, ophthalmics, sprays and new product launches. Products are included in New Launches during the calendar year of launch and the subsequent calendar year such that the period of time any product will be considered a New Launch will range from thirteen to twenty-four months. Subsequent to this thirteen to twenty-four month period that revenues are considered New Launches, these product revenues will be reflected as either U.S. Generics Base or Sterile Injectables, or will remain as an Alternative Dosage. New Launches contributed $92.3 million and $333.9 million of revenues for the three and six months ended June 30, 2017, respectively, compared to $32.9 million and $64.0 million of revenues in the comparable 2016 periods. |
Net sales of U.S. Generics Base for the three and six months ended June 30, 2017 decreased 34% to $218.9 million and decreased 33% to $455.1 million, respectively, from the comparable 2016 periods. Continued competitive pressure on commoditized generic products resulted in revenue decreases for both the three and six months ended June 30, 2017. Also contributing to the revenues decrease during the six months ended June 30, 2017 was the impact of product rationalization actions resulting from the 2016 U.S. Generic Pharmaceuticals restructuring initiative.
Net sales of Sterile Injectables for the three and six months ended June 30, 2017 increased 27% to $160.6 million and increased 25% to $311.9 million, respectively, from the comparable 2016 periods. The increase for both the three and six months ended June 30, 2017 was primarily attributable to net sales of VASOSTRICT® and ADRENALIN®. VASOSTRICT® is the first and only vasopressin injection with a New Drug Application (NDA) approved by the FDA. Its sales were $95.8 million and $194.9 million for the three and six months ended June 30, 2017, up from $77.2 million and $157.1 million in the comparable 2016 periods, with the change driven by increases in both price and volume.
Net sales of New Launches and Alternative Dosages for the three and six months ended June 30, 2017 increased 70% to $183.8 million and increased 135% to $518.3 million, respectively, from the comparable 2016 periods. Included within this portfolio 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 three and six months ended June 30, 2017 totaled $52.3 million and $253.7 million, respectively. 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 began to decline significantly during the second quarter of 2017 and will continue to decline leading into the third quarter of 2017. The remaining increases in net sales of New Launches and Alternative Dosages were primarily attributable to the launch of new injectables during the six months ended June 30, 2017 and Alternative Dosages, driven by favorable changes in the competitive market for certain products in this category. As of June 30, 2017, our U.S. Generic Pharmaceuticals segment has approximately 200 products in its pipeline, which includes approximately 110 Abbreviated New Drug Applications (ANDAs) pending with the U.S. Food and Drug Administration. Of the 110 ANDAs, approximately 40 represent potential first-to-file or first-to-market opportunities. We expect total 2017 launches to exceed 20 products.
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U.S. Branded Pharmaceuticals. The following table displays the significant components of our U.S. Branded Pharmaceuticals revenues to external customers for the three and six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Specialty Products: | |||||||||||||||
XIAFLEX® | $ | 50,077 | $ | 42,419 | $ | 99,602 | $ | 86,464 | |||||||
SUPPRELIN® LA | 23,649 | 21,211 | 42,830 | 38,463 | |||||||||||
Other Specialty (1) | 36,745 | 31,973 | 72,773 | 64,942 | |||||||||||
Total Specialty Products | $ | 110,471 | $ | 95,603 | $ | 215,205 | $ | 189,869 | |||||||
Established Products: | |||||||||||||||
OPANA® ER | $ | 31,582 | $ | 38,554 | $ | 67,300 | $ | 83,224 | |||||||
PERCOCET® | 30,889 | 35,708 | 61,834 | 69,301 | |||||||||||
VOLTAREN® Gel | 20,270 | 27,290 | 34,544 | 63,037 | |||||||||||
LIDODERM® | 11,678 | 27,039 | 24,854 | 46,751 | |||||||||||
Other Established (2) | 40,298 | 64,148 | 91,610 | 144,973 | |||||||||||
Total Established Products | $ | 134,717 | $ | 192,739 | $ | 280,142 | $ | 407,286 | |||||||
Total U.S. Branded Pharmaceuticals (3) | $ | 245,188 | $ | 288,342 | $ | 495,347 | $ | 597,155 | |||||||
__________
(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, TESTIM® and FORTESTA® Gel, including the authorized generic. |
(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 2017 or 2016. |
Specialty Products
Net sales of XIAFLEX® for the three and six months ended June 30, 2017 increased 18% to $50.1 million and increased 15% to $99.6 million, respectively, from the comparable 2016 periods. The increase for both the three and six months ended June 30, 2017 was primarily attributable to demand growth driven by the continued investment and promotional efforts behind XIAFLEX® as well as price.
Net sales of SUPPRELIN® LA for the three and six months ended June 30, 2017 increased 11% to $23.6 million and increased 11% to $42.8 million, respectively, from the comparable 2016 periods. The increase for both the three and six months ended June 30, 2017 was primarily attributable to price increases.
Net sales of Other Specialty Products for the three and six months ended June 30, 2017 increased 15% to $36.7 million and increased 12% to $72.8 million, respectively, from the comparable 2016 periods, driven by increased net sales of AVEED®, TESTOPEL® and NASCOBAL® Nasal Spray, which benefited from increased prices and, in certain cases, improved volume.
Established Products
Net sales of OPANA® ER for the three and six months ended June 30, 2017 decreased 18% to $31.6 million and decreased 19% to $67.3 million, respectively, from the comparable 2016 periods. Net sales continue to be impacted by competing generic versions of OPANA® ER and market declines. Additionally, as further described above, we are currently working with the FDA to coordinate an orderly withdrawal of OPANA® ER from the market and plan to cease shipments to customers by September 1, 2017. We expect the withdrawal of OPANA® ER will have an adverse effect on the future revenues and results of operations of OPANA® ER and our Established Products portfolio.
Net sales of PERCOCET® for the three and six months ended June 30, 2017 decreased 13% to $30.9 million and decreased 11% to $61.8 million, respectively, from the comparable 2016 periods. The decrease for both the three and six months ended June 30, 2017 was primarily attributable to volume decreases, partially offset by price increases.
Net sales of VOLTAREN® Gel for the three and six months ended June 30, 2017 decreased 26% to $20.3 million and decreased 45% to $34.5 million, respectively, from the comparable 2016 periods. The decrease for both the three and six months ended June 30, 2017 was primarily attributable to the March 2016 launch of Amneal Pharmaceuticals LLC’s generic equivalent of VOLTAREN® Gel and our launch of the authorized generic of VOLTAREN® Gel in July 2016. Subject to FDA approval, it is possible one or more additional competing generic products could potentially enter the market, which could negatively impact future sales of VOLTAREN® Gel.
Net sales of LIDODERM® for the three and six months ended June 30, 2017 decreased 57% to $11.7 million and decreased 47% to $24.9 million, respectively, from the comparable 2016 periods. The decrease for both the three and six months ended June 30, 2017 was primarily attributable to volume decreases resulting from generic competition.
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Net sales of Other Established Products for the three and six months ended June 30, 2017 decreased 37% to $40.3 million and decreased 37% to $91.6 million, respectively, from the comparable 2016 periods. Net sales for both the three and six months ended June 30, 2017 were negatively impacted by volume decreases resulting from generic competition and certain other factors, as well as the divestiture of STENDRA® in the third quarter of 2016.
International Pharmaceuticals. Revenues from our International Pharmaceuticals segment for the three and six months ended June 30, 2017 increased less than 1% to $67.2 million and decreased 4% to $132.7 million, respectively, from the comparable 2016 periods. The decrease for the six months ended June 30, 2017 was primarily attributable to lower volumes across certain of the international markets in which we operate, partially offset by the impact of certain products that were acquired or launched after the end of the second quarter of 2016. We expect this segment’s revenues to decline due to the second-half 2017 divestitures of Litha and Somar, which are described in more detail in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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 six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Adjusted income from continuing operations before income tax: | |||||||||||||||
U.S. Generic Pharmaceuticals | $ | 253,866 | $ | 214,968 | $ | 595,465 | $ | 426,736 | |||||||
U.S. Branded Pharmaceuticals | 127,595 | 122,420 | 257,087 | 291,201 | |||||||||||
International Pharmaceuticals | 14,812 | 20,615 | 29,694 | 42,369 | |||||||||||
Total segment adjusted income from continuing operations before income tax | $ | 396,273 | $ | 358,003 | $ | 882,246 | $ | 760,306 | |||||||
U.S. Generic Pharmaceuticals. Adjusted income from continuing operations before income tax for the three and six months ended June 30, 2017 increased 18% to $253.9 million and increased 40% to $595.5 million, respectively, from the comparable 2016 periods.
The increase for the three and six months ended June 30, 2017 was primarily attributable to increases to gross margins, primarily due to the fourth quarter 2016 launch of ezetimibe tablets and quetiapine ER tablets, as well as revenue increases related to Sterile Injectables. Gross margin improved and overall costs also declined due to product rationalization actions resulting from the 2016 U.S. Generic Pharmaceuticals restructuring.
U.S. Branded Pharmaceuticals. Adjusted income from continuing operations before income tax for the three and six months ended June 30, 2017 increased 4% to $127.6 million and decreased 12% to $257.1 million, respectively, from the comparable 2016 periods. Amounts were negatively impacted during both the three and six months ended June 30, 2017 as a result of decreased revenues related to generic competition and the divestiture of STENDRA® in the third quarter of 2016.
During the three months ended June 30, 2017, the impact of targeted cost reductions associated with our previously announced restructuring initiatives, together with the reduction to research and development costs described above, more than offset the impact of decreased revenues.
The decrease for the six months ended June 30, 2017 attributable to reduced revenues was partially offset by targeted cost reductions in selling, general and administrative expenses associated with our previously announced restructuring initiatives.
International Pharmaceuticals. Adjusted income from continuing operations before income tax for the three and six months ended June 30, 2017 decreased 28% to $14.8 million and decreased 30% to $29.7 million, respectively, from the comparable 2016 periods. The decreases for both the three and six months ended June 30, 2017 were primarily attributable to unfavorable shifts in the mix of revenue and, for the six months ended June 30, 2017, an overall decline in revenues.
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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 six months ended June 30, 2017 and 2016 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Total consolidated loss from continuing operations before income tax | $ | (753,500 | ) | $ | (165,465 | ) | $ | (930,851 | ) | $ | (372,943 | ) | |||
Interest expense, net | 121,747 | 111,919 | 233,746 | 228,712 | |||||||||||
Corporate unallocated costs (1) | 34,152 | 49,818 | 81,620 | 86,098 | |||||||||||
Amortization of intangible assets | 190,943 | 212,844 | 454,077 | 424,513 | |||||||||||
Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans | 100 | 29,103 | 215 | 97,579 | |||||||||||
Upfront and milestone payments to partners | 3,082 | 2,688 | 6,177 | 4,105 | |||||||||||
Separation benefits and other cost reduction initiatives (2) | 24,614 | 22,174 | 47,284 | 60,630 | |||||||||||
Impact of VOLTAREN® Gel generic competition | — | — | — | (7,750 | ) | ||||||||||
Certain litigation-related and other contingencies, net (3) | (2,600 | ) | 5,259 | (1,664 | ) | 10,459 | |||||||||
Asset impairment charges (4) | 725,044 | 39,951 | 929,006 | 169,576 | |||||||||||
Acquisition-related and integration items (5) | 4,190 | 48,171 | 15,070 | 60,725 | |||||||||||
Loss on extinguishment of debt | 51,734 | — | 51,734 | — | |||||||||||
Foreign currency impact related to the remeasurement of intercompany debt instruments | (3,233 | ) | 417 | (5,927 | ) | 1,672 | |||||||||
Other, net | — | 1,124 | 1,759 | (3,070 | ) | ||||||||||
Total segment adjusted income from continuing operations before income tax | $ | 396,273 | $ | 358,003 | $ | 882,246 | $ | 760,306 | |||||||
__________
(1) | Amounts include certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses. |
(2) | Amounts primarily relate to employee separation costs of $0.7 million and $21.5 million during the three and six months ended June 30, 2017, respectively, charges to increase excess inventory reserves of $7.9 million during both periods and other charges of $16.0 million and $17.5 million, related primarily to the 2017 U.S. Generics Pharmaceuticals restructuring initiative, during the three and six months ended June 30, 2017, respectively. Amounts during the three and six months ended June 30, 2016 include charges to increase excess inventory reserves of $6.4 million and $33.3 million related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative, employee separation costs of $8.4 million and $15.2 million and other restructuring costs of $7.1 million and $11.8 million, respectively. These amounts were primarily recorded as Cost of revenues and Selling, general and administrative expense in our Condensed Consolidated Statements of Operations. See Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for discussion of our material restructuring initiatives. |
(3) | Amounts include adjustments for Litigation-related and other contingencies, net as further described in Note 11. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. |
(4) | Amounts primarily relate to charges to write down goodwill and intangible assets as further described in Note 8. Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as charges to write down certain property, plant and equipment as further described in Note 6. Fair Value Measurements of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. |
(5) | Amounts during the three and six months ended June 30, 2017 include costs directly associated with previous acquisitions of $2.2 million and $6.9 million, respectively, and charges due to changes in fair value of contingent consideration of $2.0 million and $8.1 million, respectively. Amounts during the three and six months ended June 30, 2016 include costs directly associated with previous acquisitions of $24.3 million and $47.5 million, respectively, and charges due to changes in fair value of contingent consideration of $23.9 million and $13.2 million, respectively. |
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, contingent liabilities, vaginal mesh liability payments and debt service payments. The Company’s working capital was $48.1 million at June 30, 2017 compared to a working capital deficit of $45.3 million at December 31, 2016. The amounts at June 30, 2017 and December 31, 2016 include restricted cash and cash equivalents of $359.1 million and $276.0 million, respectively, held in QSFs. Although the amounts in QSFs are included in working capital, these amounts 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 $616.5 million at June 30, 2017 compared to $517.3 million at December 31, 2016.
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We expect cash generated from operations together with our cash, cash equivalents, restricted cash and the revolving credit facilities to be sufficient to cover cash needs for working capital and general corporate purposes, contingent liabilities, payment of contractual obligations, principal and interest payments on our indebtedness, capital expenditures, ordinary share repurchases and any regulatory and/or sales milestones that may become due over the next year. However, on a longer term basis, we may not be able to accurately predict the effect of certain developments on the rate of sales growth, such as the degree of market acceptance, patent protection and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates. Additionally, 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 for future transactions, to repay our outstanding indebtedness, or for our future operational needs. 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 June 30, 2017, the Company’s indebtedness includes a credit agreement with combined outstanding borrowings of $3,415.0 million and additional availability of approximately $995.8 million under the revolving credit facility.
The credit agreement contains affirmative and negative covenants that the Company believes to be usual and customary for a senior secured credit facility. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with the Company’s affiliates. As of June 30, 2017, we were in compliance with all such covenants.
At June 30, 2017, the Company’s indebtedness 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%. All but one series of these notes are senior unsecured obligations of the Company’s subsidiaries that are party to the applicable indenture governing such notes and are issued or guaranteed on a senior unsecured basis, as applicable, by the subsidiaries of Endo International plc that also guarantee our 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 the Company’s subsidiaries that are party to the indenture governing such notes and are issued or guaranteed on a senior secured basis by Endo International plc and its subsidiaries that also guarantee our 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 June 30, 2017, we were in compliance with all covenants.
Credit ratings. The Company’s corporate credit ratings assigned by Moody’s Investors Service and Standard & Poor’s are B2 with a stable outlook and B+ with a negative outlook, respectively.
Working capital. The components of our working capital and our liquidity at June 30, 2017 and December 31, 2016 are below (dollars in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Total current assets | $ | 2,275,015 | $ | 2,589,459 | |||
Less: total current liabilities | (2,226,947 | ) | (2,634,745 | ) | |||
Working capital | $ | 48,068 | $ | (45,286 | ) | ||
Current ratio | 1.0:1 | -1.0:1 | |||||
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Net working capital increased by $93.4 million from December 31, 2016 to June 30, 2017. This increase was primarily attributable to net cash provided by operating activities of $341.0 million. In addition, the April 2017 refinancing reduced the principal amount of debt maturing in 2017 by $86.4 million, which had the effect of increasing working capital. These increases were partially offset by the unfavorable impact of mesh-related product liability charges, net of related reclassification adjustments from current to non-current liabilities, of $349.7 million, purchases of property, plant and equipment of $59.7 million during the six months ended June 30, 2017 and the elimination of a $24.1 million current deferred charge related to the adoption of ASU 2016-16, which was recorded as an adjustment to retained earnings. Other significant items contributing to the change in working capital were largely offsetting. These included a reduction in accounts receivable of $412.0 million that was primarily driven by cash collections on fourth quarter sales of ezetimibe tablets and quetiapine ER tablets and a net reduction in accounts payable and accrued expenses of $220.7 million, primarily related to a reduction in gross-to-net accruals and payments to partners related to fourth quarter sales of ezetimibe tablets.
The following table summarizes our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, (in thousands):
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
Net cash flow provided by (used in): | |||||||
Operating activities | $ | 340,986 | $ | 558,611 | |||
Investing activities | (123,780 | ) | 137,005 | ||||
Financing activities | (99,583 | ) | (301,601 | ) | |||
Effect of foreign exchange rate | 2,786 | 1,459 | |||||
Movement in cash held for sale | (21,125 | ) | — | ||||
Net increase in cash and cash equivalents | $ | 99,284 | $ | 395,474 | |||
Net cash provided by operating activities. Net cash provided by operating activities was $341.0 million for the six months ended June 30, 2017 compared to $558.6 million of net cash provided by operating activities in the comparable 2016 period.
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 $217.6 million decrease in Net cash provided by operating activities for the six months ended June 30, 2017 compared to the same period in 2016 was primarily the result of a $707.3 million federal income tax refund received during the second quarter of 2016 and increased payments to partners during the six months ended June 30, 2017 resulting from sales of ezetimibe, which was launched during the fourth quarter of 2016. These decreases period-over-period were partially offset by increased cash receipts generated by net sales of ezetimibe tablets and quetiapine ER tablets during the six months ended June 30, 2017 and decreases in cash outlays for existing mesh settlement agreements during the six months ended June 30, 2017 compared to the same period in 2016. In addition, as a result of continued generic competition on certain legacy branded products and the discontinuation of certain generic products resulting from the 2016 U.S. Generic Pharmaceuticals restructuring initiative, cash outlays for customer rebates and chargebacks decreased during the six months ended June 30, 2017 compared to 2016.
Net cash (used in) provided by investing activities. Net cash used in investing activities was $123.8 million for the six months ended June 30, 2017 compared to $137.0 million provided by investing activities in the comparable 2016 period.
This $260.8 million fluctuation in cash used in investing activities for the six months ended June 30, 2017 compared to the comparable 2016 period relates primarily to $522.8 million paid into QSFs for mesh settlements during the six months ended June 30, 2017, an increase of $196.0 million from the comparable 2016 period. In addition, there was $440.2 million of cash released from the QSFs for mesh settlements during six months ended June 30, 2017, a decrease of $84.2 million from the comparable 2016 period. Cash payments into QSFs result in a cash outflow for investing activities. Cash releases from QSFs result in a cash inflow for investing activities and a corresponding outflow for cash provided by (used in) operating activities. Payments related to our QSFs are further described in Note 11. Commitments and Contingencies of Part I, Item 1 of this Quarterly Report on Form 10-Q. Cash used for purchases of property, plant and equipment also increased $6.0 million.
Partially offsetting the QSF activity between periods, prior year activity included payments for patent acquisition costs and license fees of $13.0 million, with no comparable activity during six months ended June 30, 2017. In addition, there was an increase in net proceeds from the sales of businesses and other assets of $11.9 million.
Net cash used in financing activities. Net cash used in financing activities was $99.6 million for the six months ended June 30, 2017 compared to $301.6 million used in financing activities in the comparable 2016 period.
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Items contributing to the $202.0 million decrease in cash used in financing activities for the six months ended June 30, 2017 compared to the same 2016 period include an increase in proceeds from issuance of term loans of $3,415.0 million, an increase in proceeds from issuance of notes of $300.0 million and a decrease in payments of revolving debt of $225.0 million, partially offset by an increase in principal payments on term loans of $3,665.5 million, an increase in payments for deferred financing fees of $53.5 million and an increase in payments for contingent consideration of $22.6 million.
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 the Company 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.
Contractual Obligations. As of June 30, 2017, 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, 2016, filed with the Securities and Exchange Commission on March 1, 2017, except for the debt issuances and repayments and mesh-related obligations, which are described in Note 10. Debt and Note 11. Commitments and Contingencies, respectively, of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The mesh-related amount we previously reported in our contractual obligations table disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 represents contractual payments for mesh-related liability settlements pursuant to MSAs that have been executed as of the effective date of the disclosure, reflecting the earliest date that a settlement payment could be due and the largest amount that could be due on that date. The previously reported amount, determined as of December 31, 2016, was $674.1 million, all of which was reported as a 2017 obligation.
As further described in Note 11. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we increased our mesh-related liability accrual during the six months ended June 30, 2017. As an update to the amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, we currently estimate that our total remaining mesh-related cash obligation, net of QSF balances, is approximately $935 million, of which we expect to pay approximately $172 million in 2017, $510 million in 2018 and $253 million in 2019.
Inflation. We do not believe that inflation had a material adverse effect on our financial statements for the periods presented.
Off-balance sheet arrangements. We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimates have not changed materially since December 31, 2016. 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, 2016 filed with the Securities and Exchange Commission on March 1, 2017.
As further described in Note 8. Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as a result of the various interim goodwill tests performed during the six months ended June 30, 2017, the Company recorded pre-tax, non-cash goodwill impairment charges relating to our Paladin, Branded and Somar reporting units of $82.6 million, $180.4 million and $25.7 million, respectively. A 50 basis point increase in the assumed discount rate utilized or a 50 basis point decrease in the annual growth rate would have increased our Paladin reporting unit goodwill impairment charge by approximately $20 million and $10 million, respectively. A 50 basis point increase in the assumed discount rate utilized or a 10% reduction of annual cash flows used in testing the Branded reporting unit would have increased our Branded reporting unit goodwill impairment charge by approximately $100 million and $300 million, respectively. The Somar goodwill impairment charge represented the remaining carrying amount.
In addition to the goodwill impairment tests described above, we also initiated an interim goodwill impairment analysis of our Generics reporting unit during the second quarter of 2017 as a result of the 2017 U.S. Generics Pharmaceuticals restructuring initiative as further described in Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The analysis indicated the estimated fair value of the Generics reporting unit exceeded its carrying amount. Accordingly, no related goodwill impairment was recorded. A 50 basis point increase in the assumed discount rate utilized or a 50 basis point decrease in the annual growth rate would not have changed the results of our analysis.
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We have not made any substantial changes to our methodology used in our annual impairment test 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 discussion of recent accounting pronouncements, refer to Note 2. Recent Accounting Pronouncements in the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in the financial markets, including interest rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable rate indebtedness associated with our term loan and revolving credit facilities. At June 30, 2017, 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 rate equal to an applicable margin plus London Interbank Offered Rate (LIBOR), in certain cases subject to a LIBOR floor. A hypothetical 1% increase in LIBOR over the LIBOR floor would result in $34.2 million in incremental annual interest expense related to our variable-rate debt borrowings.
To the extent we utilize amounts under our revolving credit facilities or take on additional variable rate indebtedness, including the impact of our April 2017 refinancing described in Note 10. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we will be exposed to additional interest rate risk.
As of June 30, 2017 and December 31, 2016, we had no other assets or liabilities with significant interest rate sensitivity.
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 June 30, 2017. 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 June 30, 2017.
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 June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The disclosures under Note 11. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q are incorporated into this Part II, Item 1 by reference.
Item 1A. Risk Factors
Risk factors disclosed in Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 1, 2017 (Annual Report) are incorporated into this document by reference. The risk factors set forth below are the risk factors containing changes from the risk factors previously disclosed in the Company’s Annual Report. Except as set forth below, there have been no material changes to the risk factors disclosed therein.
The pharmaceutical industry is heavily regulated, which creates uncertainty about our ability to bring new products to market and imposes substantial compliance costs on our business.
Governmental authorities such as the FDA impose substantial requirements on the development, manufacture, holding, labeling, marketing, advertising, promotion, distribution and sale of therapeutic pharmaceutical products through lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures. In addition, before obtaining regulatory approvals for certain generic products, we must conduct limited bioequivalence studies and other research to show comparability to the branded products. A failure to obtain satisfactory results in required pre-marketing trials may prevent us from obtaining required regulatory approvals. The FDA may also require companies to conduct post-approval studies and post-approval surveillance regarding their drug products and to report adverse events.
Before obtaining regulatory approvals for the sale of any of our new product candidates, we must demonstrate through preclinical studies and clinical trials that the product is safe and effective for each intended use. Preclinical and clinical studies may fail to demonstrate the safety and effectiveness of a product. Likewise, we may not be able to demonstrate through clinical trials that a product candidate’s therapeutic benefits outweigh its risks. Even promising results from preclinical and early clinical studies do not always accurately predict results in later, large scale trials. A failure to demonstrate safety and efficacy could or would result in our failure to obtain regulatory approvals. Clinical trials can be delayed for reasons outside of our control, which can lead to increased development costs and delays in regulatory approval. For example, there is substantial competition to enroll patients in clinical trials, and such competition has delayed clinical development of our products in the past. For example, patients may not enroll in clinical trials at the rate expected or patients may drop out after enrolling in the trials or during the trials. In addition, we rely on collaboration partners that may control or make changes in trial protocol and design enhancements, or encounter clinical trial compliance-related issues, which may also delay clinical trials. Product supplies may be delayed or be insufficient to treat the patients participating in the clinical trials, or manufacturers or suppliers may not meet the requirements of the FDA or foreign regulatory authorities, such as those relating to Current Good Manufacturing Practices. We also may experience delays in obtaining, or we may not obtain, required initial and continuing approval of our clinical trials from institutional review boards. We cannot confirm to you that we will not experience delays or undesired results in these or any other of our clinical trials.
We cannot confirm to you that the FDA or foreign regulatory agencies will approve, clear for marketing or certify any products developed by us or that such approval will not subject the marketing of our products to certain limits on indicated use. The FDA or foreign regulatory authorities may not agree with our assessment of the clinical data or they may interpret it differently. Such regulatory authorities may require additional or expanded clinical trials. Any limitation on use imposed by the FDA or delay in or failure to obtain FDA approvals or clearances of products developed by us would adversely affect the marketing of these products and our ability to generate product revenue, which would adversely affect our financial condition and results of operations.
In addition, with respect specifically to pharmaceutical products, the submission of a New Drug Application (NDA) or ANDA to the FDA with supporting clinical safety and efficacy data, for example, does not guarantee that the FDA will grant approval to market the product. Meeting the FDA’s regulatory requirements to obtain approval to market a drug product, which varies substantially based on the type, complexity and novelty of the pharmaceutical product, typically takes years and is subject to uncertainty.
Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. Although the FDA is not required to follow the recommendations of its Advisory Committees, it usually does. A negative Advisory Committee meeting could signal a lower likelihood of approval, although the FDA may still end up approving our application. Regardless of an Advisory Committee meeting outcome or the FDA’s final approval decision, public presentation of our data may shed positive or negative light on our application.
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With respect to our Supplemental New Drug Application for OPANA® ER, the FDA scheduled a Joint Meeting of the Drug Safety and Risk Management Advisory Committee and the Anesthetic and Analgesic Drug Products Advisory Committee in March 2017, to discuss pre- and post-marketing data about the abuse of OPANA® ER and the overall risk-benefit of this product. The Advisory Committees was also scheduled to discuss abuse of generic oxymorphone ER and oxymorphone immediate-release (IR) products. In March 2017, the Advisory Committees voted 18 to eight, with one abstention, that the benefits of reformulated OPANA® ER no longer outweigh its risks. In June 2017, the FDA requested that we voluntarily withdraw OPANA® ER from the market and, in July 2017, we announced that we would voluntarily comply with the FDA's request. We plan to work with the FDA to coordinate the orderly removal of OPANA® ER in a manner that looks to minimize treatment disruption for patients and allows patients sufficient time to seek guidance from their healthcare professionals. As a result of this withdrawal, we have incurred and expect to incur certain charges. These and other product corrections, recalls or withdrawals could divert management time and attention, reduce market acceptance of all of our products, harm our reputation, lead to additional charges or expenses or result in product liability claims, any of which could have a material adverse effect on our revenue, results of operations and financial condition.
Some drugs are available in the United States that are not the subject of an FDA-approved NDA. In 2011, the FDA’s Center for Drug Evaluation and Research (“CDER”) Office of Compliance modified its enforcement policy with regard to the marketing of such “unapproved” marketed drugs. Under CDER’s revised guidance, the FDA encourages manufacturers to obtain NDA approvals for such drugs by requiring unapproved versions to be removed from the market after an approved version has been introduced, subject to a grace period at the FDA’s discretion. This grace period is intended to allow an orderly transition of supply to the market and to mitigate any potential related drug shortage. Depending on the length of the grace period and the time it takes for subsequent applications to be approved, this may result in a period of de facto market exclusivity to the first manufacturer that has obtained an approved NDA for the previously unapproved marketed drug. We may seek FDA approval for certain unapproved marketed drug products through the 505(b)(2) regulatory pathway. Even if we receive approval for an NDA under Section 505(b)(2), the FDA may not take timely enforcement action against companies marketing unapproved versions of the drug; therefore, we cannot be sure that that we will receive the benefit of any de facto exclusive marketing period or that we will fully recoup the expenses incurred to obtain an approval. In addition, certain competitors and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, this could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2).
Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.
The ANDA approval process for a new product varies in time, generally requiring a minimum of 10 months following submission of the ANDA to FDA, but could also take several years from the date of application. The timing for the ANDA approval process for generic products is difficult to estimate and can vary significantly. ANDA approvals, if granted, may not include all uses (known as indications) for which a company may seek to market a product.
Further, once a product is approved or cleared for marketing, failure to comply with applicable regulatory requirements can result in, among other things, suspensions or withdrawals of approvals or clearances, seizures or recalls of products, injunctions against the manufacture, holding, distribution, marketing and sale of a product, and civil and criminal sanctions. Furthermore, changes in existing regulations or the adoption of new regulations could prevent us from obtaining, or affect the timing of, future regulatory approvals or clearances. Meeting regulatory requirements and evolving government standards may delay marketing of our new products for a considerable period of time, impose costly procedures upon our activities and result in a competitive advantage to larger companies that compete against us.
Based on scientific developments, post-market experience, or other legislative or regulatory changes, the current FDA standards of review for approving new pharmaceutical products, or new indications or uses for approved or cleared products, are sometimes more stringent than those that were applied in the past.
Some new or evolving FDA review standards or conditions for approval or clearance were not applied to many established products currently on the market, including certain opioid products. As a result, the FDA does not have as extensive safety databases on these products as on some products developed more recently. Accordingly, we believe the FDA has expressed an intention to develop such databases for certain of these products, including many opioids. In particular, the FDA has expressed interest in specific chemical structures that may be present as impurities in a number of opioid narcotic active pharmaceutical ingredients, such as oxycodone, which based on certain structural characteristics and laboratory tests may indicate the potential for having mutagenic effects. FDA has required, and may continue to require, more stringent controls of the levels of these impurities in drug products for approval.
Also, the FDA may require labeling revisions, formulation or manufacturing changes and/or product modifications for new or existing products containing such impurities. The FDA’s more stringent requirements, together with any additional testing or remedial measures that may be necessary, could result in increased costs for, or delays in, obtaining approval for certain of our products in development. Although we do not believe that the FDA would seek to remove a currently marketed product from the market unless such mutagenic effects are believed to indicate a significant risk to patient health, we cannot make any such assurance.
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In May of 2016, an FDA advisory panel recommended mandatory training of all physicians who prescribe opioids on the risks of prescription opioids. In 2016, the CDC also issued a guideline for prescribing opioids for chronic pain that provides recommendations for primary care clinicians who are prescribing opioids for chronic pain outside of active cancer treatment, palliative care and end-of-life care. In addition, state health departments and boards of pharmacy have authority to regulate distribution and may modify their regulations with respect to prescription narcotics in an attempt to curb abuse. In either case, any such new regulations or requirements may be difficult and expensive for us to comply with, may delay our introduction of new products, may adversely affect our total revenues and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
The FDA has the authority to require companies to undertake additional post-approval studies to assess known or signaled safety risks, to make any labeling changes to address those risks and to formulate approved Risk Evaluation and Mitigation Strategies (REMS) to confirm a drug’s benefits outweigh its risks. For example, in 2015, the FDA sent letters to a number of manufactures, including Endo, requiring that a randomized, double-blind, placebo-controlled clinical trial be conducted to evaluate the effect of testosterone replacement therapy on the incidence of major adverse cardiovascular events in men. The letter received by Endo required that we include new safety information in the labeling and Medication Guide for certain prescription medications containing testosterone, such as TESTIM®.
The FDA’s exercise of its authority under the FFDCA could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with additional post-approval regulatory requirements and potential restrictions on sales of approved products. Foreign regulatory agencies often have similar authority and may impose comparable requirements and costs. Post-marketing studies and other emerging data about marketed products, such as adverse event reports, may also adversely affect sales of our products. Furthermore, the discovery of significant safety or efficacy concerns or problems with a product in the same therapeutic class as one of our products that implicate or appear to implicate the entire class of products could have an adverse effect on sales of our product or, in some cases, result in product withdrawals. The FDA has continuing authority over the approval of an NDA or ANDA and may withdraw approval if, among other reasons, post-marketing clinical or other experience, tests or data show that a drug is unsafe for use under the conditions upon which it was approved, or if FDA determines that there is a lack of substantial evidence of the drug’s efficacy under the conditions described in its labeling. Furthermore, new data and information, including information about product misuse or abuse at the user level, may lead government agencies, professional societies, practice management groups or patient or trade organizations to recommend or publish guidance or guidelines related to the use of our products, which may lead to reduced sales of our products.
The FDA and the DEA have important and complementary responsibilities with respect to our business. The FDA administers an application and post-approval monitoring process to confirm that products that are available in the market are safe, effective and consistently of uniform, high quality. The DEA administers registration, drug allotment and accountability systems to satisfy against loss and diversion of controlled substances. Both agencies have trained investigators that routinely, or for cause, conduct inspections, and both have authority to seek to enforce their statutory authority and regulations through administrative remedies as well as civil and criminal enforcement actions.
The FDA regulates and monitors the quality of drug clinical trials to provide human subject protection and to support marketing applications. The FDA may place a hold on a clinical trial and may cause a suspension or withdrawal of product approvals if regulatory standards are not maintained. The FDA also regulates the facilities, processes and procedures used to manufacture and market pharmaceutical products in the U.S. Manufacturing facilities must be registered with the FDA and all products made in such facilities must be manufactured in accordance with the latest cGMP regulations, which are enforced by the FDA. Compliance with clinical trial requirements and cGMP regulations requires the dedication of substantial resources and requires significant expenditures. In the event an approved manufacturing facility for a particular drug is required by the FDA to curtail or cease operations, or otherwise becomes inoperable, or a third party contract manufacturing facility faces manufacturing problems, obtaining the required FDA authorization to manufacture at the same or a different manufacturing site could result in production delays, which could adversely affect our business, results of operations, financial condition and cash flow.
The FDA is authorized to perform inspections of U.S. and foreign facilities under the FFDCA. At the end of such an inspection, FDA could issue a Form 483 Notice of Inspectional Observations, which could cause us to modify certain activities identified during the inspection. Following such inspections, the FDA may issue an untitled letter as an initial correspondence that cites violations that do not meet the threshold of regulatory significance of a Warning Letter. FDA guidelines also provide for the issuance of Warning Letters for violations of “regulatory significance” for which the failure to adequately and promptly achieve correction may be expected to result in an enforcement action. FDA also may issue Warning Letters and untitled letters in connection with events or circumstances unrelated to an FDA inspection.
Similar to other healthcare companies, during 2016, our facilities, in multiple countries, across the full range of our business units, were subject to routine and new-product related inspections by the FDA, MHRA, HPRA and Health Canada. Some of these inspections resulted in non-critical inspection observations (including FDA Form 483 observations). We have responded to all inspection observations within the required time frame and have implemented, or are continuing to implement, the corrective action plans as agreed with the relevant regulatory agencies.
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Many of our core products contain controlled substances. The stringent DEA regulations on our use of controlled substances include restrictions on their use in research, manufacture, distribution and storage. A breach of these regulations could result in imposition of civil penalties, refusal to renew or action to revoke necessary registrations, or other restrictions on operations involving controlled substances. In addition, failure to comply with applicable legal requirements subjects the manufacturing facilities of our subsidiaries and manufacturing partners to possible legal or regulatory action, including shutdown. Any such shutdown may adversely affect their ability to supply us with product and thus, our ability to market affected products. This could have a negative impact on our business, results of operations, financial condition, cash flows and competitive position. See also the risk described under the caption “The DEA limits the availability of the active ingredients used in many of our current products and products in development, as well as the production of these products, and, as a result, our procurement and production quotas may not be sufficient to meet commercial demand or complete clinical trials.” under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. In addition, we are subject to the Federal Drug Supply Chain Security Act (DSCSA). The U.S. government has enacted DSCSA which requires development of an electronic pedigree to track and trace each prescription drug at the salable unit level through the distribution system, which will be effective incrementally over a 10-year period. Compliance with DSCSA and future U.S. federal or state electronic pedigree requirements may increase our operational expenses and impose significant administrative burdens.
We cannot determine what effect changes in regulations or legal interpretations or requirements by the FDA or the courts, when and if promulgated or issued, may have on our business in the future. Changes could, among other things, require different labeling, monitoring of patients, interaction with physicians, education programs for patients or physicians, curtailment of necessary supplies, or limitations on product distribution. These changes, or others required by the FDA or DEA could have an adverse effect on the sales of these products. The evolving and complex nature of regulatory science and regulatory requirements, the broad authority and discretion of the FDA and the generally high level of regulatory oversight results in a continuing possibility that, from time to time, we will be adversely affected by regulatory actions despite our ongoing efforts and commitment to achieve and maintain full compliance with all regulatory requirements.
We are currently dependent on outside manufacturers for the manufacture of a significant amount of our products; therefore, we have and will continue to have limited control of the manufacturing process and related costs. Certain of our manufacturers currently constitute the sole source of one or more of our products.
Third party manufacturers currently manufacture a significant amount of our products pursuant to contractual arrangements. Certain of our manufacturers currently constitute the sole source of our products. For example, Teikoku is our sole source of LIDODERM®. Because of contractual restraints and the lead-time necessary to obtain FDA approval, and possibly DEA registration, of a new manufacturer, replacement of any of these manufacturers may be expensive and time consuming and may cause interruptions in our supply of products to customers. As a result, any such delay could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We have significant goodwill and other intangible assets. Consequently, potential impairment of goodwill and other intangibles may significantly impact our profitability.
Goodwill and other intangibles represent a significant portion of our assets. As of June 30, 2017 and December 31, 2016, goodwill and other intangibles comprised approximately 76% and 74%, respectively, of our total assets. Goodwill and other intangible assets are subject to an impairment test at least annually. Additionally, impairment tests must be performed whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. For example, as further discussed in Note 8. Goodwill and Other Intangibles in Part I, Item 1 of this Quarterly Report on Form 10-Q, we recorded a $45.5 million impairment charge related to our serelaxin in-process research and development intangible asset during the three months ended March 31, 2017. This charge resulted from the announcement that a Phase III study of serelaxin in patients with AHF failed to meet its primary endpoints.
Asset impairment charges for the three and six months ended June 30, 2017 totaled $725.0 million and $929.0 million, respectively, compared to $40.0 million and $169.6 million in the comparable 2016 periods, which related primarily to goodwill and other intangible assets. The procedures used in our goodwill and intangible assets impairment testing are discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 1, 2017 under the captions “CRITICAL ACCOUNTING ESTIMATES” and “RESULTS OF OPERATIONS”.
Events giving rise to impairment of goodwill or intangible assets are an inherent risk in the pharmaceutical industry and often cannot be predicted. As a result of the significance of goodwill and other intangible assets, our results of operations and financial position in a future period could be negatively impacted should additional impairments of our goodwill or other intangible assets occur.
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We may be the subject of product liability claims or product recalls, and we may be unable to obtain or maintain insurance adequate to cover potential liabilities.
Our business exposes us to significant potential risk from product liability claims, other significant litigation matters, government investigations or product recalls, including, but not limited to, such matters associated with the testing, manufacturing, marketing and sale of our products. We have been in the past, and continue to be, subject to various product liability cases, other litigations and government investigations. In addition to direct expenditures for damages, settlement and defense costs, there is a possibility of adverse publicity, loss of revenues and disruption of business as a result of product liability claims or other litigation matters. Some plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical and/or medical device companies based upon claims for injuries allegedly caused by the use of their products. In addition, in the age of social media, plaintiffs’ attorneys have a wide variety of tools to advertise their services and solicit new clients for litigation, including using judgments against other pharmaceutical companies in a product liability or mass tort litigation as an advertising tool. Thus, we could expect that any significant product liability litigation or mass tort in which we are a defendant will have a larger number of plaintiffs than such actions have seen historically and we could expect to see an increase in number of cases filed against us because of the increasing use of widespread and media-varied advertising. Furthermore, a ruling against other pharmaceutical companies in product liability or mass tort litigation in which we are not a defendant could have a negative impact on pending litigation where we are a defendant. In addition, it may be necessary for us to voluntarily or mandatorily recall or withdraw products that do not meet approved specifications or which subsequent data demonstrate may be unsafe or ineffective or misused. Any such recall or withdraw could result in adverse publicity, costs connected to the recall and loss of revenue. If we are found liable on a product liability claim or series of claims, defaults could be declared under our debt agreements, we could suffer reputational damage, and we could incur losses, any of which could materially and adversely impact our business, financial condition, results of operations and cash flows.
Our pharmaceutical and medical device products may cause, or may appear to cause, serious adverse side effects or potentially dangerous drug interactions if misused, improperly prescribed or subject to faulty surgical technique. For example, we and/or certain of our subsidiaries, have been named as defendants in multiple lawsuits in various federal and state courts alleging personal injury resulting from use of transvaginal surgical mesh products designed to treat pelvic organ prolapse and stress urinary incontinence. Through our Astora Women’s Health Business (Astora), we and certain plaintiffs’ attorneys 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 August 2017, were solely by way of compromise and settlement were not in any way an admission of liability or fault by us or any of our subsidiaries. In addition, there may be other claims asserted in the future. It is currently not possible to estimate the number or validity of any such future claims. 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 accrued at this time.
We cannot confirm to you that we will be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities or other losses such as the cost of a recall if any claim is brought against us, regardless of the success or failure of the claim. For example, we generally no longer have product liability insurance to cover the claims in connection with the mesh-related litigation described above. Additionally, we may be limited by the surviving insurance policies of our acquired subsidiaries, which may not be adequate to cover against potential liabilities or other losses. The failure to generate sufficient cash flow or to obtain other financing could affect our ability to pay the amounts due under those liabilities not covered by insurance. See Note 11. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of our product liability claims.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no purchases or sales of equity securities by the Company during the three months ended June 30, 2017.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
On August 1, 2017, the Nominating & Governance Committee of the Company’s Board of Directors approved an amendment to the Company’s Common Stock Ownership Guidelines for Non-Employee Directors and Executive Management of Endo International plc (Guidelines). The amendment waives the applicability of the Guidelines to any non-employee director who is a representative or employee of a significant shareholder of the Company or an investment firm if such non-employee director is prohibited from personally owning Company shares of common stock by the internal policies of such significant shareholder or investment firm. As of the date hereof, the waiver covered by this amendment applies to Todd B. Sisitsky, who serves as a representative of TPG Capital, a significant shareholder of the Company. TPG Capital’s policies prohibit personal ownership of Company stock by its representatives and, accordingly, Mr. Sisitsky has waived all rights to receive any annual cash retainer fees, meeting fees, share-based awards or other compensation of any kind (other than certain rights to indemnification, directors and officers insurance and expense reimbursement) in connection with his service as a director of the Company. The Guidelines are posted on the Company’s website at www.endo.com, under “Investors-Corporate Governance-Nominating & Governance Committee.”
Item 6. Exhibits
The information called for by this item is incorporated by reference to the Exhibit Index of this Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENDO INTERNATIONAL PLC | |
(Registrant) | |
/s/ PAUL V. CAMPANELLI | |
Name: | Paul V. Campanelli |
Title: | President and Chief Executive Officer |
(Principal Executive Officer) | |
/s/ BLAISE COLEMAN | |
Name: | Blaise Coleman |
Title: | Executive Vice President, Chief Financial Officer |
(Principal Financial Officer) | |
Date: August 8, 2017
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Exhibit Index
Exhibit No. | Description |
2.1 | |
3.1 | |
10.1 | |
14.1 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101 | The following materials from Endo International plc’s Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements |