NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Business and Basis of Presentation
Business:
Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn,” the “Company,” “we,” “our” or “us”) is a specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals and branded and private-label over-the-counter (“OTC”) consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products. We specialize in difficult-to-manufacture sterile and non-sterile dosage forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays. In previous years the Company completed numerous mergers, acquisitions, product acquisitions, divestitures and dispositions, which resulted in significant growth.
Akorn is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, we relocated our corporate headquarters to the Chicago, Illinois area and currently maintain our principal corporate offices in Lake Forest, Illinois. We operate pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, Himachal Pradesh, India. We operate a central distribution warehouse in Gurnee, Illinois and additional distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers are located in Vernon Hills, Illinois and Cranbury, New Jersey. In the fourth quarter of 2017, we moved our previous R&D center in Copiague, New York to Cranbury, New Jersey. We maintain other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.
On April 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fresenius Kabi AG, a German stock corporation (“Parent”), Quercus Acquisition, Inc., a Louisiana corporation and wholly-owned subsidiary of Parent (“Merger Sub”) and, solely for purposes of Article VIII thereof, Fresenius SE & Co. KGaA, a German partnership limited by shares. The Merger Agreement provides for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Completion of the Merger is subject to the closing conditions outlined in the Merger Agreement.
Note 2 — Summary of Significant Accounting Policies
Consolidation:
The accompanying consolidated financial statements include the accounts of Akorn, Inc. and its wholly-owned domestic and foreign subsidiaries. All inter-company transactions and balances have been eliminated in consolidation, and the financial statements of Akorn India Private Limited (“AIPL”) and Akorn AG have been translated from Indian Rupees to U.S. dollars and Swiss Francs to U.S. dollars, respectively, based on the currency translation rates in effect during the period or as of the date of consolidation, as applicable. The Company has no involvement with variable interest entities.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Significant estimates and assumptions for the Company relate to the allowances for chargebacks, rebates, product returns, coupons, promotions and doubtful accounts, as well as the reserve for slow-moving and obsolete inventories, the carrying value and lives of intangible assets, the useful lives of fixed assets, the carrying value of deferred income tax assets and liabilities, the assumptions underlying share-based compensation, accrued but unreported employee benefit costs and assumptions underlying the accounting for business combinations.
Going Concern:
In connection with the preparation of the financial statements for the year ended
December 31, 2017
, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity's ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued, noting that there did not appear to be evidence of substantial doubt of the entity's ability to continue as a going concern.
Revenue Recognition:
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. Revenues from product sales are recognized when title and risk of loss have passed to the customer.
Provision for estimated chargebacks, rebates, discounts, managed care rebates, product returns and doubtful accounts is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
Freight:
The Company records amounts billed to customers for shipping and handling as revenue, and records shipping and handling expense related to product sales as cost of sales.
Cash and Cash Equivalents:
The Company considers all unrestricted, highly liquid investments with maturity of three months or less when purchased to be cash and cash equivalents. At
December 31, 2017
and 2016, approximately
$1.8 million
and
$3.3 million
of cash held by AIPL as of those dates was restricted, and was reported within
prepaid expenses and other current assets
and
other non-current assets
, respectively.
Accounts Receivable:
Trade accounts receivable are stated at their net realizable value. The nature of the Company’s business involves, in the ordinary course, significant judgments and estimates relating to chargebacks, coupon redemption, product returns, rebates, discounts given to customers and allowances for doubtful accounts. Certain rebates, chargebacks and other credits are recorded as deductions to the Company’s trade accounts receivable where applicable, based on product and customer specific terms.
Unless otherwise noted, the provisions and allowances for the following customer deductions are reflected in the accompanying consolidated financial statements as reductions of revenues and trade accounts receivable, respectively.
Chargebacks:
The Company enters into contractual agreements with certain third parties such as retailers, hospitals, group-purchasing organizations (“GPOs”) and managed care organizations to sell certain products at predetermined prices. Most of the parties have elected to have these contracts administered through wholesalers that buy the product from the Company and subsequently sell it to these third parties. As noted elsewhere, these wholesalers represent a significant percentage of the Company’s gross sales. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific contract is charged back to the Company by the wholesaler. This process typically takes four to six weeks, but for some products may extend out to twelve weeks. The Company tracks sales and submitted chargebacks by product number and contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product and records an allowance as a reduction to gross sales when the Company records its sale of the products. The Company reduces the chargeback allowance when a chargeback request from a wholesaler is processed. Actual chargebacks processed by the Company can vary materially from period to period based upon actual sales volume through the wholesalers. However, the Company’s provision for chargebacks is fully reserved for at the time when revenues are recognized.
Management obtains product inventory reports from certain wholesalers to aid in analyzing the reasonableness of the chargeback allowance and to monitor whether wholesaler inventory levels do not significantly exceed customer demand. The Company assesses the reasonableness of its chargeback allowance by applying a product chargeback percentage that is based on a combination of historical activity and future price and mix expectations to the quantities of inventory on hand at the wholesalers according to wholesaler inventory reports. In addition, the Company estimates the percentage of gross sales that were generated through direct and indirect sales channels and the percentage of contract vs. non-contract revenue in the period, as these each affect the estimated reserve calculation. In accordance with its accounting policy, the Company estimates the percentage amount of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a trend of such sales through wholesalers. On an ongoing basis, the Company evaluates its actual chargeback rate experience, and new trends are factored into its estimates each quarter as market conditions change.
For the year ended
December 31, 2017
, the Company incurred a chargeback provision of
$953.3 million
, or
40.5%
of gross sales of
$2,351.1 million
, compared to
$1,218.6 million
, or
42.1%
of gross sales of
$2,891.3 million
in the prior year. We note that the dollar
decrease
and percent decrease in the comparative period was the result of gross sales decreases and product mix shifts to products with lower chargeback expense percentages. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Events that could materially alter chargeback rates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences, customer shifts in buying patterns from direct to indirect through
wholesalers, which could either individually or in aggregate increase or decrease the chargeback rate depending on the direction and velocity of the change(s).
To better understand the impact of changes in chargeback reserve based on circumstances that are not fully outside of the Company’s control, for instance, the ratio of sales subject to chargeback to indirect sales, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a
440
basis point (“BP”) change in the ratio of sales subject to chargeback to indirect sales would increase the chargeback reserve by
$0.2 million
or decrease the chargeback reserve by
$2.3 million
depending on the change in the direction of the ratio. Fundamentally, the BP change calculation is determined based on the 6-month trend of the average ratio of sales subject to chargeback to indirect sales. Due to the competitive generic pharmaceutical industry and our recent experience with wholesalers’ strategy and shifts in contracted and non-contracted indirect sales, we believe that the 6-month trend of the proportion of direct to indirect sales provides a representative basis for sensitivity analysis. However, the average change in the ratio of sales subject to chargeback to indirect sales in the last 6 months is immaterial. Accordingly, the BP change calculation for
December 31, 2017
is based on the difference between the lowest and highest ratio of sales subject to chargeback to indirect sales during the last 6 months.
Rebates, administrative fees and others:
The Company maintains an allowance for rebates, administrative fees and others related to contracts and other rebate programs that it has in place with certain customers. Rebate, administrative fees and other percentages vary by product and by volume purchased by each eligible customer. The Company tracks sales by product number for each eligible customer and then applies the applicable rebate, administrative fees and other percentage, using both historical trends and actual experience to estimate its rebate, administrative fees and other allowances. The Company reduces gross sales and increases the rebate, administrative fees and other allowance by the estimated rebate, administrative fees and other amounts when the Company sells its products to eligible customers. The Company reduces the rebate allowance when it processes a customer request for a rebate. At each balance sheet date, the Company analyzes the allowance for rebates, administrative fees and others against actual rebates processed and makes necessary adjustments as appropriate. The amount of actual rebates processed can vary materially from period to period as discussed below.
The allowances for rebates, administrative fees and others further takes into consideration price adjustments which are credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with customers, estimated changes in market prices, and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available.
Similar to rebates, the reserve for administrative fees and others represent those amounts processed related to contracts and other fee programs which have been in place with certain entities, but they are settled through cash payment to these entities and accordingly are accounted for as a current liability. Otherwise, administrative fees and others operate similarly to rebates.
For the year ended
December 31, 2017
the Company incurred a rebates, administrative fees and others provision of
$476.6 million
, or
20.3%
of gross sales of
$2,351.1 million
, compared to
$463.7 million
, or
16.0%
of gross sales of
$2,891.3 million
in the prior year. We note that the dollar and percent
increase
from the comparative period was the result of gross sales decreases and product mix shifts to products with higher rebates, administrative fees and others expense percentages. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter rebates, administrative fees and others rates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences, customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the rebate rate depending on the direction and velocity of the change(s).
To better understand the impact of changes in rebates, administrative fees and others reserves based on circumstances that are not fully outside of the Company’s control, for instance, the proportion of direct to indirect sales subject to rebates, administrative fees and others, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a
440
BP change in the ratio of sales subject to rebates, administrative fees and others to indirect sales would increase the reserve for rebates, administrative fees and others by
$0.0 million
or decrease the same reserve by
$1.1 million
depending on the direction of the change in the ratio. Fundamentally, the BP change calculation is determined based on the 6-month
trend of the average ratio of sales subject to rebates, administrative fees and others to indirect sales. Due to the competitive generic pharmaceutical industry and our recent experience with wholesalers’ strategy and shifts in contracted and non-contracted indirect sales, we believe the 6-month trend of the average ratio of sales subject to rebates, administrative fees and others to indirect sales provides a representative basis for sensitivity analysis. However, the average change in the ratio of sales subject to rebates, administrative fees and others to indirect sales in the last 6 months is immaterial. Accordingly, the
440
BP change calculation for
December 31, 2017
is based on the difference between the lowest and highest ratio of sales subject to rebates, administrative fees and others to indirect sales during the last 6 months.
Sales Returns:
Certain of the Company’s products are sold with the customer having the right to return the product within specified periods. Provisions are made at the time of sale based upon historical experience. Historical factors such as one-time recall events as well as pending new developments like comparable product approvals or significant pricing movement that may impact the expected level of returns are taken into account to determine the appropriate reserve estimate at each balance sheet date. As part of the evaluation of the reserve required, the Company considers actual returns to date that are in process, the expected impact of any product recalls and the amount of wholesaler’s inventory to assess the magnitude of unconsumed product that may result in sales returns to the Company in the future. The sales returns level can be impacted by factors such as overall market demand and market competition and availability for substitute products which can increase or decrease the pull through for sales of the Company’s products and ultimately impact the level of sales returns.
For the year ended
December 31, 2017
the Company incurred a return provision of
$26.9 million
, or
1.1%
of gross sales of
$2,351.1 million
, compared to
$28.3 million
, or
1.0%
of gross sales of
$2,891.3 million
in the prior year. We note that the dollar
decrease
and percent increase from the comparative period was the result of gross sales decreases partially offset by product mix shifts to products with higher return rates. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter return rates include: acquisitions and integration activities that consolidate dissimilar contract terms and could decrease the return rate as typically the Company purchases smaller entities with less contracting power and integrates those product sales to Akorn contracts; and consumer demand shifts by products, which could either increase or decrease the return rate depending on the product or products specifically demanded and ultimately returned.
To better understand the impact of changes in return reserve based on certain circumstances, the Company performs a sensitivity analysis. Holding all other assumptions constant, for an average
0.8
months change in the lag from the time of sale to the time the product return is processed, this change would result in an increase of
$1.4 million
or a decrease of
$2.2 million
of the return reserve expense if the lag increases or decreases, respectively. The average
0.8
months change in the lag from the time of sale to the time the product return is processed was determined based on the average variances of the last 6-month historical activities. Due to the change in the volume and type of products sold by the Company in the recent past, we have determined that the lag calculation provides a reasonable basis for sensitivity analysis.
Allowance for Coupons, Promotions and Co-Pay discount cards:
The Company issues coupons from time to time that are redeemable against certain of our Consumer Health products. Upon release of coupons into the market, the Company records an estimate of the dollar value of coupons expected to be redeemed. This estimate is based on historical experience and is adjusted as needed based on actual redemptions. In addition to couponing, from time to time the Company authorizes various retailers to run in-store promotional sales of its products. Upon receiving confirmation that a promotion was run, the Company accrues an estimate of the dollar amount expected to be owed back to the retailer. This estimate is then adjusted to actual upon receipt of an invoice from the retailer. Additionally, the Company provides consumer co-pay discount cards, administered through outside agents to provide discounted products when redeemed. Upon release of the cards into the market, the Company records an estimate of the dollar value of co-pay discounts expected to be utilized. This estimate is based on historical experience and is adjusted as needed based on actual usage.
Doubtful Accounts:
Provisions for doubtful accounts, which reflect trade receivable balances owed to the Company that are believed to be uncollectible, are recorded as a component of SG&A expenses. In estimating the allowance for doubtful accounts, the Company considers its historical experience with collections and write-offs, the credit quality of its customers and any recent or anticipated changes thereto, and the outstanding balances and past due amounts from its customers. Note that in the ordinary course of business, and consistent with our peers, we may from time to time offer extended payment terms to our customers as an incentive for new product launches or in other circumstances in accordance with standard industry practices. These extended payment terms do not represent a significant risk to the collectability of accounts receivable as of the period-end and are evaluated in accordance with
ASC 605 —Revenue Recognition
as applicable. Accounts are considered past due when they remain uncollected beyond the due date specified in the applicable contract or on the applicable invoice, whichever is deemed to take precedence.
As of
December 31, 2017
, the Company had a total of
$16.9 million
of past due gross accounts receivable and
$4.7 million
aged over 60 days. The Company performs monthly a detailed analysis of the receivables due from its customers and provides a specific reserve against known uncollectible items. The Company also includes in the allowance for doubtful accounts an amount that it estimates to be uncollectible for all other customers, based on a percentage of the past due receivables. The percentage reserved increases as the age of the receivables increases. Accounts are written off once all reasonable collection efforts have been exhausted and/or when facts or circumstances regarding the customer (i.e. bankruptcy filing) indicate that the chance of collection is remote.
Advertising and Promotional Allowances to Customers:
The Company routinely sells its consumer health products to major retail drug chains. From time to time, the Company may arrange for these retailers to run in-store promotional sales of the Company’s products. The Company reserves an estimate of the dollar amount owed back to the retailer, recording this amount as a reduction to revenue at the later of the date on which the revenue is recognized or the date the sales incentive is offered. When the actual invoice for the sales promotion is received from the retailer, the Company adjusts its estimate accordingly. Advertising and promotional expenses paid to customers are expensed as incurred in accordance with
ASC 605-50 - Customer Payments and Incentives
.
Inventories:
Inventories are stated at the lower of cost and net realizable value ("NRV") (see Note 5 — “Inventories”). The Company maintains an allowance for slow-moving and obsolete inventory as well as inventory where the cost is in excess of its net realizable value (“NRV”). For finished goods inventory, the Company estimates the amount of inventory that may not be sold prior to its expiration or is slow-moving based upon recent sales activity by unit and wholesaler inventory information. The Company also analyzes its raw material and component inventory for slow-moving items and NRV. For the years ended
December 31, 2017
, 2016 and 2015, the Company recorded a provision for inventory obsolescence and NRV of
$21.4 million
,
$32.1 million
, and
$8.8 million
, respectively. The allowances for inventory obsolescence were
$34.4 million
and
$33.5 million
as of
December 31, 2017
and 2016, respectively.
The Company capitalizes inventory costs associated with its products prior to regulatory approval when, based on management judgment, future commercialization is considered probable and future economic benefit is expected to be realized. The Company assesses the regulatory approval process and where the product stands in relation to that approval process including any known constraints or impediments to approval. The Company also considers the shelf life of the product in relation to the product timeline for approval.
At
December 31, 2017
, the Company established a reserve of
$1.5 million
related to R&D raw materials that are not expected to be utilized prior to expiration while at the prior year end, the Company had approximately
$2.4 million
in reserves for R&D raw materials.
Property, Plant and Equipment:
Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method in amounts considered sufficient to amortize the cost of the assets to operations over their estimated useful lives or lease terms. Depreciation expense was
$23.7 million
,
$22.2 million
and
$19.9 million
for the years ended
December 31, 2017
, 2016 and 2015, respectively. The following table sets forth the average estimated useful lives at acquisition of the Company’s property, plant and equipment, by asset category:
|
|
|
|
|
|
|
Asset category
|
|
Depreciable Life (years)
|
|
Buildings
|
|
30 - 50
|
|
Building and leasehold improvements
|
|
10 - 20
|
|
Furniture and equipment
|
|
7 - 20
|
|
Automobiles
|
|
5 - 7
|
|
Computer hardware and software
|
|
3 - 5
|
Net Income (Loss) Per Common Share:
Basic net income per common share is based upon weighted average common shares outstanding. Diluted net income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of stock options and convertible securities using the treasury stock and if converted methods. Anti-dilutive shares excluded from the computation of diluted net income (loss) per share for 2017, 2016 and 2015 include
3.2 million
,
3.6 million
and
0.9 million
shares, respectively, related to options.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21%, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities and reassessing the net realizability of our deferred tax assets and liabilities. The Company’s foreign subsidiaries do not have accumulated earnings that can be distributed; therefore, the provisions of the Act related to the repatriation of foreign earnings are not applicable to the Company at December 31, 2017. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. See
Note 11 — Income Taxes from Continuing Operations
for more information.
Fair Value of Financial Instruments:
The Company applies
ASC 820
, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework.
ASC 820
defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in
ASC 820
generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability, and are to be developed based on the best information available in the circumstances.
Our financial instruments include cash and cash equivalents, accounts receivable, available for sale securities and accounts payable. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate book value because of the short maturity of these instruments.
The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:
|
|
|
|
-
|
Level 1
—Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities. The carrying value of the Company's cash and cash equivalents are considered Level 1 assets.
|
|
|
|
|
-
|
Level 2
—Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company has no Level 2 assets or liabilities in any of the periods presented.
|
|
|
|
|
-
|
Level 3
—Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities. The portion of the fair valuation of the available-for-sale investment held in shares of Nicox stock that is subject to a lock-up provision is considered a Level 3 asset. The additional consideration payable as a result of prior years' divestitures and other insignificant contingent amounts are considered Level 3 liabilities.
|
The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
|
Description
|
December 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash and cash equivalents
|
$
|
368,119
|
|
|
$
|
368,119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Available-for-sale securities
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
Total assets
|
$
|
368,154
|
|
|
$
|
368,119
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
Purchase consideration payable
|
$
|
3,901
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,901
|
|
|
Total liabilities
|
$
|
3,901
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
December 31,
2016
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash and cash equivalents
|
$
|
200,772
|
|
|
$
|
200,772
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Available-for-sale securities
|
1,106
|
|
|
1,074
|
|
|
—
|
|
|
32
|
|
|
Total assets
|
$
|
201,878
|
|
|
$
|
201,846
|
|
|
$
|
—
|
|
|
$
|
32
|
|
|
Purchase consideration payable
|
$
|
4,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,994
|
|
|
Total liabilities
|
$
|
4,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,994
|
|
In 2014, the Company acquired Nicox stock fair valued at
$12.5 million
, consisting of an original cost basis of
$10.8 million
, discounted to reflect certain lockup provisions preventing immediate sale of the underlying shares received, and
$1.7 million
unrealized gain from the original costs basis of
$10.8 million
. From 2014 through
December 31, 2016
, the Company
sold available-for-sale Nicox stock with a total original cost basis of
$9.2 million
and realized immaterial losses through these
sales. During the year ended
December 31, 2017
, the Company sold its remaining available-for-sale Nicox stock
with an original cost basis of
$1.5 million
, realizing a gain of
$0.2 million
.
On May 31, 2017, the Company gained the right to receive additional Nicox stock fair valued at
$3.0 million
as a milestone payment. The Company received the additional shares of Nicox stock in early June 2017 and subsequently sold them later that month for net cash proceeds of
$2.6 million
. Both the
$3.0 million
milestone payment and the subsequent loss of
$0.4 million
on the sale of the Nicox shares were reported within Other non-operating income (expense), net in the Company's Condensed Consolidated Statement of Comprehensive (Loss) Income for the year ended
December 31, 2017
.
The fair value of the investment is estimated using observable and unobservable inputs to discount for lack of marketability. See Note 16 -
Business Combinations and Other Strategic Investments
for further discussion.
The remaining purchase consideration payable is principally comprised of amounts owed relating to various prior years divestitures, at fair value as determined based on the underlying contracts and the Company’s subjective evaluation of the additional consideration obligation estimate.
Stock-Based Compensation:
Stock-based compensation cost is estimated at grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions to be used in the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its common stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities of similar term in effect during the quarter in which the options were granted. The dividend yield reflects the Company’s historical experience as well as future expectations over the expected term of the option. The Company estimates
forfeitures at the time of grant and revises the estimate in subsequent periods, as necessary, if actual forfeitures differ from initial estimates.
Note 3 — Accounts Receivable, Sales and Allowances
The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is typical of the pharmaceutical industry and not necessarily specific to the Company. Certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable where applicable, based on product and customer specific terms. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the terms of the respective agreement with the end-user customer (which in turn depends on the specific end-user customer, each having its own pricing arrangement, which entitles it to a particular deduction). This process can lead to partial payments against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.
With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying consolidated statements of comprehensive income. Additionally, with the exception of administrative fees and others, which is included as a current liability, the ending reserve balances are included in trade accounts receivable, net in the Company’s consolidated balance sheets.
Trade accounts receivable, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Gross accounts receivable (1)
|
$
|
378,759
|
|
|
$
|
519,175
|
|
|
Less reserves for:
|
|
|
|
|
Chargebacks (2)
|
(73,984
|
)
|
|
(80,360
|
)
|
|
Rebates (2)
|
(111,945
|
)
|
|
(97,935
|
)
|
|
Product returns
|
(41,687
|
)
|
|
(43,689
|
)
|
|
Discounts and allowances
|
(7,779
|
)
|
|
(12,389
|
)
|
|
Advertising and promotions
|
(1,301
|
)
|
|
(688
|
)
|
|
Doubtful accounts
|
(680
|
)
|
|
(960
|
)
|
|
Trade accounts receivable, net
|
$
|
141,383
|
|
|
$
|
283,154
|
|
(1) - The reduction in the Gross accounts receivable balance as of
December 31, 2017
when compared to the
December 31, 2016
balance is due to the decline in Gross sales in the fourth quarter of 2017.
(2) - The reduction in the reserve for chargebacks and increase in the reserve for rebates as of
December 31, 2017
compared to
December 31, 2016
is primarily due to product mix, customer mix, price erosion, volume declines and payment timing. The price erosion and volume declines were due to increased industry pricing pressure and the competitive nature of our business. The rebates processed during full year 2017 are disclosed under the caption “charges processed,” in the table below.
For the years ended
December 31, 2017
,
2016
and
2015
, the Company recorded the following adjustments to gross sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Gross sales
|
$
|
2,351,071
|
|
|
$
|
2,891,267
|
|
|
$
|
2,511,693
|
|
|
Less adjustments for:
|
|
|
|
|
|
|
Chargebacks (1)
|
(953,326
|
)
|
|
(1,218,560
|
)
|
|
(1,065,244
|
)
|
|
Rebates, administrative fees and others (1)
|
(476,601
|
)
|
|
(463,724
|
)
|
|
(367,514
|
)
|
|
Product returns
|
(26,874
|
)
|
|
(28,285
|
)
|
|
(34,272
|
)
|
|
Discounts and allowances
|
(45,292
|
)
|
|
(55,494
|
)
|
|
(50,384
|
)
|
|
Advertising, promotions, and others
|
(7,933
|
)
|
|
(8,361
|
)
|
|
(9,203
|
)
|
|
Revenues, net
|
$
|
841,045
|
|
|
$
|
1,116,843
|
|
|
$
|
985,076
|
|
(1) The decrease in chargebacks and increase in rebates, administrative and other fees for the twelve-month period ended
December 31, 2017
compared to the same period in
2016
, were primarily due to product mix, customer mix, volume declines, and price erosion due to increased industry pricing pressure and the competitive nature of our business.
The annual activity in the Company’s allowance for customer deductions accounts for the three years ended
December 31, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns
|
|
Chargebacks
|
|
Rebates (1)
|
|
Discounts
|
|
Doubtful Accounts
|
|
Advertising & Promotions
|
|
Total
|
|
Balance at December 31, 2014
|
44,646
|
|
|
102,438
|
|
|
95,674
|
|
|
15,554
|
|
|
309
|
|
|
759
|
|
|
259,380
|
|
|
Provision
|
34,272
|
|
|
1,065,244
|
|
|
295,787
|
|
|
50,384
|
|
|
840
|
|
|
9,203
|
|
|
1,455,730
|
|
|
Additions from acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
291
|
|
|
—
|
|
|
291
|
|
|
Charges processed
|
(30,585
|
)
|
|
(1,075,838
|
)
|
|
(228,865
|
)
|
|
(55,859
|
)
|
|
139
|
|
|
(8,444
|
)
|
|
(1,399,452
|
)
|
|
Balance at December 31, 2015
|
$
|
48,333
|
|
|
$
|
91,844
|
|
|
$
|
162,596
|
|
|
$
|
10,079
|
|
|
$
|
1,579
|
|
|
$
|
1,518
|
|
|
$
|
315,949
|
|
|
Provision
|
28,285
|
|
|
1,218,560
|
|
|
384,074
|
|
|
55,494
|
|
|
—
|
|
|
8,361
|
|
|
1,694,774
|
|
|
Additions from acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Charges processed
|
(32,929
|
)
|
|
(1,230,044
|
)
|
|
(448,735
|
)
|
|
(53,184
|
)
|
|
(619
|
)
|
|
(9,191
|
)
|
|
(1,774,702
|
)
|
|
Balance at December 31, 2016
|
$
|
43,689
|
|
|
$
|
80,360
|
|
|
$
|
97,935
|
|
|
$
|
12,389
|
|
|
$
|
960
|
|
|
$
|
688
|
|
|
$
|
236,021
|
|
|
Provision
|
26,874
|
|
|
953,326
|
|
|
416,125
|
|
|
45,292
|
|
|
—
|
|
|
7,933
|
|
|
1,449,550
|
|
|
Additions from acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Charges processed
|
(28,876
|
)
|
|
(959,702
|
)
|
|
(402,115
|
)
|
|
(49,902
|
)
|
|
(280
|
)
|
|
(7,320
|
)
|
|
(1,448,195
|
)
|
|
Balance at December 31, 2017
|
$
|
41,687
|
|
|
$
|
73,984
|
|
|
$
|
111,945
|
|
|
$
|
7,779
|
|
|
$
|
680
|
|
|
$
|
1,301
|
|
|
$
|
237,376
|
|
(1) - As provisions for rebates, administrative fees and others represent both contra-receivables and current liabilities, depending on the method of settlement, the cumulative provision relating to rebates, administrative fees and others is bifurcated as applicable based on the associated consolidated balance sheet classification. Accordingly, for the years ended
December 31, 2017
,
2016
and
2015
, an additional
$60.5 million
,
$79.7 million
and
$71.7 million
, respectively, of provision was associated with administrative fees and others.
Provisions and utilizations of provisions activity in the current period which relate to prior period revenues are not provided because to do so would be impracticable. Our current systems and processes do not capture the chargeback and rebate settlements by the period in which the original sales transaction was recorded. Chargeback and rebate claims are not submitted by customers with sufficient details to link the accrual recorded at the point of sale with the settlement of the accrual. As a result, the Company is unable to reasonably determine the dollar amount of the change in estimate in its gross
to net reporting reflected in its results of operations for each period presented, and, those changes could be significant. However, the Company uses a combination of factors and applications to estimate the dollar amount of reserves for chargebacks and rebates at each balance sheet date. The Company regularly monitors the chargeback reserve based on an analysis of the Company’s product sales and most recent claims, wholesaler inventory, current pricing, and anticipated future pricing changes. If claims are different from the estimate due to changes from estimated rates, accrual rate adjustments are considered prospectively when determining provisions in accordance with authoritative GAAP.
Note 4 — Inventories, Net
The components of inventories, net of allowances, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Finished goods
|
$
|
79,226
|
|
|
73,027
|
|
|
Work in process
|
15,447
|
|
|
14,719
|
|
|
Raw materials and supplies
|
88,895
|
|
|
87,047
|
|
|
|
$
|
183,568
|
|
|
$
|
174,793
|
|
The Company maintains an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of its net realizable value. The activity in the allowance for excess, obsolete, and net realizable value inventory account for the two years ended
December 31, 2017
and 2016, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
Balance at beginning of year
|
$
|
33,532
|
|
|
$
|
21,537
|
|
|
Provision
|
21,369
|
|
|
32,072
|
|
|
Charges processed
|
(20,499
|
)
|
|
(20,077
|
)
|
|
Balance at end of year
|
$
|
34,402
|
|
|
$
|
33,532
|
|
Note 5 - Goodwill and Other Intangible Assets
Intangible assets consist primarily of Goodwill, which is carried at its initial value, subject to evaluation for impairment, In-Process Research and Development (“IPR&D”), which is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other such costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from
one
to
thirty years
. Accumulated amortization of intangible assets was
$219.0 million
and
$195.3 million
at
December 31, 2017
and 2016, respectively. Amortization expense was
$61.4 million
,
$65.7 million
and
$66.3 million
for the years ended December 31, 2017, 2016 and 2015, respectively. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows, and through this analysis incurred impairment expense for intangible assets during the years ended December 31, 2017, 2016 and 2015, of
$103.5 million
,
$40.5 million
and
$30.4 million
, respectively.
During 2017 of the
$103.5 million
of impairment for product licensing rights,
$10.9 million
was recognized in R&D expense due to changes in market conditions expected upon launch of
two
assets acquired through the Hi-Tech acquisition and
$92.6 million
of impairment was related to competition and changing market dynamics of
eight
currently marketed products acquired through the Hi-Tech and VersaPharm acquisitions. If the Company incurs additional costs to renew or extend the life of an intangible asset, such costs are added to the remaining unamortized cost of the asset, if any, and the sum is amortized over the extended remaining life of the asset.
Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. The Company also models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. The Company performed its
annual impairment test on October 1, 2017 and determined that the fair value of its reporting units are substantially in excess of its carrying value and, therefore,
no
goodwill impairment charge was necessary.
IPR&D intangible assets represent the value assigned to acquired R&D projects that principally represent rights to develop and sell a product that the Company has acquired which have not yet been completed or approved. These assets are subject to impairment testing until completion or abandonment of each project. Impairment testing requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenue, cost of sales, R&D costs, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, and competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the IPR&D product, the assets are impaired. In 2017,
three
IPR&D project were impaired due to the Company's expectations of market conditions upon launch, resulting in an impairment expense of
$24.6 million
, while in 2016,
one
IPR&D project was partially impaired due to the Company's expectations of market conditions upon launch, resulting in an impairment expense of
$3.9 million
. These impairments were recorded in R&D expenses in the Consolidated Statements of Comprehensive Income for the years ended December 31, 2017 and 2016.
Changes in goodwill during the two years ended
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Goodwill
|
|
December 31, 2015
|
$
|
284,710
|
|
|
Foreign currency translation
|
(417
|
)
|
|
December 31, 2016
|
$
|
284,293
|
|
|
Foreign currency translation
|
1,017
|
|
|
December 31, 2017
|
$
|
285,310
|
|
The following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of
December 31, 2017
for those assets that are not already fully amortized (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Reclassifications
|
|
Impairment (1)
|
|
Net
Carrying
Amount
|
|
Weighted Average
Remaining Amortization
Period (years)
|
|
Product licensing rights
|
$
|
747,106
|
|
|
$
|
(205,549
|
)
|
|
$
|
—
|
|
|
$
|
(139,217
|
)
|
|
$
|
402,340
|
|
|
9.8
|
|
IPR&D
|
173,757
|
|
|
—
|
|
|
—
|
|
|
(24,596
|
)
|
|
149,161
|
|
|
N/A - Indefinite lived
|
|
Trademarks
|
16,000
|
|
|
(5,376
|
)
|
|
—
|
|
|
—
|
|
|
10,624
|
|
|
17.8
|
|
Customer relationships
|
4,225
|
|
|
(2,058
|
)
|
|
—
|
|
|
—
|
|
|
2,167
|
|
|
8.3
|
|
Other intangibles
|
11,235
|
|
|
(6,043
|
)
|
|
—
|
|
|
—
|
|
|
5,192
|
|
|
5.7
|
|
|
$
|
952,323
|
|
|
$
|
(219,026
|
)
|
|
$
|
—
|
|
|
$
|
(163,813
|
)
|
|
$
|
569,484
|
|
|
|
(1)
Impairment of product licensing rights is stated at gross carrying cost of
$139.2 million
less accumulated amortization of
$35.7 million
as of the impairment date. Accordingly, the net impairment expense recognized in product licensing rights was
$103.5 million
as of and for the year ended
December 31, 2017
.
Changes in intangible assets during the two years ended
December 31, 2017
and 2016, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
licensing
rights
|
|
IPR&D
|
|
Trademarks
|
|
Customer
relationships
|
|
Other
intangibles
|
|
Non-compete
agreements
|
|
December 31, 2015
|
$
|
653,627
|
|
|
$
|
186,932
|
|
|
$
|
13,018
|
|
|
$
|
2,777
|
|
|
$
|
8,635
|
|
|
$
|
—
|
|
|
Acquisitions
|
3,872
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization
|
(62,375
|
)
|
|
—
|
|
|
(1,262
|
)
|
|
(350
|
)
|
|
(1,726
|
)
|
|
—
|
|
|
Impairments
|
(40,519
|
)
|
|
(3,850
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Reclassifications
|
9,400
|
|
|
(9,400
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
December 31, 2016
|
$
|
564,005
|
|
|
$
|
173,757
|
|
|
$
|
11,756
|
|
|
$
|
2,427
|
|
|
$
|
6,909
|
|
|
$
|
—
|
|
|
Acquisitions
|
200
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization
|
(58,335
|
)
|
|
—
|
|
|
(1,132
|
)
|
|
(260
|
)
|
|
(1,717
|
)
|
|
—
|
|
|
Impairments
|
(103,530
|
)
|
|
(24,596
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
December 31, 2017
|
$
|
402,340
|
|
|
$
|
149,161
|
|
|
$
|
10,624
|
|
|
$
|
2,167
|
|
|
$
|
5,192
|
|
|
$
|
—
|
|
The amortization expense of acquired intangible assets for each of the following periods are expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Amortization Expense
|
|
2018
|
|
$
|
52,427
|
|
|
2019
|
|
49,601
|
|
|
2020
|
|
41,819
|
|
|
2021
|
|
41,819
|
|
|
2022 and thereafter
|
|
234,657
|
|
|
Total
|
|
$
|
420,323
|
|
Note 6 – Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Land
|
$
|
17,846
|
|
|
$
|
17,410
|
|
|
Buildings and leasehold improvements
|
106,316
|
|
|
88,825
|
|
|
Furniture and equipment
|
202,897
|
|
|
160,546
|
|
|
|
327,059
|
|
|
266,781
|
|
|
Accumulated depreciation
|
(130,814
|
)
|
|
(108,425
|
)
|
|
|
196,245
|
|
|
158,356
|
|
|
Construction in progress
|
117,173
|
|
|
80,048
|
|
|
Property, plant and equipment, net
|
$
|
313,418
|
|
|
$
|
238,404
|
|
At
December 31, 2017
and
2016
, property, plant and equipment carrying a net book value of
$82.8 million
and
$65.1 million
, respectively, was located outside the United States. The 2017 increase in Property, Plant and Equipment is due primarily to spending on equipment for compliance with DSCSA requirements and expansion initiatives at our Cranbury, Decatur and Somerset facilities.
Depreciation expense was
$23.7 million
,
$22.2 million
and
$19.9 million
for the years ended
December 31, 2017
,
2016
and 2015, respectively.
Note 7 — Financing Arrangements
Term Loans
During 2014, in order to finance its acquisitions of Hi-Tech Pharmacal Co Inc. and VersaPharm Inc., the Company entered into
two
term loan agreements (the “Term Loans”, or collectively, the “Existing Term Loan Facility”) with certain lenders and with JPMorgan Chase Bank, N.A., as administrative agent. On February 16, 2016, the Company made a voluntary prepayment of its Existing Term Loan Facility of
$200.0 million
which settled all future required quarterly principal repayments of the Term Loan Agreements as denoted above until the date of maturity of the Term Loan Agreements or April 16, 2021, although future voluntary principal repayments are permitted. The aggregate principal amount financed was
$1,045.0 million
. As of
December 31, 2017
, outstanding debt under the Term Loans was
$831.9 million
and the Company was in full compliance with all applicable covenants which included customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities. The Existing Term Loan Facility is scheduled to mature in 2021.
During the years ended
December 31, 2017
, the Company amortized
$5.0 million
of the total Term Loans-related costs, resulting in
$16.5 million
remaining balance of deferred financing costs at
December 31, 2017
. During the years ended December 31, 2016 and 2015, the Company amortized
$10.4 million
and
$3.8 million
, respectively, of Term Loans-related costs. The decrease in amortization of deferred financing fees in the current year as compared to the previous year was primarily the result of the deferred financing fee amortization associated with the voluntary principal repayment in the previous year. The Company will amortize this balance using the straight-line method over the life of the Term Loan Agreements.
Subsequent to November 13, 2015, interest accrues based, at the Company’s election, on an adjusted prime/federal funds rate (“ABR Loan”) or an adjusted LIBOR (“Eurodollar Loan”) rate, plus a margin of
4.00%
for ABR Loans, and
5.00%
for Eurodollar Loans. As of the date of the filing of this Form 10-K until the maturity of the Term Loans, our spread will be based upon the Ratings Level applicable on such date as documented below. As of the period ended
December 31, 2017
, the Company was a Ratings Level I for the Existing Term Loan Facility.
|
|
|
|
|
|
|
|
Ratings Level
|
Index Ratings
(Moody’s/S&P)
|
Eurodollar Spread
|
ABR Spread
|
|
Level I
|
B1/B+ or higher
|
4.25%
|
3.25%
|
|
Level II
|
B2/B
|
4.75%
|
3.75%
|
|
Level III
|
B3/B- or lower
|
5.50%
|
4.50%
|
For the years ended
December 31, 2017
, 2016 and 2015, the Company recorded interest expense of
$45.5 million
,
$43.5 million
and
$47.3 million
, respectively in relation to the Term Loans.
JPMorgan Credit Facility
On April 17, 2014, Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan acting as administrative agent, and Bank of America, N.A., as syndication agent for certain other lenders (at closing, Bank of America, N.A. and Wells Fargo Bank, N. A.) for a
$150.0 million
revolving credit facility (the “JPM Revolving Facility”).
As of
December 31, 2017
, the Company was in full compliance with all covenants applicable to the JPM Revolving Facility.
The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At
December 31, 2017
, there were
no
outstanding borrowings under the JPM Revolving Facility. Availability under the facility as of
December 31, 2017
was
$150.0 million
.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of the Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries.
Subject to other conditions in the JPM Credit Agreement, advances under the JPM Revolving Facility will be made in accordance with a borrowing base consisting of the sum of the following:
|
|
|
|
(a)
|
85%
of eligible accounts receivable;
|
|
|
|
|
a.
|
65%
of the lower of cost or market value of eligible raw materials and work in process inventory, valued on a first in first out basis, and
|
|
|
|
|
b.
|
85%
of the orderly liquidation value of eligible raw materials and work in process inventory, valued on a first in first out basis;
|
|
|
|
|
a.
|
75%
of the lower of cost or market value of eligible finished goods inventory, valued on a first in first out basis, and
|
|
|
|
|
b.
|
85%
of the orderly liquidation value of eligible finished goods inventory, valued on a first in first out basis up to
85%
of the liquidation value of eligible inventory (or
75%
of market value finished goods inventory); and
|
|
|
|
|
(d)
|
Less any reserves deemed necessary by the administrative agent, and allowed in its permitted discretion.
|
The total amount available under the JPM Revolving Facility includes a
$10.0 million
letter of credit facility.
Under the terms of the JPM Credit Agreement, if availability under the JPM Revolving Facility falls below
12.5%
of commitments or
$15.0 million
for more than
30
consecutive days, the Company may be subject to cash dominion, additional reporting requirements, and additional covenants and restrictions. The Company may seek additional commitments to increase the maximum amount of the JPM Revolving Facility to
$200.0 million
.
Unless cash dominion is exercised by the lenders in connection with the JPM Revolving Facility, the Company will be required to repay the JPM Revolving Facility upon its expiration
five years
from issuance, subject to permitted extension, and will pay interest on the outstanding balance monthly based, at the Company’s election, on an adjusted prime/federal funds rate (“ABR”) or an adjusted LIBOR (“Eurodollar”), plus a margin determined in accordance with the Company’s consolidated fixed charge coverage ratio (EBITDA to fixed charges) as follows:
|
|
|
|
|
|
|
Fixed Charge
Coverage Ratio
|
Revolver ABR
Spread
|
Revolver
Eurodollar
Spread
|
|
Category 1
> 1.50 to 1.0
|
0.50%
|
1.50%
|
|
Category 2
> 1.25 to 1.00 but
< 1.50 to 1.00
|
0.75%
|
1.75%
|
|
Category 3
< 1.25 to 1.00
|
1.00%
|
2.00%
|
In addition to interest on borrowings, the Company will pay an unused line fee of
0.25%
per annum on the unused portion of the JPM Revolving Facility.
During an event of default, as defined in the JPM Credit Agreement, any interest rate will be increased by
2.0%
per annum.
The JPM Revolving Facility is secured by all of the assets of Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a deposit account control agreement. The financial covenants require Akorn Loan Parties to maintain the following on a consolidated basis:
|
|
|
|
(a)
|
Minimum Liquidity, as defined in the JPM Credit Agreement, of not less than (a)
$120.0 million
plus (b)
25%
of the JPM Revolving Facility commitments during the three-month period preceding the June 1, 2016 maturity date of the Company’s senior convertible notes.
|
|
|
|
|
(b)
|
Ratio of EBITDA to fixed charges of no less than
1.00
to
1.00
(measured quarterly for the trailing
4
quarters).
|
As of
December 31, 2017
, the Company was in full compliance with all covenants applicable to the JPM Revolving Facility.
The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At
December 31, 2017
, there were
no
outstanding borrowings and
no
outstanding letter of credit under the JPM Revolving Facility.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries.
Convertible Notes
On June 1, 2011, the Company issued
$120.0 million
aggregate principal amount of
3.50%
Convertible Senior Notes due June 1, 2016 (the “Notes”) which included
$20.0 million
in aggregate principal amount of the Notes issued in connection with the full exercise by the initial purchasers of their over-allotment option. The Notes were governed by the Company’s indenture with Wells Fargo Bank, National Association, as trustee (the “Indenture”). The Notes were offered and sold only to qualified institutional buyers. The net proceeds from the sale of the Notes were approximately
$115.3 million
, after deducting underwriting fees and other related expenses.
The Notes paid interest at an annual rate of
3.50%
semiannually in arrears on June 1 and December 1 of each year, with the first interest payment completed on December 1, 2011. The Notes were convertible into the Company’s common stock, cash or a combination thereof at an initial conversion price of
$8.76
per share, which is equivalent to an initial conversion rate of approximately
114.1553
shares per
$1,000
principal amount of the Notes, subject to adjustment for certain events described in the Indenture.
The Notes became convertible effective April 1, 2012 as a result of the Company’s common stock closing above the required price of
$11.39
per share for
20
of the last
30
consecutive trading days in the quarter ended March 31, 2012. The Notes remained convertible for each successive quarter, up to and including the maturity date of June 1, 2016, as a result of meeting the trading price requirement at the end of each prior quarter. During the year ended December 31, 2015,
$44.3 million
in principal amount of Notes were converted at the holders' request which resulted in recognition of losses of
$1.2 million
, due to the conversions. On June 1, 2016, the remaining
$43.2 million
of Notes was converted at the holder's request, resulting in complete conversion of the Notes.
At
December 31, 2016
, there
no
balances on the net carrying amount of the liability component and the remaining unamortized debt discount due to the complete conversion of notes.
As a result of the complete conversion on June 1, 2016, during the years ended
December 31, 2017
, 2016 and 2015, the Company recorded the following expenses in relation to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Interest expense at 3.50% coupon rate (1)
|
$
|
—
|
|
|
$
|
687
|
|
|
$
|
2,205
|
|
|
Debt discount amortization
|
—
|
|
|
750
|
|
|
2,421
|
|
|
Deferred financing cost amortization
|
—
|
|
|
136
|
|
|
438
|
|
|
Loss on conversion
|
—
|
|
|
—
|
|
|
1,235
|
|
|
|
$
|
—
|
|
|
$
|
1,573
|
|
|
$
|
6,299
|
|
|
|
|
|
(1)
|
As a result of the restatement of the 2014 financial data and the resultant delays in filings of the 2015 financial statements, the Company was required to remit an additional
0.5%
interest penalty to all holders of the convertible notes from January 1, 2016 to April 5, 2016 and a lump sum payment equal to
0.25%
of the principal balance held by consenting holders of the convertible notes as of April 6, 2016.
|
Aggregate cumulative maturities of long-term obligations (including the incremental and existing term loans and the JPM revolver) as of
December 31, 2017
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Maturities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
831,938
|
|
|
$
|
—
|
|
Note 8 — Earnings (Loss) per Common Share
Basic net income (loss) per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of potentially dilutive securities using the treasury stock method. Additionally, for the twelve-month period ended December 31, 2016, the earnings per share amount was calculated using the if-converted method to account for the dilutive impact of the Convertible Notes. The Convertible Notes matured in the quarter ended June 30, 2016.
The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money, (ii) unvested RSUs, and (iii) for the twelve-month period ended December 31, 2016, shares potentially issuable upon conversion of the Notes.
A reconciliation of the (loss) earnings per share data from a basic to a fully diluted basis is detailed below (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
(Loss) income from continuing operations used for basic earnings per share
|
$
|
(24,550
|
)
|
|
$
|
184,243
|
|
|
$
|
150,798
|
|
|
Convertible debt income adjustments, net of tax
|
—
|
|
|
1,049
|
|
|
3,222
|
|
|
(Loss) income from continuing operations adjusted for convertible debt as used for diluted earnings per share
|
$
|
(24,550
|
)
|
|
$
|
185,292
|
|
|
$
|
154,020
|
|
|
(Loss) income from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.20
|
)
|
|
$
|
1.50
|
|
|
$
|
1.29
|
|
|
Diluted (1)
|
$
|
(0.20
|
)
|
|
$
|
1.47
|
|
|
$
|
1.22
|
|
|
Shares used in computing (loss) income per share:
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
124,790
|
|
|
122,869
|
|
|
116,980
|
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock options and unvested RSUs
|
—
|
|
|
914
|
|
|
1,667
|
|
|
Stock warrants
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares issuable on conversion of the Notes
|
—
|
|
|
2,018
|
|
|
7,115
|
|
|
Total dilutive securities
|
—
|
|
|
2,932
|
|
|
8,782
|
|
|
Weighted average diluted shares outstanding
|
124,790
|
|
|
125,801
|
|
|
125,762
|
|
|
|
|
|
(1)
|
As a result of the Company's expectation that it would likely settle all future note conversions in shares of the Company's common stock, the diluted income from continuing operations per share calculation for the periods prior to the complete conversion of the convertible debt on June 1, 2016, included the dilutive effect of convertible debt and was offset by the exclusion of interest expense and deferred financing fees related to the convertible debt of
$1.0 million
and
$3.2 million
, after-tax for the years ended December 31, 2016 and 2015, respectively.
|
Note 9 — Leasing Arrangements
The Company leases real and personal property in the normal course of business under various operating leases and other insignificant capital leases, including non-cancelable and month-to-month agreements. Rental expense under these leases was
$5.9 million
,
$5.2 million
and
$3.1 million
for the years ended
December 31, 2017
, 2016 and 2015, respectively.
Landlord incentives are recorded as deferred rent and amortized on a straight-line basis over the lease term. Rent escalations are recorded on a straight-line basis over the lease term. The following is a schedule, by year, of future minimum rental payments required under non-cancelable operating leases in place as of
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
2018
|
$
|
4,016
|
|
|
2019
|
3,818
|
|
|
2020
|
3,731
|
|
|
2021
|
3,524
|
|
|
2022
|
3,210
|
|
|
2023 and thereafter
|
9,649
|
|
|
Total
|
$
|
27,948
|
|
Note 10 — Stock Options, Restricted Stock and Employee Stock Purchase Plan
Stock Option Plan
The Company maintains equity compensation plans that allow the Company’s Board of Directors to grant stock options and other equity awards to eligible employees, officers, directors and consultants. On April 27, 2017, the Company’s shareholders voted to approve the Akorn, Inc. 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). Under the Omnibus Plan,
8.0 million
shares of the Company’s common stock were made available for issuance pursuant to equity awards. The Omnibus Plan replaced the Akorn, Inc. 2014 Stock Option Plan ("the 2014 Plan"), which was approved by shareholders at the Company's 2014 Annual Meeting of Shareholders on May 2, 2014 and subsequently amended by proxy vote of the Company’s shareholders on December 16, 2016. The 2014 Plan had reserved
7.5 million
shares for issuance upon the grant of stock options, restricted stock units (“RSUs”), or various other instruments to directors, employees and consultants. Following shareholder approval of the Omnibus Plan, no new awards may be granted under the 2014 Plan, although previously granted awards remain outstanding pursuant to their original terms. As of December 31, 2017, there were approximately
3.9 million
stock options and
0.2 million
RSU shares outstanding under the 2014 Plan. The 2014 Plan had replaced the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6, 2013. As of December 31, 2017, a total of
0.2 million
stock options were outstanding under the 2003 Plan.
Under the Omnibus Plan,
0.7 million
RSUs have been granted to employees and directors, of which none have vested and a small number have been forfeited, leaving
0.6 million
RSUs outstanding as of December 31, 2017.
No
stock options have been granted under the Omnibus Plan. As of December 31, 2017, approximately
7.4 million
shares remain available for future issuance under the Omnibus Plan.
The Company accounts for stock-based compensation in accordance with
ASC Topic 718 - Compensation — Stock Compensation
. Accordingly, stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, as necessary, if actual forfeitures differ from those estimates.
The Company recorded stock-based compensation expense of approximately
$21.0 million
,
$15.4 million
and
$13.1 million
during the years ended
December 31, 2017
, 2016 and 2015, respectively. The Company uses the single-award method for allocating the compensation cost to each period.
Stock Option awards
From time to time, the Company grants stock option awards to certain employees and directors. The assumptions used in estimating the fair value of the stock options granted during the period, along with the weighted-average grant date fair values, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected volatility
|
50%
|
—
|
50%
|
|
46%
|
—
|
50%
|
|
42%
|
—
|
47%
|
|
Expected life (in years)
|
|
4.8
|
|
|
|
4.7
|
|
|
|
4.8
|
|
|
Risk-free interest rate
|
1.7%
|
—
|
1.7%
|
|
0.9%
|
—
|
1.8%
|
|
1.5%
|
—
|
1.6%
|
|
Dividend yield
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Weighted-average grant date fair value per stock option
|
|
$9.25
|
|
|
|
$11.13
|
|
|
|
$14.59
|
|
A summary of stock option activity within the Company’s stock-based compensation plans for the years ended
December 31, 2017
, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
(in thousands) (1)
|
|
Outstanding at December 31, 2014
|
|
6,386
|
|
|
$
|
11.44
|
|
|
|
|
|
|
|
Granted
|
|
1,016
|
|
|
37.60
|
|
|
|
|
|
|
|
Exercised
|
|
(2,519
|
)
|
|
4.09
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(121
|
)
|
|
34.78
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
4,762
|
|
|
$
|
20.33
|
|
|
|
|
|
|
|
Granted
|
|
2,089
|
|
|
26.61
|
|
|
|
|
|
|
|
Exercised
|
|
(1,794
|
)
|
|
7.78
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(291
|
)
|
|
28.96
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
4,766
|
|
|
$
|
27.27
|
|
|
|
|
|
|
|
Granted
|
|
66
|
|
|
21.28
|
|
|
|
|
|
|
|
Exercised
|
|
(623
|
)
|
|
15.53
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(156
|
)
|
|
28.20
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
4,053
|
|
|
$
|
28.95
|
|
|
4.56
|
|
$
|
21,459
|
|
|
Exercisable at December 31, 2017
|
|
1,845
|
|
|
$
|
29.15
|
|
|
3.94
|
|
$
|
10,103
|
|
|
|
|
|
(1)
|
Includes only those options that were in-the-money as of December 31, 2017. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and the timing and volume of option grants, exercises and forfeitures.
|
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock at the end of the period and the exercise price of stock options. The total intrinsic value of stock options exercised during the years ended
December 31, 2017
, 2016 and 2015 was approximately
$9.8 million
,
$40.3 million
and
$97.4 million
, respectively. As a result of the stock options exercised, the Company received cash and recorded additional paid-in-capital of approximately
$9.7 million
,
$14.0 million
and
$10.2 million
during the years ended
December 31, 2017
, 2016 and 2015, respectively.
As of
December 31, 2017
, the total amount of unrecognized compensation cost related to non-vested stock options was approximately
$16.6 million
, which is expected to be recognized as expense over a weighted-average period of
2.0
years.
Restricted Stock Unit awards
From time to time, the Company grants restricted stock units to certain employees and directors. Restricted stock units are valued at the closing market price of the Company’s common stock on the day of grant and the total value of the units are recognized as expense ratably over the vesting period of the grants.
The following is a summary of non-vested restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
(in thousands)
|
|
Weighted Average Per Share
Grant Date Fair Value
|
|
Nonvested at December 31, 2014
|
337
|
|
|
$
|
35.31
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
(84
|
)
|
|
35.31
|
|
|
Canceled
|
—
|
|
|
—
|
|
|
Nonvested at December 31, 2015
|
253
|
|
|
$
|
35.31
|
|
|
Granted
|
303
|
|
|
29.50
|
|
|
Vested
|
(118
|
)
|
|
34.95
|
|
|
Canceled
|
(22
|
)
|
|
28.85
|
|
|
Nonvested at December 31, 2016
|
416
|
|
|
$
|
31.52
|
|
|
Granted
|
666
|
|
|
33.10
|
|
|
Vested
|
(137
|
)
|
|
32.55
|
|
|
Canceled
|
(57
|
)
|
|
31.34
|
|
|
Nonvested at December 31, 2017
|
888
|
|
|
$
|
32.55
|
|
As of December 31, 2017, the total amount of unrecognized compensation cost related to restricted stock awards was approximately
$20.3 million
which is expected to be recognized as expense over a weighted-average period of
3.0
years.
Employee Stock Purchase Plan
The 2016 Akorn, Inc. Employee Stock Purchase Plan (the “ESPP”) permits eligible employees to acquire shares of the Company’s common stock through payroll deductions. The ESPP has been structured to qualify under Section 423 of the Internal Revenue Code (“IRC”). Employees who elect to participate in the ESPP may withhold from
1%
to
15%
of eligible wages toward the purchase of stock. Shares will be purchased at a
15%
discount off the lesser of the market price at the beginning or the ending of the applicable offering period. The ESPP is designed with
two
offering periods each year, one running from January 1st to December 31st and the other running from July 1st to December 31st. In a given year, employees may enroll in either offering period, but not both. Per IRC rules, annual purchases per employee are limited to
$25,000
worth of stock, valued as of the beginning of the offering period. Accordingly, with the
15%
discount, employees may withhold no more than
$21,250
per year toward the purchase of stock under the ESPP. Employees are further limited to purchasing no more than
15,000
shares of stock per year. A total of
2.0 million
shares of the Company’s stock have been set aside for issuance under the ESPP. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016.
The initial offering period under the ESPP began in January 2017 and ran through the end of the year. The Company did not have an ESPP offering period starting on July 1, 2017 pursuant to terms of the Merger Agreement. During the year ended
December 31, 2017
, participants contributed approximately
$2.8 million
through payroll deductions toward the purchase of shares under the ESPP, resulting in the issuance of
146,247
shares of Company common stock in January 2018. The Company recorded stock-based compensation expense of
$1.1 million
during the year ended
December 31, 2017
related to the ESPP.
Note 11 — Income Taxes from Continuing Operations
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted and implements comprehensive tax legislation which, among other changes, reduces the federal statutory corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves to a territorial system. Additionally, in December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period, as defined in SAB 118, ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.
Based on the provisions of the Tax Act, the Company re-measured its U.S. deferred tax assets and liabilities and adjusted its deferred tax balances to reflect the lower U.S. corporate income tax rate at December 31, 2017. The re-measurement of the Company's U.S. deferred tax assets and liabilities at the lower enacted U.S. corporate tax rate resulted in an income tax benefit
of
$26.9 million
which is included as a discrete item in the 2017 income tax benefit. The Company’s foreign subsidiaries do not have accumulated earnings that can be distributed; therefore, the provisions of the Act related to the repatriation of foreign earnings are not applicable to the Company at December 31, 2017.
The income tax provision (benefit) from continuing operations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Deferred
|
|
Total
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
Federal
|
$
|
78,806
|
|
|
$
|
(105,006
|
)
|
|
$
|
(26,200
|
)
|
|
State
|
1,706
|
|
|
(9,785
|
)
|
|
(8,079
|
)
|
|
Foreign
|
89
|
|
|
(458
|
)
|
|
(369
|
)
|
|
|
$
|
80,601
|
|
|
$
|
(115,249
|
)
|
|
$
|
(34,648
|
)
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
107,818
|
|
|
$
|
(26,377
|
)
|
|
$
|
81,441
|
|
|
State
|
11,247
|
|
|
(4,325
|
)
|
|
6,922
|
|
|
Foreign
|
—
|
|
|
(1,306
|
)
|
|
(1,306
|
)
|
|
|
$
|
119,065
|
|
|
$
|
(32,008
|
)
|
|
$
|
87,057
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
116,375
|
|
|
$
|
(41,477
|
)
|
|
$
|
74,898
|
|
|
State
|
11,113
|
|
|
(2,620
|
)
|
|
8,493
|
|
|
Foreign
|
—
|
|
|
(2,033
|
)
|
|
(2,033
|
)
|
|
|
$
|
127,488
|
|
|
$
|
(46,130
|
)
|
|
$
|
81,358
|
|
The income tax provision differs from the “expected” tax expense computed by applying the U.S. Federal corporate income tax rates of
35%
to income from continuing operations before income taxes, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Computed “expected” tax provision
|
$
|
(20,719
|
)
|
|
$
|
94,955
|
|
|
$
|
81,255
|
|
|
Change in income taxes resulting from:
|
|
|
|
|
|
|
State income taxes, net of Federal income tax
|
(537
|
)
|
|
4,501
|
|
|
5,520
|
|
|
Change in state income tax rate, net of Federal income tax
|
(4,714
|
)
|
|
—
|
|
|
—
|
|
|
Foreign income tax provision (benefit)
|
2,206
|
|
|
1,580
|
|
|
(1,130
|
)
|
|
Deduction for domestic production activities
|
(2,527
|
)
|
|
(7,280
|
)
|
|
(6,882
|
)
|
|
Stock compensation
|
(1,316
|
)
|
|
(11,395
|
)
|
|
—
|
|
|
R&D tax credits
|
(1,200
|
)
|
|
(825
|
)
|
|
(677
|
)
|
|
Nondeductible acquisition fees
|
1,974
|
|
|
39
|
|
|
165
|
|
|
Interest and penalties from Federal audit
|
15,650
|
|
|
—
|
|
|
—
|
|
|
Federal rate change
|
(26,902
|
)
|
|
—
|
|
|
—
|
|
|
Discrete adjustments to prior year
|
1,561
|
|
|
—
|
|
|
—
|
|
|
Other expense, net
|
1,201
|
|
|
2,564
|
|
|
682
|
|
|
Valuation allowance change
|
675
|
|
|
2,918
|
|
|
2,425
|
|
|
Income tax provision
|
$
|
(34,648
|
)
|
|
$
|
87,057
|
|
|
$
|
81,358
|
|
The geographic allocation of the Company’s income from continuing operations before income taxes between U.S. and foreign operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Pre-tax (loss) income from continuing U.S. operations
|
$
|
(49,572
|
)
|
|
$
|
287,880
|
|
|
$
|
241,665
|
|
|
Pre-tax loss from continuing foreign operations
|
(9,626
|
)
|
|
(16,580
|
)
|
|
(9,509
|
)
|
|
Total pre-tax (loss) income from continuing operations
|
$
|
(59,198
|
)
|
|
$
|
271,300
|
|
|
$
|
232,156
|
|
Net deferred income taxes at
December 31, 2017
and
2016
include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carry-forward
|
$
|
25,100
|
|
|
$
|
25,657
|
|
|
Stock-based compensation
|
7,668
|
|
|
8,922
|
|
|
Chargeback reserves
|
17,802
|
|
|
—
|
|
|
Reserve for product returns
|
9,479
|
|
|
16,208
|
|
|
Inventory valuation reserve
|
10,207
|
|
|
11,503
|
|
|
Long-term debt
|
3,084
|
|
|
6,383
|
|
|
Other
|
10,805
|
|
|
18,808
|
|
|
Total deferred tax assets
|
$
|
84,145
|
|
|
$
|
87,481
|
|
|
Valuation allowance
|
(10,531
|
)
|
|
(9,856
|
)
|
|
Net deferred tax assets
|
$
|
73,614
|
|
|
$
|
77,625
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Prepaid expenses
|
$
|
(1,709
|
)
|
|
$
|
(3,091
|
)
|
|
Depreciation & amortization – tax over book
|
(108,788
|
)
|
|
$
|
(226,855
|
)
|
|
Total deferred tax liabilities
|
$
|
(110,497
|
)
|
|
$
|
(229,946
|
)
|
|
Net deferred income tax asset (liability)
|
$
|
(36,883
|
)
|
|
$
|
(152,321
|
)
|
The Company records a valuation allowance to reduce net deferred income tax assets to the amount that is more likely than not to be realized. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was necessary, the Company evaluated the data and determined that as of December 31, 2014 it could not conclude that it was more likely than not that certain of the net operating losses of its Indian and Swiss subsidiaries would be realized. Accordingly, the Company established a valuation allowance of
$10.5 million
,
$9.9 million
and
$8.8 million
against its deferred tax assets as of
December 31, 2017
,
2016
and 2015, respectively.
The deferred tax balances have been reflected gross on the balance sheet and are netted only if they are in the same jurisdiction.
The Company’s net operating loss (“NOL”) carry-forwards as of
December 31, 2017
consist of three component pieces: (i) U.S. Federal NOL carry-forwards valued at
$3.7 million
, (ii) foreign (Indian) NOLs of
$21.0 million
and (iii) foreign (Swiss) NOLs of
$0.4 million
. The U.S. Federal NOL carry-forwards were obtained through the Merck Acquisition completed in the fourth quarter of 2013. The Indian NOL carry-forwards relate to operating losses by the Company’s subsidiary in India, which was acquired in 2012. Of the
$21.0 million
Indian NOL,
$10.1 million
expires beginning in 2022; the Company has established a valuation allowance against this entire amount. The remaining
$10.9 million
of the Indian NOLs can be carried forward indefinitely, and the Company has concluded that they are more likely than not to be utilized and therefore has not established a valuation allowance against them. The Swiss NOL was obtained through the Akorn AG acquisition completed in the first quarter of 2015. It begins to expire in 2023 and, accordingly, the Company has established a valuation allowance against the entire amount.
The Company is currently undergoing an examination of its Federal income tax return for the year ended December 31, 2015 by the Internal Revenue Service. The Company’s U.S. Federal income tax returns filed for years 2014 through 2016 are open for examination by the Internal Revenue Service. The majority of the Company’s state and local income tax returns filed for years 2014 through 2016 remain open for examination as well.
In accordance with
ASC 740-10-25 - Income Taxes — Recognition
, the Company performs reviews of its tax positions to determine whether it is “more likely than not” that its tax positions will be sustained upon examination, and if any tax positions are deemed to fall short of that standard, the Company reserves based on the financial exposure and the likelihood of its tax positions not being sustained. Based on its review as of
December 31, 2017
, the Company determined that it would not recognize tax benefits as follows (in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
$
|
2,010
|
|
|
Additions relating to 2015
|
356
|
|
|
Payments of amounts relating to prior years
|
(81
|
)
|
|
Balance at December 31, 2015
|
$
|
2,285
|
|
|
Additions relating to 2016
|
303
|
|
|
Payments of amounts relating to prior years
|
(1,287
|
)
|
|
Balance at December 31, 2016
|
$
|
1,301
|
|
|
Additions relating to 2017
|
416
|
|
|
Additions relating to prior years
|
24,297
|
|
|
Terminations of exposures relating to prior years
|
(619
|
)
|
|
Balance at December 31, 2017
|
$
|
25,395
|
|
If recognized,
$2.8 million
of the above positions will impact the Company’s effective rate, while the remaining
$22.6 million
would result in adjustments to the Company’s deferred taxes. Due to the uncertainty of both timing and resolution of potential income tax examinations, the Company is unable to determine whether any amounts included in the
December 31, 2017
balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve months. The Company accounts for interest and penalties as income tax expense. In the year ended December 31, 2017, the Company recorded penalties of
$8.9 million
and interest, net of tax benefit, of
$5.9 million
related to unrecognized tax benefits. At December 31, 2017, the Company had accrued a total of
$8.9 million
and
$6.0 million
of penalties and interest, respectively.
Note 12 — Segment Information
During the year ended December 31, 2014, the Company acquired Hi-Tech and as a result, underwent a change in the organizational and reporting structure of the Company’s reportable segments, establishing
two
reporting segments that each report to the Chief Operating Decision Maker (“CODM”), as defined in
ASC Topic 280 - Segment Reporting
, and CEO. Our performance is assessed and resources allocated by the CODM based on the following
two
reportable segments:
|
|
|
|
•
|
Prescription Pharmaceuticals
|
The Company’s Prescription Pharmaceutical segment principally consists of generic and branded Prescription Pharmaceuticals products which span a broad range of indications as well as a variety of dosage forms including: sterile ophthalmics, injectables and inhalants, and non-sterile oral liquids, topicals and nasal sprays. The Company’s Consumer Health segment principally consists of animal health and OTC products, both branded and private label. OTC products include a suite of products for the treatment of dry eye sold under the TheraTears® brand name.
Financial information about each of the Company’s reportable segments is based upon internal financial reports that aggregate certain operating information. The Company’s CEO oversees operational assessments and resource allocations based upon the results of the Company’s reportable segments, which have available and discrete financial information.
Selected financial information by reporting segment is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
REVENUES, NET:
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
$
|
772,524
|
|
|
$
|
1,053,579
|
|
|
$
|
924,472
|
|
|
Consumer Health
|
68,521
|
|
|
63,264
|
|
|
60,604
|
|
|
Total revenues, net
|
$
|
841,045
|
|
|
$
|
1,116,843
|
|
|
$
|
985,076
|
|
|
GROSS PROFIT:
|
|
|
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
$
|
403,023
|
|
|
$
|
645,078
|
|
|
$
|
566,298
|
|
|
Consumer Health
|
30,124
|
|
|
29,193
|
|
|
29,714
|
|
|
Total gross profit
|
$
|
433,147
|
|
|
$
|
674,271
|
|
|
$
|
596,012
|
|
The Company manages its reportable business segments to the gross profit level and manages its operating and other costs on a company-wide basis. Inter-segment activity at the gross profit level is minimal. The Company does not have discrete assets by segment, as certain manufacturing and warehouse facilities support more than one segment, and therefore does not report assets by segment. Financial information including revenues and gross profit from customers by product or product line is not provided, as to do so would be impracticable.
During the years ended
December 31, 2017
,
2016
and
2015
, approximately
$25.5 million
,
$26.3 million
and
$37.0 million
of the Company’s net revenue, respectively, was from customers located in foreign countries. All of the net revenue is related to our Prescription Pharmaceutical segment.
The carrying amounts of Goodwill by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
|
Consumer Health
|
|
Total
|
|
December 31, 2015
|
$
|
267,993
|
|
|
$
|
16,717
|
|
|
$
|
284,710
|
|
|
Foreign currency translations
|
(417
|
)
|
|
—
|
|
|
(417
|
)
|
|
December 31, 2016
|
$
|
267,576
|
|
|
$
|
16,717
|
|
|
$
|
284,293
|
|
|
Foreign currency translations
|
1,017
|
|
|
—
|
|
|
1,017
|
|
|
December 31, 2017
|
$
|
268,593
|
|
|
$
|
16,717
|
|
|
$
|
285,310
|
|
Note 13 — Commitments and Contingencies
The Company has entered into strategic business agreements for the development and marketing of finished dosage form pharmaceutical products with various pharmaceutical development companies.
Each strategic business agreement includes a future payment schedule for contingent milestone payments and in certain strategic business agreements, minimum royalty payments. The Company will be responsible for contingent milestone payments and minimum royalty payments to these strategic business partners based upon the occurrence of future events. Each strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development progress timeline, successful product testing and validation, successful clinical studies, various FDA and other regulatory approvals and other factors as negotiated in each agreement. None of the contingent milestone payments or minimum royalty payments is individually material to the Company.
The Company is engaged in various supply agreements with third parties which obligate the Company to purchase various active pharmaceutical ingredients or finished products at contractual minimum levels. None of these agreements is individually or in aggregate material to the Company. Further, the Company does not believe at this time that any of the purchase obligations represent levels above that of normal business demands.
The table below summarizes contingent, potential milestone payments that would become due to strategic partners in the years 2018 and beyond, assuming all such contingencies occur (in thousands):
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Milestone Payments
|
|
2018
|
|
$
|
11,139
|
|
|
2019
|
|
5,545
|
|
|
2020
|
|
1,500
|
|
|
2021 and beyond
|
|
950
|
|
|
Total
|
|
$
|
19,134
|
|
The Company is a party in legal proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, management of the Company believes that the ultimate disposition of such proceedings and exposures will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company. Legal proceedings which may have a material effect on the Company have been further disclosed in Note 20 - “
Legal Proceedings.
”
Note 14 — Supplemental Cash Flow Information (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Amount paid for interest
|
$
|
45,472
|
|
|
$
|
44,063
|
|
|
$
|
54,763
|
|
|
Amount paid for income taxes, net
|
42,003
|
|
|
132,695
|
|
|
34,404
|
|
|
Non-cash conversion of convertible notes to common shares
|
—
|
|
|
43,215
|
|
|
44,310
|
|
|
Accrued capital expenditures
|
13,824
|
|
|
12,391
|
|
|
5,074
|
|
Note 15 – Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No.
2017-9,
Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.
Per the ASU, a
n entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU.
The ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017.
Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.
The Company adopted the standard on January 1, 2017, and will apply to modifications, if any, on a prospective basis.
In August 2016, the FASB issued
ASU 2016-15,
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows.
ASU 2016-15
is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The standard was adopted on January 1, 2017, and did not have a material impact on the Company's consolidated financial statements or financial statement disclosures.
In February 2016, the FASB issued
ASU 2016-02
-
Leases,
which establishes a comprehensive new lease accounting model. The new standard clarifies the definition of a lease and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than one year. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. Upon adoption, the operating leases reporting in Note 9 - Leasing Arrangements, will be reported on the statement of financial position as gross-up assets and liabilities. The Company has begun evaluating and planning for adoption and implementation of this ASU, including reviewing all material leases, the ASU practical expedient guidelines, current accounting policy elections, and assessing the overall financial statement impact. We expect this ASU will have a material impact on the Company’s financial position. The impact on the Company’s results of operations is currently being evaluated. The impact of this ASU is non-cash in nature and is not expected to affect the Company’s cash flows.
Revenue Recognition Related ASUs:
In February 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No.
2017-05 - Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.
The amendments in this ASU address the recognition of gains and losses on the transfer (i.e., sale) of nonfinancial (and in substance nonfinancial) assets to counterparties other than customers. The ASU conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The amendments are effective at the same time as the new revenue standard. For public entities that means annual periods beginning after December 15, 2017 and interim periods therein.
In December 2016, the FASB issued
ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
The amendments in this ASU affect narrow aspects of the guidance in
ASU 2014-09
, which is not yet effective. The amendments in this ASU address loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production-type contracts, and various disclosures. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by
ASU 2014-09
).
ASU 2015-14
,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, defers the effective date of
ASU 2014-09
by one year.
In May 2016, the FASB issued
ASU 2016-12 - Narrow-Scope Improvements and Practical Expedients
. This standard amends the guidance in
ASU 2014-09
to specifically provide a practical expedient for reflecting contract modifications at transition. The effective date for
ASU 2016-12
is the same as the effective date for
ASU 2014-09
,
ASU 2015-14
,
ASU 2016-08
and
ASU 2016-10
.
In April 2016, the FASB issued
ASU 2016-10 - Revenue from Contracts with Customers (Topic 606) — Identifying Performance Obligations and Licensing
. This standard amends the guidance in
ASU 2014-09
and
ASU 2016-08
specifically related to identifying performance obligations and accounting for licenses of intellectual property. The effective date for
ASU 2016-10
is the same as the effective date for
ASU 2014-09
,
ASU 2015-14
and
ASU 2016-08
.
In March 2016, the FASB issued
ASU 2016-08 - Revenue from Contracts with Customers: Principal versus Agent Considerations
. The amendments of this standard are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for
ASU 2016-08
is the same as the effective date for
ASU 2014-09
and
ASU 2015-14
.
In August 2015, the FASB issued
ASU No. 2015-14 - Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date
, which defers the effective date of
ASU 2014-09
for one year and permits early adoption as early as the original effective date of
ASU 2014-09
. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.
In May 2014, FASB issued
ASU 2014-09 - Revenue from Contracts with Customers
, which provides guidance for revenue recognition.
ASU 2014-09
affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in
ASC 605 - Revenue Recognition
, and most industry-specific guidance. This ASU also supersedes some cost guidance included in
ASC 605-35 - Revenue Recognition-Construction-Type and Production-Type Contracts
. The standard’s core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The ASU defines a five step process to achieve this core principle and,
in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company may adopt the new standard under the full retrospective approach or the modified retrospective approach, as permitted under the standard. Early adoption of the standard is not permitted. This ASU and related updates are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
The Company has completed the process of evaluating the effects of the adoption of Topic 606 and determined that the timing and measurement of our revenues under the new standard is similar to that recognized under the previous revenue guidance. Similar to the current guidance, the Company will need to make significant estimates related to variable consideration at the point of sale, including chargebacks, rebates, product returns, and other discounts and allowances. Revenue will be recognized at a point in time upon the transfer of control of the Company's products, which occurs upon delivery for substantially all of the Company's sales. The Company has adopted the practical expedient to exclude all sales taxes and contract fulfillment costs from the transaction price. The Company adopted the standard effective January 1, 2018 using the modified retrospective approach. Other than additional required disclosures to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, the adoption of Topic 606 does not have a material impact on our results of operations, cash flows or financial position.
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No.
2017-04 - Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU simplifies the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
ASU 2017-04
was early adopted by the Company for the year beginning January 1, 2017 and did not have a material impact on the Company's condensed consolidated financial statements or financial statement disclosures.
In July 2015, the FASB issued
ASU 2015-11
-
Inventory. ASU 2015-11 simplifies the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value
.
ASU 2015-11
is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
ASU 2015-11
was adopted by the Company for the year beginning January 1, 2017 and did not have a material impact on the Company's condensed consolidated financial statements or financial statement disclosures.
In August 2014, the FASB issued
ASU 2014-15 - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures.
ASU 2014-15
is effective for financial statements issued for fiscal years ending after December 15, 2016, and interim periods thereafter.
ASU 2014-15 - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
was adopted by the Company for the year ending December 31, 2016. In connection with the preparation of the financial statements for the twelve-month period ended
December 31, 2017
, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity's ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued, noting that there did not appear to be evidence of substantial doubt of the entity's ability to continue as a going concern.
In March 2016, the FASB issued
ASU 2016-09 - Compensation - Stock Compensation
, which simplifies the accounting for the tax effects related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified, amongst other items.
ASU 2016-09
is effective for financial statements
issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years with early adoption permitted.
ASU 2016-09
was early adopted by the Company for the year beginning January 1, 2016 and resulted in various effects, most notably a reduction in income tax expense of
$11.4 million
due to stock option exercises in the year ended December 31, 2016.
In November 2015, the FASB issued
ASU 2015-17 - Balance Sheet Classification of Deferred Taxes
to simplify the presentation of deferred income taxes.
ASU 2015-17 - Balance Sheet Classification of Deferred Taxes
requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
ASU 2015-17 - Balance Sheet Classification of Deferred Taxes
is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
ASU 2015-17 - Balance Sheet Classification of Deferred Taxes
was early adopted by the Company for the year beginning January 1, 2016 resulting in the reclassification of the current portion of deferred tax assets to non-current deferred tax assets for the years ended December 31, 2016 and 2015.
In September 2015, the FASB issued
ASU 2015-16 - Business Combinations
.
ASU 2015-16 - Business Combinations
simplifies the accounting for measurement-period adjustments by requiring adjustments to provisional amounts in a business combination to be recognized in the reporting period in which the adjustment amounts are determined and eliminates the requirement to retrospectively account for those adjustments.
ASU 2015-16 - Business Combinations
requires an entity to present separately on the face of the income statement or disclose in the notes the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
ASU 2015-16 - Business Combinations
was adopted by the Company for the year beginning January 1, 2016 and did not have a material impact on the Company's condensed consolidated financial statements or financial statement disclosures.
In April 2015, the FASB issued
ASU 2015-03 - Interest - Imputation of Interest
, which simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums.
ASU 2015-03
is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.
ASU 2015-03
was adopted by the Company for the year beginning January 1, 2016 resulting in the reclassification of the deferred financing fees to the respective face value of debt outstanding for the year ended December 31, 2016.
Note 16 – Business Combinations and Other Strategic Investments
Excelvision AG
On July 22, 2014, Akorn International S.à r.l., a wholly-owned subsidiary of Akorn, Inc. entered into a share purchase agreement with Fareva SA, a private company headquartered in France to acquire all of the issued and outstanding shares of capital stock of its wholly-owned subsidiary, Excelvision AG for
21.7 million
CHF, net of certain working capital and inventory amounts. Excelvision AG was a contract manufacturer located in Hettlingen, Switzerland specializing in ophthalmic products.
On January 2, 2015, the Company acquired all of the outstanding shares of capital stock of Excelvision AG for
$28.4 million
U.S. dollars (“USD”) funded through available cash on hand including other net working capital and inventory amounts. The Company’s acquisition of Akorn AG is being accounted for as a business combination in accordance with
ASC 805 - Business Combinations
. The purpose of the acquisition was to expand the Company’s manufacturing capacity. On April 1, 2016 the name of Excelvision AG was changed to Akorn AG.
The following table sets forth the consideration paid for the Akorn AG acquisition and the fair values of the acquired assets and assumed liabilities (in millions of USD) as of the acquisition date adjusted in accordance with GAAP. The figures below may differ from historical financial results of Akorn AG.
|
|
|
|
|
|
|
|
Consideration:
|
|
|
Amount of cash paid
|
$
|
25.9
|
|
|
Outstanding amount payable to Fareva
|
|
2.5
|
|
|
Total consideration at closing
|
$
|
28.4
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired:
|
|
|
|
Cash and cash equivalents
|
$
|
1.2
|
|
|
Accounts receivable
|
|
3.4
|
|
|
Inventory
|
|
4.2
|
|
|
Other current assets
|
|
0.9
|
|
|
Property and equipment
|
|
26.6
|
|
|
Total assets acquired
|
|
36.3
|
|
|
Assumed current liabilities
|
|
(1.7)
|
|
|
Assumed non-current liabilities
|
|
(3.9)
|
|
|
Deferred tax liabilities
|
|
(1.4)
|
|
|
Total liabilities assumed
|
|
(7.0)
|
|
|
Bargain purchase gain
|
|
(0.9
|
)
|
|
Fair value of assets acquired
|
$
|
28.4
|
|
Through its acquisition of Akorn AG the Company recognized a bargain purchase gain of
$0.9 million
which was largely derived from the difference between the fair value and the book value of the property and equipment acquired through the acquisition. Bargain purchase gain has been recognized within consolidated net income for the year ended December 31, 2015.
Other Strategic Investments
On August 1, 2011, the Company entered into a Series A-2 Preferred Stock Purchase Agreement to acquire a minority ownership interest in Aciex Therapeutics Inc. (“Aciex”), a private ophthalmic development pharmaceutical company based in Westborough, MA, for
$8.0 million
in cash. Subsequently, on September 30, 2011, the Company entered into Amendment No. 1 to Series A-2 Preferred Stock Purchase Agreement to acquire additional shares of Series A-2 Preferred Stock in Aciex for approximately
$2.0 million
in cash. On April 17, 2014, the Company entered into a Secured Note and Warrant Purchase Agreement to acquire secured, convertible promissory notes of Aciex for approximately
$0.4 million
in cash, and then on June 27, 2014, entered into a second Secured Note and Warrant Purchase Agreement to acquire additional secured, convertible promissory notes of Aciex for an additional amount of approximately
$0.4 million
. The Company’s aggregate investment in Aciex was
$10.8 million
at cost. Aciex was an ophthalmic drug development company focused on developing novel therapeutics to treat ocular diseases. Aciex’s pipeline consisted of both clinical stage assets and pre-Investigational new drug stage assets. The investments detailed above provided the Company with an ownership interest in Aciex of below
20%
. The Aciex Agreement and Aciex Amendment contained certain customary rights and preferences over the common stock of Aciex and further provided that the Company shall have had the right to a seat on the Aciex board of directors.
On July 2, 2014, Nicox S.A. (“Nicox”), an international company, entered into an arrangement to acquire all of the outstanding equity of Aciex (the “Aciex Acquisition”).
On October 22, 2014, Nicox shareholders voted at the Nicox General Meeting to approve the Aciex Acquisition. The transaction was consummated on October 24, 2014, following the completion of certain legal conditions and formalities. As consideration for its carried investment in Aciex, the Company received from the Aciex Acquisition pro-rata shares of Nicox which are publically traded on the Euronext Paris exchange. Through the closing, the Company received approximately
4.3 million
shares of Nicox which were subject to certain lockup provisions preventing immediate sale of the underlying shares received.
Through the years ended December 31, 2016 and 2015, the Company sold
0.5 million
and
1.1 million
unrestricted shares for
$6.0 million
and
$2.5 million
, realizing an immaterial loss of
$0.2 million
on the sale of shares, respectively. For the year ended December 31, 2017, the Company sold its remaining available-for-sale Nicox stock with an original cost basis of
$1.5 million
, realizing a gain of
$0.2 million
.
On May 31, 2017, the Company gained the right to receive additional Nicox stock fair valued at
$3.0 million
as a milestone payment. The Company received the additional shares of Nicox stock in early June 2017 and sold them later that month for net cash proceeds of
$2.6 million
. Both the
$3.0 million
milestone payment and the subsequent loss of
$0.4 million
on the sale of the Nicox shares were reported within Other non-operating income (expense), net in the Company's Condensed Consolidated Statement of Comprehensive Income (Loss) for the year ended
December 31, 2017
.
In accordance with
ASC 820 - Fair Value Measurement
, the Company records unrealized holding gains and losses on available-for-sale securities in the “Accumulated other comprehensive income” caption in the Consolidated Balance Sheet. As of
December 31, 2017
, the Company maintained rights to receive a small number of shares of Nicox stock held in an expense escrow. The unrealized holding loss on these shares was a negligible dollar amount as of December 31, 2017. The escrow shares are not expected to be released within one year, and accordingly, the original cost basis of less than
$0.1 million
on these shares is included within Other non-current assets on the Company’s Consolidated Balance Sheet as of December 31, 2017.
Note 17 — Customer, Supplier and Product Concentration
Customer Concentration
In the years ended
December 31, 2017
,
2016
and
2015
, a significant portion of the Company’s gross and net sales reported were to
three
large wholesale drug distributors, and a significant portion of the Company’s accounts receivable as of
December 31, 2017
,
2016
and
2015
were due from these wholesale drug distributors as well. AmerisourceBergen Health Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. Aside from these
three
wholesale drug distributors, no other customers accounted for more than
10%
of gross sales, net revenue or gross trade receivables for the indicated dates and periods.
The following table sets forth the percentage of the Company’s gross and net sales and gross accounts receivable attributable to these
three
distributors for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Gross
Sales
|
|
Net
Revenue
|
|
Gross
Accounts
Receivable
|
|
Gross
Sales
|
|
Net
Revenue
|
|
Gross
Accounts
Receivable
|
|
Gross
Sales
|
|
Net
Revenue
|
|
Gross
Accounts
Receivable
|
|
Amerisource
|
23.6%
|
|
19.1%
|
|
26.3%
|
|
29.5%
|
|
23.3%
|
|
35.6%
|
|
28.0%
|
|
23.2%
|
|
28.8%
|
|
Cardinal
|
17.5%
|
|
17.9%
|
|
21.1%
|
|
15.4%
|
|
16.3%
|
|
15.1%
|
|
19.7%
|
|
19.5%
|
|
26.1%
|
|
McKesson
|
39.1%
|
|
26.5%
|
|
38.6%
|
|
32.5%
|
|
24.2%
|
|
33.2%
|
|
30.1%
|
|
27.3%
|
|
27.9%
|
|
Combined Total
|
80.2%
|
|
63.5%
|
|
86.0%
|
|
77.4%
|
|
63.8%
|
|
83.9%
|
|
77.8%
|
|
70.0%
|
|
82.8%
|
If sales to Amerisource, Cardinal or McKesson were to diminish or cease, the Company believes that the end users of its products would find little difficulty obtaining the Company’s products from another distributor. Further, the Company is subject to credit risk from its accounts receivable, more heavily weighted to Amerisource, Cardinal and McKesson, but as of and for the years ended
December 31, 2017
,
2016
and
2015
, the Company has not experienced significant losses with respect to its collection of these gross accounts receivable balances.
Supplier Concentration
The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical products for its own use and for third parties with which it has contracted. The principal components of the Company’s products are active and inactive pharmaceutical ingredients and certain packaging materials. Certain of these ingredients and components are available from only a single source and, in the case of many of our products, only one supplier of raw materials has been identified and qualified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if such active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay the Company’s development and marketing efforts. In addition, certain of the pharmaceutical products marketed by the Company are manufactured by a third party manufacturer that serves as the Company’s sole source of that finished product. If for any reason the Company is unable to obtain sufficient quantities of any of the raw materials or components required to produce and package its products, it may not be able to manufacture its products as planned, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Likewise, if the
Company’s manufacturing partners experience any similar difficulties in obtaining raw materials or in manufacturing the finished product, the Company’s results of operations would be negatively impacted.
No
individual supplier represented
10%
or more of the Company’s purchases in any of the years ended
December 31, 2017
,
2016
and
2015
.
Product Concentration
In the year ended
December 31, 2017
and
2016
, Ephedrine Sulfate Injection represented approximately
10%
and
20%
of the Company’s total net revenue respectively, while in the year ended December 31,
2015
,
none
of the Company’s products represented
10%
or more of net revenue. The Company attempts to minimize the risk associated with product concentration by continuing to acquire and develop new products to add to its portfolio.
Note 18 — Related Party Transactions
During the years ended
December 31, 2017
,
2016
and
2015
, the Company obtained legal services totaling
$0.8 million
,
$1.3 million
and
$1.7 million
, respectively, of which
$0.1 million
and
$0.0 million
was payable as of
December 31, 2017
and
2016
, respectively, from Polsinelli PC, a law firm for which the spouse of the Company’s Executive Vice President, General Counsel and Secretary is an attorney and shareholder.
The Company also obtained and paid legal services totaling
$0.5 million
during the year ended
December 31, 2017
from Segal McCambridge Singer & Mahone, a firm for which the brother in law of the Company's Executive Vice President, General Counsel and Secretary is a partner.
The Company obtained support services for compliance with DSCSA requirements totaling
$0.5 million
during the year ended December 31, 2017 from Domino Amjet, Inc., a company for which the brother of the Company’s Executive Vice President, General Counsel and Secretary is a Vice President of Sales.
Note 19 – Selected Quarterly Financial Data (Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
(In thousands, except per share amounts)
|
Revenues
|
|
Gross
Profit
|
|
Operating
(Loss) Income (1)
|
|
Amount
|
|
Per Basic
Share
|
|
Per Diluted
Share
|
|
Year Ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter
|
$
|
186,057
|
|
|
$
|
83,085
|
|
|
$
|
(116,442
|
)
|
|
$
|
(65,217
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.52
|
)
|
|
3rd Quarter
|
202,428
|
|
|
97,963
|
|
|
9,423
|
|
|
(2,897
|
)
|
|
(0.02
|
)
|
|
(0.02
|
)
|
|
2nd Quarter
|
199,140
|
|
|
102,967
|
|
|
14,530
|
|
|
2,537
|
|
|
0.02
|
|
|
0.02
|
|
|
1st Quarter
|
253,420
|
|
|
149,132
|
|
|
74,833
|
|
|
41,027
|
|
|
0.33
|
|
|
0.33
|
|
|
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter
|
$
|
283,667
|
|
|
$
|
169,254
|
|
|
$
|
60,796
|
|
|
$
|
32,455
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
3rd Quarter
|
284,095
|
|
|
170,227
|
|
|
86,828
|
|
|
47,909
|
|
|
0.38
|
|
|
0.38
|
|
|
2nd Quarter
|
280,734
|
|
|
171,773
|
|
|
92,368
|
|
|
61,993
|
|
|
0.51
|
|
|
0.50
|
|
|
1st Quarter
|
268,347
|
|
|
163,017
|
|
|
87,579
|
|
|
41,886
|
|
|
0.35
|
|
|
0.34
|
|
(1) The shift from an Operating income position in the first quarter of 2017, to an Operating loss in the fourth quarter 2017, was primarily due to impairments of Intangibles assets, net. See
Note 5 - Goodwill and Other Intangible Assets
for further details.
Note 20 – Legal Proceedings
The Company is a party to legal proceedings and potential claims arising in the ordinary course of our business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management of the Company believes that the ultimate disposition of such proceedings and exposure will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.
Shareholder and Derivative Litigation Related to the Merger
As previously disclosed, on May 2, 2017, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Circuit Court of Cook County, Illinois, County Department, Chancery Division, captioned
Robert J. Shannon, Jr. v. Fresenius Kabi AG, et al.,
Case No. 2017-CH-06322. On May 16, 2017, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Circuit Court of Cook County, Illinois, County Department, Chancery Division, captioned
Daniel Ochoa v. John N. Kapoor, et al
., Case No. 2017-CH-06928. On June 27, 2017, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Circuit Court of Cook County, Illinois, County Department, Chancery Division, captioned
Glaubach v. Fresenius Kabi AG et al
., Case No. 2017-CH-08916. The Shannon Action, Ochoa Action and Glaubach Action allege, among other things, that in pursuing the merger, the directors of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to enter into the merger agreement for an allegedly unfair price and as the result of an allegedly deficient process. The Shannon Action, the Ochoa Action and the Glaubach Action also allege that Fresenius Kabi, Fresenius Parent and Merger Sub aided and abetted the other defendants’ alleged breaches of their fiduciary duties. The Shannon Action, the Ochoa Action and Glaubach Action seek, among other things, to enjoin the transactions contemplated by the merger agreement or, in the alternative, to recover monetary damages. On July 25, 2017, the parties in the Glaubach Action agreed to stay the proceedings until the plaintiff files an amended complaint. On July 28, 2017, the plaintiff in the Ochoa Action filed a motion for dismissal without prejudice. On August 9, 2017, the Circuit Court of Cook County, Illinois, County Department, Chancery Division granted the voluntary dismissal without prejudice of the Ochoa Action pursuant to the plaintiff’s motion for dismissal. On October 25, 2017, the Circuit Court of Cook County, Illinois, County Department, Chancery Division granted the voluntary dismissal without prejudice of the Glaubach Action pursuant to the plaintiff’s motion for dismissal.
On September 29, 2017, Akorn accepted service in the Shannon Action, with the understanding that the parties will stay the proceedings until the plaintiff files an amended complaint. On November 15, 2017, the Circuit Court of Cook County, Illinois, County Department, Chancery Division held a status conference in the Shannon Action and ordered that plaintiff shall file an amended complaint after the proposed merger closes by a date to be set by the court, and the Akorn defendants need not answer or otherwise respond to plaintiff’s current complaint and any deadline for response to the current complaint is stricken. The Company believes that the Shannon Action is without merit and intends to vigorously defend it.
On June 2, 2017, a purported shareholder of the Company filed a complaint in a putative class action in the United States District Court for the Middle District of Louisiana, captioned
Robert Berg v. Akorn, Inc., et al.
, Case No. 3:17-cv-00350. On June 7, 2017, a purported shareholder of the Company filed a complaint in a putative class action in the United States District Court for the Middle District of Louisiana, captioned
Jorge Alcarez v. Akorn, Inc., et al.
, Case No. 3:17-cv-00359. The Berg Action and the Alcarez Action alleged that the Company’s preliminary proxy statement, filed with the SEC on May 22, 2017, omits material information with respect to the merger, rendering it false and misleading and thus that the Company, the directors of the Company and the CEO of the Company violated Section 14(a) of the Exchange Act as well as SEC Rule 14a-9. The Berg Action further alleged that Fresenius Kabi, the directors of the Company and the CEO of the Company violated Section 20(a) of the Exchange Act. Similarly, the Alcarez Action also alleged that the directors of the Company and the CEO of the Company violated Section 20(a) of the Exchange Act. The Berg Action and Alcarez Action sought, among other things, an order requiring the dissemination of a proxy statement that does not contain allegedly untrue statements of material fact and that states all material facts allegedly required or necessary to make the proxy statement not misleading; an order enjoining the transactions contemplated by the merger agreement; an award of rescissory damages should the merger be consummated; and an award of attorneys’ fees and expenses.
On June 12, 2017, a purported shareholder of the Company filed a complaint in a putative class action in the United States District Court for the Middle District of Louisiana, captioned
Shaun A. House v. Akorn, Inc., et al
., Case No. 3:17-cv-00367. On June 13, 2017, a purported shareholder of the Company filed a complaint in a putative class action in the United States District Court for the Northern District of Illinois, captioned
Robert Carlyle v. Akorn, Inc., et al
., Case No. 1:17-cv-04455. On June 14, 2017, a purported shareholder of the Company filed a complaint in a putative class action in the United States District Court for the Middle District of Louisiana, captioned
Sean Harris v. Akorn, Inc. et at
., Case No. 3:17-cv-00373. On June 20, 2017, plaintiff Robert Carlyle filed a notice of voluntary dismissal in
Carlyle v. Akorn, Inc., et al
., No. 17-cv-04455, and the United States District Court for the Northern District of Illinois dismissed
Carlyle v. Akorn, Inc., et al
., No. 17-cv-04455, pursuant to that notice. Also on June 20, 2017, plaintiff Robert Carlyle filed a complaint in a putative class action in the United States District Court for the Middle District of Louisiana, captioned
Robert Carlyle v. Akorn, Inc., et al
., Case No. 3:17-cv-00389. On June 22, 2017, a purported shareholder of the Company filed a complaint in a putative class action in the United States District Court for the Middle District of Louisiana, captioned
Demetrios Pullos v. Akorn, Inc. et al
., Case No. 3:17-cv-00395. The House Action, the Carlyle Action, the Harris Action and the Pullos Action alleged that the Company’s
preliminary proxy statement, filed with the SEC on May 22, 2017, omits material information with respect to the merger, rendering it false and misleading and thus that the Company and the directors of the Company violated Section 14(a) of the Exchange Act as well as SEC Rule 14a-9. The House Action, the Carlyle Action, the Harris Action and the Pullos Action further alleged that the directors of the Company violated Section 20(a) of the Exchange Act. The House Action, the Harris Action and the Pullos Action sought, among other things, to enjoin the transactions contemplated by the merger agreement unless the Company discloses the allegedly material information that was allegedly omitted from the proxy statement, an award of damages and an award of attorneys’ fees and expenses. The Carlyle Action sought, among other things, to enjoin the transactions contemplated by the merger agreement unless the Company adopts and implements a procedure or process to obtain certain unspecified terms for shareholders and discloses the allegedly material information that was allegedly omitted from the proxy statement, rescission, to the extent already implemented, of the transactions contemplated by the merger agreement or of the terms thereof, an award of damages and an award of attorneys’ fees and expenses.
On July 5, 2017, the United States District Court for the Middle District of Louisiana ordered that the Berg Action, Alcarez Action, House Action, Carlyle Action, Harris Action and Pullos Action be transferred to the United States District Court for the Northern District of Illinois.
On July 14, 2017, the plaintiffs in the Berg Action, Alcarez Action, House Action, Harris Action, Carlyle Action and Pullos Action (collectively, “the Section 14(a) Actions”) filed stipulations of voluntary dismissal without prejudice in their respective actions, in each case acknowledging that disclosures by the Company supplementing the disclosures previously made in the proxy statement rendered moot the claims asserted in their respective actions. On July 17, 2017, the United States District Court for the Northern District of Illinois dismissed the Alcarez Action, the Harris Action and the Pullos Action without prejudice pursuant to the parties’ respective stipulations of voluntary dismissal. Also on July 17, 2017, the United States District Court for the Northern District of Illinois granted the voluntary dismissal of the Carlyle Action without prejudice pursuant to the parties’ stipulation of voluntary dismissal. On July 19, 2017, the United States District Court for the Northern District of Illinois granted the voluntary dismissal without prejudice of the Berg Action pursuant to the parties’ stipulation of voluntary dismissal. On July 25, 2017, the United States District Court for the Northern District of Illinois dismissed the House Action without prejudice pursuant to the parties’ stipulation of voluntary dismissal.
On September 15, 2017, the parties in the Berg Action filed a stipulation reflecting an agreement upon the payment of attorneys’ fees and expenses to plaintiffs’ counsel to resolve any and all fee claims related to the Section 14(a) Actions. On September 18, 2017, Objector Theodore H. Frank filed motions to intervene in the Section 14(a) Actions, seeking to enjoin plaintiffs and their counsel in these actions from receiving payment under the stipulation filed in the Berg Action on September 15, 2017. The motions to intervene do not seek any relief from the Company or its directors. On September 26, 2017, the United States District Court for the Northern District of Illinois denied the motion to intervene without prejudice in the Alcarez Action. On September 27, 2017, the United States District Court for the Northern District of Illinois struck the motion to intervene in the Harris Action and terminated the motion to intervene in the Pullos Action. On October 4, 2017, the United States District Court for the Northern District of Illinois entered and continued Objector Frank’s motions to consolidate and intervene in the Berg Action. Following additional briefing, on November 21, 2017, the United States District Court for the Northern District of Illinois denied Objector Frank’s motions to intervene and consolidate without prejudice and granted Objector Frank leave to refile his motions to intervene and consolidate. On December 8, 2017, Objector Frank filed his renewed motion to intervene and the parties completed briefing on January 8, 2018.
Other Matters
On April 7, 2017, a jury in the State Court of Houston County in the State of Georgia reached a verdict of
$20.5 million
in damages against Akorn, Inc. in the product liability case
Ann Pope and Anthony Pope v. Horatio V. Cabasares, M.D., Horatio V. Cabasares, M.D., P.C. Houston Healthcare Systems, Inc., Akorn Sales, Inc., and Akorn, Inc.
in which plaintiff claimed Akorn provided inadequate labeling on its product methylene blue. The Company maintains sufficient product liability insurance coverage for the defense costs and expenses as well as the verdict related to this case. Further, on April 27, 2017, Akorn filed its notice of appeal on August 17, 2017, and the appeal is proceeding, thereby challenging liability as well as the compensatory and punitive damage awards. The appeal is proceeding.
As previously disclosed in various reports filed with the SEC, on March 4, 2015, a purported class action complaint was filed entitled
Yeung v. Akorn, Inc., et al.
, in the federal district court of Northern District of Illinois, No. 15-cv-1944. The complaint alleged that the Company and
three
of its officers violated the federal securities laws in connection with matters related to its accounting and financial reporting in the wake of its acquisitions of Hi-Tech Pharmaceutical Co., Inc. and VersaPharm, Inc. A second, related case entitled
Sarzynski v. Akorn, Inc., et al.
, No. 15-cv-3921, was filed on May 4, 2015 making similar allegations. On August 24, 2015, the
two
cases were consolidated and a lead plaintiff appointed in In re Akorn, Inc. Securities Litigation. On July 5, 2016, the lead plaintiff group filed a consolidated amended complaint making
similar allegations against the Company and an officer and former officer of the Company. The consolidated amended complaint seeks damages on behalf of the putative class. On August 9, 2016, the defendants filed a motion to dismiss the case. On March 6, 2017, the court denied the motion to dismiss and the defendants subsequently filed an answer to the consolidated amended complaint on March 27, 2017. On October 3, 2017, the parties informed the court that they have reached a settlement in principle of the litigation. In December 2017, following the court's order preliminarily approving the class plaintiffs’ proposed settlement for
$24 million
, the Company paid
$5.0 million
and its insurers paid
$19.0 million
. The court scheduled a final approval settlement and plan of allocation of settlement funds hearing for April 2, 2018.
Four
shareholder derivative lawsuits have been filed alleging breaches of fiduciary duty in connection with the Company’s accounting for its acquisition and the restatement of its financials.
Two
of the derivative lawsuits,
Safriet v. Rai, et al., No. 15-cv-7275
, and
Glaubach v. Rai, et al., No. 15- 11129
, were filed in the U.S. District Court for the Northern District of Illinois. These cases have been consolidated into a single action, and the defendants filed a motion to dismiss on July 10, 2017. In response, on July 31, 2017, the plaintiffs voluntarily dismissed their claims.
A third lawsuit,
Kogut v. Akorn, Inc., et al., No. 646174
, was filed in Louisiana state court in the Parish of East Baton Rouge, on March 8, 2016. On June 10, 2016, the plaintiff filed an amended complaint asserting shareholder derivative claims similar to the others asserted in the other derivative lawsuits. On September 23, 2016, the Company filed a motion to dismiss the case. Briefing on that motion is not yet complete. A fourth lawsuit,
Miller v. Rai, et al., No. 16 CH 1363
, was filed on September 8, 2016 in Illinois state court in the Circuit Court of Lake County. On July 5, 2017, the plaintiff voluntarily dismissed the case.
The Louisiana Attorney General filed suit, Number 624,522,
State of Louisiana v. Abbott Laboratories, Inc., et al.,
in the Nineteenth Judicial District Court, Parish of East Baton Rouge, Louisiana state court, including Hi-Tech Pharmacal and other defendants. Louisiana’s complaint alleges that the defendants violated Louisiana state laws in connection with Medicaid reimbursement for certain vitamins, dietary supplements, and DESI products that were allegedly ineligible for reimbursement. The defendants filed exceptions of no cause of action and no right of action in response to Louisiana’s amended complaint resulting in a judgment entered on October 2, 2015, which dismissed all of Louisiana’s claims. Louisiana sought appellate review of the court’s decision. On October 21, 2016, the First Circuit Court of Appeal affirmed the trial court’s judgment in part, reversed it in part, and remanded the case for further proceedings. On December 22, 2016, the First Circuit denied Louisiana’s application for rehearing with respect to the First Circuit’s affirmance. On January 20, 2017, Louisiana filed an application for certiorari in the Louisiana Supreme Court as to the portion of the First Circuit’s decision affirming the trial court’s judgment. On January 23, 2017, the defendants filed an application for certiorari in the Louisiana Supreme Court as to the portion of the First Circuit’s decision reversing the trial court’s judgment. On March 13, 2017, the Louisiana Supreme Court denied both writ applications. On May 11, 2017, the defendants filed an exception of no cause of action in response to Louisiana’s amended complaint, which seeks the dismissal of Louisiana’s two remaining statutory claims. In a judgment entered on August 9, 2017, the trial court sustained defendants’ exception of no cause of action with respect to Louisiana’s claim under Louisiana’s Medicaid fraud statute. The trial court issued a further judgment on October 3, 2017, holding that for the one remaining claim, brought under Louisiana’s unfair trade practices claim, Louisiana could not seek civil penalties for conduct pre-dating June 2, 2006. The defendants filed an application for supervisory writs with the Court of Appeal for the First Circuit on October 24, 2017, seeking reversal of the trial court’s denial of their no cause of action exception with respect to the unfair trade practices claim, which would completely dismiss the case. Briefing is complete, and the parties are awaiting a ruling from the First Circuit.
As previously disclosed in various reports filed with the SEC,
Fera Pharmaceuticals, LLC v. Akorn Inc., Sean Brynjelsen, and Michael Stehn
, in the United States District Court for the Southern District of New York, Case No. 12-cv-07692-LLS. Fera Pharmaceuticals, LLC (“Fera”) filed this action on September 12, 2012. The defendants in the case are the Company,
one
former employee of the Company, Sean Brynjelsen, and a current employee of the Company, Michael Stehn. The amended complaint generally alleges that the Company breached certain terms of a contract manufacturing supply agreement by, among other things, failing to manufacture Fera’s products, raising the manufacturing cost, and impermissibly terminating the contract. In addition, Fera alleges that the Company misappropriated Fera’s trade secrets in order to manufacture Erythromycin and Bacitracin for its own benefit. The counts in the amended complaint are for (1) breach of contract, (2) misappropriation of trade secrets, (3) fraudulent inducement, and (4) declaratory and injunctive relief. Fera seeks
$135 million
in compensatory damages, an additional, unspecified amount in punitive damages, and injunctive relief restraining the Company from selling the products at issue in the case. The Company filed a counterclaim against Fera and certain affiliates, as well as Perrigo Company of Tennessee and Perrigo Company plc, asserting violations of Sections 1 and 2 of the Sherman Act and tortious interference with business relations. Pursuant to a settlement reached by all of the parties, on February 16, 2018, settlement payments were made and on February 23, 2018, the court entered an order dismissing all claims at issue in the case with prejudice.
The Chicago Regional Office of the Securities and Exchange Commission (SEC) is conducting an investigation regarding the previously disclosed restatement, internal controls and other related matters. Additionally, the United States Attorney’s
Office for the Southern District of New York (USAO) has requested information regarding these matters. Akorn has been furnishing requested information and is fully cooperating with the SEC and USAO.
The legal matters discussed above and others could result in losses, including damages, fines and civil penalties, and criminal charges, which could be substantial. We record accruals for these contingencies to the extent that we conclude that a loss is both probable and reasonably estimable. Regarding the aforementioned labeling verdict related to methylene blue, the Company recorded a reasonable estimate of the liability less than the verdict amount (for which a corresponding insurance receivable is also recorded). Regarding the aforementioned In re Akorn, Inc. Securities Litigation matter, the Company recorded a reasonable estimate of the liability consistent with the parties’ settlement in principle. Regarding the other matters disclosed above, the Company has determined that liabilities associated with these legal matters are reasonably possible but they cannot be reasonably estimated. Given the nature of the litigation and investigations and the complexities involved, the Company is unable to reasonably estimate a possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation or investigation. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid.
Note 21 – Share Repurchases
In July 2016, the Company announced that the Board of Directors authorized a stock repurchase program (the "Stock Repurchase Program") pursuant to which the Company may repurchase up to
$200.0 million
of the Company’s common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or others, including accelerated stock repurchase arrangements, pursuant to a Rule 10b5-1 repurchase plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be suspended or discontinued at any time without notice and at the Company's discretion, and at this time no estimate to the effect on the results of the Company due to the Stock Repurchase Program can be made.
The Company did not repurchase any of its common stock during 2017. During 2016, the Company repurchased
1.8 million
shares at an average price of
$24.89
. In aggregate, over the life of the Stock Repurchase Program the Company has repurchased
1.8 million
shares at an average purchase price of
$24.89
. As of December 31, 2017, the Company had
$155.0 million
remaining under the repurchase authorization.
Companies incorporated under Louisiana law are subject to the Louisiana Business Corporation Act ("LBCA"). Provisions of the LBCA eliminate the concept of treasury stock. As a result, all stock repurchases are presented as a reduction to issued shares of common stock, the stated value of common stock and retained earnings.