NOTE 7. LEASES
The following table presents information about the Company's right-of-use (ROU) assets and lease liabilities at March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets Line Items
|
|
March 31, 2020
|
|
December 31, 2019
|
ROU assets:
|
|
|
|
|
|
Operating lease ROU assets
|
Operating lease assets
|
|
$
|
49,349
|
|
|
$
|
51,700
|
|
Finance lease ROU assets
|
Property, plant and equipment, net
|
|
54,482
|
|
|
56,793
|
|
Total ROU assets
|
|
$
|
103,831
|
|
|
$
|
108,493
|
|
Operating lease liabilities:
|
|
|
|
|
|
Current operating lease liabilities
|
Current portion of operating lease liabilities
|
|
$
|
11,512
|
|
|
$
|
10,763
|
|
Noncurrent operating lease liabilities
|
Operating lease liabilities, less current portion
|
|
45,057
|
|
|
48,299
|
|
Total operating lease liabilities
|
|
$
|
56,569
|
|
|
$
|
59,062
|
|
Finance lease liabilities:
|
|
|
|
|
|
Current finance lease liabilities
|
Accounts payable and accrued expenses
|
|
$
|
5,799
|
|
|
$
|
5,672
|
|
Noncurrent finance lease liabilities
|
Other liabilities
|
|
29,706
|
|
|
31,312
|
|
Total finance lease liabilities
|
|
$
|
35,505
|
|
|
$
|
36,984
|
|
The following table presents information about lease costs and expenses and sublease income for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Condensed Consolidated Statements of Operations Line Items
|
|
2020
|
|
2019
|
Operating lease cost
|
Various (1)
|
|
$
|
3,992
|
|
|
$
|
3,499
|
|
Finance lease cost:
|
|
|
|
|
|
Amortization of ROU assets
|
Various (1)
|
|
$
|
2,311
|
|
|
$
|
2,296
|
|
Interest on lease liabilities
|
Interest expense, net
|
|
$
|
466
|
|
|
$
|
500
|
|
Other lease costs and income:
|
|
|
|
|
|
Variable lease costs (2)
|
Various (1)
|
|
$
|
2,658
|
|
|
$
|
2,089
|
|
Sublease income
|
Various (1)
|
|
$
|
(861
|
)
|
|
$
|
(964
|
)
|
__________
|
|
(1)
|
Amounts are included in the Condensed Consolidated Statements of Operations based on the function that the underlying leased asset supports. The following table presents the components of such aggregate amounts for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Cost of revenues
|
$
|
3,328
|
|
|
$
|
2,700
|
|
Selling, general and administrative
|
$
|
4,721
|
|
|
$
|
4,169
|
|
Research and development
|
$
|
51
|
|
|
$
|
51
|
|
|
|
(2)
|
Amounts represent variable lease costs incurred that were not included in the initial measurement of the lease liability such as common area maintenance and utilities costs associated with leased real estate and certain costs associated with our automobile leases.
|
The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash payments for operating leases
|
$
|
2,981
|
|
|
$
|
3,692
|
|
Operating cash payments for finance leases
|
$
|
648
|
|
|
$
|
473
|
|
Financing cash payments for finance leases
|
$
|
1,184
|
|
|
$
|
1,174
|
|
NOTE 8. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the three months ended March 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Pharmaceuticals
|
|
Sterile Injectables
|
|
Generic Pharmaceuticals
|
|
International Pharmaceuticals
|
|
Total
|
Goodwill as of December 31, 2019
|
$
|
828,818
|
|
|
$
|
2,731,193
|
|
|
$
|
—
|
|
|
$
|
35,173
|
|
|
$
|
3,595,184
|
|
Effect of currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,387
|
)
|
|
(2,387
|
)
|
Goodwill impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
(32,786
|
)
|
|
(32,786
|
)
|
Goodwill as of March 31, 2020
|
$
|
828,818
|
|
|
$
|
2,731,193
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,560,011
|
|
The carrying amounts of goodwill at March 31, 2020 and December 31, 2019 are net of the following accumulated impairments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Pharmaceuticals
|
|
Sterile Injectables
|
|
Generic Pharmaceuticals
|
|
International Pharmaceuticals
|
|
Total
|
Accumulated impairment losses as of December 31, 2019
|
$
|
855,810
|
|
|
$
|
—
|
|
|
$
|
3,142,657
|
|
|
$
|
500,417
|
|
|
$
|
4,498,884
|
|
Accumulated impairment losses as of March 31, 2020
|
$
|
855,810
|
|
|
$
|
—
|
|
|
$
|
3,142,657
|
|
|
$
|
494,499
|
|
|
$
|
4,492,966
|
|
Other Intangible Assets
Changes in the amount of other intangible assets for the three months ended March 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost basis:
|
Balance as of December 31, 2019
|
|
Acquisitions
|
|
Impairments
|
|
Effect of Currency Translation
|
|
Balance as of March 31, 2020
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
93,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,900
|
|
Total indefinite-lived intangibles
|
$
|
93,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,900
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
Licenses (weighted average life of 14 years)
|
$
|
457,402
|
|
|
$
|
—
|
|
|
$
|
(8,700
|
)
|
|
$
|
—
|
|
|
$
|
448,702
|
|
Tradenames
|
6,409
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,409
|
|
Developed technology (weighted average life of 11 years)
|
5,844,439
|
|
|
—
|
|
|
(55,051
|
)
|
|
(19,839
|
)
|
|
5,769,549
|
|
Total finite-lived intangibles (weighted average life of 11 years)
|
$
|
6,308,250
|
|
|
$
|
—
|
|
|
$
|
(63,751
|
)
|
|
$
|
(19,839
|
)
|
|
$
|
6,224,660
|
|
Total other intangibles
|
$
|
6,402,150
|
|
|
$
|
—
|
|
|
$
|
(63,751
|
)
|
|
$
|
(19,839
|
)
|
|
$
|
6,318,560
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
Balance as of December 31, 2019
|
|
Amortization
|
|
Impairments
|
|
Effect of Currency Translation
|
|
Balance as of March 31, 2020
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
Licenses
|
$
|
(410,336
|
)
|
|
$
|
(2,429
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(412,765
|
)
|
Tradenames
|
(6,409
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,409
|
)
|
Developed technology
|
(3,414,138
|
)
|
|
(114,808
|
)
|
|
—
|
|
|
11,934
|
|
|
(3,517,012
|
)
|
Total other intangibles
|
$
|
(3,830,883
|
)
|
|
$
|
(117,237
|
)
|
|
$
|
—
|
|
|
$
|
11,934
|
|
|
$
|
(3,936,186
|
)
|
Net other intangibles
|
$
|
2,571,267
|
|
|
|
|
|
|
|
|
$
|
2,382,374
|
|
Amortization expense for the three months ended March 31, 2020 and 2019 totaled $117.2 million and $145.6 million, respectively. Amortization expense is included in Cost of revenues in the Condensed Consolidated Statements of Operations. Estimated amortization of intangibles for the five fiscal years subsequent to December 31, 2019 is as follows (in thousands):
|
|
|
|
|
2020
|
$
|
427,824
|
|
2021
|
$
|
389,418
|
|
2022
|
$
|
373,293
|
|
2023
|
$
|
331,379
|
|
2024
|
$
|
292,903
|
|
Impairments
Goodwill and indefinite-lived intangible assets are tested for impairment annually and when events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1.
As part of our goodwill and intangible asset impairment assessments, we estimate the fair values of our reporting units and our intangible assets using an income approach that utilizes a discounted cash flow model or, where appropriate, a market approach.
The discounted cash flow models are dependent upon our estimates of future cash flows and other factors including estimates of (i) future operating performance, including future sales, long-term growth rates, operating margins, discount rates, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rates applied to the estimated cash flows are based on the overall risk associated with the particular assets and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to Asset impairment charges in our Condensed Consolidated Statements of Operations.
During the three months ended March 31, 2020 and 2019, the Company incurred the following goodwill and other intangible asset impairment charges (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Goodwill impairment charges
|
$
|
32,786
|
|
|
$
|
86,000
|
|
Other intangible asset impairment charges
|
$
|
63,751
|
|
|
$
|
78,700
|
|
Except as described below, pre-tax non-cash asset impairment charges related primarily to certain in-process research and development and/or developed technology intangible assets that were tested for impairment following changes in market conditions and certain other factors impacting recoverability.
As a result of certain business decisions that occurred during the first quarter of 2020, we tested the goodwill of our Paladin reporting unit for impairment as of March 31, 2020. The fair value of the reporting unit was estimated using an income approach that utilized a discounted cash flow model. The discount rate utilized in this test was 9.5%. This goodwill impairment test resulted in a pre-tax non-cash goodwill impairment charge of $32.8 million during the three months ended March 31, 2020, representing the remaining carrying amount. This impairment was primarily attributable to portfolio decisions and updated market expectations during the quarter.
As a result of certain competitive events that occurred during the first quarter of 2019, we tested the goodwill of our Generic Pharmaceuticals reporting unit for impairment as of March 31, 2019. The fair value of the reporting unit was estimated using an income approach that utilized a discounted cash flow model. The discount rate utilized in this test was 10.5%. This goodwill impairment test resulted in a pre-tax non-cash goodwill impairment charge of $86.0 million during the three months ended March 31, 2019, representing the excess of this reporting unit’s carrying amount over its estimated fair value. This Generic Pharmaceuticals impairment can be primarily attributed to the impact of the competitive events referenced above and an increase in the discount rate used in the determination of fair value.
We are closely monitoring the impact of COVID-19 on our business. It is possible that COVID-19 could result in reductions to the estimated fair values of our goodwill and other intangible assets, which could ultimately result in asset impairment charges that may be material.
NOTE 9. CONTRACT ASSETS AND LIABILITIES
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship products to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. At March 31, 2020, the unfulfilled performance obligations for these types of contracts relate to ordered but undelivered products. We generally expect to fulfill the performance obligations and recognize revenue within one week of entering into the underlying contract. Based on the short-term initial contract duration, additional disclosure about the remaining performance obligations is not required.
Certain of our other revenue-generating contracts, including license and collaboration agreements, may result in contract assets and/or contract liabilities. For example, we may recognize contract liabilities upon receipt of certain upfront and milestone payments from customers when there are remaining performance obligations.
The following table shows the opening and closing balances of contract assets and contract liabilities from contracts with customers (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
$ Change
|
|
% Change
|
Contract assets, net (1)
|
$
|
7,325
|
|
|
$
|
—
|
|
|
$
|
7,325
|
|
|
NM
|
|
Contract liabilities, net (2)
|
$
|
6,451
|
|
|
$
|
6,592
|
|
|
$
|
(141
|
)
|
|
(2
|
)%
|
__________
NM indicates that the percentage change is not meaningful or is greater than 100%
|
|
(1)
|
At March 31, 2020, the entire contract asset amount is classified as a noncurrent asset and is included in Other assets. The net increase in contract assets during the three months ended March 31, 2020 was primarily due to the Company’s estimated consideration for the sale of certain intellectual property rights.
|
|
|
(2)
|
At both March 31, 2020 and December 31, 2019, approximately $1.4 million of these contract liability amounts are classified as current liabilities and are included in Accounts payable and accrued expenses in the Company’s Condensed Consolidated Balance Sheets. The remaining amounts are classified as noncurrent and are included in Other liabilities. The decrease to contract liabilities was due to approximately $0.1 million in revenue recognized during the period.
|
During the three months ended March 31, 2020, we recognized revenue of $3.9 million relating to performance obligations satisfied, or partially satisfied, in prior periods. Such revenue generally relates to changes in estimates with respect to our variable consideration.
NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Trade accounts payable
|
$
|
88,211
|
|
|
$
|
101,532
|
|
Returns and allowances
|
213,756
|
|
|
206,248
|
|
Rebates
|
115,763
|
|
|
129,056
|
|
Chargebacks
|
1,630
|
|
|
1,594
|
|
Accrued interest
|
100,249
|
|
|
112,860
|
|
Accrued payroll and related benefits
|
59,777
|
|
|
79,869
|
|
Accrued royalties and other distribution partner payables
|
116,702
|
|
|
115,816
|
|
Acquisition-related contingent consideration—current
|
8,459
|
|
|
6,534
|
|
Other
|
150,411
|
|
|
146,440
|
|
Total
|
$
|
854,958
|
|
|
$
|
899,949
|
|
NOTE 11. DEBT
The following table presents information about the Company’s total indebtedness at March 31, 2020 and December 31, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Effective Interest Rate
|
|
Principal Amount
|
|
Carrying Amount
|
|
Effective Interest Rate
|
|
Principal Amount
|
|
Carrying Amount
|
7.25% Senior Notes due 2022
|
7.25
|
%
|
|
$
|
8,294
|
|
|
$
|
8,294
|
|
|
7.25
|
%
|
|
$
|
8,294
|
|
|
$
|
8,294
|
|
5.75% Senior Notes due 2022
|
5.75
|
%
|
|
182,479
|
|
|
182,479
|
|
|
5.75
|
%
|
|
182,479
|
|
|
182,479
|
|
5.375% Senior Notes due 2023
|
5.62
|
%
|
|
210,440
|
|
|
209,126
|
|
|
5.62
|
%
|
|
210,440
|
|
|
209,018
|
|
6.00% Senior Notes due 2023
|
6.28
|
%
|
|
1,439,840
|
|
|
1,427,814
|
|
|
6.28
|
%
|
|
1,439,840
|
|
|
1,426,998
|
|
5.875% Senior Secured Notes due 2024
|
6.14
|
%
|
|
300,000
|
|
|
296,798
|
|
|
6.14
|
%
|
|
300,000
|
|
|
296,647
|
|
6.00% Senior Notes due 2025
|
6.27
|
%
|
|
1,200,000
|
|
|
1,186,326
|
|
|
6.27
|
%
|
|
1,200,000
|
|
|
1,185,726
|
|
7.50% Senior Secured Notes due 2027
|
7.71
|
%
|
|
1,500,000
|
|
|
1,482,675
|
|
|
7.71
|
%
|
|
1,500,000
|
|
|
1,482,212
|
|
Term Loan Facility
|
6.09
|
%
|
|
3,321,088
|
|
|
3,295,558
|
|
|
6.21
|
%
|
|
3,329,625
|
|
|
3,302,675
|
|
Revolving Credit Facility
|
4.13
|
%
|
|
300,000
|
|
|
300,000
|
|
|
4.25
|
%
|
|
300,000
|
|
|
300,000
|
|
Total long-term debt, net
|
|
|
$
|
8,462,141
|
|
|
$
|
8,389,070
|
|
|
|
|
$
|
8,470,678
|
|
|
$
|
8,394,049
|
|
Less current portion, net
|
|
|
34,150
|
|
|
34,150
|
|
|
|
|
34,150
|
|
|
34,150
|
|
Total long-term debt, less current portion, net
|
|
|
$
|
8,427,991
|
|
|
$
|
8,354,920
|
|
|
|
|
$
|
8,436,528
|
|
|
$
|
8,359,899
|
|
The Company and its subsidiaries, with certain customary exceptions, guarantee or serve as issuers or borrowers of the debt instruments representing substantially all of the Company’s indebtedness at March 31, 2020. The obligations under (i) all of the senior secured notes and (ii) the Credit Agreement (as defined below) and related loan documents are secured on a pari passu basis by a perfected first priority (subject to certain permitted liens) lien on the collateral securing such instruments, which collateral represents substantially all of the assets of the issuers or borrowers and the guarantors party thereto (subject to customary exceptions). Our senior unsecured notes are unsecured and effectively subordinated in right of priority to the Credit Agreement and our senior secured notes, in each case to the extent of the value of the collateral securing such instruments.
The aggregate estimated fair value of the Company’s long-term debt, which was estimated using inputs based on quoted market prices for the same or similar debt issuances, was $7.2 billion and $7.4 billion at March 31, 2020 and December 31, 2019, respectively. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
Credit Facilities
The Company and certain of its subsidiaries are party to a credit agreement (the Credit Agreement), which provides for (i) a $1,000.0 million senior secured revolving credit facility (the Revolving Credit Facility) and (ii) a senior secured term loan facility in an initial principal amount of $3,415.0 million (the Term Loan Facility and, together with the Revolving Credit Facility, the Credit Facilities). Current amounts outstanding under the Credit Facilities are set forth in the table above. After giving effect to borrowings under the Revolving Credit Facility and previously issued and outstanding letters of credit, approximately $696.8 million of remaining credit is available under the Revolving Credit Facility as of March 31, 2020. The Company’s outstanding debt agreements contain a number of restrictive covenants, including certain limitations on the Company’s ability to incur additional indebtedness.
At March 31, 2020 and December 31, 2019, we were in compliance with all covenants contained in the Credit Agreement.
Senior Notes and Senior Secured Notes
At March 31, 2020 and December 31, 2019, we were in compliance with all covenants contained in the indentures governing our various senior notes and senior secured notes.
Debt Financing Transactions
Set forth below are certain disclosures relating to debt financing transactions that occurred during the three months ended March 31, 2020 or the year ended December 31, 2019.
March 2019 Refinancing
In March 2019, the Company executed certain transactions (the March 2019 Refinancing Transactions) that included:
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•
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entry into an amendment (the Revolving Credit Facility Amendment) to the Company’s existing credit agreement, which was originally dated April 27, 2017 (the amended credit agreement is described above under the heading “Credit Facilities”);
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•
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issuance of $1,500.0 million of 7.50% Senior Secured Notes due 2027 (the 2027 Notes);
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•
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repurchase of $1,642.2 million aggregate principal amount ($1,624.0 million aggregate carrying amount) of certain of the Company’s senior unsecured notes for $1,500.0 million in cash, excluding accrued interest (the Notes Repurchases); and
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|
|
•
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solicitation of consents from the holders of the existing 7.25% Senior Notes due 2022 and 5.75% Senior Notes due 2022 to certain amendments to the indentures governing such notes, which eliminated substantially all of the restrictive covenants, certain events of default and other provisions contained in each such indenture.
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The difference between the cash paid and the carrying amount of notes repurchased in the Notes Repurchases resulted in a $124.0 million gain. In connection with the March 2019 Refinancing Transactions, we also incurred costs and fees totaling $26.2 million, of which $4.2 million related to the Notes Repurchases, $19.1 million related to the 2027 Notes issuance and $2.9 million related to the Revolving Credit Facility Amendment. The costs incurred in connection with the Notes Repurchases were charged to expense in the first quarter of 2019 and recorded as a partial offset to the gain. The costs incurred in connection with the 2027 Notes issuance and the Revolving Credit Facility Amendment, together with previously deferred debt issuance costs associated with the Revolving Credit Facility, have been deferred to be amortized as interest expense over the terms of the respective instruments. The net gain resulting from the March 2019 Refinancing Transactions was included in the Gain on extinguishment of debt line item in the Condensed Consolidated Statements of Operations.
June 2019 Revolving Credit Facility Borrowing
In June 2019, the Company borrowed $300.0 million under the Revolving Credit Facility to be used for purposes consistent with the Company’s capital allocation priorities, including for general corporate purposes.
Maturities
The following table presents, as of March 31, 2020, the maturities on our long-term debt for each of the five fiscal years subsequent to December 31, 2019 (in thousands):
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Maturities (1)
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2020
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|
$
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34,150
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|
2021
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|
$
|
34,150
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2022 (2)
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|
$
|
247,723
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|
2023
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|
$
|
1,684,430
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2024 (2)
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$
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3,770,225
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__________
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(1)
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Certain amounts borrowed pursuant to the Credit Facilities will immediately mature if certain of our senior notes 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 seek to repay or refinance certain senior notes prior to their stated maturity dates. The amounts in this maturities table do not reflect any such early repayment or refinancing; rather, they reflect stated maturity dates.
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(2)
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Based on the Company’s borrowings under the Revolving Credit Facility that were outstanding at March 31, 2020, $22.8 million will mature in 2022, with the remainder maturing in 2024.
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NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal Proceedings and Investigations
We and certain of our subsidiaries are involved in various claims, legal proceedings and internal and governmental investigations (collectively, proceedings) that arise from time to time, including, among others, those relating to product liability, intellectual property, regulatory compliance, consumer protection, tax and commercial matters. While we cannot predict the outcome of these proceedings and we intend to vigorously prosecute or defend our position as appropriate, there can be no assurance that we will be successful or obtain any requested relief. An adverse outcome in any of these proceedings could have a material adverse effect on our business, financial condition, 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 them.
We believe that certain settlements and judgments, as well as legal defense costs, relating to certain product liability or other matters are or may be covered in whole or in part under our insurance policies with a number of insurance carriers. In certain circumstances, insurance carriers reserve their rights to contest or deny coverage. We intend to contest vigorously any 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 realization of the potential claim for recovery is considered probable. Amounts recovered under our insurance policies could be materially less than stated coverage limits and may not be adequate to cover damages, other relief and/or costs relating to claims. In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available. See the risk factor “We may not have and may be unable to obtain or maintain insurance adequate to cover potential liabilities” in the Annual Report for more information.
As of March 31, 2020, our accrual for loss contingencies totaled $442.2 million, the most significant components of which relate to product liability and related matters associated with transvaginal surgical mesh products, which we have not sold since March 2016. 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. While the timing of the resolution of certain of the matters accrued for as loss contingencies remains uncertain and could extend beyond 12 months, as of March 31, 2020, the entire liability accrual amount is classified in the Current portion of legal settlement accrual in the Condensed Consolidated Balance Sheets.
Product Liability and Related Matters
We and certain of our subsidiaries have been named as defendants in numerous lawsuits in various U.S. federal and state courts, and in Canada, Australia and other countries, alleging personal injury resulting from the use of certain products of our subsidiaries, including the product liability and other related matters described below in more detail.
Vaginal Mesh. Since 2008, we and certain of our subsidiaries, including American Medical Systems Holdings, Inc. (AMS) (subsequently converted to Astora Women’s Health Holding LLC and merged into Astora Women’s Health LLC and referred to herein as AMS and/or Astora), have been named as defendants in multiple lawsuits in various state and federal courts in the U.S. (including a federal multidistrict litigation (MDL) in the U.S. District Court for the Southern District of West Virginia), and in Canada, Australia and other countries, alleging personal injury resulting from the use of transvaginal surgical mesh products designed to treat pelvic organ prolapse (POP) and stress urinary incontinence (SUI). Our subsidiaries have not sold such products since March 2016. Plaintiffs claim a variety of personal injuries, including chronic pain, incontinence, inability to control bowel function and permanent deformities, and seek compensatory and punitive damages, where available.
Various Master Settlement Agreements (MSAs) and other agreements have resolved up to approximately 71,000 filed and unfiled U.S. mesh claims. These MSAs and other agreements were entered into at various times between June 2013 and the present, were solely by way of compromise and settlement and were not in any way an admission of liability or fault by us or any of our subsidiaries. All MSAs are subject to a process that includes guidelines and procedures for administering the settlements and the release of funds. In certain cases, the MSAs provide for the creation of QSFs into which the settlement funds will be deposited, establish participation requirements and allow for a reduction of the total settlement payment in the event participation thresholds are not met. Funds deposited in QSFs are considered restricted cash and/or restricted cash equivalents. Distribution of funds to any individual claimant is conditioned upon the receipt of documentation substantiating product use, the dismissal of any lawsuit and the release of the claim as to us and all affiliates. Prior to receiving funds, an individual claimant must represent and warrant that liens, assignment rights or other claims identified in the claims administration process have been or will be satisfied by the individual claimant. Confidentiality provisions apply to the settlement funds, amounts allocated to individual claimants and other terms of the agreement.
In October 2019, the Ontario Superior Court of Justice approved a class action settlement covering unresolved claims by Canadian women implanted with an AMS vaginal mesh device. Astora funded the settlement in February 2020.
The following table presents the changes in the QSFs and mesh liability accrual balances during the three months ended March 31, 2020 (in thousands):
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Qualified Settlement Funds
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Mesh Liability Accrual
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Balance as of December 31, 2019
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$
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242,842
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|
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$
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454,031
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Additional charges
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—
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|
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30,454
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Cash distributions to settle disputes from Qualified Settlement Funds
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(47,801
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)
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(47,801
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)
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Cash distributions to settle disputes
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—
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(17,819
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)
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Other (1)
|
694
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(2,180
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)
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Balance as of March 31, 2020
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$
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195,735
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|
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$
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416,685
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__________
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(1)
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Amounts deposited in the QSFs may earn interest, which is generally used to pay administrative costs of the fund and is reflected in the table above as an increase to the QSF and Mesh Liability Accrual balances. Any interest remaining after all claims have been paid will generally be distributed to the claimants who participated in that settlement. Also included within this line are foreign currency adjustments for settlements not denominated in U.S. dollars.
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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.
As of March 31, 2020, the Company has made total cumulative mesh liability payments of approximately $3.6 billion, $195.7 million of which remains in the QSFs as of March 31, 2020. We currently expect to fund the remaining payments under all previously executed settlement agreements into the QSFs during 2020. 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 various U.S. state attorneys general into mesh products, including transvaginal surgical mesh products designed to treat POP and SUI. In November 2013, we received a subpoena relating to this investigation from the state of California, and we have subsequently received additional subpoenas from California and other states. We are cooperating with the investigations.
The MDL court has been remanding MDL cases to their districts of origin for further proceedings. Other cases are proceeding in various state and federal courts. The earliest trial is currently scheduled for August 2020; however, trials may occur earlier or later as timing remains uncertain due to the impact of COVID-19 and other factors. We will continue to vigorously defend any unresolved claims and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred.
Although the Company believes it has appropriately estimated the probable total amount of loss associated with all mesh-related matters as of the date of this report, litigation is ongoing in certain cases that have not settled, and it is reasonably possible that further claims may be filed or asserted and that adjustments to our overall liability accrual may be required. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Opioid-Related Matters
Since 2014, multiple U.S. states as well as other governmental persons or entities and private plaintiffs in the U.S. and Canada have filed suit against us and/or certain of our subsidiaries, including Endo Health Solutions Inc. (EHSI), Endo Pharmaceuticals Inc. (EPI), Par Pharmaceutical, Inc. (PPI), Par Pharmaceutical Companies, Inc. (PPCI), Endo Generics Holdings, Inc. (EGHI), Vintage Pharmaceuticals, LLC, Generics Bidco I, LLC and DAVA Pharmaceuticals, LLC, and in Canada, Paladin, as well as various other manufacturers, distributors, pharmacies and/or others, asserting claims relating to defendants’ alleged sales, marketing and/or distribution practices with respect to prescription opioid medications, including certain of our products. As of April 30, 2020, filed cases in the U.S. of which we were aware include, but are not limited to, approximately 20 cases filed by or on behalf of states; approximately 2,780 cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately 280 cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers and approximately 160 cases filed by individuals. Certain of the cases have been filed as putative class actions. The Canadian cases include an action filed by British Columbia on behalf of a proposed class of all federal, provincial and territorial governments and agencies in Canada that paid healthcare, pharmaceutical and treatment costs related to opioids, as well as three additional putative class actions, filed in Ontario, Quebec and British Columbia, seeking relief on behalf of Canadian residents who were prescribed and/or consumed opioid medications.
Many of the U.S. cases have been coordinated in a federal MDL pending in the U.S. District Court for the Northern District of Ohio. Other cases are pending in various federal or state courts. The cases are at various stages. The first MDL trial, relating to the claims of two Ohio counties (Track One plaintiffs), was set for October 2019 but did not go forward after most defendants settled. EPI, EHSI, PPI and PPCI executed a settlement agreement with the Track One plaintiffs in September 2019 which provided for payments totaling $10 million and up to $1 million of VASOSTRICT® and/or ADRENALIN®. Under the settlement agreement, the Track One plaintiffs may be entitled to additional payments in the event of a comprehensive resolution of government-related opioid claims. The settlement agreement was solely by way of compromise and settlement and was not in any way an admission of liability or fault by us or any of our subsidiaries. The earliest trial is currently scheduled for August 2020; however, trials may occur earlier or later as timing remains uncertain due to the impact of COVID-19 and other factors. Most cases remain at the pleading and/or discovery stage.
The complaints in the cases assert a variety of claims, including but not limited to statutory claims asserting violations of public nuisance, consumer protection, unfair trade practices, racketeering, Medicaid fraud and/or drug dealer liability laws and/or common law claims for public nuisance, fraud/misrepresentation, strict liability, negligence and/or unjust enrichment. The claims are generally based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or alleged failures to take adequate steps to identify and report suspicious orders and to prevent abuse and diversion. Plaintiffs have generally sought various remedies including, without limitation, declaratory and/or injunctive relief; compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees, costs and/or other relief.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition to the lawsuits described above, the Company and/or its subsidiaries have received certain subpoenas, civil investigative demands (CIDs) and informal requests for information concerning the sale, marketing and/or distribution of prescription opioid medications, including the following:
Various state attorneys general have served subpoenas and/or CIDs on EHSI and/or EPI. We are cooperating with the investigations.
In January 2018, EPI received a federal grand jury subpoena from the U.S. District Court for the Southern District of Florida seeking documents and information related to OPANA® ER, other oxymorphone products and marketing of opioid medications. We are cooperating with the investigation.
In September 2019, EPI, EHSI, PPI and PPCI received subpoenas from the New York State Department of Financial Services seeking documents and information regarding the marketing, sale and distribution of opioid medications in New York. We are providing information responsive to these subpoenas.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In January 2020, EPI and PPI executed a settlement agreement with the state of Oklahoma providing for a payment of approximately $8.75 million in resolution of potential opioid-related claims. The settlement agreement was solely by way of compromise and settlement and was not in any way an admission of liability or fault by us or any of our subsidiaries.
Generic Drug Pricing Matters
Since March 2016, various private plaintiffs and state attorneys general have filed cases against our subsidiary PPI and/or, in some instances, the Company, Generics Bidco I, LLC, DAVA Pharmaceuticals, LLC, EPI, EHSI and/or PPCI, as well as other pharmaceutical manufacturers and, in some instances, other corporate and/or individual defendants, alleging price-fixing and other anticompetitive conduct with respect to generic pharmaceutical products. These cases, which include proposed class actions filed on behalf of direct purchasers, end-payers and indirect purchaser resellers, as well as non-class action suits, have generally been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Eastern District of Pennsylvania.
The various complaints and amended complaints generally assert claims under federal and/or state antitrust law, state consumer protection statutes and/or state common law, and seek damages, treble damages, civil penalties, disgorgement, declaratory and injunctive relief, costs and attorneys’ fees. Some claims are based on alleged product-specific conspiracies and other claims allege broader, multiple-product conspiracies. Under these overarching conspiracy theories, plaintiffs seek to hold all alleged participants in a particular conspiracy jointly and severally liable for all harms caused by the alleged conspiracy, not just harms related to the products manufactured and/or sold by a particular defendant.
The MDL court has issued various case management and substantive orders, including orders denying certain motions to dismiss, and discovery is ongoing.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In December 2014, our subsidiary PPI received from the Antitrust Division of the U.S. Department of Justice (DOJ) a federal grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania addressed to “Par Pharmaceuticals.” The subpoena requested documents and information focused primarily on product and pricing information relating to the authorized generic version of Lanoxin (digoxin) oral tablets and generic doxycycline products, and on communications with competitors and others regarding those products. We are cooperating with the investigation.
In May 2018, we and our subsidiary PPCI each received a CID from the DOJ in relation to a False Claims Act investigation concerning whether generic pharmaceutical manufacturers engaged in price-fixing and market allocation agreements, paid illegal remuneration and caused the submission of false claims. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Antitrust Matters
Beginning in November 2013, multiple alleged purchasers of LIDODERM® sued our subsidiary EPI and other pharmaceutical companies alleging violations of antitrust law arising out of their settlement of certain patent infringement litigation. The various complaints asserted claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law and sought damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. These cases were consolidated and/or coordinated in a federal MDL in the U.S. District Court for the Northern District of California. The last cases remaining in the MDL were dismissed with prejudice in September 2018, when the court approved EPI’s settlements with direct and indirect purchaser classes. Those settlement agreements provided for aggregate payments of approximately $100 million. Of this total, EPI paid approximately $60 million in 2018, $30 million in the first quarter of 2019 and $10 million in the first quarter of 2020. In September 2019, Blue Cross Blue Shield of Michigan and Blue Care Network of Michigan filed a complaint against EPI and other pharmaceutical companies in the Third Judicial Circuit Court, Wayne County, Michigan, asserting claims substantially similar to those asserted in the MDL. In October 2019, certain defendants removed the case to federal court; in April 2020, the case was remanded back to state court.
Beginning in June 2014, multiple alleged purchasers of OPANA® ER sued our subsidiaries EHSI and EPI and other pharmaceutical companies including Impax Laboratories, LLC (formerly Impax Laboratories, Inc. and referred to herein as Impax) and Penwest Pharmaceuticals Co., which our subsidiary EPI had acquired, alleging violations of antitrust law arising out of an agreement reached by EPI and Impax to settle certain patent infringement litigation and EPI’s introduction of reformulated OPANA® ER. Some cases were filed on behalf of putative classes of direct and indirect purchasers, while others were filed on behalf of individual retailers or health care benefit plans. The cases have been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Illinois. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. In March 2019, direct and indirect purchaser plaintiffs filed motions for class certification, which remain pending. In April 2020, defendants filed motions for summary judgment.
Beginning in February 2009, the Federal Trade Commission (FTC) and certain private plaintiffs sued our subsidiaries PPCI (since June 2016, EGHI) and/or PPI as well as other pharmaceutical companies alleging violations of antitrust law arising out of the settlement of certain patent litigation concerning the generic version of AndroGel® and seeking damages, treble damages, equitable relief and attorneys’ fees and costs. The cases were consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Georgia. In May 2016, plaintiffs representing a putative class of indirect purchasers voluntarily dismissed their claims with prejudice. In February 2017, the FTC voluntarily dismissed its claims against EGHI with prejudice. In June 2018, the MDL court granted in part and denied in part various summary judgment and evidentiary motions filed by defendants. In particular, among other things, the court rejected two of the remaining plaintiffs’ causation theories and rejected damages claims related to AndroGel® 1.62%. In July 2018, the court denied certain plaintiffs’ motion for certification of a direct purchaser class. In November 2019, PPI and PPCI entered into settlement agreements with all but one of the remaining plaintiffs in the MDL. The settlement agreements were solely by way of compromise and settlement and were not in any way an admission of liability or fault. Separately, in August 2019, several alleged direct purchasers filed suit in the U.S. District Court for the Eastern District of Pennsylvania asserting claims substantially similar to those asserted in the MDL, as well as additional claims against other defendants relating to other alleged conduct. In January 2020, the U.S. District Court for the Eastern District of Pennsylvania denied defendants’ motion to transfer venue to the Northern District of Georgia.
Beginning in February 2018, several alleged indirect purchasers filed proposed class actions against our subsidiary PPI and other pharmaceutical companies alleging violations of antitrust law arising out of the settlement of certain patent litigation concerning the generic version of Zetia® (ezetimibe). The various complaints asserted claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law and sought injunctive relief, damages, treble damages, attorneys’ fees and costs. In June 2018, these and other related cases, including proposed direct purchaser class actions in which PPI was not named as a defendant, were consolidated and/or coordinated for pretrial proceedings in a federal MDL in the U.S. District Court for the Eastern District of Virginia. In September 2018, the indirect purchaser plaintiffs dismissed their claims against PPI without prejudice. In June and July 2019, the MDL court granted the direct purchaser plaintiffs and certain retailer plaintiffs leave to file amended complaints adding PPI as a defendant. In July 2019, PPI entered into settlement agreements with both the direct purchaser plaintiffs and the retailer plaintiffs. The direct purchaser settlement was subject to court approval, which was granted in March 2020. The settlement agreements were solely by way of compromise and settlement, were not in any way an admission of liability or fault and involved no monetary payment.
Beginning in May 2018, multiple complaints were filed in the U.S. District Court for the Southern District of New York against PPI, EPI and/or us, as well as other pharmaceutical companies, alleging violations of antitrust law arising out of the settlement of certain patent litigation concerning the generic version of Exforge® (amlodipine/valsartan). Some cases were filed on behalf of putative classes of direct and indirect purchasers; others are non-class action suits. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In September 2018, the putative class plaintiffs stipulated to the dismissal without prejudice of their claims against EPI and us, and the retailer plaintiffs later did the same. PPI filed a partial motion to dismiss certain claims in September 2018, which was granted in August 2019. The cases are currently in discovery.
Beginning in August 2019, multiple complaints were filed in the U.S. District Court for the Southern District of New York against PPI and other pharmaceutical companies alleging violations of antitrust law arising out the settlement of certain patent litigation concerning generic versions of Seroquel XR® (extended release quetiapine fumarate). The claims against PPI are based on allegations that PPI entered into an exclusive acquisition and license agreement with Handa Pharmaceuticals, LLC (Handa) in 2012 pursuant to which Handa assigned to PPI certain rights under a prior settlement agreement between Handa and AstraZeneca resolving certain patent litigation. Some cases were filed on behalf of putative classes of direct and indirect purchasers; others are non-class action suits. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In October 2019, the defendants filed various motions to dismiss and, in the alternative, moved to transfer the litigation to the U.S. District Court for the District of Delaware.
To the extent unresolved, we will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In February 2015, EGHI and affiliates received a CID from the Office of the Attorney General for the state of Alaska seeking documents and information regarding EGHI’s settlement of AndroGel® patent litigation as well as documents produced in the aforementioned litigation filed by the FTC. Also in February 2015, EHSI received a CID from Alaska’s Office of the Attorney General seeking production of certain documents and information concerning agreements with Actavis and Impax settling OPANA® ER patent litigation. We are cooperating with the investigations.
In July 2019, EPI received a CID from the FTC seeking documents and information regarding oxymorphone ER and EPI’s settlement of a contract dispute with Impax (now Amneal) in August 2017. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Securities Litigation
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. The complaint alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 against us, certain of our current and former directors and officers, and the underwriters who participated in the offering, based on certain disclosures about Endo’s generics business. In June 2019, the parties entered into a settlement providing for, among other things, a $50 million payment to the investor class in exchange for a release of their claims. In December 2019, the court denied a petition to intervene filed by the lead plaintiff in the Pelletier litigation described below, and granted final approval of the settlement. In December 2019, the putative intervenor appealed the denial of its petition to intervene and the final approval order to Pennsylvania Superior Court. That appeal remains pending. As a result of the settlement, during the first quarter of 2019, the Company recorded an increase of approximately $50 million to its accrual for loss contingencies. As the Company’s insurers agreed to fund the settlement, the Company also recorded a corresponding insurance receivable of approximately $50 million during the first quarter of 2019, which was recorded as Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The Company’s insurers funded the settlement during the third quarter of 2019, resulting in corresponding decreases to the Company’s accrual for loss contingencies and insurance receivable.
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 sought class certification, declaratory relief, damages, interest and costs based on alleged violations of the Ontario Securities Act arising out of alleged negligent misrepresentations concerning the Company’s revenues, profit margins and earnings per share; its receipt of a subpoena from the state of Connecticut regarding doxycycline hyclate, amitriptyline hydrochloride, doxazosin mesylate, methotrexate sodium and oxybutynin chloride; and the erosion of the Company’s U.S. generic pharmaceuticals business. In January 2019, plaintiff amended her statement of claim to add a claim on behalf of herself and similarly-situated Canadian investors who purchased Endo’s securities between January 11, 2016 and June 8, 2017, based on our decision to voluntarily remove reformulated OPANA® ER from the market. In April 2020, the parties reached a settlement in principle, which will be subject to court approval. The amount of the settlement is not material to the Company and is expected to be funded by the Company’s insurers.
In November 2017, a putative class action entitled Pelletier v. Endo International plc, Rajiv Kanishka Liyanaarchchie De Silva, Suketu P. Upadhyay and Paul V. Campanelli was filed in the U.S. District Court for the Eastern District of Pennsylvania by an individual shareholder on behalf of himself and all similarly situated shareholders. The lawsuit alleges violations of Section 10(b) and 20(a) of the Exchange Act relating to the pricing of various generic pharmaceutical products. In June 2018, the court appointed Park Employees’ and Retirement Board Employees’ Annuity Benefit Fund of Chicago lead plaintiff in the action. In September 2018, the defendants filed a motion to dismiss, which the court granted in part and denied in part in February 2020. In particular, the court granted the motion and dismissed the claims with prejudice insofar as they were based on an alleged price-fixing conspiracy; the court otherwise denied the motion to dismiss, allowing other aspects of lead plaintiff’s claims to proceed.
To the extent unresolved, we will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
VASOSTRICT® Related Matters
In July 2016, Fresenius Kabi USA, LLC (Fresenius) sued our subsidiaries PPCI and Par Sterile Products, LLC (PSP LLC) in the U.S. District Court for the District of New Jersey alleging an anticompetitive scheme to exclude competition for PPCI’s VASOSTRICT®, a vasopressin-based cardiopulmonary drug. In particular, Fresenius alleged violations of Sections 1 and 2 of the Sherman Antitrust Act, as well as state antitrust and common law, based on assertions that our subsidiaries entered into exclusive supply agreements with one or more active pharmaceutical ingredient (API) manufacturers and that, as a result, Fresenius could not obtain vasopressin API in order to file an Abbreviated New Drug Application (ANDA) to obtain U.S. Food and Drug Administration (FDA) approval for its own vasopressin product. Fresenius sought actual, treble and punitive damages, attorneys’ fees and costs and injunctive relief. In February 2020, the court granted our subsidiaries’ motion for summary judgment on all claims and denied Fresenius’s cross-motion for partial summary judgment. In March 2020, Fresenius filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit.
In August 2017, our subsidiaries PPI and PSP LLC filed a complaint for actual, exemplary and punitive damages, injunctive relief and other relief against QuVa Pharma, Inc. (QuVa), Stuart Hinchen, Peter Jenkins and Mike Rutkowski in the U.S. District Court for the District of New Jersey. The complaint alleges misappropriation in violation of the federal Defend Trade Secrets Act, New Jersey’s Trade Secrets Act and New Jersey common law, as well as unfair competition, breach of contract, breach of fiduciary duty, breach of the duty of loyalty, tortious interference with contractual relations and breach of the duty of confidence in connection with VASOSTRICT®. In November 2017, we filed a motion for preliminary injunction seeking various forms of relief. In March 2018, the court granted in part our motion for preliminary injunction and enjoined QuVa from marketing and releasing its planned vasopressin product through the conclusion of trial. We subsequently deposited a bond to the court’s interest-bearing account to secure the preliminary injunction. In May 2018, defendants filed a notice of appeal to the Third Circuit Court of Appeals indicating intent to appeal the court’s preliminary injunction. In February 2019, the defendants filed counterclaims for defamation, tortious interference with contract, tortious interference with prospective business relations and witness interference. The counterclaims seek actual, exemplary and punitive damages and other relief. In March 2019, we filed a motion to dismiss all of the defendants’ counterclaims. In April 2019, the Third Circuit Court of Appeals affirmed the court’s preliminary injunction but remanded for additional fact-finding concerning the duration of the preliminary injunction and, if needed, consideration of the additional trade secrets raised in our motion for preliminary injunction but not addressed by the preliminary injunction order. In September 2019, following the decision in Athenex Inc. v. Azar, No. 19-cv-00603, 2019 WL 3501811 (D.D.C. Aug. 1, 2019), which upheld the FDA’s determination that there is no clinical need for outsourcing facilities to compound drugs using bulk vasopressin, the parties submitted a proposed consent order to the district court agreeing to a lifting of the preliminary injunction against QuVa but reserving PPI and PSP LLC’s right to seek return or reduction of the bond. In January 2020, the court granted our motion to dismiss the defendants’ counterclaims and ordered the preliminary injunction lifted while the bond remains in place pending an adjudication on the merits. In March 2020, we filed a motion for partial summary judgment on the merits of PPI and PSP LLC’s breach of contract claims.
Beginning in April 2018, PSP LLC and PPI received notice letters from Eagle Pharmaceuticals, Inc., Sandoz, Inc., Amphastar Pharmaceuticals, Inc., Amneal Pharmaceuticals LLC, American Regent, Fresenius, Dr. Reddy’s Laboratories, Inc. and Aurobindo Pharma Limited advising of the filing by such companies of ANDAs/New Drug Applications (NDAs) for generic versions of VASOSTRICT® (vasopressin IV solution (infusion)) 20 units/ml and/or 200 units/10 ml. Beginning in May 2018, PSP LLC, PPI and Endo Par Innovation Company, LLC filed lawsuits against Eagle Pharmaceuticals, Inc., Sandoz, Inc., Amphastar Pharmaceuticals, Inc., Amneal Pharmaceuticals LLC, American Regent and Fresenius in the U.S. District Court for the District of Delaware or New Jersey within the 45-day deadline to invoke a 30-month stay of FDA approval pursuant to the Hatch-Waxman legislative scheme. The earliest trial is presently scheduled for January 2021; however, a trial may occur earlier or later as timing remains uncertain due to the impact of COVID-19 and other factors.
We will continue to vigorously defend or prosecute the foregoing matters as appropriate, to protect our intellectual property rights, to pursue all available legal and regulatory avenues and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Proceedings and Investigations
Proceedings similar to those described above may also be brought in the future. Additionally, we are involved in, or have been involved in, arbitrations or various other proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these other proceedings. Currently, neither we nor our subsidiaries are involved in any other proceedings that we expect to have a material effect on our business, financial condition, results of operations and cash flows.
NOTE 13. OTHER COMPREHENSIVE (LOSS) INCOME
During the three months ended March 31, 2020 and 2019, there were no tax effects allocated to any component of Other comprehensive (loss) income and there were no reclassifications out of Accumulated other comprehensive loss. Substantially all of the Company’s Accumulated other comprehensive loss balances at March 31, 2020 and December 31, 2019 consist of Foreign currency translation loss.
NOTE 14. SHAREHOLDERS' DEFICIT
The following table presents a reconciliation of the beginning and ending balances in Total shareholders' deficit for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Deferred Shares
|
|
Ordinary Shares
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total Shareholders' Deficit
|
BALANCE, DECEMBER 31, 2019
|
$
|
45
|
|
|
$
|
23
|
|
|
$
|
8,904,692
|
|
|
$
|
(9,552,214
|
)
|
|
$
|
(219,090
|
)
|
|
$
|
(866,544
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
129,930
|
|
|
—
|
|
|
129,930
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,437
|
)
|
|
(14,437
|
)
|
Compensation related to share-based awards
|
—
|
|
|
—
|
|
|
17,645
|
|
|
—
|
|
|
—
|
|
|
17,645
|
|
Tax withholding for restricted shares
|
—
|
|
|
—
|
|
|
(4,398
|
)
|
|
—
|
|
|
—
|
|
|
(4,398
|
)
|
Other
|
(1
|
)
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
BALANCE, MARCH 31, 2020
|
$
|
44
|
|
|
$
|
23
|
|
|
$
|
8,917,927
|
|
|
$
|
(9,422,284
|
)
|
|
$
|
(233,527
|
)
|
|
$
|
(737,817
|
)
|
The following table presents a reconciliation of the beginning and ending balances in Total shareholders' deficit for the three months ended March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Deferred Shares
|
|
Ordinary Shares
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total Shareholders' Deficit
|
BALANCE, DECEMBER 31, 2018, PRIOR TO THE ADOPTION OF ASC 842, LEASES
|
$
|
46
|
|
|
$
|
22
|
|
|
$
|
8,855,810
|
|
|
$
|
(9,124,932
|
)
|
|
$
|
(229,229
|
)
|
|
$
|
(498,283
|
)
|
Effect of adopting ASC 842, Leases
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,646
|
)
|
|
—
|
|
|
(4,646
|
)
|
BALANCE, JANUARY 1, 2019
|
$
|
46
|
|
|
$
|
22
|
|
|
$
|
8,855,810
|
|
|
$
|
(9,129,578
|
)
|
|
$
|
(229,229
|
)
|
|
$
|
(502,929
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,573
|
)
|
|
—
|
|
|
(18,573
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,730
|
|
|
4,730
|
|
Compensation related to share-based awards
|
—
|
|
|
—
|
|
|
24,733
|
|
|
—
|
|
|
—
|
|
|
24,733
|
|
Exercise of options
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Tax withholding for restricted shares
|
—
|
|
|
—
|
|
|
(2,414
|
)
|
|
—
|
|
|
—
|
|
|
(2,414
|
)
|
Other
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
BALANCE, MARCH 31, 2019
|
$
|
45
|
|
|
$
|
22
|
|
|
$
|
8,878,133
|
|
|
$
|
(9,148,151
|
)
|
|
$
|
(224,499
|
)
|
|
$
|
(494,450
|
)
|
Share-Based Compensation
The Company recognized share-based compensation expense of $17.6 million and $24.7 million during the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the total remaining unrecognized compensation cost related to non-vested share-based compensation awards amounted to $49.3 million.
As of March 31, 2020, the weighted average remaining requisite service period for non-vested stock options was 0.6 years and for non-vested restricted stock units was 1.8 years.
NOTE 15. OTHER (INCOME) EXPENSE, NET
The components of Other (income) expense, net for the three months ended March 31, 2020 and 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Net (gain) loss on sale of business and other assets (1)
|
$
|
(8,192
|
)
|
|
$
|
1,294
|
|
Foreign currency (gain) loss, net (2)
|
(5,639
|
)
|
|
1,716
|
|
Net loss from our investments in the equity of other companies (3)
|
249
|
|
|
2,086
|
|
Other miscellaneous, net
|
(392
|
)
|
|
(294
|
)
|
Other (income) expense, net
|
$
|
(13,974
|
)
|
|
$
|
4,802
|
|
__________
|
|
(1)
|
Amounts primarily relate to the sales of various ANDAs.
|
|
|
(2)
|
Amounts relate to the remeasurement of the Company’s foreign currency denominated assets and liabilities.
|
|
|
(3)
|
Amounts relate to the income statement impacts of our investments in the equity of other companies, including investments accounted for under the equity method.
|
NOTE 16. INCOME TAXES
The following table displays our Income (loss) from continuing operations before income tax, Income tax (benefit) expense and Effective tax rate for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Income (loss) from continuing operations before income tax
|
$
|
21,249
|
|
|
$
|
(1,709
|
)
|
Income tax (benefit) expense
|
$
|
(136,332
|
)
|
|
$
|
10,903
|
|
Effective tax rate
|
(641.6
|
)%
|
|
(638.0
|
)%
|
The income tax benefit for the three months ended March 31, 2020 primarily relates to the discrete tax benefit arising from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as discussed below. As of March 31, 2020, we had valuation allowances established against our deferred tax assets in most jurisdictions in which we operate, with the exception of Canada and India. The income tax expense for the comparable 2019 period primarily relates to a taxable gain arising from the extinguishment of debt in the March 2019 Refinancing Transactions.
On March 27, 2020, the CARES Act was enacted by the U.S. government in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. In the first quarter of 2020, the Company has recorded a discrete tax benefit in continuing operations of $137.3 million as a result of the change in the NOL carryback period.
NOTE 17. NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the numerator and denominator of basic and diluted net income (loss) per share for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
Income (loss) from continuing operations
|
$
|
157,581
|
|
|
$
|
(12,612
|
)
|
Loss from discontinued operations, net of tax
|
(27,651
|
)
|
|
(5,961
|
)
|
Net income (loss)
|
$
|
129,930
|
|
|
$
|
(18,573
|
)
|
Denominator:
|
|
|
|
For basic per share data—weighted average shares
|
227,198
|
|
|
224,594
|
|
Dilutive effect of ordinary share equivalents
|
5,816
|
|
|
—
|
|
For diluted per share data—weighted average shares
|
233,014
|
|
|
224,594
|
|
Basic net income (loss) per share amounts are computed based on the weighted average number of ordinary shares outstanding during the period. Diluted net income (loss) per share amounts are computed based on the weighted average number of ordinary shares outstanding and, if there is net income from continuing operations during the period, the dilutive effect of ordinary share equivalents outstanding during the period.
The dilutive effect of ordinary share equivalents is measured using the treasury stock method. Stock options and awards that have been issued but for which a grant date has not yet been established are not considered in the calculation of basic or diluted weighted average shares.
For the three months ended March 31, 2020, aggregate stock options and stock awards of 7.2 million and 3.3 million, respectively, were excluded from the diluted share calculation because their effect would have been anti-dilutive. All potentially dilutive items were excluded from the diluted share calculation for the three months ended March 31, 2019 because their effect would have been anti-dilutive as the Company was in a loss position.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources and critical accounting estimates of Endo International plc. This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements and related notes thereto and the Annual Report. The 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 Endo International plc and its subsidiaries.
RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past and may continue to fluctuate. These fluctuations are primarily due to (1) the timing of new product launches, (2) purchasing patterns of our customers, (3) market acceptance of our products, (4) the impact of competitive products and products we recently acquired, (5) pricing of our products, (6) the timing of mergers, acquisitions, divestitures and other related activity and (7) other actions taken by the Company which may impact the availability of our products. These fluctuations are also attributable to charges incurred for compensation related to share-based payments, amortization of intangible assets, asset impairment charges, litigation-related charges, restructuring charges and certain upfront, milestone and other payments made or accrued pursuant to acquisition or licensing agreements.
Additionally, as further described below, the impact on our results of COVID-19 and related changes in economic conditions, including changes to consumer spending resulting from the rapid rise in local and national unemployment rates, are highly uncertain and, in many instances, outside of our control. The duration and severity of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult to anticipate. There are numerous uncertainties related to the COVID-19 pandemic that have impacted our ability to forecast our future operations. The extent to which COVID-19 will affect our business, financial position and operating results cannot be predicted with certainty; however, any such impact could be material. In addition, because COVID-19 did not begin to affect our financial results until late in the first quarter of 2020, its impact on our consolidated results and the results of our business segments in the first quarter of 2020 may not be directly comparable to any historical period and are not necessarily indicative of its impact on our results for the remainder of 2020 or any subsequent periods. COVID-19 could also increase the degree to which our quarterly results, including the results of our business segments, fluctuate in the future. Refer to “Risk Factors” in Part II, Item 1A of this report for further details.
COVID-19 Update and Other Key Trends
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China. In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Many countries and localities have announced aggressive actions to reduce the spread of the disease, including limiting non-essential gatherings of people, suspending all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing shelter-in-place orders (subject to limited exceptions). We are closely monitoring the impact of COVID-19 on all aspects of our business, the pharmaceutical industry and the economy as a whole, including how it has and will continue to impact our workforce, our customers and the patients they serve, our manufacturing and supply chain operations, our research and development (R&D) programs and regulatory approval processes and our liquidity and access to capital. In addition to our existing business continuity plans, we have established a team, led by our President and Chief Executive Officer and our executive leadership team, which has developed and implemented a range of proactive measures to address the risks, uncertainties and operational challenges associated with COVID-19. This team is closely monitoring the rapidly evolving situation and is implementing plans intended to limit the impact of COVID-19 on our business so that we can continue to produce the critical care medicines that hospitals and healthcare providers need to treat patients, including those with COVID-19. Actions we have taken to date and expected key trends are further described below.
Workforce. We have taken, and will continue to take, proactive measures to provide for the well-being of our workforce around the globe while continuing to safely produce products upon which patients and their healthcare providers rely. In addition to employing and paying full wages to our workforce, we are providing additional compensation to certain of our on-site operations employees for the hours worked during the COVID-19 pandemic. We have implemented alternative working practices and mandatory work-from-home requirements for appropriate employees, inclusive of our executive leadership team. We have suspended international and domestic travel, increased our already-thorough cleaning protocols throughout our facilities and prohibited non-essential visitors from our sites. We have also implemented various social distancing, modified schedules, shift rotation and other similar policies at our manufacturing facilities. Certain of these measures have resulted in increased and unexpected costs and, as further described below, resulted in the prioritization of certain products in our production plans.
Customers and the Patients They Serve. We have experienced, and expect to continue to experience, changes in customer demand as the COVID-19 pandemic evolves. Beginning late in the first quarter of 2020, we experienced a significant increase in sales volumes for certain of our critical care products administered to patients infected with COVID-19, such as VASOSTRICT®, ADRENALIN® and albuterol sulfate HFA inhaler, the authorized generic of Merck’s Proventil®. These higher volumes resulted from increased utilization and channel inventory stocking of these products, primarily to treat patients infected with COVID-19. Other products not used to treat COVID-19, such as everolimus tablets, a generic version of Novartis Pharmaceuticals Corporation’s Afinitor®, have also experienced increased demand due to accelerated prescription fulfillment that we believe is a result of concerns of healthcare providers and consumers regarding their ability to access medications because of shelter-in-place and similar measures taken by governments. At the same time, certain products that are physician administered, including XIAFLEX® and SUPPRELIN® LA, began experiencing decreased demand during the last two weeks of the first quarter of 2020 due to a reduction in physician activity and a slowing of patient office visits resulting from shelter-in-place orders. Additionally, as a result of our work-from-home requirements, we have transitioned to a “virtual” engagement model to continue supporting healthcare professionals, patient care and access to medicines.
Manufacturing and Supply Chain Operations. As of the date of this report, our business has not experienced any material supply issues related to COVID-19 and our manufacturing and quality assurance facilities across the globe have continued to operate. We have taken, and plan to continue to take, commercially practical measures to keep these facilities open as they are critical to our ability to reliably supply required critical care and medically necessary products. These measures, including the implementation of social distancing, modified schedules, shift rotation and other similar policies at our manufacturing facilities, as well as changes in our workforce availability have impacted our manufacturing and supply chain productivity at certain of our facilities and resulted in the prioritization of certain products, such as VASOSTRICT®, in our production plans to provide for their continued availability during and after the pandemic. We believe that our diversified manufacturing footprint, which includes a combination of Endo owned and leased facilities located in the U.S. and India, supply agreements and strong business relationships with numerous contract manufacturing organizations throughout the world, including in the U.S., Canada, Europe and India, and our proven ability to be a preferred partner of choice to large pharmaceutical companies seeking authorized generic distributors for their branded products, is a critical factor to mitigate significant risks related to manufacturing and supply chain disruption. This footprint, overseen by our global quality and supply chain teams in Ireland, combined with a skilled management team with significant experience in manufacturing and supply chain operations, has enabled us to respond quickly and effectively to the evolving COVID-19 pandemic to date.
Clinical and Development Programs. We have a number of ongoing clinical trials. We are committed to the safety of our patients, employees and others involved in these trials. We are monitoring COVID-19 closely and continue to partner with the FDA on our ongoing clinical trials, regulatory applications and other R&D activities. Based on an assessment of our R&D programs, including our clinical trials, we have developed a plan and timeline for each study in order to enhance communication with patients, sites and vendors. However, we may experience delays in some of our clinical trials and product development and commercialization programs, including obtaining adequate patient enrollment, receiving regulatory approvals and successfully bringing product candidates to market. For example, as a result of COVID-19 and its impact on medical aesthetics physician office closures and consumer spending, we are planning on changing the anticipated product launch of collagenase clostridium histolyticum (CCH) for the treatment of cellulite in the buttocks, if approved, to 2021.
Key Trends. Although we did not experience significant disruptions to our business during the three months ended March 31, 2020 from COVID-19, we have since experienced and expect that we, and our industry as a whole, will continue to experience a greater impact going forward. The most significant trends we face as a result of the COVID-19 pandemic include: (i) decreases in demand for certain of our physician administered products due to physician office closures and a decline in patients electing to be treated, (ii) potential temporary decreases to the supply of certain of our products due to modified production schedules to safely maintain operations in response to COVID-19 and other factors including, without limitation, workforce availability, (iii) potential idle capacity charges based on implementation of social distancing, modified schedules, shift rotation and other similar policies at our manufacturing facilities and (iv) potential delays in our ability to launch some new products due to production prioritization and economic conditions and other factors outside of our control. For further information regarding the impact of COVID-19 on the Company, please refer to “Risk Factors” in Part II, Item 1A.
Our estimated revenue trends for the full year 2020 compared to the full year 2019 are set forth below. These estimated revenue trends reflect the current expectations of our management team based on information currently available to them. Our estimates are subject to significant risks and uncertainties that could cause our actual results to differ materially from those indicated below, including our assumptions about the duration and severity of COVID-19 and the impact of any related governmental, business or other actions, any of which could cause the impact of COVID-19 to be more significant than our current expectations.
|
|
•
|
For the full year 2020, we expect increased revenues from our Sterile Injectables segment as compared to 2019, primarily driven by increased sales of VASOSTRICT®. Beginning late in the first quarter of 2020, we experienced a significant increase in sales volumes for VASOSTRICT® compared to pre-COVID-19 levels resulting from increased utilization and channel inventory stocking of this product, primarily to treat patients infected with COVID-19. We expect that there will be an increase in revenues in the second quarter of 2020 compared to the first quarter, primarily due to higher utilization and channel inventory stocking. During the second half of 2020, we anticipate a period of destocking with a subsequent return toward pre-COVID-19 purchasing levels. Additionally, we expect the increase in VASOSTRICT® in 2020 to be partially offset by decreases in certain other Sterile Injectables, primarily due to assumed competitive pressures not related to COVID-19.
|
|
|
•
|
For the full year 2020, we expect a decline in revenues from the Specialty Products portfolio of our Branded Pharmaceuticals segment as compared to 2019. During the last two weeks of the first quarter of 2020, we began to experience decreased demand as compared to pre-COVID-19 levels for physician administered products, including XIAFLEX®, SUPPRELIN® LA and AVEED®, due to physician office closures and a decline in patients electing to be treated. We expect to see a continuation of the decline in demand for these products during the second quarter of 2020, followed by a gradual increase in volumes beginning in the second half of the year to the extent that physician and patient activities return toward pre-COVID-19 levels.
|
|
|
•
|
For the full year 2020, we expect a decline in revenues from our Generic Pharmaceuticals segment as compared to 2019, driven by modified production schedules to safely maintain operations in response to COVID-19, which could result in potential temporary supply decreases and potential launch delays for certain medications in this segment, as well as continued competitive pressures on certain commoditized generic products not related to COVID-19. We expect this decline to be partially offset by sales resulting from certain 2019 product launches, as further described below, and increased demand compared to pre-COVID-19 levels resulting from the utilization of certain of our generic products used to treat patients infected with COVID-19.
|
|
|
•
|
For the full year 2020, we expect declines in revenues from the Established Products portfolio of our Branded Pharmaceuticals segment and the International Pharmaceuticals segment as compared to 2019, primarily driven by competitive pressures impacting these product portfolios.
|
Consolidated Results Review
The following table displays our revenue, gross margin, gross margin percentage and other pre-tax expense or income for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
% Change
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
Total revenues, net
|
$
|
820,405
|
|
|
$
|
720,411
|
|
|
14
|
%
|
Cost of revenues
|
388,799
|
|
|
391,909
|
|
|
(1
|
)%
|
Gross margin
|
$
|
431,606
|
|
|
$
|
328,502
|
|
|
31
|
%
|
Gross margin percentage
|
52.6
|
%
|
|
45.6
|
%
|
|
|
Selling, general and administrative
|
$
|
166,768
|
|
|
$
|
151,123
|
|
|
10
|
%
|
Research and development
|
31,615
|
|
|
33,486
|
|
|
(6
|
)%
|
Litigation-related and other contingencies, net
|
(17,176
|
)
|
|
6
|
|
|
NM
|
|
Asset impairment charges
|
97,785
|
|
|
165,448
|
|
|
(41
|
)%
|
Acquisition-related and integration items, net
|
12,462
|
|
|
(37,501
|
)
|
|
NM
|
|
Interest expense, net
|
132,877
|
|
|
132,675
|
|
|
—
|
%
|
Gain on extinguishment of debt
|
—
|
|
|
(119,828
|
)
|
|
(100
|
)%
|
Other (income) expense, net
|
(13,974
|
)
|
|
4,802
|
|
|
NM
|
|
Income (loss) from continuing operations before income tax
|
$
|
21,249
|
|
|
$
|
(1,709
|
)
|
|
NM
|
|
__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
Total revenues, net. The increase in revenue for the three months ended March 31, 2020 was primarily due to increases from our Sterile Injectables segment, including VASOSTRICT® and ADRENALIN®, our Branded Pharmaceuticals segment’s Specialty Products portfolio, led by XIAFLEX®, and recent product launches in our Generic Pharmaceuticals segment as further discussed below. Revenue also increased as a result of higher patient demand and increased customer inventory purchasing for certain of our products due to the COVID-19 pandemic. These increases were partially offset by the impact of competitive pressures on our Branded Pharmaceuticals segment’s Established Products portfolio. Our revenues are further disaggregated and described below under the heading “Business Segment Results Review.”
Cost of revenues and gross margin percentage. During the three months ended March 31, 2020 and 2019, we incurred certain charges that impact the comparability of total Cost of revenues, including those related to amortization expense and continuity and separation benefits and other cost reduction initiatives. The following table summarizes such amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Amortization of intangible assets (1)
|
$
|
117,237
|
|
|
$
|
145,599
|
|
Continuity and separation benefits and other cost reduction initiatives (2)
|
$
|
6,238
|
|
|
$
|
—
|
|
__________
|
|
(1)
|
Amortization expense fluctuates based on changes in the total amount of amortizable intangible assets and the rate of amortization in effect for each intangible asset, both of which can vary based on factors such as the amount and timing of acquisitions, dispositions, asset impairment charges, transfers between indefinite- and finite-lived intangibles assets, changes in foreign currency rates and changes in the composition of our intangible assets impacting the weighted average useful lives and amortization methodologies being utilized. The decrease during the three months ended March 31, 2020 was primarily driven by asset impairment charges and decreases in the rate of amortization expense for certain assets.
|
|
|
(2)
|
Amounts primarily relate to certain accelerated depreciation charges and employee continuity and separation benefits.
|
The decrease in amortization expense during the three months ended March 31, 2020 resulted in decreased Cost of revenues and increased gross margin percentage. The decrease in Cost of revenues was partially offset by increased revenues as described above and increased expenses related to continuity and separation benefits and other cost reduction initiatives. In addition, favorable changes in product mix resulting primarily from increased revenues of VASOSTRICT® and ADRENALIN® contributed to the overall increase in gross margin percentage.
Selling, general and administrative expenses. The increase for the three months ended March 31, 2020 was primarily due to a higher branded prescription drug fee, increased long-term incentive compensation costs and increased costs associated with continuity bonuses for certain senior management of the Company. Additionally, we incurred increased costs associated with preparing for our planned commercial launch of CCH for the treatment of cellulite in the buttocks, if approved, and expect such costs to continue to increase in 2020 as compared to 2019.
R&D expenses. The amount of R&D expense we record in any period varies depending on the nature and stage of development of our R&D programs and can also vary in periods in which we incur significant upfront or milestone charges related to agreements with third parties.
In recent years, our R&D efforts have focused primarily on developing a balanced, diversified portfolio of innovative and clinically differentiated product candidates. We have been progressing and expect to continue to progress our cellulite treatment development program. In early 2020, we announced that we had initiated our XIAFLEX® development programs for the treatment of plantar fibromatosis and adhesive capsulitis. We also expect to continue to focus investments in our Sterile Injectables segment, potentially including license and commercialization agreements such as our Nevakar, Inc. agreement. In addition, we are conducting an open-label Phase 1 pharmacokinetic (PK) study of VASOSTRICT® in healthy volunteers, studying plasma clearance with TT genotype versus AA/AT genotype.
The decrease in R&D expense for the three months ended March 31, 2020 was driven by decreased costs associated with certain post-marketing R&D commitments, offset in part by increased costs associated with our Sterile Injectables segment.
Litigation-related and other contingencies, net. Included within Litigation-related and other contingencies, net are changes to our accruals for litigation-related settlement charges and certain settlement proceeds related to suits filed by our subsidiaries. Our material legal proceedings and other contingent matters are described in more detail in Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1. As further described therein, adjustments to the corresponding liability accruals may be required in the future. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Asset impairment charges. The following table presents the components of our total Asset impairment charges for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Goodwill impairment charges
|
$
|
32,786
|
|
|
$
|
86,000
|
|
Other intangible asset impairment charges
|
63,751
|
|
|
78,700
|
|
Property, plant and equipment impairment charges
|
1,248
|
|
|
748
|
|
Total asset impairment charges
|
$
|
97,785
|
|
|
$
|
165,448
|
|
The factors leading to our material goodwill and intangible asset impairment tests, as well as the results of these tests, are further described in Note 8. Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1. A discussion of critical accounting estimates made in connection with certain of our impairment tests is included below under the caption “CRITICAL ACCOUNTING ESTIMATES.”
Acquisition-related and integration items, net. Acquisition-related and integration items, net for the three months ended March 31, 2020 and 2019 primarily consist of the net expense (benefit) from changes in the fair value of acquisition-related contingent consideration liabilities resulting from changes to our estimates regarding the timing and amount of the future revenues of the underlying products and changes in other assumptions impacting the probability of incurring, and extent to which we could incur, related contingent obligations. See Note 5. 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 months ended March 31, 2020 and 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Interest expense
|
$
|
136,373
|
|
|
$
|
137,106
|
|
Interest income
|
(3,496
|
)
|
|
(4,431
|
)
|
Interest expense, net
|
$
|
132,877
|
|
|
$
|
132,675
|
|
The decrease in interest expense for the three months ended March 31, 2020 was primarily attributable to decreases to the London Interbank Offered Rate (LIBOR) that impacted our variable-rate debt and reductions to the amount of our indebtedness associated with the March 2019 Refinancing Transactions, partially offset by increases to the weighted average interest rate applicable to our senior notes and senior secured notes following the March 2019 Refinancing Transactions and interest expense associated with our June 2019 Revolving Credit Facility draw of $300.0 million. Refer to Note 11. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of these transactions.
Changes in interest rates could increase our interest expense in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Interest income varies primarily based on the amounts of our interest-bearing investments, such as money market funds, as well as changes in the corresponding interest rates.
Gain on extinguishment of debt. The gain on extinguishment of debt recognized during the three months ended March 31, 2019 relates to the March 2019 Refinancing Transactions. Refer to Note 11. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion.
Other (income) expense, net. The components of Other (income) expense, net for the three months ended March 31, 2020 and 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Net (gain) loss on sale of business and other assets
|
$
|
(8,192
|
)
|
|
$
|
1,294
|
|
Foreign currency (gain) loss, net
|
(5,639
|
)
|
|
1,716
|
|
Net loss from our investments in the equity of other companies
|
249
|
|
|
2,086
|
|
Other miscellaneous, net
|
(392
|
)
|
|
(294
|
)
|
Other (income) expense, net
|
$
|
(13,974
|
)
|
|
$
|
4,802
|
|
For additional information on the components of Other (income) expense, net, refer to Note 15. Other (Income) Expense, Net of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
Income tax (benefit) expense. The following table displays our Income (loss) from continuing operations before income tax, Income tax (benefit) expense and Effective tax rate for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Income (loss) from continuing operations before income tax
|
$
|
21,249
|
|
|
$
|
(1,709
|
)
|
Income tax (benefit) expense
|
$
|
(136,332
|
)
|
|
$
|
10,903
|
|
Effective tax rate
|
(641.6
|
)%
|
|
(638.0
|
)%
|
Our tax rate is affected by recurring items, such as tax rates in non-U.S. jurisdictions as compared to the notional U.S. federal statutory tax rate, and the relative amount of income or loss in those various jurisdictions. It is also impacted by certain items that may occur in any given period, but are not consistent from period to period.
The income tax benefit for the three months ended March 31, 2020 primarily relates to the discrete tax benefit arising from the CARES Act. The income tax expense for the comparable 2019 period primarily relates to a taxable gain arising from the extinguishment of debt in the March 2019 Refinancing Transactions.
We have valuation allowances established against our deferred tax assets in most jurisdictions in which we operate, with the exception of Canada and India. Accordingly, it would be unlikely for future pre-tax losses to create a tax benefit that would be more likely than not to be realized. Although the Company has valuation allowances established against deferred tax assets in most major jurisdictions as of March 31, 2020, it is possible that there could be material reversals, particularly if certain proposed law changes were to be enacted.
The Internal Revenue Service (IRS) presently is examining certain of our subsidiaries’ U.S. income tax returns for fiscal years ended between December 31, 2011 and December 31, 2015 and, in connection with those examinations, is reviewing our tax positions related to, among other things, certain intercompany arrangements, including the level of profit earned by our U.S. subsidiaries pursuant to such arrangements, and a worthless stock deduction directly attributable to product liability losses. The IRS may examine our tax returns for other fiscal years and/or for other tax positions. Similarly, other tax authorities, including the Canada Revenue Agency, are currently examining our non-U.S. tax returns. Additionally, other jurisdictions where we are not currently under audit remain subject to potential future examinations. Such examinations may lead to proposed or actual adjustments to our taxes that may be material, individually or in the aggregate. An adverse outcome of these tax examinations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
For additional information on our income taxes, including information about the impact of the CARES Act, see Note 16. Income Taxes of the Condensed Consolidated Financial Statements included in Part I, Item 1.
Discontinued operations, net of tax. The operating results of the Company’s Astora business, which the Board resolved to wind-down in 2016, 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, were losses of $27.7 million and $6.0 million during the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, we recorded a $30.5 million charge for mesh-related litigation. The remaining amounts during the three months ended March 31, 2020 and 2019 were primarily related to mesh-related legal defense costs and certain other items. Additionally, we recorded an income tax benefit of $5.9 million related to discontinued operations during the three months ended March 31, 2020. For additional discussion of mesh-related matters, refer to Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1.
Business Segment Results Review
Refer to Note 4. Segment Results of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for further details regarding our reportable segments and segment adjusted income from continuing operations before income tax (the measure we use to evaluate segment performance), as well as reconciliations of Total consolidated income (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.
We refer to segment adjusted income from continuing operations before income tax, a financial measure not defined by U.S. GAAP, in making operating decisions because we believe it provides meaningful supplemental information regarding our operational performance. For instance, we believe that this measure facilitates internal comparisons to our historical operating results and comparisons to competitors’ results. We believe this measure is useful to investors in allowing for greater transparency related to supplemental information used in our financial and operational decision-making. Further, we believe that segment adjusted income from continuing operations before income tax may be useful to investors as we are aware that certain of our significant shareholders utilize segment adjusted income from continuing operations before income tax to evaluate our financial performance. Finally, segment adjusted income from continuing operations before income tax is utilized in the calculation of other financial measures not determined in accordance with U.S. GAAP that are used by the Compensation Committee of the Company’s Board in assessing the performance and compensation of substantially all of our employees, including our executive officers. Effective January 1, 2020, the Company revised its definition of segment adjusted income from continuing operations before income tax to exclude certain legal costs in order to reflect changes in how the CODM reviews segment performance. Refer to Note 4. Segment Results of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for further details regarding this revision.
There are limitations to using financial measures such as segment adjusted income from continuing operations before income tax. Other companies in our industry may define segment adjusted income from continuing operations before income tax differently than we do. As a result, it may be difficult to use segment 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, segment 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 an indicator of operating performance, a measure of liquidity or as alternative to net income, cash flows or any other financial measure determined in accordance with U.S. GAAP. We compensate for these limitations by providing, in Note 4. Segment Results of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report, reconciliations of Total consolidated income (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.
Revenues, net. The following table displays our revenue by reportable segment for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
% Change
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
Branded Pharmaceuticals
|
$
|
204,073
|
|
|
$
|
203,525
|
|
|
—
|
%
|
Sterile Injectables
|
336,390
|
|
|
270,048
|
|
|
25
|
%
|
Generic Pharmaceuticals
|
251,283
|
|
|
218,526
|
|
|
15
|
%
|
International Pharmaceuticals (1)
|
28,659
|
|
|
28,312
|
|
|
1
|
%
|
Total net revenues from external customers
|
$
|
820,405
|
|
|
$
|
720,411
|
|
|
14
|
%
|
__________
|
|
(1)
|
Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada.
|
Branded Pharmaceuticals. The following table displays the significant components of our Branded Pharmaceuticals revenues from external customers for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
% Change
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
Specialty Products:
|
|
|
|
|
|
XIAFLEX®
|
$
|
89,072
|
|
|
$
|
68,507
|
|
|
30
|
%
|
SUPPRELIN® LA
|
19,720
|
|
|
22,056
|
|
|
(11
|
)%
|
Other Specialty (1)
|
25,505
|
|
|
24,403
|
|
|
5
|
%
|
Total Specialty Products
|
$
|
134,297
|
|
|
$
|
114,966
|
|
|
17
|
%
|
Established Products:
|
|
|
|
|
|
PERCOCET®
|
$
|
27,703
|
|
|
$
|
30,760
|
|
|
(10
|
)%
|
EDEX®
|
8,568
|
|
|
5,971
|
|
|
43
|
%
|
Other Established (2)
|
33,505
|
|
|
51,828
|
|
|
(35
|
)%
|
Total Established Products
|
$
|
69,776
|
|
|
$
|
88,559
|
|
|
(21
|
)%
|
Total Branded Pharmaceuticals (3)
|
$
|
204,073
|
|
|
$
|
203,525
|
|
|
—
|
%
|
__________
|
|
(1)
|
Products included within Other Specialty are NASCOBAL® Nasal Spray and AVEED®.
|
|
|
(2)
|
Products included within Other Established include, but are not limited to, LIDODERM® and TESTOPEL®.
|
|
|
(3)
|
Individual products presented above represent the top two performing products in each product category for the three months ended March 31, 2020 and/or any product having revenues in excess of $25 million during any quarterly period in 2020 or 2019.
|
Specialty Products
The increase in XIAFLEX® for the three months ended March 31, 2020 was primarily attributable to demand growth driven by the continued investment and promotional efforts behind XIAFLEX® and increases in inventory stocking due to future access concerns during the COVID-19 pandemic, as well as price.
The decrease in SUPPRELIN® LA, a physician administered product, for the three months ended March 31, 2020 was primarily due to a reduction in physician activity and a slowing of patient office visits resulting from shelter-in-place orders, which led to decreased demand for SUPPRELIN® LA.
The increase in Other Specialty Products for the three months ended March 31, 2020 was primarily attributable to increased sales of AVEED® as a result of price and volume increases.
XIAFLEX®, SUPPRELIN® LA and certain of our Other Specialty Products are physician administered products. During the last two weeks of the first quarter of 2020, these products began to experience decreased demand due to a reduction in physician activity and a slowing of patient office visits resulting from shelter-in-place orders. We expect to see a continuation of the decline in demand for these products during the second quarter of 2020, followed by a gradual increase in volumes beginning in the second half of the year to the extent that physician and patient activities return toward pre-COVID-19 levels.
Established Products
The decrease in PERCOCET® for the three months ended March 31, 2020 was primarily attributable to volume decreases, partially offset by price increases.
The increase in EDEX® for the three months ended March 31, 2020 was primarily attributable to volume increases.
The decrease in Other Established Products for the three months ended March 31, 2020 was primarily attributable to volume decreases as a result of ongoing competitive pressures.
Sterile Injectables. The following table displays the significant components of our Sterile Injectables revenues from external customers for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
% Change
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
VASOSTRICT®
|
$
|
202,904
|
|
|
$
|
139,137
|
|
|
46
|
%
|
ADRENALIN®
|
56,512
|
|
|
47,322
|
|
|
19
|
%
|
Ertapenem for injection
|
17,874
|
|
|
32,219
|
|
|
(45
|
)%
|
APLISOL®
|
9,867
|
|
|
12,381
|
|
|
(20
|
)%
|
Other Sterile Injectables (1)
|
49,233
|
|
|
38,989
|
|
|
26
|
%
|
Total Sterile Injectables (2)
|
$
|
336,390
|
|
|
$
|
270,048
|
|
|
25
|
%
|
__________
|
|
(1)
|
Products included within Other Sterile Injectables include ephedrine sulfate injection and others.
|
|
|
(2)
|
Individual products presented above represent the top two performing products within the Sterile Injectables segment for the three months ended March 31, 2020 and/or any product having revenues in excess of $25 million during any quarterly period in 2020 or 2019.
|
The increase in VASOSTRICT® for the three months ended March 31, 2020 was primarily attributable to increases in both volume and price. Beginning late in the first quarter of 2020, we experienced a significant increase in sales volumes for VASOSTRICT® resulting from increased utilization and channel inventory stocking of this product, primarily to treat patients infected with COVID-19. We expect that there will be an increase in revenues in the second quarter of 2020 compared to the first quarter, primarily due to higher utilization and channel inventory stocking. During the second half of 2020, we anticipate a period of destocking with a subsequent return toward pre-COVID-19 purchasing levels.
As of March 31, 2020, we have six patents for VASOSTRICT® listed in the Orange Book and additional patents pending with the U.S. Patent and Trademark Office. The FDA requires any applicant seeking FDA approval for vasopressin prior to patent expiry and relying on VASOSTRICT® as the reference-listed drug to notify us of its filing before the FDA will issue an approval. As further discussed in Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 under the heading “VASOSTRICT® Related Matters,” we have received notice letters from certain other pharmaceutical companies advising of the filing by such companies of ANDAs for generic versions of VASOSTRICT®. We have taken and plan to continue to take actions in our best interest to protect our rights with respect to VASOSTRICT®. The introduction of any competing versions of VASOSTRICT® could result in reductions to our market share, revenues, profitability and cash flows.
The increase in ADRENALIN® for the three months ended March 31, 2020 was primarily attributable to increases in both volume and price. Beginning late in the first quarter of 2020, we experienced a significant increase in sales volumes for ADRENALIN® resulting from increased utilization and channel inventory stocking of this product, primarily to treat patients infected with COVID-19.
The decrease in Ertapenem for injection, the authorized generic of Merck’s Invanz®, was primarily attributable to decreased volume and price as a result of increased competition.
The decrease in APLISOL® for the three months ended March 31, 2020 was primarily driven by destocking as wholesalers continued to normalize inventory levels following increased purchasing in the third quarter of 2019 subsequent to a temporary supply shortage.
The increase in Other Sterile Injectables for the three months ended March 31, 2020 was primarily driven by increased volume across multiple products within the product portfolio.
Generic Pharmaceuticals. Revenue for the Generic Pharmaceuticals segment increased during the three months ended March 31, 2020, primarily due to certain recent product launches including, among others, the fourth-quarter 2019 launch of everolimus tablets, a generic version of Novartis Pharmaceuticals Corporation’s Afinitor®, the second-quarter 2019 launch of albuterol sulfate HFA inhaler, the authorized generic of Merck’s Proventil®, and the third-quarter 2019 launch of posaconazole tablets, the authorized generic of Merck’s Noxafil®. Additionally, certain of these and other products in our Generic Pharmaceuticals segment experienced increased demand during the three months ended March 31, 2020, resulting from their utilization to treat patients infected with COVID-19 and from the impact of accelerated prescription fulfillment that we believe is a result of concerns of healthcare providers and consumers regarding their ability to access medications because of shelter-in-place and similar measures taken by governments. Partially offsetting the increase were the impacts of continued competitive pressures on certain commoditized generic products.
In the second quarter of 2020, we expect to see a decline in revenue for this segment compared to the first quarter driven by lower prescription trends following accelerated first-quarter prescription fulfillment, modified production schedules to safely maintain operations in response to COVID-19, which could result in potential temporary supply decreases and potential launch delays for certain medications in this segment, and continued competitive pressures on certain commoditized generic products.
International Pharmaceuticals. Revenue for the International Pharmaceuticals segment for the three months ended March 31, 2020 was in line with prior year.
Segment adjusted income from continuing operations before income tax. The following table displays our segment adjusted income from continuing operations before income tax by reportable segment for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
% Change
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
Branded Pharmaceuticals
|
$
|
98,422
|
|
|
$
|
95,283
|
|
|
3
|
%
|
Sterile Injectables
|
$
|
263,896
|
|
|
$
|
196,183
|
|
|
35
|
%
|
Generic Pharmaceuticals
|
$
|
57,327
|
|
|
$
|
50,411
|
|
|
14
|
%
|
International Pharmaceuticals
|
$
|
14,197
|
|
|
$
|
12,095
|
|
|
17
|
%
|
Branded Pharmaceuticals. The increase for the three months ended March 31, 2020 was primarily attributable to increased gross margins resulting from changes in product mix and lower R&D expense resulting from lower costs associated with certain post-marketing R&D commitments. This was partially offset by increased costs associated with our planned commercial launch of CCH for the treatment of cellulite in the buttocks, if approved by the FDA.
Sterile Injectables. The increase for the three months ended March 31, 2020 was primarily driven by increased revenues and gross margins resulting from strong performance across several products in this segment, including increases in revenues related to COVID-19, as further described above.
Generic Pharmaceuticals. The increase for the three months ended March 31, 2020 was primarily attributable to increased revenues as described above and the resulting increases to gross margin. This increase was partially offset by negative impacts to gross margin due to changes in product mix resulting from increased sales of certain lower margin authorized generic products.
International Pharmaceuticals. The increase for the three months ended March 31, 2020 was primarily attributable to increased gross margin as a result of favorable changes in product mix.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is cash generated from operations. Our principal liquidity requirements are primarily for working capital for operations, licenses, milestone payments, capital expenditures, acquisitions, contingent liabilities, debt service payments and litigation-related matters, including vaginal mesh liability payments. The Company’s working capital was $1,388.3 million at March 31, 2020 compared to working capital of $1,125.9 million at December 31, 2019. The amounts at March 31, 2020 and December 31, 2019 include restricted cash and cash equivalents of $195.7 million and $242.8 million, respectively, held in QSFs for mesh-related matters. Although these amounts in QSFs are included in working capital, they are required to be used for mesh product liability settlement agreements.
Cash and cash equivalents, which primarily consisted of bank deposits and money market accounts, totaled $1,531.5 million at March 31, 2020 compared to $1,454.5 million at December 31, 2019. While we currently expect our operating cash flows, together with our cash, cash equivalents, restricted cash and restricted cash equivalents, to be sufficient to cover our principal liquidity requirements over the next year, the extent to which COVID-19 could impact our business, financial condition, results of operations and cash flows in the short- and medium-term cannot be predicted with certainty, but such impact could be material. Although we did not experience significant disruptions to our business during the three months ended March 31, 2020 from COVID-19, we have since experienced and expect that we, and our industry as a whole, will continue to experience a greater impact going forward. To the extent COVID-19 has resulted in any increase to our Cash and cash equivalents, including as a result of any increase in revenues as described above, such increase could be temporary. Additionally, on a longer term basis, we may not be able to accurately predict the effect of certain developments on our sales and gross margins, such as the degree of market acceptance, patent protection and exclusivity of our products, pricing pressures (including those due to the impact of competition), the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates. We may also face unexpected costs in connection with our business operations, our ongoing and future legal proceedings, governmental investigations and other contingent liabilities, including potential costs related to settlements and judgments, as well as legal defense costs, and the implementation of our COVID-19 related policies and procedures. Furthermore, we may not be successful in implementing, or may face unexpected changes or expenses in connection with our strategic direction, including the potential for opportunistic corporate development transactions. Any of the above could have a material adverse effect on our business, financial condition, results of operations and cash flows and require us to seek additional sources of liquidity and capital resources as described below. For information regarding the impact of COVID-19 on the Company, including on our liquidity and capital resources, please refer to “Risk Factors” in Part II, Item 1A.
To the extent our operating cash flows, together with our cash, cash equivalents, restricted cash and restricted cash equivalents, become insufficient to cover our liquidity and capital requirements, including funds for any future acquisitions and other corporate transactions, we may be required to seek third-party financing, including additional draws on our Revolving Credit Facility or additional credit facilities, and/or engage in one or more capital markets transactions. The COVID-19 pandemic has resulted in significant disruptions to and volatility in the local, national and global financial markets and there can be no assurance that we would be able to obtain any required financing on a timely basis or at all. Further, lenders and other financial institutions could require us to agree to more restrictive covenants, grant liens on our assets as collateral (resulting in an increase in our total outstanding secured indebtedness) and/or accept other terms that are not commercially beneficial to us in order to obtain financing, as a result of the actual or perceived impact that financial institutions believe the pandemic will have on our business. Such terms could further restrict our operations and exacerbate any impact on our results of operations and liquidity that may result from COVID-19.
We may also, from time to time, seek to enter into certain transactions to reduce our leverage and/or interest expense and/or to extend the maturities of our outstanding indebtedness. Such transactions could include, for example, transactions to exchange existing indebtedness for our ordinary shares or other debt (including exchanges of unsecured debt for secured debt), to issue equity (including convertible securities) or to repurchase, redeem, exchange or refinance our existing indebtedness (including the Credit Agreement) as well as our outstanding senior notes. Any of these transactions could impact our liquidity or results of operations. Our ability to obtain any third-party financing needed for such transactions is subject to the same uncertainties relating to the disruptions to and volatility in the financial markets described above. Further, the terms of any such transactions, including the amount of any exchange consideration and terms of any refinanced debt, could also be less favorable than we have been able to obtain in the past, including a requirement that we grant liens on our assets as collateral (resulting in an increase in our total outstanding secured indebtedness), as a result of changing market conditions and investment interest from the pandemic and its impact on our business and the financial markets.
Indebtedness. The Company and/or certain of its subsidiaries are party to the Credit Agreement governing the Credit Facilities and the indentures governing our various senior secured and senior unsecured notes. As of March 31, 2020, approximately $3.3 billion was outstanding under the Term Loan Facility, approximately $0.3 billion was outstanding under the Revolving Credit Facility and approximately $4.8 billion was outstanding under the senior secured and senior unsecured notes.
After giving effect to previous borrowings and issued and outstanding letters of credit, approximately $0.7 billion of remaining credit was available under the Revolving Credit Facility at March 31, 2020. The Company’s outstanding debt agreements contain a number of restrictive covenants, including certain limitations on the Company’s ability to incur additional indebtedness.
The Credit Agreement and the indentures governing our various notes contains certain covenants. As of March 31, 2020 and December 31, 2019, the Company was in compliance with all such covenants.
Refer to Note 11. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and Note 14. Debt in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report for additional information about our indebtedness, including information about covenants, maturities, interest rates, security and priority.
Credit ratings. The Company’s corporate credit ratings assigned by Moody’s Investors Service and Standard & Poor’s are B3 with a stable outlook and B with a negative outlook, respectively. No report of any rating agency is being incorporated by reference herein.
Working capital. The components of our working capital and our liquidity at March 31, 2020 and December 31, 2019 are below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Total current assets
|
$
|
2,735,335
|
|
|
$
|
2,586,218
|
|
Less: total current liabilities
|
1,346,991
|
|
|
1,460,289
|
|
Working capital
|
$
|
1,388,344
|
|
|
$
|
1,125,929
|
|
Current ratio (total current assets divided by total current liabilities)
|
2.0:1
|
|
|
1.8:1
|
|
Net working capital increased by $262.4 million from December 31, 2019 to March 31, 2020. This increase primarily reflects the favorable impact to net current assets resulting from operations during the three months ended March 31, 2020. This activity was partially offset by purchases of property, plant and equipment, excluding capitalized interest, of $19.6 million during three months ended March 31, 2020.
The following table summarizes our Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Net cash flow provided by (used in):
|
|
|
|
Operating activities
|
$
|
62,556
|
|
|
$
|
(90,583
|
)
|
Investing activities
|
(15,963
|
)
|
|
(16,377
|
)
|
Financing activities
|
(14,483
|
)
|
|
(33,771
|
)
|
Effect of foreign exchange rate
|
(1,894
|
)
|
|
537
|
|
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents
|
$
|
30,216
|
|
|
$
|
(140,194
|
)
|
Operating activities. Net cash provided by (used in) 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 $153.1 million change in Net cash provided by (used in) operating activities during the three months ended March 31, 2020 compared to the prior year period was primarily due to our results of operations as described above and the timing of cash collections and cash payments related to our operations. Additionally, cash paid for interest decreased by approximately $72.4 million during the three months ended March 31, 2020 as a result of the timing and amounts of interest payments related to our indebtedness.
Investing activities. Net cash used in investing activities during the three months ended March 31, 2020 was in line with the prior year period.
Financing activities. During the three months ended March 31, 2020, Net cash used in financing activities related primarily to Repayments of term loans of $8.5 million and Payments of tax withholding for restricted shares of $4.4 million.
During the three months ended March 31, 2019, Net cash used in financing activities related primarily to Repayments of term loans of $8.5 million, Payments for contingent consideration of $4.6 million and the net effect of the March 2019 Refinancing Transactions, which resulted in Repayments of notes totaling $1,500.0 million and Payments for debt issuance and extinguishment costs of $0.2 million, partially offset by Proceeds from issuance of notes, net of $1,483.1 million.
Contractual Obligations. As of March 31, 2020, there were no material changes in our contractual obligations from those disclosed in the Annual Report.
Fluctuations. Our quarterly results have fluctuated in the past and may continue to fluctuate. These fluctuations may be due to the timing of new product launches, purchasing patterns of our customers, market acceptance of our products, the impact of competitive products and pricing, certain actions taken by us which may impact the availability of our products, asset impairment charges, litigation-related charges, restructuring costs including separation benefits, business combination transaction costs, the impact of financing transactions, 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. The impact of COVID-19 may heighten these fluctuations in our operating results.
Additionally, the current economic crisis and rising unemployment rates resulting from COVID-19 have significantly reduced individual disposable income and depressed consumer confidence, which could limit the ability of some consumers to purchase certain pharmaceutical products and reduce consumer spend on certain medical procedures in both the short- and medium-term. Additionally, as part of the measures to address COVID-19, certain healthcare providers are not currently performing various medical procedures.
Inflation. We do not believe that inflation had a material adverse effect on our financial statements for the periods presented.
Off-balance sheet arrangements. We have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
CRITICAL ACCOUNTING ESTIMATES
Significant changes to our critical accounting estimates since December 31, 2019 are detailed below. For additional discussion of the Company’s critical accounting estimates, see “Critical Accounting Estimates” in Item 7 of the Annual Report.
Goodwill and indefinite-lived intangible assets
As further described in Note 8. Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1, we recorded a pre-tax, non-cash goodwill impairment charge relating to our Paladin reporting unit of $32.8 million during the first quarter of 2020. Following this impairment, there was no remaining goodwill associated with this reporting unit.
We have not made any substantial changes to our methodology used in our impairment tests since our previous assessment. Determination of the fair value of a reporting unit is a matter of judgment and involves the use of estimates and assumptions, which are based on management’s best estimates at the time. The use of different assumptions would increase or decrease our estimated discounted future cash flows and the resulting estimated fair value of our reporting units, which could result in the fair value of a reporting unit being less than its carrying amount in an impairment test.
We are closely monitoring the impact of COVID-19 on our business. It is possible that COVID-19 could result in reductions to the estimated fair values of our goodwill and other intangible assets, which could ultimately result in asset impairment charges that may be material. For further information regarding the impact of COVID-19 on the Company, please refer to “Risk Factors” in Part II, Item 1A.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies of the Condensed Consolidated Financial Statements included in Part I, Item 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in the financial markets, including interest rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable-rate indebtedness associated with our Credit Facilities. At March 31, 2020 and December 31, 2019, the aggregate principal amounts of such variable-rate indebtedness were $3,621.1 million and $3,629.6 million, respectively. Borrowings under the Credit Facilities may from time to time bear interest at variable rates, as further described in Note 11. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1, in certain cases subject to a floor. At March 31, 2020 and December 31, 2019, a hypothetical 1% increase in the applicable rate over the floor would have resulted in $36.2 million and $36.3 million, respectively, of incremental interest expense (representing the annual rate of expense) related to our variable-rate debt borrowings.
To the extent that we utilize additional amounts under the Revolving Credit Facility or otherwise increase the amount of our variable-rate indebtedness, we will be exposed to additional interest rate risk.
As of March 31, 2020 and December 31, 2019, we had no other assets or liabilities with significant interest rate sensitivity.
Foreign Currency Exchange Rate Risk
We operate and transact business in various foreign countries and are therefore subject to risks associated with foreign currency exchange rate fluctuations. The Company manages this foreign currency risk, in part, through operational means including managing foreign currency revenues in relation to same-currency costs and foreign currency assets in relation to same-currency liabilities. The Company is also exposed to potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans. Additionally, certain of the Company’s subsidiaries maintain their books of record in currencies other than their respective functional currencies. These subsidiaries’ financial statements are remeasured into their respective functional currencies. Such remeasurement adjustments could have a material adverse effect on our business, financial condition, results of operations and cash flows.
All assets and liabilities of our international subsidiaries, which maintain their financial statements in local currency, are translated to U.S. dollars at period-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in Accumulated other comprehensive loss. Gains and losses on foreign currency transactions and short-term intercompany receivables from foreign subsidiaries are included in Other (income) expense, net in the Condensed Consolidated Statements of Operations. Refer to Note 15. Other (Income) Expense, Net of the Condensed Consolidated Financial Statements included in Part I, Item 1 for the amount of Foreign currency (gain) loss, net.
Based on the Company’s significant foreign currency denominated intercompany loans, we separately considered the hypothetical impact of a 10% change in the underlying currencies of our foreign currency denominated intercompany loans, relative to the U.S. dollar, at March 31, 2020 and December 31, 2019. A 10% change at March 31, 2020 would have resulted in approximately $9 million in incremental foreign currency losses on such date. A 10% change at December 31, 2019 would have resulted in approximately $11 million in incremental foreign currency losses on such date.