UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 25, 2014
ACTAVIS plc
(Exact Name of Registrant as Specified in Charter)
Ireland | 000-55075 | 98-1114402 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
1 Grand Canal Square, Docklands
Dublin 2, Ireland
(Address of Principal Executive Offices)
(862) 261-7000
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c) |
Item 8.01. | Other Events. |
This Current Report on Form 8-K includes unaudited condensed consolidated historical financial statements of Warner Chilcott Public Limited Company (Warner Chilcott) for the quarter and nine months ended September 30, 2013 (the Warner Chilcott Unaudited Financial Statements), which are attached hereto as Exhibit 99.1 and incorporated herein by reference. The Warner Chilcott Unaudited Financial Statements have not been, and are not required to be, filed by Warner Chilcott with the Securities and Exchange Commission (SEC) due to the Form 15 filed with the SEC by Warner Chilcott on October 11, 2013, which suspended Warner Chilcotts duty to file such information.
As previously announced, on February 17, 2014, Actavis plc (the Company) entered into a Merger Agreement by and among the Company, Tango US Holdings Inc., a Delaware corporation and a direct wholly owned subsidiary of the Company, Tango Merger Sub 1 LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdco, Tango Merger Sub 2 LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdco and Forest Laboratories, Inc., a Delaware corporation (Forest).
On January 31, 2014, pursuant to the Agreement and Plan of Merger, dated January 7, 2014, among Forest, FRX Churchill Holdings, Inc., a Delaware corporation (Forest Holdings) and wholly owned indirect subsidiary of Forest, FRX Churchill Sub, LLC (f/k/a FRX Churchill Sub, Inc.), a Delaware limited liability company (Aptalis Merger Sub) and wholly owned indirect subsidiary of Holdings, and Aptalis Holdings Inc., a Delaware corporation (Aptalis), Aptalis Merger Sub merged with and into Aptalis, with Aptalis continuing as the surviving corporation and an indirect wholly owned subsidiary of Forest Holdings.
In this Current Report on Form 8-K, the Company is incorporating by reference certain historical and pro forma financial information relating to the Companys acquisition of Forest and Forests acquisition of Aptalis.
Item 9.01. | Financial Statements and Exhibits. |
(a) Financial Statements of Warner Chilcott, Forest and Aptalis.
The Warner Chilcott Unaudited Financial Statements are filed at Exhibit 99.1 to this Current Report on Form 8-K and are incorporated by reference herein.
The audited consolidated balance sheets of Forest and its subsidiaries as of March 31, 2013 and March 31, 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders equity, and cash flows for each of the years ended March 31, 2013, March 31, 2012 and March 31, 2011, the Notes to Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are filed as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated by reference herein.
The unaudited interim consolidated balance sheets of Forest and its subsidiaries as of December 31, 2013 and March 31, 2013, the unaudited interim consolidated statements of operations, comprehensive income (loss) and cash flows for the three months and nine months ended December 31, 2013 and December 31, 2012 and the Notes to Consolidated Financial Statements (unaudited) are filed as Exhibit 99.3 to this Current Report on Form 8-K and are incorporated by reference herein.
The audited consolidated balance sheets of Aptalis and its subsidiaries as of September 30, 2013, and the related consolidated statements of operations, comprehensive income, shareholders equity and cash flows for the year ended September 30, 2013, the Notes to Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are filed as Exhibit 99.4 to this Current Report on Form 8-K and are incorporated by reference herein.
The unaudited interim consolidated balance sheets of Aptalis and its subsidiaries as of December 31, 2013 and 2012, the interim consolidated statements of operations, comprehensive income (loss), shareholders equity (deficit) and cash flows for the three months ended December 31, 2013 and December 31, 2012 and the Notes to Consolidated Financial Statements (unaudited) are filed as Exhibit 99.5 to this Current Report on Form 8-K and are incorporated by reference herein.
(b) Pro Forma Financial Statements
The unaudited pro forma combined balance sheet of the Company, as of December 31, 2013, and the unaudited pro forma combined statements of operations of the Company, for and as of the year ended December 31, 2013 are incorporated by reference in Exhibit 99.6 hereto and herein.
(d) Exhibits
Exhibit |
Description | |
23.1 | Consent of BDO USA, LLP | |
23.2 | Consent of PricewaterhouseCoopers LLP (Aptalis) | |
99.1 | Unaudited condensed consolidated balance sheets of Warner Chilcott Public Limited Company as of September 30, 2013 and December 31, 2012, unaudited condensed consolidated statements of operations and comprehensive income of Warner Chilcott Public Limited Company for the quarters and nine months ended September 30, 2013 and September 30, 2012 and unaudited condensed consolidated statements of cash flows of Warner Chilcott Public Limited Company for the nine months ended September 30, 2013 and September 30, 2012, together with the notes thereto. | |
99.2 | Audited consolidated balance sheets of Forest Laboratories, Inc. as of March 31, 2013 and March 31, 2012, consolidated statements of operations and comprehensive income (loss) and statements of stockholders equity of Forest Laboratories, Inc. for the years ended March 31, 2013, March 31, 2012 and March 31, 2011 and consolidated statements of cash flows of Forest Laboratories, Inc. for the years ended March 31, 2013, March 31, 2012 and March 31, 2011, together with the notes thereto, and Schedule II (incorporated by reference to the Annual Report on Form 10-K filed by Forest Laboratories, Inc. (SEC File No. 001-05438) on May 23, 2013). | |
99.3 | Unaudited condensed consolidated balance sheets of Forest Laboratories, Inc. as of December 31, 2013 and March 31, 2013, unaudited condensed consolidated statements of operations and comprehensive income (loss) of Forest Laboratories, Inc. for the three months and nine months ended December 31, 2013 and December 31, 2012 and unaudited condensed consolidated statements of cash flows of Forest Laboratories, Inc. for the nine months ended December 31, 2013 and December 31, 2012, together with the notes thereto (incorporated by reference to the Quarterly Report on Form 10-Q filed by Forest Laboratories, Inc. (SEC File No. 001-05438) on February 6, 2014). | |
99.4 | Audited consolidated balance sheet of Aptalis Holdings, Inc., as of September 30, 2013, and the related consolidated statement of operations, comprehensive income, shareholders equity and cash flows for the year ended September 30, 2013, including the notes thereto (incorporated by reference to Exhibit 99.3 of the Current Report on Form 8-K filed by Forest Laboratories, Inc. (SEC File No. 001-05438) on January 27, 2014). | |
99.5 | Unaudited condensed consolidated balance sheets of Aptalis Holdings Inc. as of December 31, 2013 and September 30, 2013, unaudited condensed consolidated statements of operations, comprehensive income (loss) and shareholders equity (deficit) of Aptalis Holdings Inc. for the three months ended December 31, 2013 and December 31, 2012 and unaudited condensed consolidated statements of cash flows of Aptalis Holdings Inc. for the quarters ended December 31, 2013 and December 31, 2012, together with the notes thereto. | |
99.6 | Actavis plc Unaudited Pro Forma Combined Financial Information. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: March 25, 2014 | ACTAVIS plc | |||||
By: | /s/ R. Todd Joyce | |||||
R. Todd Joyce | ||||||
Chief Financial Officer - Global |
EXHIBIT INDEX
Exhibit No. |
Description | |
23.1 | Consent of BDO USA, LLP | |
23.2 | Consent of PricewaterhouseCoopers LLP (Aptalis) | |
99.1 | Unaudited condensed consolidated balance sheets of Warner Chilcott Public Limited Company as of September 30, 2013 and December 31, 2012, unaudited condensed consolidated statements of operations and comprehensive income of Warner Chilcott Public Limited Company for the quarters and nine months ended September 30, 2013 and September 30, 2012 and unaudited condensed consolidated statements of cash flows of Warner Chilcott Public Limited Company for the nine months ended September 30, 2013 and September 30, 2012, together with the notes thereto. | |
99.2 | Audited consolidated balance sheets of Forest Laboratories, Inc. as of March 31, 2013 and March 31, 2012, consolidated statements of operations and comprehensive income (loss) and statements of stockholders equity of Forest Laboratories, Inc. for the years ended March 31, 2013, March 31, 2012 and March 31, 2011 and consolidated statements of cash flows of Forest Laboratories, Inc. for the years ended March 31, 2013, March 31, 2012 and March 31, 2011, together with the notes thereto, and Schedule II (incorporated by reference to the Annual Report on Form 10-K filed by Forest Laboratories, Inc. (SEC File No. 001-05438) on May 23, 2013). | |
99.3 | Unaudited condensed consolidated balance sheets of Forest Laboratories, Inc. as of December 31, 2013 and March 31, 2013, unaudited condensed consolidated statements of operations and comprehensive income (loss) of Forest Laboratories, Inc. for the three months and nine months ended December 31, 2013 and December 31, 2012 and unaudited condensed consolidated statements of cash flows of Forest Laboratories, Inc. for the nine months ended December 31, 2013 and December 31, 2012, together with the notes thereto (incorporated by reference to the Quarterly Report on Form 10-Q filed by Forest Laboratories, Inc. (SEC File No. 001-05438) on February 6, 2014). | |
99.4 | Audited consolidated balance sheet of Aptalis Holdings, Inc., as of September 30, 2013, and the related consolidated statement of operations, comprehensive income, stockholders equity and cash flows for the year ended September 30, 2013, including the notes thereto (incorporated by reference to Exhibit 99.3 of the Current Report on Form 8-K filed by Forest Laboratories, Inc. (SEC File No. 001-05438) on January 27, 2014). | |
99.5 | Unaudited condensed consolidated balance sheets of Aptalis Holdings Inc. as of December 31, 2013 and September 30, 2013, unaudited condensed consolidated statements of operations, comprehensive income (loss) and shareholders equity (deficit) of Aptalis Holdings Inc. for the quarters ended December 31, 2013 and December 31, 2012 and unaudited condensed consolidated statements of cash flows of Aptalis Holdings Inc. for the three months ended December 31, 2013 and December 31, 2012, together with the notes thereto. | |
99.6 | Actavis plc Unaudited Pro Forma Combined Financial Information. |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Forest Laboratories, Inc.
New York, New York
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-191487) of Actavis plc of our reports dated May 23, 2013, relating to the consolidated financial statements, the effectiveness of Forest Laboratories, Inc.s internal control over financial reporting, and schedule of Forest Laboratories, Inc. appearing in the Companys Annual Report on Form 10-K for the year ended March 31, 2013, which is incorporated by reference in Actavis plcs Current Report on Form 8-K dated March 25, 2014.
/s/ BDO USA, LLP
New York, New York
March 24, 2014
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-191487) of Actavis plc of our report dated December 16, 2013 relating to the financial statements of Aptalis Holdings, Inc., which is incorporated by reference in Actavis plcs Current Report on Form 8-K dated March 25, 2014.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 24, 2014
Exhibit 99.1
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2013
INDEX
Page # | ||||
Condensed Consolidated Financial Statements (unaudited) |
2 | |||
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2013 and December 31, 2012 |
2 | |||
Condensed Consolidated Statements of Operations (unaudited) for the quarters and nine months ended September 30, 2013 and September 30, 2012 |
3 | |||
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the quarters and nine months ended September 30, 2013 and September 30, 2012 |
4 | |||
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and September 30, 2012 |
5 | |||
Notes to the Condensed Consolidated Financial Statements (unaudited) |
6 |
1
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in millions except share amounts and per share amounts)
(Unaudited)
As of September 30, 2013 |
As of December 31, 2012 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 179 | $ | 474 | ||||
Accounts receivable, net |
304 | 195 | ||||||
Inventories, net |
130 | 113 | ||||||
Prepaid income taxes, net |
81 | 51 | ||||||
Prepaid expenses and other current assets |
204 | 193 | ||||||
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|
|
|
|||||
Total current assets |
898 | 1,026 | ||||||
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|
|
|
|||||
Other assets: |
||||||||
Property, plant and equipment, net |
204 | 216 | ||||||
Intangible assets, net |
1,487 | 1,817 | ||||||
Goodwill |
1,029 | 1,029 | ||||||
Other non-current assets |
82 | 130 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,700 | $ | 4,218 | ||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 32 | $ | 29 | ||||
Accrued expenses and other current liabilities |
502 | 668 | ||||||
Income taxes |
47 | 18 | ||||||
Current portion of long-term debt |
185 | 179 | ||||||
|
|
|
|
|||||
Total current liabilities |
766 | 894 | ||||||
|
|
|
|
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Other liabilities: |
||||||||
Long-term debt, excluding current portion |
3,112 | 3,796 | ||||||
Other non-current liabilities |
120 | 128 | ||||||
|
|
|
|
|||||
Total liabilities |
3,998 | 4,818 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
| | ||||||
SHAREHOLDERS (DEFICIT) |
||||||||
Ordinary shares, par value $0.01 per share; 500,000,000 shares authorized; 251,309,395 and 250,488,078 shares issued and outstanding |
3 | 3 | ||||||
Additional paid-in capital |
11 | 4 | ||||||
Accumulated (deficit) |
(284 | ) | (572 | ) | ||||
Accumulated other comprehensive (loss) |
(28 | ) | (35 | ) | ||||
|
|
|
|
|||||
Total shareholders (deficit) |
(298 | ) | (600 | ) | ||||
|
|
|
|
|||||
Total liabilities and shareholders (deficit) |
$ | 3,700 | $ | 4,218 | ||||
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
2
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in millions except per share amounts)
(Unaudited)
Quarter Ended September 30, 2013 |
Quarter Ended September 30, 2012 |
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
|||||||||||||
REVENUE |
||||||||||||||||
Net sales |
$ | 588 | $ | 591 | $ | 1,765 | $ | 1,879 | ||||||||
Other revenue |
13 | 15 | 42 | 50 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
601 | 606 | 1,807 | 1,929 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
COSTS, EXPENSES AND OTHER |
||||||||||||||||
Cost of sales (excludes amortization and impairment of intangible assets) |
76 | 79 | 227 | 221 | ||||||||||||
Selling, general and administrative |
194 | 183 | 575 | 554 | ||||||||||||
Restructuring (income) / costs |
| | (3 | ) | 50 | |||||||||||
Research and development |
28 | 25 | 86 | 73 | ||||||||||||
Amortization of intangible assets |
109 | 122 | 329 | 376 | ||||||||||||
Impairment of intangible assets |
| | | 106 | ||||||||||||
Interest expense, net |
54 | 65 | 179 | 179 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
INCOME BEFORE TAXES |
140 | 132 | 414 | 370 | ||||||||||||
Provision for income taxes |
27 | 19 | 80 | 91 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INCOME |
$ | 113 | $ | 113 | $ | 334 | $ | 279 | ||||||||
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|
|||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.45 | $ | 0.46 | $ | 1.34 | $ | 1.12 | ||||||||
Diluted |
$ | 0.45 | $ | 0.45 | $ | 1.32 | $ | 1.11 | ||||||||
Dividends per share: |
$ | | $ | 4.00 | $ | 0.25 | $ | 4.00 |
See accompanying notes to the unaudited condensed consolidated financial statements.
3
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Quarter Ended September 30, 2013 |
Quarter Ended September 30, 2012 |
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
|||||||||||||
Net Income |
$ | 113 | $ | 113 | $ | 334 | $ | 279 | ||||||||
Other comprehensive income: |
||||||||||||||||
Cumulative translation adjustment |
8 | 4 | 3 | 1 | ||||||||||||
Actuarial gains related to defined benefit plans |
1 | | 4 | | ||||||||||||
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Total other comprehensive income |
9 | 4 | 7 | 1 | ||||||||||||
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|||||||||
Comprehensive Income |
$ | 122 | $ | 117 | $ | 341 | $ | 280 | ||||||||
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|
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|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
4
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 334 | $ | 279 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
29 | 27 | ||||||
Amortization of intangible assets |
329 | 376 | ||||||
Impairment of intangible assets |
| 106 | ||||||
Non-cash gain relating to the reversal of the liability for contingent milestone payments |
| (20 | ) | |||||
Amortization and write-off of deferred loan costs |
33 | 32 | ||||||
Stock-based compensation expense |
19 | 17 | ||||||
|
|
|
|
|||||
Net income as adjusted per above |
744 | 817 | ||||||
Changes in assets and liabilities: |
||||||||
(Increase) in accounts receivable, prepaid expenses and other current assets |
(118 | ) | (38 | ) | ||||
(Increase) in inventories |
(18 | ) | (4 | ) | ||||
(Decrease) in accounts payable, accrued expenses and other current liabilities |
(160 | ) | (179 | ) | ||||
(Decrease) in income taxes and other, net |
(7 | ) | (48 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
441 | 548 | ||||||
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|
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CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Proceeds from sale of assets |
15 | | ||||||
Capital expenditures |
(18 | ) | (23 | ) | ||||
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|
|
|
|||||
Net cash (used in) investing activities |
(3 | ) | (23 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Term borrowings under Senior Secured Credit Facilities |
| 600 | ||||||
Payments for loan costs, including refinancing premium |
| (15 | ) | |||||
Term repayments under Senior Secured Credit Facilities |
(677 | ) | (444 | ) | ||||
Cash dividends paid |
(62 | ) | (955 | ) | ||||
Redemption of ordinary shares |
| (32 | ) | |||||
Proceeds from the exercise of non-qualified options to purchase ordinary shares |
5 | 8 | ||||||
|
|
|
|
|||||
Net cash (used in) financing activities |
(734 | ) | (838 | ) | ||||
|
|
|
|
|||||
Effect of exchange rates on cash and cash equivalents |
1 | 1 | ||||||
|
|
|
|
|||||
Net (decrease) in cash and cash equivalents |
(295 | ) | (312 | ) | ||||
Cash and cash equivalents, beginning of period |
474 | 616 | ||||||
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|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 179 | $ | 304 | ||||
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SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Cash paid for income taxes |
$ | 81 | $ | 119 | ||||
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SCHEDULE OF NON-CASH INVESTING ACTIVITIES |
||||||||
Increase in liabilities related to the 2012 special dividend |
$ | | $ | 47 | ||||
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
5
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Notes to the Condensed Consolidated Financial Statements (unaudited)
1. General
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The interim statements should be read in conjunction with the audited consolidated financial statements of Warner Chilcott Public Limited Company and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012 (the Annual Report). Subsequent events have been evaluated as applicable for inclusion in this report through December 31, 2013.
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim condensed consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The Company is responsible for the unaudited interim condensed consolidated financial statements included in this report. The Company has made certain reclassifications to prior period information to conform to the current period presentation. All intercompany transactions and balances have been eliminated in consolidation.
2. Actavis Transaction
On October 1, 2013, pursuant to the transaction agreement, dated May 19, 2013, among Actavis, Inc. (Actavis), Warner Chilcott Public Limited Company (Warner Chilcott), Actavis plc (New Actavis and formerly known as Actavis Limited), Actavis Ireland Holding Limited, Actavis W.C. Holding LLC (now known as Actavis W.C. Holding Inc.) and Actavis W.C. Holding 2 LLC (now known as Actavis W.C. Holding 2 Inc.) (MergerSub) (the Transaction Agreement), (a) New Actavis acquired Warner Chilcott (the Acquisition) pursuant to a scheme of arrangement under Section 201, and a capital reduction under Sections 72 and 74, of the Irish Companies Act of 1963 and (b) MergerSub merged with and into Actavis, with Actavis as the surviving corporation in the merger (the Merger and, together with the Acquisition, the Transactions). Following the consummation of the Transactions, each of Actavis and Warner Chilcott became wholly owned subsidiaries of New Actavis. Warner Chilcott is an acquiree for accounting and financial reporting purposes beginning on October 1, 2013.
Pursuant to the terms of the Transaction Agreement, each Warner Chilcott ordinary share (other than those held by Actavis or any of its affiliates) (the Warner Chilcott Ordinary Shares) was converted into the right to receive 0.160 of a New Actavis ordinary share, and each Actavis common share (the Actavis Common Shares) was converted into the right to receive one New Actavis ordinary share. The aggregate value of the Acquisition was approximately $9 billion.
Pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the Exchange Act), New Actavis is the successor issuer to Actavis and to Warner Chilcott, New Actavis ordinary shares are deemed to be registered under Section 12(b) of the Exchange Act, and New Actavis is subject to the informational requirements of the Exchange Act, and the rules and regulations promulgated thereunder. New Actavis ordinary shares were approved for listing on the New York Stock Exchange (NYSE) and trade under the symbol ACT. The Actavis Common Shares were registered pursuant to Section 12(b) of the Exchange Act and listed on the NYSE. The Warner Chilcott Ordinary Shares were registered pursuant to Section 12(b) of the Exchange Act and listed on the NASDAQ Global Select Market (the NASDAQ). As a result of the merger, the Warner Chilcott Ordinary Shares and the Actavis Common Shares have been delisted from the NASDAQ and the NYSE, respectively. On September 30, 2013, NASDAQ Stock Market LLC filed a Form 25 with the Securities and Exchange Commission (the SEC) to effect the delisting of the Warner Chilcott Ordinary Shares from the NASDAQ and the deregistration of the Warner Chilcott Ordinary Shares under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). On October 11, 2013, Warner Chilcott filed a Form 15 to voluntarily suspend its duty to file periodic and other reports with the SEC.
As a result of the Acquisition, the Company incurred material financial impacts on October 1, 2013, that are discussed further in this document, including, but not limited to (i) the refinancing of the Senior Secured Credit Facilities (as defined below), (ii) the accelerated vesting of certain outstanding equity awards and (iii) the incurrence of third party general and administrative overhead expenses, primarily relating to expenses associated with the Companys advisors. In addition, account balances will be impacted by acquisition method accounting under Financial Accounting Standards Board Accounting Standards Codification (ASC) 805 Business Combinations.
3. Summary of Significant Accounting Policies
The following are interim updates to certain of the policies described in Note 2 of the notes to the Companys audited consolidated financial statements for the year ended December 31, 2012 included in the Annual Report.
6
Revenue Recognition
Revenue from product sales is recognized when title and risk of loss to the product transfers to the customer, which is based on the transaction shipping terms. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and the completion of all performance obligations. The Company warrants products against defects and for specific quality standards, permitting the return of products under certain circumstances. Product sales are recorded net of all sales-related deductions including, but not limited to: trade discounts, sales returns and allowances, commercial and government rebates, customer loyalty programs and fee for service arrangements with certain distributors. The Company establishes provisions for its sales-related deductions in the same period that it recognizes the related gross sales based on select criteria for estimating such contra revenues including, but not limited to: contract terms, government regulations, estimated utilization or redemption rates, costs related to the programs and other historical data. These reserves reduce revenues and are included as either a reduction of accounts receivable or as a component of liabilities. No material revisions were made to the methodology used in determining these reserves during the quarter and nine months ended September 30, 2013.
As of September 30, 2013 and December 31, 2012, the amounts related to all sales-related deductions included as a reduction of accounts receivable were $28 million and $31 million, respectively. The amounts related to all sales-related reductions included as liabilities were $385 million (of which $120 million related to reserves for product returns) and $434 million (of which $118 million related to reserves for product returns) as of September 30, 2013 and December 31, 2012, respectively. The provisions recorded to reduce gross sales to net sales were $163 million and $203 million in the quarters ended September 30, 2013 and 2012, respectively, and $536 million and $649 million in the nine months ended September 30, 2013 and 2012, respectively.
In early 2010, the U.S. Patient Protection and Affordable Care Act of 2010 was signed into law. This statute impacts the Companys net sales by increasing certain rebates it pays per prescription, most notably managed Medicaid rebates and the Medicare Part D, or donut hole rebates. Included in the provisions recorded to reduce gross sales to net sales are the current provisions related to sales due to the increased Medicaid rebates and donut hole rebates, which totaled $16 million and $14 million in the quarters ended September 30, 2013 and 2012, respectively, and $46 million and $49 million in the nine months ended September 30, 2013 and 2012, respectively.
Deferred Loan Costs
Expenses associated with the issuance of indebtedness are capitalized and amortized as a component of interest expense over the term of the respective financing arrangements using the effective interest method. In the event that long-term debt is prepaid, the deferred loan costs associated with such indebtedness are expensed as a component of interest expense in the period in which such prepayment is made. Interest expense resulting from the amortization and write-offs of deferred loan costs amounted to $8 million and $15 million in the quarters ended September 30, 2013 and 2012, respectively, and $33 million and $32 million in the nine months ended September 30, 2013 and 2012, respectively. Aggregate deferred loan costs, net of accumulated amortization, were $47 million and $80 million as of September 30, 2013 and December 31, 2012, respectively, of which $11 million and $16 million were included in prepaid expenses and other current assets in the condensed consolidated balance sheets, respectively, and $36 million and $64 million were recorded in other non-current assets in the condensed consolidated balance sheets, respectively.
On October 1, 2013, in connection with the refinancing of the Senior Secured Credit Facilities, as discussed further in Note 12, the Company extinguished the then outstanding Senior Secured Credit Facilities (as defined below) and incurred a non-cash interest expense relating to the write-off of deferred loan costs due to such refinancing being deemed a debt modification requiring debt extinguishment treatment in accordance with ASC 405-20 Extinguishment of Liabilities.
Restructuring Costs
The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee severance costs are accrued when the restructuring actions are probable and estimable. Costs for one-time termination benefits where the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. Curtailment (gains) / losses associated with defined benefit arrangements for severed employees are recognized in accordance with ASC Topic 715 Compensation Retirement Benefits. See Note 4 for more information.
4. Strategic Initiatives
Western European Restructuring
In April 2011, the Company announced a plan to restructure its operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring did not impact the Companys operations at its headquarters in Dublin, Ireland, its facilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or its commercial operations in the United Kingdom. The Company determined to proceed with the restructuring following the completion of a strategic review of its operations in its Western European markets where its product ACTONEL lost exclusivity in late 2010. ACTONEL accounted for approximately 70% of the Companys Western European revenues in the year ended December 31, 2010. In connection with the restructuring, the Company has moved to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The implementation of the restructuring plan impacted approximately 500 employees in total. There were no charges incurred during the
7
quarter ended September 30, 2013. In the nine months ended September 30, 2013, the Company recorded restructuring income of $3 million, which was comprised of pretax severance income of $3 million recorded based on estimated future payments in accordance with specific contractual terms and employee specific events and pension-related curtailment gains of $1 million, offset, in part, by non-personnel related costs of $1 million.
In the quarter ended September 30, 2012, the Company incurred pretax severance costs of zero and other restructuring costs of $1 million, which were offset, in full, by pension-related curtailment gains of $1 million. In the nine months ended September 30, 2012, the Company recorded restructuring costs of $50 million, which were comprised of pretax severance costs of $57 million and other restructuring costs of $2 million, offset, in part, by pension-related curtailment gains of $9 million.
The Company does not expect to record any material expenses or gains relating to the Western European restructuring in future periods. The majority of the remaining severance-related costs and other liabilities are expected to be settled in cash within the next twelve months.
Severance Liabilities
The following table summarizes the activity in the Companys aggregate severance liabilities during the quarter and nine months ended September 30, 2013:
Balance, December 31, 2012 |
$ | 32 | ||
Western European severance adjustments included in restructuring (income) |
(3 | ) | ||
Cash payments during the period |
(14 | ) | ||
Foreign currency translation adjustments and other |
1 | |||
|
|
|||
Balance, June 30, 2013 |
$ | 16 | ||
|
|
|||
Cash payments during the period |
(4 | ) | ||
Foreign currency translation adjustments and other |
1 | |||
|
|
|||
Balance, September 30, 2013 |
$ | 13 | ||
|
|
5. ENABLEX Acquisition
The Company and Novartis Pharmaceuticals Corporation (Novartis) were parties to an agreement to co-promote ENABLEX, developed by Novartis, in the United States. On October 18, 2010, the Company acquired the U.S. rights to ENABLEX from Novartis for an upfront payment of $400 million in cash at closing, plus potential future milestone payments of up to $20 million in the aggregate subject to the achievement of pre-defined 2011 and 2012 ENABLEX net sales thresholds (the ENABLEX Acquisition). At the time of the ENABLEX Acquisition, $420 million was recorded as a component of intangible assets and is being amortized on an accelerated basis over the period of the projected cash flows for the product. Concurrent with the closing of the ENABLEX Acquisition, the Company and Novartis terminated their existing co-promotion agreement, and the Company assumed full control of sales and marketing of ENABLEX in the U.S. market. In connection with the ENABLEX Acquisition, Novartis agreed to manufacture ENABLEX for the Company until October 31, 2013. Novartis also currently packages ENABLEX for the Company.
In the nine months ended September 30, 2012, the Company concluded that it was no longer probable, as defined by ASC Topic 450 Contingencies, that the contingent milestone payments to Novartis would be required to be paid. As a result, the Company reversed the related liability and recorded a $20 million gain, which reduced selling, general and administrative (SG&A) expenses in the nine months ended September 30, 2012.
6. Shareholders (Deficit)
In November 2011, the Company announced that its Board of Directors had authorized the redemption of up to an aggregate of $250 million of its ordinary shares (the Prior Redemption Program). Pursuant to the Prior Redemption Program, the Company recorded the redemption of 1.9 million ordinary shares (at an aggregate cost of $32 million), in the nine months ended September 30, 2012. Following the settlement of such redemptions, the Company cancelled all shares redeemed. As a result of the redemptions recorded during the nine months ended September 30, 2012, in accordance with ASC Topic 505 Equity, the Company recorded a decrease in ordinary shares at par value of $0.01 per share, and an increase in an amount equal to the aggregate purchase price above par value in accumulated deficit of approximately $32 million in the nine months ended September 30, 2012. The Prior Redemption Program allowed the Company to redeem up to an aggregate of $250 million of its ordinary shares and was to terminate on the earlier of December 31, 2012 or the redemption by the Company of an aggregate of $250 million of its ordinary shares. On August 7, 2012, the Company announced that its Board of Directors had authorized the renewal of the Prior Redemption Program. The renewed program (the Current Redemption Program) replaced the Prior Redemption Program and allowed the Company to redeem up to an aggregate of $250 million of its ordinary shares in addition to those redeemed under the Prior Redemption Program. The Current Redemption Program was set to terminate on the earlier of December 31, 2013 or the redemption by the Company of an aggregate of $250 million of its ordinary shares. As of September 30, 2013, the Company had not redeemed any ordinary shares under the Current
8
Redemption Program. In connection with the Transactions, on October 1, 2013, each Warner Chilcott Ordinary Share (other than those held by Actavis or any of its affiliates) was converted into the right to receive 0.160 of a New Actavis ordinary share and therefore, there are no ordinary shares for future redemptions remaining.
On August 7, 2012, the Company announced a dividend policy (the Dividend Policy) relating to the payment of a total annual cash dividend to its ordinary shareholders of $0.50 per share in equal semi-annual installments of $0.25 per share. On June 14, 2013, the Company paid a semi-annual cash dividend under the Dividend Policy in the amount of $0.25 per share, or $63 million in the aggregate. At the time of the semi-annual dividend the Companys retained earnings were in a deficit position and consequently the semi-annual dividend reduced the additional paid-in-capital of the Company from $17 million to zero as of May 31, 2013 and increased the Companys accumulated deficit by $46 million.
The Company has operations in the United States, Puerto Rico, United Kingdom, Republic of Ireland, Australia, Canada and many other Western European countries. The results of its non-U.S. dollar based operations are translated to U.S. dollars at the average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transaction. Translation adjustments are reflected in shareholders (deficit) as a component of accumulated other comprehensive (loss). The Company also realizes foreign currency gains / (losses) in the normal course of business based on movement in the applicable exchange rates. These gains / (losses) are included as a component of SG&A.
The movements in accumulated other comprehensive (loss) for the quarters and nine months ended September 30, 2013 were as follows:
(dollars in millions) | Cumulative Translation Items |
Defined Benefit Plan Items |
Total Accumulated Other Comprehensive (Loss) |
|||||||||
Balance as of December 31, 2012 |
$ | (25 | ) | $ | (10 | ) | $ | (35 | ) | |||
Other comprehensive (loss) / income before reclassifications into SG&A |
(5 | ) | 3 | (2 | ) | |||||||
Amounts reclassified from accumulated other comprehensive (loss) into SG&A |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive (loss) / income |
(5 | ) | 3 | (2 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance as of June 30, 2013 |
$ | (30 | ) | $ | (7 | ) | $ | (37 | ) | |||
|
|
|
|
|
|
|||||||
Other comprehensive income before reclassifications into SG&A |
8 | 1 | 9 | |||||||||
Amounts reclassified from accumulated other comprehensive (loss) into SG&A |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income |
8 | 1 | 9 | |||||||||
|
|
|
|
|
|
|||||||
Balance as of September 30, 2013 |
$ | (22 | ) | $ | (6 | ) | $ | (28 | ) | |||
|
|
|
|
|
|
9
The movements in accumulated other comprehensive income / (loss) for the quarter and nine months ended September 30, 2012 were as follows:
(dollars in millions) | Cumulative Translation Items |
Defined Benefit Plan Items |
Total Accumulated Other Comprehensive (Loss) |
|||||||||
Balance as of December 31, 2011 |
$ | (30 | ) | $ | 4 | $ | (26 | ) | ||||
Other comprehensive (loss) before reclassifications into SG&A |
(3 | ) | | (3 | ) | |||||||
Amounts reclassified from accumulated other comprehensive (loss) into SG&A |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive (loss) |
(3 | ) | | (3 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance as of June 30, 2012 |
$ | (33 | ) | $ | 4 | $ | (29 | ) | ||||
|
|
|
|
|
|
|||||||
Other comprehensive income before reclassifications into SG&A |
4 | | 4 | |||||||||
Amounts reclassified from accumulated other comprehensive (loss) into SG&A |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income |
4 | | 4 | |||||||||
|
|
|
|
|
|
|||||||
Balance as of September 30, 2012 |
$ | (29 | ) | $ | 4 | $ | (25 | ) | ||||
|
|
|
|
|
|
7. Earnings Per Share
The Company accounts for earnings per share (EPS) in accordance with ASC Topic 260, Earnings Per Share (ASC 260) and related guidance, which requires two calculations of EPS to be disclosed: basic and diluted. The numerator in calculating basic and diluted EPS is an amount equal to the consolidated net income for the periods presented. The denominator in calculating basic EPS is the weighted average shares outstanding for the respective periods. The denominator in calculating diluted EPS is the weighted average shares outstanding, plus the dilutive effect of stock option grants and unvested restricted share/share unit grants for the respective periods. The following sets forth the basic and diluted calculations of EPS for the quarters and nine months ended September 30, 2013 and 2012:
(in millions, except per share amounts) | Quarter Ended September 30, 2013 |
Quarter Ended September 30, 2012 |
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
||||||||||||
Net income available to ordinary shareholders |
$ | 113 | $ | 113 | $ | 334 | $ | 279 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average number of ordinary and potential ordinary shares outstanding: |
||||||||||||||||
Basic number of ordinary shares outstanding |
250.0 | 248.3 | 249.5 | 248.2 | ||||||||||||
Dilutive effect of grants of stock options and unvested restricted shares/share units |
3.8 | 2.3 | 3.0 | 2.3 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
Diluted number of ordinary and potential ordinary shares outstanding |
253.8 | 250.6 | 252.5 | 250.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per ordinary share: |
||||||||||||||||
Basic |
$ | 0.45 | $ | 0.46 | $ | 1.34 | $ | 1.12 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
$ | 0.45 | $ | 0.45 | $ | 1.32 | $ | 1.11 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Dividend per ordinary share |
$ | | $ | 4.00 | $ | 0.25 | $ | 4.00 | ||||||||
|
|
|
|
|
|
|
|
The Prior Redemption Program decreased each of the weighted average basic shares outstanding and the weighted average diluted shares outstanding by 1.9 million shares and 1.7 million shares during the quarter and nine months ended September 30, 2012, respectively. The remaining 0.2 million shares redeemed in the nine months ended September 30, 2012 were not included in the calculation of basic or diluted EPS for the nine months ended September 30, 2012 as their impact was anti-dilutive under the treasury stock method.
10
The following represents amounts not included in the above calculation of diluted EPS as their impact was anti-dilutive under the treasury stock method including the implied purchase cost of non-qualified options to purchase ordinary shares and restricted ordinary shares/share units to be repurchased as defined by ASC 260:
(in millions) | Quarter Ended September 30, 2013 |
Quarter Ended September 30, 2012 |
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
||||||||||||
Stock options to purchase ordinary shares |
4.2 | 4.5 | 4.4 | 4.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Unvested restricted shares/share units |
1.5 | 1.8 | 2.5 | 2.1 | ||||||||||||
|
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|
|
|
|
|
|
8. Sanofi Collaboration Agreement
The Company and Sanofi-Aventis U.S. LLC (Sanofi) are parties to a collaboration agreement pursuant to which the parties co-develop and market ACTONEL on a global basis, excluding Japan (the Collaboration Agreement). ATELVIA, the Companys risedronate sodium delayed-release product launched in January 2011 and currently sold in the United States and Canada, is also marketed pursuant to the Collaboration Agreement. As a result of ACTONELs loss of patent exclusivity in Western Europe in late 2010 and as part of the Companys transition to a wholesale distribution model in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom, the Company and/or Sanofi reduced or discontinued marketing and promotional efforts in certain territories covered by the Collaboration Agreement. Under the Collaboration Agreement, the Companys and Sanofis rights and obligations are specified by geographic market. For example, under the Collaboration Agreement, Sanofi generally has the right to elect to participate in the development of ACTONEL-related product improvements, other than product improvements specifically related to the United States and Puerto Rico, where the Company has full control over all product development decisions following the April 2010 amendment discussed below. Under the Collaboration Agreement following the April 2010 amendment, the ongoing global research and development (R&D) costs for ACTONEL are shared equally between the parties, except for R&D costs specifically related to the United States and Puerto Rico, which are borne solely by the Company. In certain geographic markets, the Company and Sanofi share selling and advertising and promotion (A&P) costs, as well as product profits based on contractual percentages. In the geographic markets where the Company is deemed to be the principal in transactions with customers and invoices sales, the Company recognizes all revenues from sales of the product along with the related product costs. In these markets, all selling and A&P expenses incurred by the Company and all contractual payments to Sanofi are recognized in SG&A expenses. In geographic markets where Sanofi is deemed to be the principal in transactions with customers and invoices sales, the Companys share of selling and A&P expenses is recognized in SG&A expenses, and the Company recognizes its share of income attributable to the contractual payments made by Sanofi to the Company in these territories, on a net basis, as a component of other revenue.
In April 2010, the Company and Sanofi entered into an amendment to the Collaboration Agreement. Pursuant to the terms of the amendment, the Company took full operational control over the promotion, marketing and R&D decisions for ACTONEL and ATELVIA in the United States and Puerto Rico, and assumed responsibility for all associated costs relating to those activities. Prior to the amendment, the Company shared such costs with Sanofi in these territories. The Company remained the principal in transactions with customers in the United States and Puerto Rico and continues to invoice all sales in these territories. In return, it was agreed that for the remainder of the term of the Collaboration Agreement, Sanofi would receive, as part of the global collaboration agreement between the parties, payments from the Company which, depending on actual net sales in the United States and Puerto Rico, are based on the lower of (i) an agreed percentage of either United States and Puerto Rico actual net sales or (ii) an agreed sales threshold for the territory. As of September 30, 2013, the fixed minimum payments under the Collaboration Agreement relating to the United States and Puerto Rico totaled $125 million, all of which will be payable in the year ending December 31, 2014.
On October 28, 2013, Warner Chilcott Company, LLC (WCCL), our indirect wholly-owned subsidiary, and Sanofi entered into an amendment (the Amendment) to the Collaboration Agreement. Pursuant to the Amendment, the parties amended the Collaboration Agreement with respect to ACTONEL and ATELVIA in the U.S. and Puerto Rico (the Exclusive Territory) to provide that, in exchange for the payment of a lump sum of $125 million by WCCL to Sanofi in the year ended December 31, 2013, WCCLs obligations with respect to the global reimbursement payment, which represented a percentage of Actavis net sales as defined, as it relates to the Exclusive Territory for the year ended December 31, 2014 shall be satisfied in full. The Amendment does not apply to or affect the parties respective rights and obligations under the Collaboration Agreement with respect to (i) the remainder of 2013 or (ii) territories outside the Exclusive Territory.
The Company will continue to sell ACTONEL and ATELVIA products with Sanofi in accordance with its obligations under the Collaboration Agreement until the termination of the Collaboration Agreement on January 1, 2015, at which time all of Sanofis rights under the Collaboration Agreement will revert to the Company. Thereafter, the Company will have the sole right to market and promote ACTONEL and ATELVIA on a global basis, excluding Japan.
11
For the quarters and nine months ended September 30, 2013 and 2012, the Company recognized net sales, other revenue and co-promotion expenses as follows:
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(dollars in millions) | 2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales |
||||||||||||||||
ACTONEL |
$ | 80 | $ | 107 | $ | 263 | $ | 372 | ||||||||
ATELVIA |
17 | 19 | 54 | 51 | ||||||||||||
Other revenue |
||||||||||||||||
ACTONEL |
11 | 12 | 35 | 43 | ||||||||||||
Co-promotion expense |
||||||||||||||||
ACTONEL / ATELVIA |
43 | 53 | 143 | 173 |
9. Inventories
Inventories consisted of the following:
(dollars in millions) | As of September 30, 2013 |
As of December 31, 2012 |
||||||
Finished goods |
$ | 57 | $ | 57 | ||||
Work-in-progress / Bulk |
29 | 26 | ||||||
Raw materials |
44 | 30 | ||||||
|
|
|
|
|||||
Total |
$ | 130 | $ | 113 | ||||
|
|
|
|
Total inventories are net of $20 million and $22 million related to inventory obsolescence reserves as of September 30, 2013 and December 31, 2012, respectively.
Product samples are stated at cost ($6 million and $8 million as of September 30, 2013 and December 31, 2012, respectively) and are included in prepaid expenses and other current assets.
10. Goodwill and Intangible Assets
The Companys goodwill and a trademark have been deemed to have indefinite lives and are not amortized. The Companys acquired intellectual property, licensing agreements and certain trademarks that do not have indefinite lives are being amortized on either an economic benefit model, which typically results in accelerated amortization or on a straight-line basis over their useful lives not to exceed 15 years.
The Companys intangible assets as of September 30, 2013 consisted of the following:
Gross Carrying | Accumulated | Net Carrying | ||||||||||
(dollars in millions) | Value | Amortization | Value | |||||||||
Definite-lived intangible assets |
||||||||||||
ASACOL / DELZICOL product family |
$ | 1,849 | $ | 899 | $ | 950 | ||||||
ENABLEX |
506 | 322 | 184 | |||||||||
ATELVIA |
241 | 49 | 192 | |||||||||
ACTONEL |
525 | 468 | 57 | |||||||||
ESTRACE Cream |
411 | 366 | 45 | |||||||||
Other products |
1,485 | 1,456 | 29 | |||||||||
|
|
|
|
|
|
|||||||
Total definite-lived intangible assets |
5,017 | 3,560 | 1,457 | |||||||||
|
|
|
|
|
|
|||||||
Indefinite-lived intangible assets |
||||||||||||
Trademark |
30 | | 30 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets, net |
$ | 5,047 | $ | 3,560 | $ | 1,487 | ||||||
|
|
|
|
|
|
12
The Companys intangible assets as of December 31, 2012 consisted of the following:
(dollars in millions) | Gross Carrying Value |
Accumulated Amortization |
Net Carrying Value |
|||||||||
Definite-lived intangible assets |
||||||||||||
ASACOL / DELZICOL product family |
$ | 1,849 | $ | 742 | $ | 1,107 | ||||||
ENABLEX |
506 | 252 | 254 | |||||||||
ATELVIA |
241 | 31 | 210 | |||||||||
ACTONEL |
525 | 413 | 112 | |||||||||
ESTRACE Cream |
411 | 343 | 68 | |||||||||
Other products |
1,485 | 1,449 | 36 | |||||||||
|
|
|
|
|
|
|||||||
Total definite-lived intangible assets |
5,017 | 3,230 | 1,787 | |||||||||
|
|
|
|
|
|
|||||||
Indefinite-lived intangible assets |
||||||||||||
Trademark |
30 | | 30 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets, net |
$ | 5,047 | $ | 3,230 | $ | 1,817 | ||||||
|
|
|
|
|
|
Aggregate amortization expense related to intangible assets was $109 million and $122 million for the quarters ended September 30, 2013 and 2012, respectively, and was $329 million and $376 million for the nine months ended September 30, 2013 and 2012, respectively. The Company continuously reviews its products remaining useful lives based on each products estimated future cash flows. The Company may incur material impairment charges or accelerate the amortization of certain intangible assets based on triggering events that reduce expected future cash flows, including those events relating to the loss of market exclusivity for any of the Companys products as a result of the expiration of a patent, the expiration of U.S. Food and Drug Administration (FDA) exclusivity or an at-risk launch of a competing generic product. Based on the Companys review of future cash flows, the Company recorded an impairment charge in the nine months ended September 30, 2012 of $106 million, $101 million of which was attributable to the impairment of the Companys DORYX intangible asset following the April 30, 2012 decision of the U.S. District Court for the District of New Jersey holding that neither Mylan Pharmaceuticals Inc.s (Mylan) nor Impax Laboratories, Inc.s (Impax) proposed generic version of the Companys DORYX 150 mg product (DORYX 150) infringed U.S. Patent No. 6,958,161 covering DORYX 150 (the 161 Patent) and Mylans subsequent introduction of a generic product in early May 2012. For a discussion of the DORYX patent litigation and the Companys other ongoing patent litigation refer to Note 15.
As of September 30, 2013, estimated amortization expense based on current forecasts (excluding indefinite-lived intangible assets) for the period from October 1, 2013 to December 31, 2013 and for each of the next five years is as follows:
(dollars in millions) | Amortization | |||
2013 (remaining) |
$ | 110 | ||
2014 |
369 | |||
2015 |
291 | |||
2016 |
186 | |||
2017 |
157 | |||
2018 |
130 | |||
Thereafter |
214 | |||
|
|
|||
$ | 1,457 | |||
|
|
13
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
(dollars in millions) | As of September 30, 2013 |
As of December 31, 2012 |
||||||
Product rebate accruals (commercial and government) |
$ | 222 | $ | 269 | ||||
Sales return reserves |
120 | 118 | ||||||
Customer loyalty and coupon programs |
43 | 47 | ||||||
Payroll, commissions, and employee costs |
33 | 35 | ||||||
Professional fees |
15 | 17 | ||||||
Severance accruals(1) |
12 | 31 | ||||||
R&D expense accruals |
8 | 4 | ||||||
Obligations under product licensing and distribution agreements |
5 | 10 | ||||||
Interest payable |
4 | 29 | ||||||
U.S. branded prescription drug fee |
4 | | ||||||
Liabilities related to dividends declared |
3 | 7 | ||||||
Litigation-related accrual |
3 | 6 | ||||||
Deferred liabilities |
3 | 3 | ||||||
Withholding taxes |
2 | 12 | ||||||
ACTONEL co-promotion liability |
| 49 | ||||||
Other |
25 | 31 | ||||||
|
|
|
|
|||||
Total |
$ | 502 | $ | 668 | ||||
|
|
|
|
(1) | Severance liabilities included as a component of other non-current liabilities totaled $1 million as of each September 30, 2013 and December 31, 2012. |
12. Indebtedness
Senior Secured Credit Facilities (terminated on October 1, 2013)
On March 17, 2011, Warner Chilcott Holdings Company III, Limited (Holdings III), WC Luxco S.à r.l. (the Luxco Borrower), Warner Chilcott Corporation (WCC or the US Borrower) and WCCL (or the PR Borrower, and together with the Luxco Borrower and the US Borrower, the Borrowers) entered into a new credit agreement (the Credit Agreement) with a syndicate of lenders (the Lenders) and Bank of America, N.A. as administrative agent, in order to refinance the Companys then-outstanding senior secured credit facilities (the Prior Senior Secured Credit Facilities). Pursuant to the Credit Agreement, the Lenders provided senior secured credit facilities (the Initial Senior Secured Credit Facilities) in an aggregate amount of $3,250 million comprised of (i) $3,000 million in aggregate term loan facilities and (ii) a $250 million revolving credit facility available to all Borrowers (the Revolving Credit Facility). The term loan facilities were initially comprised of (i) a $1,250 million Term A Loan Facility (the Term A Loan) and (ii) a $1,750 million Term B Loan Facility consisting of an $800 million Term B-1 Loan, a $400 million Term B-2 Loan and a $550 million Term B-3 Loan (together, the Initial Term B Loans). The proceeds of these term loans, together with approximately $279 million of cash on hand, were used to make an optional prepayment of $250 million in aggregate term loans under the Prior Senior Secured Credit Facilities, repay the remaining $2,969 million in aggregate term loans outstanding under the Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest.
On August 20, 2012, Holdings III and the Borrowers entered into an amendment to the Credit Agreement, pursuant to which the Lenders provided additional term loans in an aggregate principal amount of $600 million (the Additional Term Loan Facilities and, together with the Initial Senior Secured Credit Facilities, the Senior Secured Credit Facilities), which, together with cash on hand, were used to fund a special cash dividend in September 2012 of $4.00 per share, or $1,002 million in the aggregate (the 2012 Special Dividend), and to pay related fees and expenses. The Additional Term Loan Facilities were comprised of (i) a $250 million Term B-4 Loan Facility and a $50 million Term B-5 Loan Facility (collectively, the Term B-4/5 Loan) and (ii) a $300 million Additional Term B-1 Loan Facility (the Additional Term B-1 Loan).
The Term A Loan was set to mature on March 17, 2016 and bore interest at LIBOR plus 3.00%, with a LIBOR floor of 0.75%, each of the Initial Term B Loans and the Additional Term B-1 Loan was set to mature on March 15, 2018 and bore interest at LIBOR plus 3.25%, with a LIBOR floor of 1.00%, and the Term B-4/5 Loan was set to mature on August 20, 2017 and bore interest at LIBOR plus 3.00%, with no LIBOR floor. The Revolving Credit Facility was set to mature on March 17, 2016 and included a $20 million sublimit for swing line loans and a $50 million sublimit for the issuance of standby letters of credit. Any swing line loans and letters of credit would have reduced the available commitment under the Revolving Credit Facility on a dollar-for-dollar basis. Loans drawn under the Revolving Credit Facility bore interest at LIBOR plus 3.00%, and letters of credit issued under the Revolving Credit Facility were subject to a fee equal to 3.00% per annum on the amounts thereof. The Borrowers were also required to pay a commitment fee on the unused commitments under the Revolving Credit Facility at a rate of 0.75% per annum, subject to leverage-based step-downs.
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The loans and other obligations under the Senior Secured Credit Facilities (including in respect of hedging agreements and cash management obligations) were (i) guaranteed by Holdings III and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) were secured by substantially all of the assets of the Borrowers and each guarantor (subject to certain exceptions and limitations). In addition, the Senior Secured Credit Facilities contained (i) customary provisions related to mandatory prepayment of the loans thereunder with (a) 50% of excess cash flow, as defined, subject to a leverage-based step-down and (b) the proceeds of asset sales or casualty events (subject to certain limitations, exceptions and reinvestment rights) and the incurrence of certain additional indebtedness and (ii) certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, loans and investments, acquisitions, dividends and other restricted payments, transactions with affiliates, asset dispositions, mergers and consolidations, prepayments, redemptions and repurchases of other indebtedness and other matters customarily restricted in such agreements and, in each case, subject to certain exceptions.
The Senior Secured Credit Facilities specified certain customary events of default including, without limitation, non-payment of principal or interest, violation of covenants, breaches of representations and warranties in any material respect, cross default or cross acceleration of other material indebtedness, material judgments and liabilities, certain Employee Retirement Income Security Act events and invalidity of guarantees and security documents under the Senior Secured Credit Facilities.
The fair value as of September 30, 2013 and December 31, 2012 of the Companys then outstanding debt under its Senior Secured Credit Facilities, as determined in accordance with ASC Topic 820 Fair Value Measurements and Disclosures (ASC 820) under Level 2 based upon quoted prices for similar items in active markets, was approximately $2,039 million ($2,041 million book value) and $2,744 million ($2,718 million book value), respectively.
As of September 30, 2013, there were letters of credit totaling $2 million outstanding. As a result, the Company had $248 million available under the Revolving Credit Facility as of September 30, 2013. During the quarter and nine months ended September 30, 2013, the Company made optional prepayments of $152 million and $552 million, respectively, of its term loan indebtedness under the Senior Secured Credit Facilities.
New Senior Secured Credit Facilities
On October 1, 2013, in connection with the Acquisition, the Company completed the refinancing of its Senior Secured Credit Facilities. The new senior secured credit facilities were entered into by New Actavis, the Borrowers, Warner Chilcott Finance LLC, as a guarantor, and Bank of America, N.A. as Administrative Agent. The new senior secured credit facilities were comprised of $2,000 million of term loan indebtedness in the aggregate (the New Senior Secured Credit Facilities) and were used, together with other working capital, to refinance the Companys then outstanding Senior Secured Credit Facilities. The New Senior Secured Credit Facilities are comprised of $1,000 million of three year term loan indebtedness maturing on October 1, 2016 (the Three Year Tranche) and $1,000 million of five year term loan indebtedness maturing on October 1, 2018 (the Five Year Tranche).
Borrowings under the New Senior Secured Credit Facilities will bear interest at the applicable Borrowers choice at a per annum rate equal to either (i) a base rate plus an applicable margin per annum varying from (x) 0.00% per annum to 0.75% per annum under the Three Year Tranche and (y) 0.125% per annum to 0.875% per annum under the Five Year Tranche, depending on the debt rating or (b) a Eurodollar rate, plus an applicable margin varying from (x) 1.00% per annum to 1.75% per annum under the Three Year Tranche and (y) 1.125% per annum to 1.875% per annum under the Five Year Tranche, depending on the debt rating.
The outstanding principal amount of loans under the Five Year Tranche is payable in equal quarterly amounts of 2.50% per quarter with the remaining balance payable on October 1, 2018. The outstanding principal amount of loans under the Three Year Tranche is not subject to quarterly amortization and shall be payable in full on October 1, 2016.
The borrowings under the New Senior Secured Credit Facilities will be jointly and severally guaranteed by (i) New Actavis, (ii) each subsidiary of New Actavis (other than any Borrower) that is a primary obligor or a guarantor under the 7.75% Notes (as defined below) and (iii) any subsidiary (other than any Borrower) that becomes a guarantor of third party indebtedness of a Borrower in an aggregate principal amount exceeding $200 million (unless, in the case of a foreign subsidiary, such guarantee would give rise to adverse tax consequences as reasonably determined by New Actavis).
7.75% Notes
On August 20, 2010, the Company and certain of the Companys subsidiaries entered into an indenture (the Indenture) with Wells Fargo Bank, National Association, as trustee (the Trustee), in connection with the issuance by WCCL and Warner Chilcott Finance LLC (together, the Issuers) of $750 million aggregate principal amount of 7.75% senior notes due 2018 (the 7.75% Notes). The 7.75% Notes are unsecured senior obligations of the Issuers, guaranteed on a senior basis by the Company and its subsidiaries that guarantee obligations under the Senior Secured Credit Facilities, subject to certain exceptions. The 7.75% Notes will mature on September 15, 2018. Interest on the 7.75% Notes is payable on March 15 and September 15 of each year, and the first payment was made on March 15, 2011.
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On September 29, 2010, the Issuers issued an additional $500 million aggregate principal amount of 7.75% Notes at a premium of $10 million. The proceeds from the issuance of the additional 7.75% Notes were used by the Company to fund its $400 million upfront payment in connection with the ENABLEX Acquisition, which closed on October 18, 2010, and for general corporate purposes. The additional 7.75% Notes constitute a part of the same series, and have the same guarantors, as the 7.75% Notes issued in August 2010. The $10 million premium received was added to the face value of the 7.75% Notes and is being amortized over the life of the 7.75% Notes as a reduction to reported interest expense.
The Indenture contains restrictive covenants that limit, among other things, the ability of each of Holdings III, and certain of Holdings IIIs subsidiaries, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repurchase subordinated debt and common and preferred stock, make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. Certain of these restrictive covenants will be suspended at any time when the 7.75% Notes are rated Investment Grade by each of S&P and Moodys and no Default has occurred and is continuing, in each case as described and defined in the Indenture. The Indenture also contains customary events of default which would permit the holders of the 7.75% Notes to declare those 7.75% Notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the 7.75% Notes or other material indebtedness, the failure to comply with covenants, and specified events of bankruptcy and insolvency.
The fair value of the Companys outstanding 7.75% Notes ($1,250 million book value), as determined in accordance with ASC 820 under Level 2 based upon quoted prices for similar items in active markets, was $1,359 million and $1,325 million as of September 30, 2013 and December 31, 2012, respectively.
On October 1, 2013, in connection with the completion of the Transactions, New Actavis, the Issuers and Wells Fargo Bank, National Association, as the Trustee (the Trustee), entered into a third supplemental indenture (the Supplemental Indenture) to the Indenture, among the Issuers, the guarantors party thereto and the Trustee, with respect to the 7.75% Notes. Pursuant to the Supplemental Indenture, New Actavis has provided a full and unconditional guarantee of the 7.75% Notes.
On October 1, 2013, the Issuers and the Trustee also entered into a Release of Guarantees of Certain Guarantors, pursuant to which the Companys guarantee of the 7.75% Notes was released and the guarantees of certain other guarantors were released, in each case in accordance with the Indenture.
Components of Indebtedness
As of September 30, 2013, the Companys outstanding debt included the following:
(dollars in millions) | Current Portion as of September 30, 2013 |
Long-Term Portion as of September 30, 2013 |
Total Outstanding as of September 30, 2013 |
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Revolving Credit Facility under the Senior |
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Secured Credit Facilities |
$ | | $ | | $ | | ||||||
Term loans under the Senior Secured |
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Credit Facilities |
184 | 1,857 | 2,041 | |||||||||
7.75% Notes (including $6 unamortized premium) |
1 | 1,255 | 1,256 | |||||||||
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Total |
$ | 185 | $ | 3,112 | $ | 3,297 | ||||||
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As of September 30, 2013, scheduled mandatory principal repayments of long-term debt for the period from October 1, 2013 to December 31, 2013 and in each of the five years ending December 31, 2014 through 2018 were as follows:
(dollars in millions) Year Ending December 31, |
Aggregate Maturities |
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2013 (remaining) |
$ | 46 | ||
2014 |
184 | |||
2015 |
198 | |||
2016 |
83 | |||
2017 |
83 | |||
2018 |
2,697 | |||
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Total long-term debt to be settled in cash |
$ | 3,291 | ||
7.75% Notes unamortized premium |
6 | |||
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Total long-term debt |
$ | 3,297 | ||
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13. Stock-Based Compensation Plans
The Companys stock-based compensation, including grants of non-qualified time-based vesting options to purchase ordinary shares and grants of time-based and performance-based vesting restricted ordinary shares/share units, is measured at fair value on the date of grant and is recognized in the statement of operations as compensation expense over the applicable vesting periods. For
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purposes of computing the amount of stock-based compensation attributable to time-based vesting options and time-based vesting restricted ordinary shares/share units expensed in any period, the Company treats such equity grants as serial grants with separate vesting dates. This treatment results in accelerated recognition of share-based compensation expense whereby 52% of the compensation is recognized in year one, 27% is recognized in year two, 15% is recognized in year three, and 6% is recognized in the final year of vesting. The Company treats performance-based vesting restricted ordinary share/share unit grants as vesting evenly over a four year vesting period, subject to the achievement of annual performance targets.
Total stock-based compensation expense recognized for the quarters ended September 30, 2013 and 2012 was $6 million and $5 million, respectively and for the nine months ended September 30, 2013 and 2012 was $19 million and $17 million, respectively. Unrecognized future stock-based compensation expense was $32 million as of September 30, 2013. This amount was set to be recognized as an expense over a remaining weighted average period of 1.2 years. In connection with the Acquisition, the Company recognized stock-based compensation expense on October 1, 2013 resulting from the accelerated vesting of certain outstanding awards of restricted shares/share units pursuant to the terms of the Companys award agreements.
The Company has granted equity-based incentives to its employees comprised of restricted ordinary shares/share units and non-qualified options to purchase ordinary shares. All restricted ordinary shares/share units (whether time-based vesting or performance-based vesting) are granted and expensed, using the closing market price per share on the applicable grant date, over a four year vesting period. Non-qualified options to purchase ordinary shares are granted to employees at exercise prices per share equal to the closing market price per share on the date of grant.
The fair value of non-qualified options is determined on the applicable grant date using the Black-Scholes method of valuation and that amount is recognized as an expense over the four year vesting period. In establishing the value of the options on each grant date, the Company uses its actual historical volatility for its ordinary shares to estimate the expected volatility at each grant date. Beginning in September 2012, the dividend yield is calculated on the day of grant using the annual expected dividend under the Dividend Policy of $0.50 per share divided by the closing stock price on that given day. The options have a term of ten years. The Company assumes that the options will be exercised, on average, in six years. Using the Black-Scholes valuation model, the fair value of the options is based on the following assumptions:
Nine months ended September 30, 2013 |
Year ended December 31, 2012 |
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Dividend yield |
2.54 - 3.49 | % | 0 - 4.15 | % | ||||
Expected volatility |
40.00 | % | 38.00 - 40.00 | % | ||||
Risk-free interest rate |
1.78 - 2.49 | % | 1.76 - 1.87 | % | ||||
Expected term (years) |
6.00 | 6.00 |
The weighted average remaining contractual term of all outstanding options to purchase ordinary shares granted was 6 years as of September 30, 2013.
The following is a summary of equity award activity for unvested restricted ordinary shares/share units in the period from December 31, 2012 through September 30, 2013:
Restricted Share/Share Units Grants | ||||||||
(in millions except per share amounts) | Shares/Share Units |
Weighted Average Fair Value per share on Grant Date |
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Unvested restricted ordinary shares/share units, at December 31, 2012 |
2.5 | $ | 19.03 | |||||
Granted share units |
2.2 | 14.32 | ||||||
Vested shares/share units |
(0.8 | ) | 19.29 | |||||
Forfeited shares/share units |
(0.4 | ) | 16.45 | |||||
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Unvested restricted ordinary shares/share units, at September 30, 2013 |
3.5 | $ | 16.31 | |||||
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The following is a summary of equity award activity for non-qualified options to purchase ordinary shares in the period from December 31, 2012 through September 30, 2013:
Options to Purchase Ordinary Shares | ||||||||||||
(in millions except per option amounts) | Options | Weighted Average Fair Value per Option on Grant Date |
Weighted Average Exercise Price per Option |
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Balance at December 31, 2012 |
5.8 | $ | 6.29 | $ | 10.50 | |||||||
Granted options |
1.3 | 4.09 | 14.41 | |||||||||
Exercised options |
(0.8 | ) | 6.97 | 6.20 | ||||||||
Forfeited options |
(0.3 | ) | 7.01 | 14.33 | ||||||||
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Balance at September 30, 2013 |
6.0 | $ | 5.71 | $ | 11.68 | |||||||
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Vested and exercisable at September 30, 2013 |
3.8 | $ | 5.55 | $ | 9.84 | |||||||
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The intrinsic value of non-qualified options to purchase ordinary shares is calculated as the difference between the closing price of the Companys ordinary shares and the exercise price of the non-qualified options to purchase ordinary shares that had a strike price below the closing price. The total intrinsic value for the non-qualified options to purchase ordinary shares that are in-the-money as of September 30, 2013 was as follows:
(in millions except per option and per share amounts) | Number of Options |
Weighted Average Exercise Price per Option |
Closing Stock Price per Share |
Total Intrinsic Value |
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Balance outstanding at September 30, 2013 |
6.0 | $ | 11.68 | $ | 22.93 | $ | 67 | |||||||||
Vested and exercisable at September 30, 2013 |
3.8 | $ | 9.84 | $ | 22.93 | $ | 50 |
14. Commitments and Contingencies
Product Development Agreements
In July 2007, the Company entered into an agreement with Paratek Pharmaceuticals Inc. (Paratek) under which it acquired certain rights to novel tetracyclines under development for the treatment of acne and rosacea. The Company paid an up-front fee of $4 million and agreed to reimburse Paratek for R&D expenses incurred during the term of the agreement. In September 2010, the Company made a $1 million milestone payment to Paratek upon the achievement of a developmental milestone. In June 2012, the Company made a $2 million milestone payment to Paratek upon the achievement of a developmental milestone which was included in R&D expenses in the nine months ended September 30, 2012. The Company may make additional payments to Paratek upon the achievement of certain developmental milestones that could aggregate up to $21 million. In addition, the Company agreed to pay royalties to Paratek based on the net sales, if any, of the products covered under the agreement.
In December 2008, the Company signed an agreement (the Dong-A Agreement) with Dong-A PharmTech Co. Ltd. (Dong-A), to develop and, if approved, market its orally-administered udenafil product, a PDE5 inhibitor for the treatment of erectile dysfunction (ED) in the United States. The Company paid $2 million in connection with signing the Dong-A Agreement. In March 2009, the Company paid $9 million to Dong-A upon the achievement of a developmental milestone related to the ED product under the Dong-A Agreement. The Company agreed to pay for all development costs incurred during the term of the Dong-A Agreement with respect to development of the ED product to be marketed in the United States, and the Company may make additional payments to Dong-A of up to $13 million upon the achievement of contractually-defined milestones in relation to the ED product. In addition, the Company agreed to pay a profit-split to Dong-A based on operating profit (as defined in the Dong-A Agreement), if any, resulting from the commercial sale of the ED product.
In February 2009, the Company acquired the U.S. rights to Apricus Biosciences, Inc.s (formerly NexMed, Inc.) (Apricus) topically applied alprostadil cream for the treatment of ED and a prior license agreement between the Company and Apricus relating to the product was terminated. Under the terms of the acquisition agreement, the Company paid Apricus an up-front payment of $3 million. The Company also agreed to make a milestone payment of $2 million upon the FDAs approval of the products New Drug Application. The Company continues to work to prepare its response to the non-approvable letter that the FDA delivered to Apricus in July 2008 with respect to the product.
In April 2010, the Company amended the Dong-A Agreement to add the right to develop, and if approved, market in the United States and Canada, Dong-As udenafil product for the treatment of lower urinary tract symptoms associated with Benign Prostatic Hyperplasia (BPH). As a result of this amendment, the Company made an up-front payment to Dong-A of $20 million in April 2010. Under the amendment, the Company may make additional payments to Dong-A in an aggregate amount of up to $25 million upon the achievement of contractually-defined milestones in relation to the BPH product. These payments would be in addition to the potential milestone payments in relation to the ED product described above. The Company also agreed to pay Dong-A a percentage of net sales of the BPH product in the United States and Canada, if any.
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The Company and Sanofi are parties to the Collaboration Agreement pursuant to which they co-develop and market ACTONEL on a global basis, excluding Japan. ATELVIA, the Companys risedronate sodium delayed-release product launched in January 2011 and currently sold in the United States and Canada, is also marketed pursuant to the Collaboration Agreement. See Note 8 for additional information related to the Collaboration Agreement.
Other Commitments and Contingencies
In March 2012, the Companys Fajardo, Puerto Rico manufacturing facility received a warning letter from the FDA. The warning letter raised certain violations of current Good Manufacturing Practices originally identified in a Form 483 observation letter issued by the FDA after an inspection of the Companys Fajardo facility in June and July 2011. More specifically, the warning letter indicated that the Company failed to conduct a comprehensive evaluation of its corrective actions to ensure that certain stability issues concerning OVCON 50 were adequately addressed. In addition, the FDA cited the Companys stability issues with OVCON 50 and the Companys evaluation of certain other quality data, in expressing its general concerns with respect to the performance of the Companys Fajardo quality control unit.
The Company takes these matters seriously and submitted a written response to the FDA in April 2012. Following its receipt of the Form 483 observation letter, the Company immediately initiated efforts to address the issues identified by the FDA. In March and April 2013, the FDA re-inspected the Fajardo facility and issued a Form 483 observation letter at the conclusion thereof that identified two observations, which did not directly relate to the issues listed in the warning letter. The Company provided its response to such observations to the FDA in early May 2013. In June 2013, the FDA issued the Company a warning letter close out letter, informing the Company that it had addressed the issues raised by the FDA in the warning letter.
In connection with the Acquisition, the Company incurred $34 million of SG&A expenses on October 1, 2013. These fees were contingent upon the successful completion of the Acquisition and were paid to the Companys advisors.
15. Legal Proceedings
General Matters
The Company is involved in various legal proceedings, including product liability litigation, intellectual property litigation, antitrust litigation, false claims act litigation, employment litigation and other litigation, as well as government investigations. The outcome of such proceedings is uncertain, and the Company may from time to time enter into settlements to resolve such proceedings that could result, among other things, in the sale of generic versions of the Companys products prior to the expiration of its patents.
The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable. The Company maintains insurance with respect to potential litigation in the normal course of its business based on its consultation with its insurance consultants and outside legal counsel, and in light of current market conditions, including cost and availability. The Company is responsible for any losses from such litigation that are not covered under its litigation insurance.
The following discussion is limited to the Companys material on-going legal proceedings:
Product Liability Litigation
Hormone Therapy Product Liability Litigation
Beginning in early 2004, a number of product liability suits were filed against the Company as well as numerous other pharmaceutical companies, for personal injuries allegedly arising out of the use of hormone replacement therapy products, including but not limited to Warner Chilcott products FEMHRT, ESTRACE, ESTRACE Cream and medroxyprogesterone acetate. Under the purchase and sale agreement pursuant to which we acquired FEMHRT from Pfizer Inc. (Pfizer) in 2003, we agreed to assume certain product liability exposure with respect to claims made against Pfizer after March 5, 2003 and tendered to us relating to FEMHRT products. We successfully tendered 94 cases involving ESTRACE to Bristol-Myers Squibb Company (BMS) pursuant to an indemnification provision in the asset purchase agreement pursuant to which we acquired this product. The purchase agreement included an indemnification agreement whereby BMS indemnified us for product liability exposure associated with ESTRACE products shipped prior to July 2001.
Many of the cases originally filed against the Company have been dismissed. Approximately 12 cases remain pending against Warner Chilcott and/or other Company affiliates in state and federal courts and that have not been tendered successfully to other parties. The remaining cases are pending in various courts including a consolidated action in the United States District Court for the Eastern District of Arkansas (In re: Prempro Products Liability Litigation, MDL Docket No. 1507) as well as proceedings in the federal district court for the District of Minnesota and in the Philadelphia Common Pleas Court. Discovery in the individual cases has not been completed. The Company believes it has substantial meritorious defenses to these cases and maintains product liability
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insurance against such cases. However, litigation is inherently uncertain and the Company cannot predict the outcome of this litigation. These actions, if successful, or if insurance does not provide sufficient coverage against such claims, could adversely affect the Company and could have a material adverse effect on the Companys business, results of operations, financial condition and cash flows.
ACTONEL Product Liability Litigation
The Company is a defendant in approximately 281 cases and a potential defendant with respect to approximately 390 unfiled claims involving a total of approximately 679 plaintiffs and potential plaintiffs relating to the Companys bisphosphonate prescription drug ACTONEL. The claimants allege, among other things, that ACTONEL caused them to suffer osteonecrosis of the jaw (ONJ), a rare but serious condition that involves severe loss or destruction of the jawbone, and/or atypical fractures of the femur (AFF). All of the cases have been filed in either federal or state courts in the United States. The Company is in the initial stages of discovery in these litigations. The 390 unfiled claims involve potential plaintiffs that have agreed, pursuant to a tolling agreement, to postpone the filing of their claims against the Company in exchange for the Companys agreement to suspend the statutes of limitations relating to their potential claims. In addition, the Company is aware of four purported product liability class actions that were brought against the Company in provincial courts in Canada alleging, among other things, that ACTONEL caused the plaintiffs and the proposed class members who ingested ACTONEL to suffer atypical fractures or other side effects. It is expected that these plaintiffs will seek class certification. Of the approximately 679 total ACTONEL-related claims, approximately 147 include ONJ-related claims, approximately 508 include AFF-related claims and approximately 4 include both ONJ and AFF-related claims. The Company is reviewing these lawsuits and potential claims and intends to defend these claims vigorously.
Sanofi, which co-promotes ACTONEL with the Company on a global basis pursuant to the Collaboration Agreement, is a defendant in many of the Companys ACTONEL product liability cases. In some of the cases, manufacturers of other bisphosphonate products are also named as defendants. Plaintiffs have typically asked for unspecified monetary and injunctive relief, as well as attorneys fees. Under the Collaboration Agreement, Sanofi has agreed to indemnify the Company, subject to certain limitations, for 50% of the losses from any product liability claims in Canada relating to ACTONEL and for 50% of the losses from any product liability claims in the United States and Puerto Rico relating to ACTONEL brought prior to April 1, 2010, which would include approximately 90 claims relating to ONJ and other alleged injuries that were pending as of March 31, 2010 and not subsequently dismissed. Pursuant to the April 2010 amendment to the Collaboration Agreement, the Company will be fully responsible for any product liability claims in the United States and Puerto Rico relating to ACTONEL brought on or after April 1, 2010. The Company may be liable for product liability, warranty or similar claims in relation to products acquired from The Procter & Gamble Company (P&G) in October 2009 in connection with the Companys acquisition (the PGP Acquisition) of P&Gs global branded pharmaceuticals business (PGP), including ONJ-related claims that were pending as of the closing of the PGP Acquisition. The Companys agreement with P&G provides that P&G will indemnify the Company, subject to certain limits, for 50% of the Companys losses from any such claims, including approximately 88 claims relating to ONJ and other alleged injuries, pending as of October 30, 2009 and not subsequently dismissed.
The Company currently maintains product liability insurance coverage for claims aggregating between $30 million and $170 million, subject to certain terms, conditions and exclusions, and is otherwise responsible for any losses from such claims. The terms of the Companys current and prior insurance programs vary from year to year and the Companys insurance may not apply to, among other things, damages or defense costs related to the above mentioned HT or ACTONEL-related claims, including any claim arising out of HT or ACTONEL products with labeling that does not conform completely to FDA approved labeling.
In May 2013, the Company entered into a settlement agreement in respect of up to 74 ONJ-related claims, subject to the acceptance thereof by the individual respective claimants. The Company recorded a charge in the nine months ended September 30, 2013 in the amount of $2 million in accordance with ASC Topic 450 Contingencies in connection with the Companys entry into the settlement agreement. This charge represents the Companys current estimate of the aggregate amount that is probable to be paid by the Company in connection with the settlement agreement. In October 2013, the Company entered into a separate settlement agreement in respect of up to 53 additional ONJ-related claims, subject to the acceptance thereof by the individual respective claimants. Assuming that all of the relevant claimants accept the settlement agreements, approximately 545 ACTONEL-related claims would remain outstanding, of which approximately 28 include ONJ-related claims, approximately 498 include AFF-related claims and approximately 4 include both ONJ and AFF-related claims. However, it is impossible to predict with certainty (i) the number of such individual claimants that will accept the settlement agreement or (ii) the outcome of any litigation with claimants rejecting the settlement or other plaintiffs and potential plaintiffs with ONJ, AFF or other ACTONEL-related claims, and the Company can offer no assurance as to the likelihood of an unfavorable outcome in any of these matters. An estimate of the potential loss, or range of loss, if any, to the Company relating to proceedings with (i) claimants rejecting the settlement or (ii) other plaintiffs and potential plaintiffs with ONJ, AFF or other ACTONEL-related claims is not possible at this time.
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Gastroenterology Patent Matters
ASACOL HD
In September 2011, the Company received a Paragraph IV certification notice letter from Zydus Pharmaceuticals USA, Inc. (together with its affiliates, Zydus) indicating that Zydus had submitted to the FDA an Abbreviated New Drug Application (ANDA) seeking approval to manufacture and sell a generic version of the Companys ASACOL 800 mg product (ASACOL HD). Zydus contends that the Companys U.S. Patent No. 6,893,662, expiring in November 2021 (the 662 Patent), is invalid and/or not infringed. In addition, Zydus indicated that it had submitted a Paragraph III certification with respect to Medeva Pharma Suisse AGs (Medeva) U.S. Patent No. 5,541,170 (the 170 Patent) and U.S. Patent No. 5,541,171 (the 171 Patent), formulation and method patents which the Company exclusively licenses from Medeva covering the Companys ASACOL products, consenting to the delay of FDA approval of the ANDA product until the 170 Patent and the 171 Patent expired in July 2013. In November 2011, the Company filed a lawsuit against Zydus in the U.S. District Court for the District of Delaware charging Zydus with infringement of the 662 Patent. The lawsuit results in a stay of FDA approval of Zydus ANDA for 30 months from the date of the Companys receipt of the Zydus notice letter, subject to prior resolution of the matter before the court. While the Company intends to vigorously defend the 662 Patent and pursue its legal rights, the Company can offer no assurance as to when the pending litigation will be decided, whether the lawsuit will be successful or that a generic equivalent of ASACOL HD will not be approved and enter the market prior to the expiration of the 662 Patent in 2021. On December 7, 2013, we reached a settlement in principle with Zydus. Pursuant to the terms of the agreement in principle, Zydus will be permitted to launch its ANDA version of ASACOL HD on November 15, 2015. If Zydus does not obtain FDA approval of its ANDA version of ASACOL HD by July 1, 2016, the Company will provide Zydus with an authorized generic version of the product for sale within the United States. The settlement remains subject to execution of definitive documentation.
Osteoporosis Patent Matters
ACTONEL
ACTONEL Once-a-Month
In August 2008, December 2008 and January 2009, PGP and Hoffman-La Roche Inc. (Roche) received Paragraph IV certification notice letters from Teva, Sun and Apotex Inc. and Apotex Corp. (together Apotex), indicating that each such company had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of the ACTONEL 150 mg product (ACTONEL OaM). The notice letters contended that Roches U.S. Patent No. 7,192,938 (the 938 Patent), a method patent expiring in November 2023 (including a 6-month pediatric extension of regulatory exclusivity) which Roche licensed to PGP with respect to ACTONEL OaM, was invalid, unenforceable or not infringed. PGP and Roche filed patent infringement suits against Teva in September 2008, Sun in January 2009 and Apotex in March 2009 in the U.S. District Court for the District of Delaware charging each with infringement of the 938 Patent. The lawsuits resulted in a stay of FDA approval of each defendants ANDA for 30 months from the date of PGPs and Roches receipt of notice, subject to the prior resolution of the matters before the court. The stay of approval of each of Tevas, Suns and Apotexs ANDAs has expired, and the FDA has tentatively approved Tevas ANDA with respect to ACTONEL OaM. However, none of the defendants challenged the validity of the underlying 122 Patent, which covers all of the Companys ACTONEL products, including ACTONEL OaM, and does not expire until June 2014 (including a 6-month pediatric extension of regulatory exclusivity). As a result, the Company does not believe that any of the defendants will be permitted to market their proposed generic versions of ACTONEL OaM prior to June 2014.
On February 24, 2010, the Company and Roche received a Paragraph IV certification notice letter from Mylan indicating that it had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ACTONEL OaM. The notice letter contends that the 938 Patent, which expires in November 2023 and covers ACTONEL OaM, is invalid and/or will not be infringed. The Company and Roche filed a patent suit against Mylan in April 2010 in the U.S. District Court for the District of Delaware charging Mylan with infringement of the 938 Patent based on its proposed generic version of ACTONEL OaM. The lawsuit resulted in a stay of FDA approval of Mylans ANDA for 30 months from the date of the Companys and Roches receipt of notice, subject to prior resolution of the matter before the court. The stay of approval of Mylans ANDA has now expired. Since Mylan did not challenge the validity of the underlying 122 Patent, which expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity) and covers all of the Companys ACTONEL products, the Company does not believe that Mylan will be permitted to market its proposed ANDA product prior to the June 2014 expiration of the 122 Patent (including a 6-month pediatric extension of regulatory exclusivity).
In October, November and December 2010 and February 2011, the Company and Roche received Paragraph IV certification notice letters from Sun, Apotex, Teva and Mylan, respectively, indicating that each such company had amended its existing ANDA covering generic versions of ACTONEL OaM to include a Paragraph IV certification with respect to Roches U.S. Patent No. 7,718,634 (the 634 Patent). The notice letters contended that the 634 Patent, a method patent expiring in November 2023 (including a 6-month pediatric extension of regulatory exclusivity) which Roche licensed to the Company with respect to ACTONEL OaM, was invalid, unenforceable or not infringed. The Company and Roche filed patent infringement suits against Sun and Apotex in December 2010, against Teva in January 2011 and against Mylan in March 2011 in the U.S. District Court for the District of Delaware charging each with infringement of the 634 Patent. The Company believes that no additional 30-month stay is available in these matters because the 634 Patent was listed in the FDAs Orange Book subsequent to the date on which Sun, Apotex, Teva and Mylan filed their respective ANDAs with respect to ACTONEL OaM. However, the underlying 122 Patent, which covers all of the Companys ACTONEL products, including ACTONEL OaM, does not expire until June 2014 (including a 6-month pediatric extension of regulatory exclusivity).
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The Company and Roches actions against Teva, Apotex, Sun and Mylan for infringement of the 938 Patent and the 634 Patent arising from each such partys proposed generic version of ACTONEL OaM were consolidated for all pretrial purposes, and a consolidated trial for those suits was previously expected to be held in July 2012. Following an adverse ruling in Roches separate ongoing patent infringement suit before the U.S. District Court for the District of New Jersey relating to its Boniva® product, in which the court held that claims of the 634 Patent covering a monthly dosing regimen using ibandronate were invalid as obvious, Teva, Apotex, Sun and Mylan filed a motion for summary judgment in the Companys ACTONEL OaM patent infringement litigation. In the motion, the defendants have sought to invalidate the asserted claims of the 938 Patent and 634 Patent, which cover a monthly dosing regimen using risedronate, on similar grounds. The previously scheduled trial has been postponed pending resolution of the new summary judgment motion. A hearing on Teva, Apotex, Sun and Mylans motions for summary judgment of invalidity and a separate motion by the Company and Roche for summary judgment of infringement took place on December 14, 2012. Oral arguments in Roches appeal of the adverse ruling concerning the 634 Patent in the Boniva® case took place on December 6, 2013. The Court of Appeals for the Federal Circuit has not issued a decision.
To the extent that any ANDA filer also submitted a Paragraph IV certification with respect to U.S. Patent No. 6,165,513 covering ACTONEL OaM, the Company has determined not to pursue an infringement action with respect to this patent. While the Company and Roche intend to vigorously defend the 938 Patent and the 634 Patent and protect their legal rights, the Company can offer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful or that a generic equivalent of ACTONEL OaM will not be approved and enter the market prior to the expiration of the 938 Patent and the 634 Patent in 2023 (including, in each case, a 6-month pediatric extension of regulatory exclusivity).
ATELVIA
In August and October 2011 and March 2012, the Company received Paragraph IV certification notice letters from Watson Laboratories, Inc.Florida (together with Actavis, Inc. (formerly Watson Pharmaceuticals, Inc.) and its subsidiaries, Actavis), Teva and Ranbaxy Laboratories Ltd. (together with its affiliates, Ranbaxy) indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ATELVIA 35 mg tablets (ATELVIA). The notice letters contend that the Companys U.S. Patent Nos. 7,645,459 (the 459 Patent) and 7,645,460 (the 460 Patent), two formulation and method patents expiring in January 2028, are invalid, unenforceable and/or not infringed. The Company filed a lawsuit against Actavis in October 2011, against Teva in November 2011 and against Ranbaxy in April 2012 in the U.S. District Court for the District of New Jersey charging each with infringement of the 459 Patent and 460 Patent. On August 21, 2012, the United States Patent and Trademark Office issued to the Company U.S. Patent No. 8,246,989 (the 989 Patent), a formulation patent expiring in January 2026. The Company listed the 989 Patent in the FDAs Orange Book, each of Actavis, Teva and Ranbaxy amended its Paragraph IV certification notice letter to contend that the 989 Patent is invalid and/or not infringed, and the Company amended its complaints against Actavis, Teva and Ranbaxy to assert the 989 Patent. The lawsuits result in a stay of FDA approval of each defendants ANDA for 30 months from the date of the Companys receipt of such defendants original notice letter, subject to prior resolution of the matter before the court. The Company does not believe that the amendment of its complaints against Actavis, Teva and Ranbaxy to assert the 989 Patent will result in any additional 30-month stay. In addition, none of the ANDA filers certified against the 122 Patent, which covers all of the Companys ACTONEL and ATELVIA products and expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity). On October 2, 2013, Actavis divested its ANDA to Amneal Pharmaceuticals. No trial date has been set.
In September 2013, we received a Paragraph IV certification notice letter from Impax indicating that it had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ATELVIA. The notice letter contends that the 459 Patent, 460 Patent and 989 Patent are invalid, unenforceable and/or not infringed. We filed a lawsuit against Impax on October 23, 2013 (Warner Chilcott Co., LLC et al. v. Impax Labs., Inc., Case No. 13-cv-6403) in the U.S. District Court for the District of New Jersey charging Impax with infringement of the 459 Patent, 460 Patent and 989 Patent. No schedule or trial date has been set, and the Impax case has not been consolidated with the Teva, Amneal Pharmaceuticals and Ranbaxy case.
While the Company intends to vigorously defend the 459 Patent, the 460 Patent and the 989 Patent and pursue its legal rights, the Company can offer no assurance as to when the lawsuits will be decided, whether such lawsuits will be successful or that a generic equivalent of ATELVIA will not be approved and enter the market prior to the expiration of the 989 Patent in 2026 and/or the 459 Patent and the 460 Patent in 2028.
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Hormonal Contraceptive Patent and Other Litigation Matters
Generess® Fe
On November 22, 2011, WCCL sued Mylan and Famy Care in the United States District Court for the District of New Jersey, alleging that sales of norethindrone and ethinyl estradiol and ferrous fumarate tablets, a generic version of the Companys Generess® Fe tablets (which is exclusively licensed by Warner Chilcott), would infringe U.S. Patent No. 6,667,050 (the 050 Patent) (Warner Chilcott Company LLC v. Mylan Inc., et al., Case No. 11cv6844). The complaint seeks injunctive relief. On December 12, 2011 we sued Lupin in the United States District Court for the District of New Jersey, alleging that sales of Lupins generic version of Generess® Fe would infringe the 050 Patent. (Warner Chilcott Company LLC v. Lupin Ltd., et al., Case No. 11cv7228). The complaint seeks injunctive relief. Our lawsuits against Mylan and Lupin have been consolidated and remain pending. Pursuant to the provisions of the Hatch-Waxman Act, the FDA is precluded from granting final approval to the generic applicants until the earlier of thirty months after the generic applicant provided us with notice of its ANDA filing or the generic applicant prevails in the pending litigation. The trial is scheduled to begin on January 13, 2014. The Company believes it has meritorious claims to prevent the generic applicants from launching a generic version of Generess Fe. However, if a generic applicant prevails in the pending litigation or launches a generic version of Generess Fe before the pending litigation is finally resolved, it could have an adverse effect on the Companys business, results of operations, financial condition and cash flows.
Other LOESTRIN 24 FE Litigation
On April 5, 2013, two putative class actions were filed in the federal district court (New York Hotel Trades Council & Hotel Assoc. of New York City, Inc. Health Benefits Fund v. Warner Chilcott Pub. Ltd. Co., et al., D.N.J., Civ. No. 13-02178, and United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund v. Warner Chilcott (US), LLC, et al., E.D.Pa., No. 13-01807) against Warner Chilcott (US), LLC and certain affiliates, Actavis, Inc. and certain affiliates, and Lupin, Ltd. and certain affiliates, alleging that our 2009 patent lawsuit settlements with Watson Pharmaceuticals, which at the time was an unrelated company, and Lupin Pharmaceuticals related to Loestrin 24 Fe® (norethindrone acetate/ethinyl estradiol tablets and ferrous fumarate tablets, Loestrin 24®) are unlawful. The complaints, both asserted on behalf of putative classes of end-payors, generally allege that in exchange for substantial payments from the Company, Watson and Lupin improperly delayed launching generic versions of Loestrin 24® in violation of federal and state antitrust and consumer protection laws. The complaints each seek declaratory and injunctive relief and damages. On April 15, 2013, the plaintiff in New York Hotel Trades withdrew its complaint and, on April 16, 2013, refiled it in the federal court for the Eastern District of Pennsylvania (New York Hotel Trades Council & Hotel Assoc. of New York City, Inc. Health Benefits Fund v. Warner Chilcott Public Ltd. Co., et al., E.D.Pa., Civ. No. 13-02000). Additional complaints have been filed by different plaintiffs seeking to represent the same putative class of end-payors (A.F. of L. A.G.C. Building Trades Welfare Plan v. Warner Chilcott, et al., D.N.J. 13-02456, Fraternal Order of Police, Fort Lauderdale Lodge 31, Insurance Trust Fund v. Warner Chilcott Public Ltd. Co., et al., E.D.Pa. Civ. No. 13-02014). Electrical Workers 242 and 294 Health & Welfare Fund v. Warner Chilcott Public Ltd. Co., et al., E.D.Pa. Civ. No. 13-2862 and City of Providence v. Warner Chilcott Public Ltd. Co., et al., D.R.I. Civ. No. 13-307). In addition to the end-payor suits, two lawsuits have been filed on behalf of a class of direct payors (American Sales Company, LLC v. Warner Chilcott Public Ltd., Co. et al., D.R.I. Civ. No. 12-347 and Rochester Drug Co-Operative Inc., v. Warner Chilcott (US), LLC, et al., E.D.Pa. Civ. No. 13-133476). On June 18, 2013, defendants filed a motion with the Judicial Panel on Multidistrict Litigation (JPML) to consolidate these cases in one federal district court. The JPML issued an order on October 3, 2013 transferring all related Loestrin 24 cases to the federal court for the District of Rhode Island. A preliminary hearing was held on November 4, 2013. Following the preliminary hearing, on December 6, 2013, plaintiffs filed a consolidated complaint. Defendants motions to dismiss the complaint must be filed by February 7, 2014. The consolidated case is still in its early stages and discovery has not yet begun on either the class allegations or merits. The Company anticipates additional claims or lawsuits based on the same or similar allegations.
The Company intends to defend against these actions vigorously. However, it is impossible to predict with certainty the outcome of any litigation, and the Company can offer no assurance as to when the lawsuits will be decided, whether the Company will be successful in its defense and whether any additional similar suits will be filed. These actions, if successful, could adversely affect the Company and could have a material adverse effect on the Companys business, results of operations, financial condition and cash flows.
LO LOESTRIN FE
In July 2011 and April 2012, the Company received Paragraph IV certification notice letters from Lupin and Actavis indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Companys oral contraceptive, LO LOESTRIN FE. The notice letters contend that the 394 Patent and the Companys U.S. Patent No. 7,704,984 (the 984 Patent), which cover LO LOESTRIN FE and expire in 2014 and 2029, respectively, are invalid and/or not infringed. The Company filed a lawsuit against Lupin in September 2011 and against Actavis in May 2012 in the U.S. District Court for the District of New Jersey charging each with infringement of the 394 Patent and the 984 Patent. The Company granted Lupin and Actavis covenants not to sue on the 394 Patent with regard to their ANDAs seeking approval for a generic version of LO LOESTRIN FE, and the court dismissed all claims concerning the 394 Patent in the Lupin and the Actavis litigations in December 2012 and February 2013, respectively. The lawsuits result in a stay of FDA approval of each defendants ANDA for 30 months from the date of the Companys receipt of such defendants notice letter, subject to the prior resolution of the matter before the court. On October 2, 2013, Actavis divested its ANDA to Amneal Pharmaceuticals. On October 4, 2013, Amneal Pharmaceuticals was substituted for Actavis as a defendant. A joint trial began on October 7, 2013 and concluded on October 17, 2013. The Court has not issued its decision.
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While the Company intends to vigorously defend the 984 Patent and pursue its legal rights, it can offer no assurance as to when the lawsuits will be decided, whether such lawsuits will be successful or that a generic equivalent of LO LOESTRIN FE will not be approved and enter the market prior to the expiration of the 984 Patent in 2029.
Dermatology Patent and Other Litigation Matters
DORYX Patent Litigation
In March 2009, the Company and Mayne Pharma International Pty. Ltd. (Mayne) received Paragraph IV certification notice letters from Impax and Mylan indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of DORYX 150. The notice letters contended that Maynes 161 Patent expiring in 2022 was not infringed. In March and May 2009, the Company and Mayne, which licenses the 161 Patent to the Company, filed lawsuits against Impax and Mylan, respectively, in the U.S. District Court for the District of New Jersey, charging each with infringement of the 161 Patent. The resulting 30-month stay of FDA approval of each of Mylans and Impaxs ANDAs with respect to DORYX 150 expired in September 2011. In advance of that stays expiration, the Company and Mayne filed a motion in the District Court for a preliminary injunction (PI) to prevent an at-risk launch by Mylan of its generic version of DORYX 150. On September 22, 2011, the District Court entered a PI against Mylan and, in connection therewith, required the Company and Mayne to post a bond in the amount of $36 million (the Bond) in respect of damages, if any, that might result to Mylan should the PI later be determined to have been improvidently granted. The Company and Mayne posted the Bond and Mylan appealed the District Courts grant of the PI to the U.S. Court of Appeals for the Federal Circuit. The Federal Circuit vacated the PI on December 12, 2011 due to the District Courts failure to hold an evidentiary hearing, and suggested that the District Court consolidate such an evidentiary hearing with the trial and consider entry of a temporary restraining order (TRO) prohibiting Mylan from launching a generic version of DORYX 150 until the District Court rendered its decision on the merits.
In September 2011, the Company received FDA approval for a dual-scored DORYX 150 product, which today accounts for all but a de minimis amount of the Companys DORYX net sales, and filed a citizen petition requesting that the FDA refrain from granting final approval to any DORYX 150 ANDA unless the ANDA filers product also adopts a dual-scored configuration and has the same labeling as the Companys dual-scored DORYX 150 product. On February 8, 2012, the FDA denied the Companys citizen petition and granted final approval to Mylan for its generic version of DORYX 150. As of July 15, 2013, Impax has not yet received final approval of its ANDA from the FDA with respect to DORYX 150 and has forfeited its first filer status.
The actions against Mylan and Impax were consolidated and a trial was held in early February 2012, during which Mylan agreed to the entry of the TRO. In entering the TRO, the District Court denied Mylans request that the Company post another bond or the Bond amount be increased from $36 million. On April 30, 2012, the District Court issued its opinion upholding the validity of the 161 Patent, but determining that neither Mylans nor Impaxs proposed generic version of DORYX 150 infringed the 161 Patent. The Company appealed the non-infringement determinations, and Impax and Mylan appealed the District Courts denial of their attorneys fees. On September 7, 2012, the Federal Circuit affirmed the District Courts decision. The Company determined not to petition the panel for a rehearing and the Federal Circuits judgment issued on October 15, 2012.
As a consequence of the District Courts April 30th ruling, Mylan entered the market with its FDA approved generic equivalent of DORYX 150 in early May 2012. Under settlement agreements previously entered into with Heritage Pharmaceuticals Inc. (Heritage) and Sandoz Inc. (Sandoz) in connection with their respective ANDA challenges, each of Heritage and Sandoz can market and sell a generic equivalent of DORYX 150 upon receipt of final FDA approval for its generic product.
The loss of exclusivity for DORYX 150 resulted in a significant decline in the Companys DORYX 150 revenues in the year ended December 31, 2012. In addition, the Company recorded an impairment charge of $101 million in the quarter ended June 30, 2012 related to its DORYX intangible asset. On November 9, 2012, Mylan made an application to the District Court seeking to recover damages under the Bond, alleging it was damaged from the District Courts entry of injunctions prior to the District Courts decision on the merits. The Company recorded a charge in the quarter ended September 30, 2012 in accordance with ASC Topic 450 Contingencies in the amount of $6 million in connection with the Federal Circuits judgment and Mylans application for damages. In September 2013, the Company and Mayne entered into a settlement and release agreement with Mylan to resolve Mylans damages claim under the Bond. Pursuant to the agreement, among other things, (i) the Company agreed to pay $12 million to Mylan in full satisfaction of Mylans damages claim under the Bond and (ii) Mylans damages claim was dismissed and the Bond was released. On September 11, 2013, the District Court entered an order releasing the Bond and dismissing Mylans damages claim. In connection with the Companys entry into the agreement, the Company recorded an incremental charge in the quarter ended September 30, 2013 in the amount of $6 million in accordance with ASC Topic 450 Contingencies, in addition to the $6 million charge that the Company previously recorded in the quarter ended September 30, 2012. These charges represent the amount paid by the Company in connection with the settlement and release agreement.
Other DORYX Litigation
In July 2012, Mylan filed a complaint against the Company and Mayne in the U.S. District Court for the Eastern District of Pennsylvania alleging that the Company and Mayne prevented or delayed Mylans generic competition to the Companys DORYX products in violation of U.S. federal antitrust laws and tortiously interfered with Mylans prospective economic relationships under Pennsylvania state law. In the complaint, Mylan seeks unspecified treble and punitive damages and attorneys fees.
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Following the filing of Mylans complaint, three putative class actions were filed against the Company and Mayne by purported direct purchasers, and one putative class action was filed against the Company and Mayne by purported indirect purchasers, each in the same court. In each case the plaintiffs allege that they paid higher prices for the Companys DORYX products as a result of the Companys and Maynes alleged actions preventing or delaying generic competition in violation of U.S. federal antitrust laws and/or state laws. Plaintiffs seek unspecified injunctive relief, treble damages and/or attorneys fees. The court consolidated the purported class actions and the action filed by Mylan and ordered that all the pending cases proceed on the same schedule.
On February 5, 2013, four retailers including HEB Grocery, Safeway, Inc., Supervalu, Inc. and Walgreen Co., filed in the same court a civil antitrust complaint in their individual capacities against the Company and Mayne regarding DORYX. (Walgreen Co., Safeway, Inc., Supervalu, Inc. and HEB Grocery Co, LP. v. Warner Chilcott Public Limited Co., et al., E.D.Pa. No. 13-cv-00658). On March 28, 2013, another retailer, Rite Aid, filed a similar complaint in the same court. (Rite Aid Corp. v. Warner Chilcott Public Limited Co., et al., E.D.Pa. No. 13-cv-01644). Both retailer complaints recite similar facts and assert similar legal claims for relief to those asserted in the related cases described above. Both retailer complaints have been consolidated with the cases described above. On December 5, 2013, the International Union of Operating Engineers Local 132 Health and Welfare Fund, from Huntington West Virginia, filed a complaint on behalf of a purported class of indirect purchasers in the same district court. (International Union of Operating Engineers Local 132 Health and Welfare Fund v. Warner Chilcott Public Limited Company, et al., E.D.Pa. No. 13-cv-07096). This complaint contains similar allegations and legal claims as the other Doryx antitrust suits and includes claims under West Virgina state law. The plaintiffs have moved the court to consolidated this case with the others described above.
The Company and Mayne moved to dismiss the claims of Mylan, the direct purchasers, the indirect purchasers and the retailers. On November 21, 2012, the Federal Trade Commission filed with the court an amicus curiae brief supporting the plaintiffs theory of relief. On June 12, 2013, the court entered a denial, without prejudice, of the Company and Maynes motions to dismiss. Discovery is ongoing in the consolidated cases. The direct purchaser plaintiffs and indirect purchaser plaintiffs have filed motions for class certification in the case. On November 7, 2013, the Company, the direct purchaser plaintiffs, and the opt-out direct purchaser plaintiffs participated in a mediation. The mediation resulted in a November 13, 2013 agreement in principle to settle the claims asserted by the direct purchaser plaintiffs for a one-time payment of $15 million. The Company believes it has meritorious defenses to the remaining claims and intends to continue to vigorously defend its rights in the litigation. However, based on the terms of settlement negotiated in principle with the direct purchaser plaintiffs, the Company currently intends to engage in settlement discussions with the remaining plaintiffs in order to resolve the litigation in its entirety and has a reasonable expectation that it can negotiate settlements on similar terms. On November 20, 2013, the court denied without prejudice the indirect purchaser plaintiffs motion for class certification, and granted leave to file an amended motion for class certification by December 31, 2013. The indirect purchaser plaintiffs thereafter requested an extension of time to file their renewed motion for class certification until January 7, 2014. The direct purchaser plaintiffs motion for class certification remains pending before the court, with no class having yet been certified.
The Company intends to seek settlements with the plaintiffs to resolve the remaining claims. If the Company is unable to settle the pending claims on reasonable terms, it intends to vigorously defend its rights in the litigations. It is impossible to predict with certainty the outcome of any litigation and, if the matters are not resolved through settlement, the Company can offer no assurance as to when the lawsuits will be decided, whether the Company will be successful in its defense and whether any additional similar suits will be filed. The plaintiffs collectively seek approximately $1.2 billion in compensatory damages. The Company believes these amounts are unfounded and without merit. However, any award of compensatory damages could be subject to trebling. If these claims are successful such claims could adversely affect the Company and could have a material adverse effect on the Companys business, financial condition, results of operation and cash flows.
Bayer Patent Litigation
In August 2012, Bayer Pharma AG (together with its affiliates, Bayer) filed a complaint against the Company in the U.S. District Court for the District of Delaware alleging that the Companys manufacture, use, offer for sale, and/or sale of its LO LOESTRIN FE oral contraceptive product infringes Bayers U.S. Patent No. 5,980,940. In the complaint, Bayer seeks injunctive relief and unspecified monetary damages for the alleged infringement. In December 2012, Bayer amended the complaint to add a patent interference claim seeking to invalidate the Companys 984 Patent, which covers the LO LOESTRIN FE product. A jury trial has been set for July 13, 2015. On February 19, 2013, Bayer filed a complaint against the Company in the U.S. District Court for the District of Nevada alleging that the Companys LOESTRIN 24 FE oral contraceptive product infringes Bayers U.S. Patent No. RE43,916. Bayer voluntarily dismissed that complaint on October 17, 2013 and that litigation is therefore no longer pending.
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Although it is impossible to predict with certainty the outcome of any litigation, the Company believes that it has a number of strong defenses to the allegations in the complaint and intends to vigorously defend the litigation. This case is in the early stages of litigation, and an estimate of the potential loss, or range of loss, if any, to the Company relating to this proceeding is not possible at this time.
Medicaid Drug Reimbursement Litigation
Numerous pharmaceutical companies, including the Company, have been named as defendants in a qui tam action pending in the United States District Court for the District of Massachusetts (United States of America ex rel. Constance A. Conrad v. Abbott Laboratories, Inc. et. al., USDC Case No. 02- CV-11738-NG). The seventh amended complaint alleges that the defendants falsely reported to the United States that certain pharmaceutical products were eligible for Medicaid reimbursement and thereby allegedly caused false claims for payment to be made through the Medicaid program. In July 2011, the plaintiff served a tenth amended complaint that unseals the action in its entirety and continues to allege the previously asserted claims. All named defendants filed a Joint Motion to Dismiss the Tenth Amended Complaint on December 9, 2011. On February 25, 2013, the court granted the motion to dismiss as to all defendants. The plaintiff may appeal. On September 11, 2013, a new action was filed against the Company and numerous other pharmaceutical company defendants by the State of Louisiana based on the same core set of allegations as asserted in the Conrad qui tam action. Additional actions alleging similar claims could be asserted. The Company believes that it has meritorious defenses to the claims and intends to vigorously defend itself against such allegations. However, it is impossible to predict with certainty the outcome of any litigation, and the Company can offer no assurance as to when the lawsuits will be decided, whether the Company will be successful in its defense and whether any additional similar suits will be filed. These actions or similar actions, if successful, could adversely affect the Company and could have a material adverse effect on the Companys business, results of operations, financial condition and cash flows.
Governmental Investigation and False Claims Act Litigation
Beginning in February 2012, the Company, along with several current and former non-executive employees in its sales organization and certain third parties, received subpoenas from the United States Attorney for the District of Massachusetts. The subpoena received by the Company seeks information and documentation relating to a wide range of matters, including sales and marketing activities, payments to people who are in a position to recommend drugs, medical education, consultancies, prior authorization processes, clinical trials, off-label use and employee training (including with respect to laws and regulations concerning off-label information and physician remuneration), in each case relating to all of the Companys current key products. The Company is cooperating in responding to the subpoena but cannot predict or determine the impact of this inquiry on its future financial condition or results of operations.
The Company is aware of two qui tam complaints filed by former Company sales representatives and unsealed in February and March 2013. The unsealed qui tam complaints allege that the Company violated Federal and state false claims acts and other state laws through the promotion of all of the Companys current key products by, among other things, making improper claims concerning the products, providing kickbacks to physicians and engaging in improper conduct concerning prior authorizations. The complaints seek, among other things, treble damages, civil penalties of up to eleven thousand dollars for each alleged false claim and attorneys fees and costs. Other similar complaints may exist under seal. The United States of America has elected not to intervene at this time in each of the unsealed qui tam actions, stating at the times of the relevant seal expirations that its investigation of the allegations raised in the relevant complaint was continuing and, as such, it was not able to decide at such time whether to intervene in the action. The United States of America may later seek to intervene, and its election does not prevent the plaintiffs/relators from litigating the actions. The Company intends to vigorously defend itself in the litigations. However, these cases are in the early stages of litigation, it is impossible to predict with certainty the outcome of any litigation, and the Company can offer no assurance as to when the lawsuits will be decided, whether the Company will be successful in its defense and whether any additional similar suits will be filed. If these claims are successful, such claims could adversely affect the Company and could have a material adverse effect on the Companys business, financial condition, results of operation and cash flows.
16. Income Taxes
The Company operates in many tax jurisdictions including: Ireland, the United States, the United Kingdom, Puerto Rico, Germany, Switzerland, Canada and other Western European countries. The Companys effective tax rate for the quarter and nine months ended September 30, 2013 was 19% and 19%, respectively. The Companys effective tax rate for the quarter and nine months ended September 30, 2012 was 14% and 25%, respectively. The effective income tax rate for interim reporting periods reflects the changes in income mix among the various tax jurisdictions in which the Company operates, the impact of discrete items, as well as the overall level of consolidated income before income taxes. The Companys effective tax rate is impacted by a significant portion of the Companys pretax income being generated in Puerto Rico, which is taxed at 2%. As a result, the estimated annual effective tax rates applied to income before discrete items for the periods are significantly below 35%. For the quarter and nine months ended September 30, 2013 the effective tax rate was favorably impacted by a foreign tax credit relating to the Puerto Rican excise tax. No other discrete items had a significant impact on the effective tax rate. For the nine months ended September 30, 2012, the discrete items, all of which negatively impacted the Companys effective tax rate, included reserves related to the restructuring of certain of the Companys Western European operations as well as the impairment charge relating to the DORYX intangible asset. The Companys estimated annual effective tax rate for all periods includes the impact of changes in income tax liabilities related to reserves recorded under ASC Topic 740 Accounting for Income Taxes.
26
17. Segment Information
Effective October 1, 2012, the Company considers its business to be a single segment entity constituting the development, manufacture and sale on a global basis of pharmaceutical products. The Companys chief operating decision maker (the CEO) evaluates the various global products on a net sales basis. Executives reporting to the CEO include those responsible for operations and supply chain management, R&D, sales and certain corporate functions. The CEO evaluates profitability, investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources. In addition, the CEO reviews U.S. revenue specifically as it constitutes the substantial majority of the Companys overall revenue. Prior to October 1, 2012, the Companys business was organized as two segments: North America and the Rest of World, consistent with how the Companys business was run at that time.
The following table presents total revenues by product for the quarters and nine months ended September 30, 2013 and 2012:
(dollars in millions) | Quarter Ended September 30, 2013 |
Quarter Ended September 30, 2012 |
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
||||||||||||
Revenue breakdown by product: |
||||||||||||||||
ASACOL |
$ | 123 | $ | 191 | $ | 416 | $ | 589 | ||||||||
ACTONEL(1) |
91 | 119 | 298 | 415 | ||||||||||||
LO LOESTRIN FE |
67 | 33 | 178 | 95 | ||||||||||||
MINASTRIN 24 FE |
62 | | 62 | | ||||||||||||
DORYX |
61 | 20 | 102 | 73 | ||||||||||||
ESTRACE Cream |
56 | 45 | 162 | 143 | ||||||||||||
DELZICOL |
42 | | 114 | | ||||||||||||
ENABLEX |
29 | 45 | 101 | 130 | ||||||||||||
ATELVIA |
17 | 19 | 54 | 51 | ||||||||||||
LOESTRIN 24 FE |
12 | 95 | 196 | 300 | ||||||||||||
Other Womens Healthcare |
12 | 12 | 36 | 41 | ||||||||||||
Other Hormone Therapy |
9 | 11 | 32 | 32 | ||||||||||||
Other Oral Contraceptives |
2 | 3 | 14 | 13 | ||||||||||||
Other products |
9 | 8 | 20 | 32 | ||||||||||||
Contract manufacturing product sales |
7 | 2 | 15 | 8 | ||||||||||||
Other revenue |
2 | 3 | 7 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 601 | $ | 606 | $ | 1,807 | $ | 1,929 | ||||||||
|
|
|
|
|
|
|
|
(1) | Other revenue related to ACTONEL is combined with product net sales for purposes of presenting revenue by product. |
The following table presents total revenue by significant country of domicile for the quarters and nine months ended September 30, 2013 and 2012:
(dollars in millions) | Quarter Ended September 30, 2013 |
Quarter Ended September 30, 2012 |
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
||||||||||||
US |
$ | 517 | $ | 517 | $ | 1,566 | $ | 1,609 | ||||||||
Canada |
18 | 19 | 50 | 66 | ||||||||||||
U.K. / Ireland |
15 | 14 | 41 | 40 | ||||||||||||
France |
10 | 14 | 32 | 71 | ||||||||||||
Spain |
5 | 6 | 17 | 24 | ||||||||||||
Puerto Rico |
8 | 6 | 20 | 18 | ||||||||||||
Other |
15 | 15 | 39 | 51 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net sales |
588 | 591 | 1,765 | 1,879 | ||||||||||||
Other revenue (1) |
13 | 15 | 42 | 50 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 601 | $ | 606 | $ | 1,807 | $ | 1,929 | ||||||||
|
|
|
|
|
|
|
|
(1) | Includes royalty revenue and contractual payments from the Companys co-promotion partners. |
27
18. Reliance on Significant Suppliers
In the event that a significant supplier (including a third-party manufacturer, packager or supplier of certain active pharmaceutical ingredients, or API) suffers an event that causes it to be unable to manufacture or package the Companys product or meet the Companys API requirements for a sustained period and the Company is unable to obtain the product or API from an alternative supplier, the resulting shortages of inventory could have a material adverse effect on the Companys business. The following table presents, by category of supplier, the percentage of the Companys total revenues generated from products provided by each individual third-party supplier accounting for 10% or more of the Companys total revenues.
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
API Supply: |
||||||||||||||||
Cambrex Corporation |
24 | % | 27 | % | 25 | % | 26 | % | ||||||||
Lonza Inc. |
18 | % | 23 | % | 19 | % | 24 | % | ||||||||
Bayer |
15 | % | 18 | % | 17 | % | 18 | % | ||||||||
Manufacturing: |
||||||||||||||||
Norwich Pharmaceuticals Inc. (NPI) |
18 | % | 23 | % | 19 | % | 24 | % | ||||||||
Packaging: |
||||||||||||||||
NPI |
25 | % | 29 | % | 27 | % | 29 | % | ||||||||
AmerisourceBergen Corporation |
12 | % | 15 | % | 13 | % | 15 | % |
28
19. Retirement Plans
The Company has defined benefit retirement pension plans covering certain employees in Western Europe. Retirement benefits are generally based on an employees years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances.
The net periodic benefit (income) of the Companys non-U.S. defined benefit plans amounted to $0 and $(1) million for the quarters ended September 30, 2013 and 2012, respectively. Included in the net periodic benefit (income) for the quarters ended September 30, 2013 and 2012 are curtailment gains of $0 and $(1) million, respectively, in connection with the Western European restructuring described in Note 4. The net periodic benefit (income) of the Companys non-U.S. defined benefit plans amounted to $0 and $(8) million for the nine months ended September 30, 2013 and 2012, respectively. Included in the net periodic benefit (income) for the nine months ended September 30, 2013 and 2012 are curtailment gains of $(1) million and $(9) million, respectively, in connection with the Western European restructuring.
29
Exhibit 99.5
APTALIS HOLDINGS INC.
Condensed Consolidated financial statements as of and for the three months ended December 31, 2013 and 2012 (unaudited) |
||||||
Condensed Consolidated Balance Sheets |
2 | |||||
Condensed Consolidated Statements of Operations |
3 | |||||
Condensed Consolidated Statements of Comprehensive Income |
4 | |||||
Condensed Consolidated Statements of Shareholders Equity (Deficit) |
5 | |||||
Condensed Consolidated Statements of Cash Flows |
6 | |||||
Notes to Consolidated Financial Statements |
7 |
1
APTALIS HOLDINGS INC.
Condensed Consolidated Balance Sheets
(in thousands of U.S. dollars, except share related data)
December 31, 2013 |
September 30, 2013 |
|||||||
$ (unaudited) |
$ | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
104,216 | 229,903 | ||||||
Accounts receivable, net |
104,102 | 86,234 | ||||||
Income taxes receivable (Note 6) |
3,449 | 5,963 | ||||||
Inventories, net (Note 5) |
61,486 | 61,059 | ||||||
Prepaid expenses and other current assets |
13,696 | 9,832 | ||||||
Deferred income taxes, net (Note 6) |
8,888 | 8,176 | ||||||
|
|
|
|
|||||
Total current assets |
295,837 | 401,167 | ||||||
Property, plant and equipment, net (Note 7) |
94,333 | 95,470 | ||||||
Intangible assets, net (Note 8) |
574,439 | 589,173 | ||||||
Goodwill (Note 8) |
180,682 | 180,058 | ||||||
Deferred debt issue expenses, net of accumulated amortization of $15,077 ($18,959 as of September 30, 2013) |
23,938 | 22,454 | ||||||
Other long term assets |
624 | | ||||||
Deferred income taxes, net (Note 6) |
259 | 52,895 | ||||||
|
|
|
|
|||||
Total assets |
1,170,112 | 1,341,217 | ||||||
|
|
|
|
|||||
Liabilities |
||||||||
Current liabilities |
||||||||
Accounts payable and accrued liabilities (Note 9) |
159,091 | 188,896 | ||||||
Income taxes payable (Note 6) |
6,469 | 10,354 | ||||||
Current portion of long-term debt (Note 10) |
12,500 | 9,500 | ||||||
Deferred income taxes, net (Note 6) |
259 | 52,895 | ||||||
|
|
|
|
|||||
Total current liabilities |
178,319 | 261,645 | ||||||
Long-term debt (Note 10) |
1,218,310 | 911,844 | ||||||
Other long-term liabilities |
40,505 | 56,086 | ||||||
Deferred income taxes (Note 6) |
64,833 | 64,997 | ||||||
|
|
|
|
|||||
Total liabilities |
1,501,967 | 1,294,572 | ||||||
Shareholders Equity (Deficit) |
||||||||
Capital stock (Note 11) |
||||||||
Common shares, par value $0.001; 100,000,000 shares authorized: 67,804,421 issued and outstanding as of December 31, 2013, 67,696,126 as at September 30, 2013 |
67 | 67 | ||||||
Accumulated deficit |
(593,887 | ) | (596,724 | ) | ||||
Additional paid-in capital |
307,571 | 691,378 | ||||||
Accumulated other comprehensive loss (Note 12) |
(45,606 | ) | (48,076 | ) | ||||
|
|
|
|
|||||
Total shareholders equity (deficit) |
(331,855 | ) | 46,645 | |||||
|
|
|
|
|||||
Total liabilities and shareholders equity (deficit) |
1,170,112 | 1,341,217 | ||||||
|
|
|
|
The accompanying notes are an integral part of the condensed interim consolidated financial statements. These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements.
2
APTALIS HOLDINGS INC.
Consolidated Statements of Operations
(in thousands of U.S. dollars, except share related data)
(unaudited)
Three Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Net product sales |
188,007 | 167,018 | ||||||
Other revenue |
3,503 | 7,319 | ||||||
|
|
|
|
|||||
Total revenue |
191,510 | 174,337 | ||||||
|
|
|
|
|||||
Cost of goods sold (a) |
39,857 | 32,279 | ||||||
Selling and administrative expenses (a) |
56,629 | 42,745 | ||||||
Management fees (Note 17) |
1,925 | 1,729 | ||||||
Research and development expenses (a) |
28,840 | 17,509 | ||||||
Depreciation and amortization (Note 12) |
20,000 | 25,258 | ||||||
Fair value adjustments to intangible assets and contingent consideration |
694 | 2,910 | ||||||
Gain on disposal of product line (Note 4) |
(2,000 | ) | (1,000 | ) | ||||
Transaction, restructuring and integration costs |
48 | 586 | ||||||
|
|
|
|
|||||
Total operating expenses |
145,993 | 122,016 | ||||||
|
|
|
|
|||||
Operating income |
45,517 | 52,321 | ||||||
|
|
|
|
|||||
Financial expenses (Note 12) |
23,774 | 17,888 | ||||||
Loss on extinguishment of debt (Note 10) |
5,309 | | ||||||
Interest and other income |
(47 | ) | (60 | ) | ||||
Loss (gain) on foreign currencies |
119 | (392 | ) | |||||
|
|
|
|
|||||
Total other expenses |
29,155 | 17,436 | ||||||
|
|
|
|
|||||
Income before income taxes |
16,362 | 34,885 | ||||||
Income tax expense (Note 6) |
13,455 | 8,234 | ||||||
|
|
|
|
|||||
Net income |
2,907 | 26,651 | ||||||
|
|
|
|
(a) | Excluding depreciation and amortization |
The accompanying notes are an integral part of the condensed interim consolidated financial statements. These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements.
3
APTALIS HOLDINGS INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands of U.S. dollars)
(unaudited)
Three Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Net income |
2,907 | 26,651 | ||||||
Other comprehensive income (loss), net of tax: |
||||||||
Foreign currency translation adjustments, net of taxes of $(531) ($0 in 2012) |
2,576 | 3,231 | ||||||
Fair value adjustments of hedging contracts: |
||||||||
Unrealized loss arising during period, net of taxes of $288 ($150 in 2012) |
(486 | ) | (254 | ) | ||||
Reclassification to earnings for realized losses, net of taxes of ($816) ($568 in 2012) (Note 15) |
(380 | ) | (942 | ) | ||||
|
|
|
|
|||||
Net change |
(106 | ) | 688 | |||||
Other comprehensive income |
2,470 | 3,919 | ||||||
|
|
|
|
|||||
Comprehensive income |
5,377 | 30,570 | ||||||
|
|
|
|
The accompanying notes are an integral part of the condensed interim consolidated financial statements. These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements.
4
APTALIS HOLDINGS INC.
Condensed Consolidated Statements of Shareholders Equity (Deficit)
(in thousands of U.S. dollars, except share related data)
(unaudited)
Common Shares |
Accumulated Deficit |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders Equity (Deficit) |
||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
(number) | $ | $ | $ | $ | $ | |||||||||||||||||||
Balance, October 1, 2012 |
67,789,341 | 67 | (683,033 | ) | 682,246 | (58,504 | ) | (59,224 | ) | |||||||||||||||
Net income |
| | 26,651 | | | 26,651 | ||||||||||||||||||
Other comprehensive income |
| | | | 3,919 | 3,919 | ||||||||||||||||||
Shares issued for cash |
1,800 | | | | | | ||||||||||||||||||
Buy-back of shares |
(60,846 | ) | | | | | | |||||||||||||||||
Stock-based compensation expense |
| | | 653 | | 653 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, December 31, 2012 |
67,730,295 | 67 | (656,382 | ) | 682,899 | (54,585 | ) | (28,001 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, October 1, 2013 |
67,696,126 | 67 | (596,724 | ) | 691,378 | (48,076 | ) | 46,645 | ||||||||||||||||
Net income |
| | 2,907 | | | 2,907 | ||||||||||||||||||
Other comprehensive income |
| | | | 2,470 | 2,470 | ||||||||||||||||||
Buy-back of shares |
(127,547 | ) | | (70 | ) | (107 | ) | | (177 | ) | ||||||||||||||
Stock-based compensation expense |
| | | 806 | | 806 | ||||||||||||||||||
Stock-based compensation on exercised options |
235,842 | | | 2 | | 2 | ||||||||||||||||||
Dividends paid |
| | | (384,508 | ) | | (384,508 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, December 31, 2013 |
67,804,421 | 67 | (593,887 | ) | 307,571 | (45,606 | ) | (331,855 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed interim consolidated financial statements. These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements.
5
APTALIS HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
(unaudited)
Three Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Cash flows from operating activities |
||||||||
Net income |
2,907 | 26,651 | ||||||
Adjustments to reconcile net income to cash flows from operating activities: |
||||||||
Accretion expenses on amounts payable for the Mpex transaction |
270 | 527 | ||||||
Loss on extinguishment of debt |
5,264 | | ||||||
Other non-cash financial expenses |
1,498 | 1,924 | ||||||
Depreciation and amortization |
20,000 | 25,258 | ||||||
Stock-based compensation expense |
806 | 1,379 | ||||||
Gain on disposal of product line and write-down of assets |
| (992 | ) | |||||
Fair value adjustments to intangible assets and contingent consideration |
694 | 2,910 | ||||||
Non-cash gain on foreign exchange |
(94 | ) | (16 | ) | ||||
Change in fair value of derivatives |
(203 | ) | (72 | ) | ||||
Deferred income taxes |
(2,185 | ) | (2,858 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(17,596 | ) | (427 | ) | ||||
Income taxes receivable |
2,547 | 419 | ||||||
Inventories |
88 | (8,144 | ) | |||||
Prepaid expenses and other current assets |
(1,969 | ) | 3,731 | |||||
Accounts payable and accrued liabilities |
(27,570 | ) | (19,798 | ) | ||||
Other long-term liabilities |
(15,183 | ) | (15,037 | ) | ||||
Income taxes payable |
(3,891 | ) | (11,400 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
(34,617 | ) | 4,055 | |||||
|
|
|
|
|||||
Cash flows from investing activities |
||||||||
Business acquisition, net of cash acquired |
| (20,000 | ) | |||||
Acquisition of property, plant and equipment |
(4,912 | ) | (3,285 | ) | ||||
Disposal of property, plant and equipment |
| 4 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(4,912 | ) | (23,281 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of long-term debt (Note 12) |
1,237,500 | | ||||||
Repayment of long-term debt |
(929,500 | ) | (2,699 | ) | ||||
Deferred offering costs |
(1,868 | ) | | |||||
Deferred debt issue expenses |
(6,778 | ) | | |||||
Payments of contingent consideration related to Rectiv |
(958 | ) | (487 | ) | ||||
Dividends paid (Note 13) |
(384,508 | ) | | |||||
Proceeds from exercise of options |
2 | | ||||||
Buy-Back of shares |
(177 | ) | | |||||
|
|
|
|
|||||
Net cash used in financing activities |
(86,287 | ) | (3,186 | ) | ||||
|
|
|
|
|||||
Foreign exchange gain on cash held in foreign currencies |
129 | 287 | ||||||
|
|
|
|
|||||
Net decrease in cash and cash equivalents |
(125,687 | ) | (22,125 | ) | ||||
Cash and cash equivalents, beginning of year |
229,903 | 115,010 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of year |
104,216 | 92,885 | ||||||
|
|
|
|
The accompanying notes are an integral part of the condensed interim consolidated financial statements. These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements.
6
APTALIS HOLDINGS INC.
Notes to Condensed Interim Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
1. | Governing Statutes, Description of Business and Basis of Presentation |
Aptalis Holdings Inc. (formerly Axcan Holdings Inc.) is a corporation incorporated on January 10, 2008, under the General Corporation Law of the State of Delaware. The corporation and its subsidiaries (together the Company) commenced active operations with the purchase, through a wholly owned subsidiary, on February 25, 2008 of all of the outstanding common shares of Axcan Pharma Inc., a company incorporated under the Canada Business Corporations Act. The Company provides innovative, effective therapies for unmet medical needs including cystic fibrosis and gastrointestinal disorders. The Company has manufacturing and commercial operations in the United States, the European Union and Canada. The Company also formulates and clinically develops enhanced pharmaceutical and biopharmaceutical products for itself and others using its proprietary technology platforms including bioavailability enhancement of poorly soluble drugs, custom release profiles, and taste-masking/orally disintegration tablet (ODT) formulations.
On October 4, 2013, the Company and certain other wholly-owned subsidiaries completed a refinancing consisting of the (i) repayment of all outstanding indebtedness under preexisting senior secured credit facilities, (ii) termination of preexisting senior secured credit facilities and (iii) execution of a new senior secured credit facility that provides for senior secured term loans in the amount of $1,250,000,000 and a senior secured revolving credit facility that allows borrowings of up to $150,000,000 (collectively, the Refinancing). Following the Refinancing, we distributed approximately $399,500,000 to our shareholders, holders of our restricted stock units and certain holders of options (the Distribution). We also reduced the per share exercise prices of certain outstanding stock options, as allowable under the relevant option plan, to reflect the effects of the Distribution. The Refinancing and the Distribution are collectively referred to as the Recapitalization. Refer to Notes 10, 11 and 17 for additional information.
The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency, and prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The interim financial statements and related notes should be read in conjunction with the Companys audited consolidated financial statements for the fiscal year ended September 30, 2013. We have evaluated subsequent events as of January 30, 2014. The unaudited interim condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. When necessary, the financial statements include amounts based on informed estimates and best judgment of management. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. In Managements opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair statement of the results of operations for the periods shown. Certain prior period amounts have been reclassified to conform to the current period presentation, most notably, the Company has reclassified its presentation of fair value adjustments related to contingent consideration payable relating to business combinations from financial expenses to operating expenses within its consolidated statement of operations. These reclassifications did not change net income, total or net assets or cash and were not material. All intercompany transactions and balances have been eliminated in consolidation.
2. | Recently Issued Accounting Standards |
In July 2013, the Financial Accounting Standards Board (FASB) issued a clarification regarding the presentation of an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss or a tax credit carryforward. Under this new standard, the liability related to an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset if available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, the unrecognized tax benefit should be presented in the financial statements as a separate liability. The assessment is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. We are still determining the impact of this standard on the presentation of both our deferred tax assets and income taxes payable.
7
In July 2013, the FASB issued guidance that permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury rate and London Interbank Offered Rate (LIBOR). In addition, the restriction on using different benchmark rates for similar hedges is removed. The provisions of this guidance are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance is not expected to have a material impact on the Companys consolidated financial statements.
In March 2013, the FASB issued guidance on foreign currency matters on parents accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This amendment clarifies the timing of release of currency translation adjustments from accumulated other comprehensive income upon deconsolidation or derecognition of a foreign entity, subsidiary or a group of assets within a foreign entity and in step acquisitions. This guidance is effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Companys consolidated financial statements.
In February 2013, the FASB issued guidance on the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance also requires an entity to disclose the nature and amount of those obligations. These amendments are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is required. The adoption of this guidance is not expected to have a material impact on the Companys consolidated financial statements.
In February 2013, the FASB issued guidance on presentation of comprehensive income and requires an entity to present, either on the face of the financial statement or in the notes, the effects of significant amounts reclassified out of accumulated other comprehensive income on the respective line items of net income and to cross-reference to other required disclosures, where applicable. These disclosure requirements are effective for reporting periods beginning after December 15, 2012, with early adoption permitted. The adoption of this guidance requires enhanced disclosures and did not have a material impact on the Companys consolidated financial statements.
In January 2013, the FASB issued guidance that limits the scope of existing disclosure requirements about offsetting assets and liabilities to derivatives, repurchase agreements, and securities borrowings and securities lending transactions that are either offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. These amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The adoption of this guidance requires enhanced disclosures and did not have a material impact on the Companys consolidated financial statements.
8
3. | Acquisitions, Research Collaborations and License Agreements |
Agreements with Mpex Pharmaceuticals Inc. for acquisition and development of APT-1026
On April 11, 2011, the Company and its affiliate, Axcan Lone Star Inc, entered into a series of agreements with Mpex Pharmaceuticals Inc. (Mpex) for the acquisition and development of APT-1026 (the Mpex Transaction), a proprietary aerosol formulation of levofloxacin, which recently completed Phase 3 clinical trials for the treatment of pulmonary infections in patients with cystic fibrosis (CF). Subsequently on August 31, 2011, under the terms of these agreements, the Company and Merger Sub acquired all of Mpexs assets related to APT-1026 in a merger of Mpex with and into Merger Sub, with Mpex being the surviving corporation and a direct, wholly owned unrestricted subsidiary of the Company. Prior to the merger, Mpex transferred all of its assets not related to APT-1026 to Rempex Pharmaceuticals Inc. (Rempex), a newly formed company that is owned primarily by the previous Mpex stockholders. Total consideration in relation to the Mpex Transaction consists of (i) time-based, non-contingent payments amounting to $62,500,000 to be paid in a number of installments, of which $52,500,000 has been paid to date, plus (ii) contingent payments of up to $195,000,000 upon the achievement of certain regulatory and commercial milestones, such as, acceptance for substantive review of an NDA or foreign equivalent, EU approval or U.S. approval and certain net sales milestones and (iii) earn-out payments based on net sales of APT-1026. Indemnity obligations of the Mpex security holders will be satisfied by set-off against a portion of the foregoing merger consideration payments. The final installments on the time-based non-contingent payments of $25,000,000 are due in the fiscal year ending September 30, 2014. On November 1, 2013, we paid $15,000,000 of these remaining installments. Also, in November 2013, we filed a Marketing Authorization Application (MAA) with the EMA. The MAA was accepted for substantive review and as a result, the Company paid a development milestone of $10,000,000 in December 2013 and expensed as research and development. The Mpex transaction was accounted for as an asset acquisition as Mpex did not entail the necessary processes or outputs to qualify as a business as defined in GAAP. The Company reached the conclusion that Mpex was an asset acquisition because it obtained the rights to access inputs through its co-development of pre-clinical intellectual property and did not employ Rempexs scientists. The Company did not acquire processes that are capable of producing outputs given the intellectual property was early-stage. Given that the intellectual property acquired was still in development, it requires significant development effort by the Company and the scientists retained by the seller in order to produce outputs. Additionally, any substantive decisions related to APT-1026 required the approval of the development steering committee, which had equal representation from the Company and Rempex.
The further development of APT-1026 was conducted pursuant to the terms of the Development Agreement dated April 11, 2011, which was subsequently amended on October 25, 2013 among the Company, Merger Sub and Mpex. Since the completion of the divestiture of assets and liabilities unrelated to APT-1026 (the Divestiture) to Rempex, Rempex has assumed all of Mpexs obligations under the Development Agreement. Under the Development Agreement, Mpex (and after the Divestiture, Rempex) has been paid for the actual development costs of APT-1026 and has had primary responsibility for conducting day-to-day development activities. Prior to the amendment of the Development Agreement, the Company was required to pay certain development costs estimated for the next three months in advance based on a rolling three-month forecast. The Company and Merger Sub have input regarding development strategy. Pursuant to the Development Agreement, on April 12, 2011, Mpex was paid $8,731,000 for development expenses it incurred from November 15, 2010 to March 31, 2011, which has been expensed as acquired in-process research, and an additional $9,913,000 for estimated development costs to be incurred during the first three months of the Development Agreement, of which $8,514,000 has been expensed as research and development. All payments under the Development Agreement, Option Agreement and Merger Agreement to Mpex or Mpex security holders, as applicable, will be made by or on behalf of Merger Sub (or after the consummation of the Merger, the Surviving Company). During the year ended September 30, 2011, the Company expensed $65,540,000 as acquired in-process research and development reflecting the initial non-contingent payment of $12,000,000, the discounted value of future time-based non-contingent payments payable under the Option and Merger agreements of $44,809,000 (with a corresponding liability) and the payment for certain pre-agreement incurred development expenses of $8,731,000.
During the three months ended December 31, 2013, the Company expensed $13,099,000 in research and development related to the development of APT-1026 and includes the contingent milestone of $10,000,000 due on acceptance of the MAA for substantive review ($2,998,000 during the three months ended December 31, 2012).As of December 31, 2013, $9,810,000 representing the amount accrued for the non-contingent payments payable under the Option and Merger agreements, is included in accounts payable and accrued liabilities. During three months ended December 31, 2013, the Company made milestone payments of $15,000,000 under this agreement.
9
On July 18, 2012, the Company received preliminary data on the placebo-controlled phase III clinical trial for U.S. approval for APT-1026. The Companys initial analysis of this data showed that the clinical trial did not meet its primary endpoint, time to exacerbation, while it demonstrated efficacy in key secondary endpoints. The Company recently completed its second active controlled phase III clinical trials for EU approval where APT-1026 was compared to tobramycin. In this trial, the primary endpoint, non inferiority versus tobramycin in lung function, was met and efficacy in key secondary endpoints was also demonstrated. The Company has determined to take the next steps toward a regulatory filing for APT-1026 in the EU. On Friday, November 29, 2013, Aptalis filed the Marketing Authorization Application (MAA) in Europe, via the Centralized procedure, for APT-1026 (APT-1026, levofloxacin 240 mg Nebulizer Solution), a new formulation of levofloxacin for inhalation for the long-term management of chronic Pseudomonas aeruginosa infection in cystic fibrosis. The MAA was accepted for substantive review on December 23, 2013.
Equity investment in the Company
Simultaneous with the execution of the Mpex agreements, the Company received the proceeds of a $55,000,000 equity investment from funds managed by Investor Growth Capital Limited. Aptalis Holdings contributed the proceeds of the equity investment to its subsidiaries to fund a portion of the cost of the Mpex transactions.
4. | Disposal of the PHOTOFRIN/PHOTOBARR Product line |
On March 28, 2011, the Company entered into a definitive agreement with Pinnacle Biologics, Inc., which acquired all global assets and rights related to PHOTOFRIN/PHOTOBARR, including inventory, for non-contingent payments amounting to $4,252,000. In addition to the non-contingent payments, additional payments shall be made to the Company after the achievement of certain milestones events. The Company will also be paid royalties on annual net sales of PHOTOFRIN/PHOTOBARR.
During the year ended September 30, 2011, the Company recorded a loss of $7,365,000 as a result of the disposal of the PHOTOFRIN/PHOTOBARR product line. Consideration for additional contingent payments to be made to the Company shall be recorded as a gain in the period in which they are received. The Company received milestone payments of $2,000,000 during the three months ended December 31, 2013 and recorded a gain ($1,000,000 during the three months ended December 31, 2012).
5. | Inventories |
December 31, 2013 |
September 30, 2013 |
|||||||
$ | $ | |||||||
Raw materials and packaging materials, net of reserve for obsolescence of $953 ($555 as at September 30, 2013) |
23,283 | 22,543 | ||||||
Work in progress, net of reserve for obsolescence of $663 ($449 as at September 30, 2013) |
10,201 | 9,479 | ||||||
Finished goods, net of reserve for obsolescence of $1,024 ($981 as at September 30, 2013) |
28,002 | 29,037 | ||||||
|
|
|
|
|||||
61,486 | 61,059 | |||||||
|
|
|
|
10
6. | Income Taxes |
The Company establishes a valuation allowance against deferred income tax assets in accordance with U.S. GAAP. At December 31, 2013, the Company had a valuation allowance of $214,080,000. The jurisdictions in which the Company recorded valuation allowances are the United States for $190,379,000, France for $21,981,000, Canada for $1,016,000 and Italy for $704,000. In future periods, if the deferred income tax assets are determined by management to be more likely than not to be realized, the recognized tax benefits relating to the reversal of the valuation allowance will be recorded in the consolidated statement of operations.
The Companys effective tax rate for the three months ended December 31, 2013 was 82.23% compared to 23.60% in the prior years period. This difference arises from the following:
Three months ended | ||||||||||||||||
December 31, 2013 | December 31, 2012 | |||||||||||||||
Combined statutory rate applied to pre-tax income |
35.00 | % | 5,727 | 35.00 | % | 12,210 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Difference with foreign tax rates |
(21.54 | %) | (3,524 | ) | (16.26 | %) | (5,673 | ) | ||||||||
Unrecognized Outside basis difference for foreign subsidiaries |
(48.07 | %) | (7,865 | ) | | | ||||||||||
Foreign Tax Credits |
(64.98 | %) | (10,633 | ) | | | ||||||||||
Tax benefit arising from a financing structure |
(13.49 | %) | (2,208 | ) | (11.91 | %) | (4,156 | ) | ||||||||
Non-deductible items |
27.21 | % | 4,452 | 1.23 | % | 430 | ||||||||||
Research and developmental tax credits |
(5.76 | %) | (943 | ) | (4.47 | %) | (1,560 | ) | ||||||||
State and local taxes |
2.00 | % | 327 | 0.35 | % | 121 | ||||||||||
Change in Valuation Allowance |
172.72 | % | 28,262 | 15.94 | % | 5,561 | ||||||||||
Others |
(0.86 | %) | (140 | ) | 3.72 | % | 1,301 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
82.23 | % | 13,455 | 23.60 | % | 8,234 | |||||||||||
|
|
|
|
|
|
|
|
As of September 30, 2013, the Company had approximately $287,000,000 of unremitted earnings in respect to its international subsidiaries. A deferred income tax liability amounting to $ 101,000,000 on the outside basis of a subsidiary had been recorded in the fourth quarter of fiscal year 2013. During the first quarter of fiscal year 2014, distributions were made to the shareholders and cash was repatriated from certain of the Companys foreign subsidiaries. The repatriation of earnings resulted in recognition of income of $ 250,000,000 for U.S. tax purposes; tax impact of which was offset by utilization of net operating losses and tax credits in the U.S. The excess amount of deferred income tax liability recorded at September 30, 2013 amounted to $ 13,500,000 which has been reversed during the first quarter of fiscal year 2014.
As at December 31, 2013, with respect to uncertain tax positions, the Company had unrecognized tax benefits of $5,987,400 ($5,939,000 as at September 30, 2013).
The following table presents a summary of the changes to unrecognized tax benefits:
Three Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Balance, beginning of period |
5,939 | 5,885 | ||||||
Additions based on tax positions related to the current year |
| | ||||||
Additions for tax positions of prior years |
48 | 72 | ||||||
Settlements |
| | ||||||
Reductions for tax positions of prior years |
| | ||||||
|
|
|
|
|||||
Balance, end of period |
5,987 | 5,957 | ||||||
|
|
|
|
11
The Company has historically recognized interest relating to income tax matters as a component of financial expenses and penalties related to income tax matters as a component of income tax expense. As of December 31, 2013, the Company had accrued $1,490,000 ($1,446,000 as of September 30, 2013) for interest relating to income tax matters. There were no amounts recorded for penalties as of December 31, 2013. The Company believes that the total amounts of unrecognized tax benefits will not significantly increase or decrease within 12 months.
The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and various states, local and foreign jurisdictions including Canada and France. In many cases, the Companys uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company is subject to federal and state income tax examination by U.S. tax authorities for fiscal years 2008 through 2013. The Company is subject to Canadian and provincial income tax examination for fiscal years 2010 through 2013 and for international transactions for fiscal years 2007 through 2013. There are numerous other income jurisdictions for which tax returns are not yet settled, none of which is individually significant.
7. | Property, Plant and Equipment |
December 31, 2013 | ||||||||||||
Cost | Accumulated depreciation |
Net | ||||||||||
$ | $ | $ | ||||||||||
Land |
4,781 | | 4,781 | |||||||||
Buildings |
48,751 | 10,463 | 38,288 | |||||||||
Machinery, equipment and office furnishings |
57,929 | 17,791 | 40,138 | |||||||||
Automotive equipment |
5,584 | 1,538 | 4,046 | |||||||||
Computer equipment and software |
31,482 | 26,512 | 4,970 | |||||||||
Leasehold improvements |
3,708 | 1,598 | 2,110 | |||||||||
|
|
|
|
|
|
|||||||
152,235 | 57,902 | 94,333 | ||||||||||
|
|
|
|
|
|
September 30, 2013 | ||||||||||||
Cost | Accumulated depreciation |
Net | ||||||||||
$ | $ | $ | ||||||||||
Land |
4,730 | | 4,730 | |||||||||
Buildings |
47,870 | 9,931 | 37,939 | |||||||||
Machinery, equipment and office furnishings |
56,167 | 15,975 | 40,192 | |||||||||
Automotive equipment |
6,216 | 1,395 | 4,821 | |||||||||
Computer equipment and software |
30,996 | 25,484 | 5,512 | |||||||||
Leasehold improvements |
3,689 | 1,413 | 2,276 | |||||||||
|
|
|
|
|
|
|||||||
149,668 | 54,198 | 95,470 | ||||||||||
|
|
|
|
|
|
8. | Goodwill and Intangible Assets |
Goodwill
The following table reflects the changes in the carrying amount of goodwill:
December 31, 2013 |
September 30, 2013 |
|||||||
$ | $ | |||||||
Balance, beginning of year |
180,058 | 178,325 | ||||||
Foreign exchange |
624 | 1,733 | ||||||
|
|
|
|
|||||
Balance, end of year |
180,682 | 180,058 | ||||||
|
|
|
|
12
Intangible assets with a finite life
The following table reflects the gross carrying amount and accumulated amortization roll-forward by major intangible asset class:
December 31, 2013 | ||||||||||||
Cost | Accumulated amortization |
Net | ||||||||||
$ | $ | $ | ||||||||||
Trademarks, trademark licenses, patents and other product rights related to commercialized products |
820,153 | 308,999 | 511,154 | |||||||||
Platforms and technologies |
70,945 | 14,405 | 56,540 | |||||||||
Supply agreements |
9,668 | 2,923 | 6,745 | |||||||||
|
|
|
|
|
|
|||||||
900,766 | 326,327 | 574,439 | ||||||||||
|
|
|
|
|
|
September 30, 2013 | ||||||||||||
Cost | Accumulated amortization |
Net | ||||||||||
$ | $ | $ | ||||||||||
Trademarks, trademark licenses, patents and other product rights related to commercialized products |
818,761 | 293,427 | 525,334 | |||||||||
Platforms and technologies |
69,782 | 12,941 | 56,841 | |||||||||
Supply agreements |
9,668 | 2,670 | 6,998 | |||||||||
|
|
|
|
|
|
|||||||
898,211 | 309,038 | 589,173 | ||||||||||
|
|
|
|
|
|
The following table reflects the changes in the carrying amounts of intangible assets:
December 31, 2013 | ||||||||||||
Cost | Accumulated amortization |
Net | ||||||||||
$ | $ | $ | ||||||||||
Balance, at October 1, 2013 |
898,211 | 309,038 | 589,173 | |||||||||
Amortization |
| 16,143 | (16,143 | ) | ||||||||
Foreign exchange |
2,555 | 1,146 | 1,409 | |||||||||
|
|
|
|
|
|
|||||||
Balance, at December 31, 2013 |
900,766 | 326,327 | 574,439 | |||||||||
|
|
|
|
|
|
September 30, 2013 | ||||||||||||
Cost | Accumulated amortization |
Net | ||||||||||
$ | $ | $ | ||||||||||
Balance, at October 1, 2012 |
994,767 | 257,392 | 737,375 | |||||||||
Impairment |
(103,654 | ) | (31,946 | ) | (71,708 | ) | ||||||
Amortization |
| 80,801 | (80,801 | ) | ||||||||
Foreign exchange |
7,098 | 2,791 | 4,307 | |||||||||
|
|
|
|
|
|
|||||||
Balance, at September 30, 2013 |
898,211 | 309,038 | 589,173 | |||||||||
|
|
|
|
|
|
13
9. | Accounts Payable and Accrued Liabilities |
December 31, 2013 |
September 30, 2013 |
|||||||
$ | $ | |||||||
Accounts payable |
30,320 | 44,785 | ||||||
Contract rebates, product returns and accrued chargebacks |
73,174 | 63,999 | ||||||
Accrued compensation and benefits |
16,288 | 24,311 | ||||||
Current portion of purchase consideration on business combination (Note 3) |
4,094 | 3,830 | ||||||
Accrued research and development costs |
14,659 | 30,414 | ||||||
Accrued royalties |
2,924 | 3,254 | ||||||
Deferred revenue |
2,676 | 2,179 | ||||||
Other accrued liabilities |
14,956 | 16,124 | ||||||
|
|
|
|
|||||
159,091 | 188,896 | |||||||
|
|
|
|
14
10. | Long-Term Debt |
December 31, 2013 |
September 30, 2013 |
|||||||
$ | $ | |||||||
Senior secured term B loans of $1,246,875 as at December 31, 2013, bearing interest at a rate per annum equal to an applicable margin plus, at the Companys option, either (1) a base rate determined by reference to the highest of (a) the prime rate of Bank of America, N.A., (b) the federal funds effective rate plus 1/2 of 1.00%, and (c) the one-month LIBOR plus 1.00% or (2) LIBOR determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margins for borrowings under the Senior Secured Term Loan Facility under the Senior Secured Credit Facilities are 4.00% with respect to base rate borrowings and 5.00% with respect to LIBOR borrowings. In addition, the LIBOR and base rate for borrowings under the Senior Secured Term Loan Facility under the Senior Secured Credit Facilities are subject to a floor of 100 basis points and 200 basis points, respectively, secured by substantially all of the present and future assets of the Company, payable in quarterly installments, maturing in October 2020, subject to interest rate swap and cap agreements as further disclosed in Note 15 |
1,230,810 | | ||||||
Senior secured term loans of $926,375 as at September 30, 2013, bearing interest at a rate per annum equal to an applicable margin plus, at the Companys option, either (1) a base rate determined by reference to the highest of (a) the prime rate of Bank of America, N.A., (b) the federal funds effective rate plus 1/2 of 1.00%, and (c) the one-month LIBOR plus 1.00% or (2) LIBOR determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margins for borrowings under the Senior Secured Term Loan Facility under the Second Amended and Restated Credit Agreement are 3.00% with respect to base rate borrowings and 4.00% with respect to LIBOR borrowings. In addition, the LIBOR and base rate for borrowings under the Senior Secured Term Loan Facility under the Second Amended and Restated Credit Agreement are subject to a floor of 150 basis points and 250 basis points, respectively, secured by substantially all of the present and future assets of the Company, payable in quarterly installments, maturing in February 2017, subject to interest rate swap and cap agreements as further disclosed in Note 15 |
| 921,344 | ||||||
|
|
|
|
|||||
1,230,810 | 921,344 | |||||||
Installments due within one year |
12,500 | 9,500 | ||||||
|
|
|
|
|||||
1,218,310 | 911,844 | |||||||
|
|
|
|
On October 4, 2013, in connection with the Recapitalization, the Company completed a refinancing of the term loans outstanding under the Amended Credit Facilities. The Company terminated its Second Amended and Restated Credit Agreement and entered into a new Credit Agreement (Credit Agreement). The Credit Agreement governs the new Senior Secured Credit Facilities.
Our new Senior Secured Credit Facilities consist of (i) a senior secured revolving credit facility (the Senior Secured Revolving Credit Facility), allowing for borrowings of up to $150,000,000, of which $25,000,000 may be in the form of letters of credit, and (ii) term B loans (the term B loans and the facility the Senior Secured Term Loan Facility and, together with the Senior Secured Revolving Credit Facility, the Senior Secured Credit Facilities) with an outstanding principal amount of $1,250,000,000 (excluding OID and upfront payments). The new senior secured revolving credit facility includes borrowing capacity available for letters of credit and for short-term borrowings.
15
An upfront fee of 50 basis points was paid on commitments under the senior secured revolving credit facility and an upfront fee of 1.00% was paid on the principal amount of the term B loans. Borrowings under the new senior secured credit facilities bear interest at a rate per annum equal, at the Companys option, to either a base rate (subject to a floor of 2.0% in the case of term B loans) or a LIBOR rate (subject to a floor of 1.0% in the case of term B loans), plus, in each case, an applicable margin. Subject to the floor described in the immediately preceding sentence, the base rate is the highest of (1) the prime rate of Bank of America, N.A., (2) the federal funds effective rate plus 1/2 of 1.0% and (3) the one-month LIBOR rate plus 1.0%. Subject to the floor described in the first sentence of this paragraph, the LIBOR rate is determined by reference to the costs of funds for U.S. dollar deposits for the associated interest period and is adjusted for certain additional costs. The applicable margins for term B loan borrowings are 4.00% per annum on base rate borrowings and 5.00% per annum on LIBOR borrowings. The applicable margin for revolving loan borrowings are subject to quarterly adjustment based on Aptalis Pharmas senior secured net leverage ratio and will range from (A) 3.50% to 3.75% per annum on revolving loans that are base rate borrowings and (B) 4.50% to 4.75% per annum on revolving loans that are LIBOR borrowings.
Further, upon or after the consummation of a Qualifying IPO, as defined, so long as Aptalis Pharmas senior secured net leverage ratio does not exceed 3.25:1.00, the applicable margin with respect to term B loans and revolving loans (otherwise determined in accordance with the above) will be reduced by 0.50%.
In addition to paying interest on outstanding principal under the senior secured credit facilities, the Company is required to pay a commitment fee of 0.50% per annum on unutilized commitments under the senior secured revolving credit facility. This unutilized commitment fee is subject to quarterly adjustment based on Aptalis Pharmas senior secured net leverage ratio but in no event will the commitment fee increase to higher than 0.5%. We are also required to pay customary letter of credit fees and agency fees.
The principal amount of the term B loans amortize in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount with payments beginning in December 31, 2013. The principal amount outstanding of the term B loans will be due and payable on October 4, 2020. The principal amount of outstanding loans under the Senior Secured Revolving Facility will be due and payable in full on October 4, 2018. At December 31, 2013, $1,250,000,000 of term B loans had been issued and no amounts had been drawn against the senior secured revolving credit facility. The term B loan was priced at $0.99, with yield to maturity of 6.23%, before the effect of interest rate hedging transactions as disclosed in Note 15.
The Credit Agreement governing the Senior Secured Credit Facilities requires the Company to prepay outstanding term B loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Senior Secured Credit Facilities, (2) commencing with the fiscal year ended September 30, 2014, 50% (which percentage will be reduced if the senior secured net leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the Credit Agreement governing the Senior Secured Credit Facilities) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or its subsidiaries, subject to reinvestment rights and certain other exceptions. As a result of the refinancing, the Company was not required to make prepayments related to the Amended Credit Facilities in the year ended September 30, 2013.
The Company used the proceeds from the borrowings under the term B loans to repay in full the outstanding indebtedness, in aggregate principal amount of $926,375,000 under the Second Amended and Restated Credit Agreement. Following the repayment, in accordance with the applicable accounting guidance for debt modifications and extinguishments, $980,000 of the remaining unamortized original issuance discount and $4,284,000 of the remaining unamortized deferred financing fees were written off and are included in Loss on extinguishment of debt in the accompanying statement of condensed consolidated operations during the three months ended December 31, 2013.
The Companys Second Amended and Restated Credit Agreement governed the Amended Credit Facilities and comprised of Term B-1 Loans amounting to $750,000,000, Term B2- Loans amounting to $200,000,000 and a senior secured revolving credit facility totaling $147,000,000. As at September 30, 2013, $950,000,000 of term loans comprised of Term B-1 Loans amounting to $750,000,000 and Term B-2 Loans amounting to $200,000,000 had been issued of which $926,375,000 remained outstanding. No amounts had been drawn against the revolving credit facility under the Amended Credit Facilities.
16
Payments required in each of the next five years from the date of the balance sheet to meet the retirement provisions of the long-term debt are as follows:
$ | ||||
2015 |
12,500 | |||
2016 |
12,500 | |||
2017 |
12,500 | |||
2018 |
12,500 | |||
2019 |
12,500 | |||
Following years |
1,184,375 | |||
|
|
|||
1,246,875 | ||||
Unamortized original issuance discount |
16,065 | |||
|
|
|||
1,230,810 | ||||
|
|
11. | Stock Incentive Plans |
Management equity incentive plan
In April 2008, the Company adopted a Management Equity Incentive Plan (the MEIP), pursuant to which options are granted to select employees and directors of the Company. The MEIP provides that a maximum of 3,833,307 common shares of the Company are issuable pursuant to the exercise of options. The per share purchase price cannot be less than the fair value of the common share of the Company at the grant date and the option expires no later than ten years from the date of grant. Vesting of these stock options is split into three categories: (1) time-based options: 50% of option grants generally vest ratably over five years and feature a fixed exercise price equal to the fair value of common shares of the Company on grant date; (2) premium options: 25% of stock option grants with an exercise price initially equal to the fair value of common shares on grant date that will increase by 10% each year and generally vesting ratably over five years; and (3) performance-based options: 25% of stock option grants with a fixed exercise price equal to the fair value of common shares on grant date which vest upon the occurrence of a liquidity event (as defined under the terms of the MEIP) based on the achievement of return targets calculated based on the return received by majority shareholders from the liquidity event. While the time-based options and the premium options are expensed over the requisite service period, the performance-based options will not be expensed until the occurrence of the liquidity event. The MEIP was amended and restated effective February 11, 2011 primarily to reflect an increase to a maximum of 5,033,507 common shares of the Company issuable pursuant to the exercise of options and to change the required return targets that need to be achieved for vesting performance-based options issued under the amended and restated plan.
Special equity grant
In April 2008, the Company approved the Restricted Stock Unit grant agreement and the penny option grant agreement (collectively Equity Grant Agreements) pursuant to which a one-time grant of equity-based awards of either restricted stock units (RSUs) or options to purchase shares of common stock of the Company for a penny (Penny Options) was made to certain employees of the Company. A maximum of 1,343,348 shares of common stock of the Company are issuable with respect to the special grants. As a result of the option to allow the recipients to elect to have an amount withheld that is in excess of the required minimum withholding under the current tax law, the special grants will be accounted for as liability awards. As a liability award, the fair value on which the expense is based is remeasured each period based on the estimated fair value and the final expense will be based on the fair value of the shares on the date the award is settled. Such final expense is reclassified to additional paid-in capital six months after the settlement of awards on the lapse of the aforementioned option allowed to the recipients. The RSUs and Penny Options expire no later than four years and ten years respectively from the date of grant. One third of the granted RSUs and Penny Options vested immediately on date of grant; one third vested on August 25, 2009, and the remainder vested on August 25, 2010.
The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one common share of the Company. The RSUs and Penny Options entitle the holders to receive common shares of the Company at the end of a vesting period. The total number of RSUs and Penny Options granted was 1,343,348 with an initial fair value of $10, equal to the share price at the date of grant. As at December 31, 2013, there were 5,000 RSUs outstanding (5,000 RSUs and 235,842 Penny Options outstanding as of September 30, 2013), all of which were vested at September 30, 2013.
17
Annual grant
In June 2008, the Company adopted a Long-Term Incentive Plan (the LTIP), whereby the Company is expected to grant annual awards to certain employees of the Company (the participants). The number of awards is initially based on the participants job level and base salary and is subsequently adjusted based on the outcome of certain financial performance conditions relating to the fiscal year. Each award that vests is ultimately settleable at the option of the participant in cash or in common shares of equivalent value. The awards vest (i) upon the occurrence of a liquidity event (as defined under the terms of the LTIP) and (ii) in varying percentages based on the level of return realized by majority shareholders as a result of the liquidity event.
The awards granted under this LTIP are eventually to be classified as liabilities in accordance with the FASB issued guidance on distinguishing liabilities from equity, since the award is for a fixed amount of value that can be settled at the option of the participant in (i) cash, or (ii) a variable number of common shares of equivalent value.
The Company will not recognize any compensation expense until such time as the occurrence of a liquidity event generating sufficient return to the majority shareholders (in order for the award to vest) is probable. If such an event were probable as of December 31, 2013, the value of the awards to be expensed by the Company would range between $16,674,000 and $20,009,000 depending on the level of return expected to be realized by the majority shareholders.
Distribution
The Company used the proceeds of the refinancing described in Note 10 and distributed approximately $399,500,000 to our shareholders, holders of the Companys RSUs and certain holders of options granted under the MEIP (the Distribution). The Distribution resulted in the exercise of all the outstanding vested penny options. The distribution of $384,508,000 to the shareholders reduced the additional paid-in capital of the Company since the Companys retained earnings are in a deficit position. The distribution of $14,978,000 to the RSU holders and holders of options granted under the MEIP is considered compensation expense. A portion of the distribution to certain holders of options granted under the MEIP amounting to $3,730,000 is subject to a repayment clause and has been deferred and will be recognized in expense over eighteen months.
The Company also reduced the per share exercise prices of certain outstanding stock options granted under the MEIP, as allowable under the relevant option plan, to reflect the effects of the Distribution. The per share exercise price reduction of $5.67 per underlying share of each unvested option granted under the MEIP was treated as a modification resulting in an incremental share-based compensation expense of $4,000,000 which will be recognized over the remaining vesting period of these options.
12. | Information Included in the Consolidated Operations and Cash Flows |
a) Financial expenses
Three Months Ended December 31, |
||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Interest on long-term debt , including amortization of original issuance discount of $487 in 2013 ($346 in 2012) |
19,487 | 13,834 | ||||||
Accretion expenses on amounts payable for the Mpex transaction |
270 | 527 | ||||||
Interest and bank charges |
137 | 250 | ||||||
Interest rate swaps and cap (Note 17) |
1,320 | 1,510 | ||||||
Financing fees |
1,549 | 192 | ||||||
Amortization of deferred debt issue expenses |
1,011 | 1,575 | ||||||
|
|
|
|
|||||
23,774 | 17,888 | |||||||
|
|
|
|
18
b) Other information
Three Months Ended December 31, |
||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Rental expenses |
836 | 887 | ||||||
Shipping and handling expenses |
1,215 | 1,495 | ||||||
Advertising expenses |
3,478 | 3,763 | ||||||
Depreciation of property, plant and equipment |
3,857 | 2,866 | ||||||
Amortization of intangible assets |
16,143 | 22,392 | ||||||
Stock-based compensation expense |
806 | 1,379 |
c) Accumulated other comprehensive loss
The components of accumulated other comprehensive loss are as follows:
Foreign currency translation |
Hedging contracts | Accumulated other comprehensive loss |
||||||||||
$ | $ | |||||||||||
Balance, October 1, 2012 |
(41,123 | ) | (17,382 | ) | (58,504 | ) | ||||||
Other comprehensive income |
3,231 | 688 | 3,919 | |||||||||
|
|
|
|
|
|
|||||||
Balance, December 31, 2012 |
(37,892 | ) | (16,693 | ) | (54,585 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance, October 1, 2013 |
(34,041 | ) | (14,035 | ) | (48,076 | ) | ||||||
Other comprehensive income (loss) |
2,576 | (106 | ) | 2,470 | ||||||||
|
|
|
|
|
|
|||||||
Balance, December 31, 2013 |
(31,465 | ) | (14,141 | ) | (45,606 | ) | ||||||
|
|
|
|
|
|
Amounts in accumulated other comprehensive loss are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries.
Details on reclassifications out of Accumulated Other Comprehensive Income:
(1) Hedging contracts - reclassifications to earnings are recorded in financial expenses. See Note 15 for additional details.
d) Supplemental cash flow information
Three Months Ended December 31, |
||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Interest received |
47 | 59 | ||||||
Interest paid |
20,334 | 15,033 | ||||||
Income taxes received |
528 | 83 | ||||||
Income taxes paid |
17,636 | 22,081 | ||||||
Non-cash investing and financing activities: |
||||||||
Accrual for purchase of property, plant and equipment |
1,234 | |
19
13. | Concentration of Credit Risk and Geographic Information |
The Company operates in one segment, pharmaceutical products, due to the internal reporting structure in place, the composition of its business operations and the level of detail contained in the Companys Chief Operating Decision Maker financial information package.
The Company operates in the following geographic areas:
Three Months Ended December 31, |
||||||||
2013 | 2012 | |||||||
$ | $ | |||||||
Total revenue |
||||||||
United States |
||||||||
Domestic sales |
148,764 | 132,914 | ||||||
Foreign sales |
4,641 | 3,394 | ||||||
International |
||||||||
Canadian and EU sales |
30,138 | 28,311 | ||||||
Other sales |
7,967 | 9,718 | ||||||
|
|
|
|
|||||
191,510 | 174,337 | |||||||
|
|
|
|
20
Revenue is attributed to geographic areas based on the country of origin of the sales.
December 31, 2013 |
September 30, 2013 |
|||||||
$ | $ | |||||||
Property, plant, equipment and intangible assets |
||||||||
United States |
88,142 | 91,692 | ||||||
Europe |
395,379 | 401,623 | ||||||
Canada |
185,251 | 191,328 | ||||||
|
|
|
|
|||||
668,772 | 684,643 | |||||||
|
|
|
|
December 31, 2013 |
September 30, 2013 |
|||||||
$ | $ | |||||||
Goodwill |
||||||||
United States |
20,931 | 20,931 | ||||||
Europe |
97,864 | 97,240 | ||||||
Canada |
61,887 | 61,887 | ||||||
|
|
|
|
|||||
180,682 | 180,058 | |||||||
|
|
|
|
14. | Financial Instruments |
Interest rate risk
The Company is exposed to interest rate risk on its variable interest-bearing term loans. The term loans bear interest based on British Banker Association LIBOR. As further disclosed in Note 15, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.
Currency risk
The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of the rates. The Company has used derivative instruments historically to reduce its exposure to foreign currency risk. As at December 31, 2013, and September 30, 2013, no foreign exchange contracts were outstanding. As at December 31, 2013, the financial assets totaling $208,318,000 ($316,137,000 as at September 30, 2013) include cash and cash equivalents and accounts receivable for 5,645,000 Canadian dollars, 17,718,000 euros and 1,002,000 Swiss francs respectively (4,738,000 Canadian dollars, 14,379,000 euros and 1,084,000 Swiss francs as at September 30, 2013). As at December 31, 2013, the financial liabilities totaling $1,389,901,000 ($1,110,240,000 as at September 30, 2013) include accounts payable, accrued liabilities and long-term debt of 5,635,000 Canadian dollars, 19,074,000 euros and 61,000 Swiss francs respectively (6,828,000 Canadian dollars, 21,119,000 euros and 1,000 Swiss francs as at September 30, 2013).
Credit risk
Generally, the carrying amount of the Companys financial assets exposed to credit risk, net of applicable provisions for losses, represents the maximum amount of exposure to credit risk. As at December 31, 2013 and September 30, 2013, the Companys financial assets exposed to credit risk are composed primarily of cash and cash equivalents and accounts receivable.
As at December 31, 2013, the Company has approximately 84% of its cash and cash equivalents with two financial institutions. At times, such deposits may exceed the amount insured by Federal Deposit Insurance Corporation.
21
Fair value of financial instruments held at carrying amount on the consolidated balance sheet
The estimated fair value of the financial instruments held at carrying amount is as follows:
December 31, 2013 | September 30, 2013 | |||||||||||||||
Fair value |
Carrying amount |
Fair value |
Carrying amount |
|||||||||||||
$ | $ | $ | $ | |||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
104,216 | 104,216 | 229,903 | 229,903 | ||||||||||||
Accounts receivable, net |
104,102 | 104,102 | 86,234 | 86,234 | ||||||||||||
Liabilities |
||||||||||||||||
Accounts payable and accrued liabilities |
159,091 | 159,091 | 188,896 | 188,896 | ||||||||||||
Long-term debt |
1,267,199 | 1,230,810 | 925,819 | 921,344 |
The following methods and assumptions were used to calculate the estimated fair value of the financial instruments that are held at carrying amount on the consolidated balance sheet:
a) Financial instruments for which fair value approximates carrying amount
The estimated fair value of certain financial instruments shown on the consolidated balance sheet approximates their carrying amount. These financial instruments include cash and cash equivalents, accounts receivable, net, accounts payable and accrued liabilities.
b) Long-term debt
The fair value of the variable interest-bearing term loan has been established based on broker-dealer quotes and represents a Level 2 input.
15. | Derivatives and Hedging Activities |
Risk management objective of using derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, currency and credit risks primarily by managing the amount, sources, conditions and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which is determined by interest rates. The Companys derivative financial instruments, if any, are used to manage differences in the amount, timing and duration of the Companys known or expected cash payments principally related to the Companys borrowings.
Cash flow hedges of interest rate risk
The Companys objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and/or caps as part of its interest rate risk management strategy. While the Company seeks to mitigate interest rate risk by entering into hedging arrangements with counterparties that are large financial institutions that the Company deems to be creditworthy, it is possible that the hedging transactions, which are intended to limit losses, could adversely affect earnings. Furthermore, if the Company terminates a hedging arrangement, it may be obligated to pay certain costs, such as transaction or breakage fees. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges protect the Company from increases in interest rates above the strike rate of the interest rate cap. During the three months ended December 31, 2013, such derivatives were used to hedge the variable cash flows associated with a portion of the existing variable-rate debt.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive loss and is subsequently reclassified to earnings in the period in which the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
22
On November 8, 2013, in conjunction with the refinancing described in Note 10, the Company terminated its existing interest rate swap and interest rate cap agreements and paid a total of $13,547,000 to its derivative counterparties and discontinued hedge accounting accordingly. Subsequent to the refinancing, the existing swaps and cap no longer met the requirements for hedge accounting. As of the termination date, losses of $13,804,000 were deferred in Accumulated Other Comprehensive Income which will be amortized to interest expense through the original maturities of the instruments.
The Company then entered in two new interest rate cap agreements with an effective date of December 31, 2013 which protects the Company from increases in the cash flows on its variable rate debt under its October 4, 2013 Refinancing attributable to changes in LIBOR above the strike rate of the interest rate cap. The interest rate caps each have a notional amount of $275,000,000 amortizing to $25,000,000 by their maturity in December 2019. The interest rate caps are designated as cash flow hedges of interest rate risk and limits the Companys interest payments on the hedged October 4, 2013 refinanced debt at 1.0%, plus the appropriate margin on each debt interest period which is currently 5.0%. The interest rate caps will fix the Companys interest payments on the hedged debt at 6.78%.
On April 4, 2011, the Company had entered into two separate pay-fixed, receive-floating interest rate swap agreements with an effective date of June 30, 2011 which converted a portion of the variable rate debt under its Amended and Restated Senior Secured Credit Facilities to fixed rate debt. The first swap had a notional amount of $331,000,000, amortizing to $84,000,000 by its maturity in December 2015. At September 30, 2013, the notional amount of the first swap was $169,000,000. The second swap had a notional amount of $219,000,000 and matures in December 2016. These swaps were designated as cash flow hedges of interest rate risk.
On June 27, 2012, the Company had entered in an interest rate cap agreement with an effective date of September 30, 2012 which protected the Company from increases in the cash flows on its variable rate debt under its Second Amended and Restated Senior Secured Credit Facilities attributable to changes in LIBOR above the strike rate of the interest rate cap. The interest rate cap had a notional amount of $100,000,000 and matured in September 2016. The interest rate cap was designated as a cash flow hedge of interest rate risk.
As at December 31, 2013, the Company had two interest rate caps outstanding with a combined current notional amount of $550,000,000 and were designated as cash flow hedges of interest rate risk on LIBOR-based debt as described above. Amounts reported in Accumulated other comprehensive income related to derivatives are reclassified to interest expense as interest payments are made on the Companys variable-rate debt. The Company estimates that $4,563,000 presently classified in Accumulated other comprehensive loss will be reclassified as an increase to interest expense during the next twelve months. On January 29, 2014, the Company cancelled its outstanding interest rate caps and incurred cancellation fees amounting to $1,150,000.
The table below presents the fair value of the Companys derivative financial instruments as well as their classification on the condensed consolidated balance sheet as at December 31, 2013:
Derivatives Fair Value | ||||||||||
December 31, 2013 |
September 30, 2013 |
|||||||||
Balance sheet location | ||||||||||
Derivatives designated as hedging instruments | $ | $ | ||||||||
Assets: |
||||||||||
Interest rate cap |
Other long-term assets | 624 | | |||||||
|
|
|
|
|||||||
Total |
624 | | ||||||||
|
|
|
|
|||||||
Liabilities: |
||||||||||
Interest rate swaps |
Other long-term liabilities | | 11,733 | |||||||
Interest rate cap |
Other long-term liabilities | | 277 | |||||||
|
|
|
|
|||||||
Total |
| 12,010 | ||||||||
|
|
|
|
23
The table below presents the effect of the Companys derivative financial instruments on the condensed consolidated operations for the three months ended December 31, 2013 and 2012:
Location in the Condensed Consolidated Financial Statements |
Three Months Ended |
|||||||||
2013 | 2012 | |||||||||
$ | $ | |||||||||
Interest rate swaps and cap in cash flow hedging relationships |
||||||||||
Loss recognized in other comprehensive income (loss) on derivatives (effective portion), net of tax of $288 ($150 in 2012) |
OCI/OCL | (486 | ) | (254 | ) | |||||
Loss reclassified from accumulated comprehensive loss into income (effective portion) |
Financial expenses | (1,196 | ) | (1,510 | ) | |||||
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) |
Financial expenses | | |
The Company considers the impact of its and its counterparties credit risk on the fair value of the derivative financial instruments. At December 31, 2013, credit risk did not materially change the fair value of the Companys derivative financial instruments.
The Company has determined that there is no difference between net and gross presentations of its financial instruments because (1) all financial instruments are presented gross on the condensed consolidated balance sheet; (2) the Company is not party to a master netting arrangement or other similar agreement; and (3) all of the Companys financial instruments were in an asset position at December 31, 2013 and in a liability position at September 30, 2013.
16. | Fair Value Measurements |
Financial assets and financial liabilities measured or disclosed at fair value on a recurring basis as at December 31, 2013 and September 30, 2013 are summarized below:
Quoted prices in active markets for identical assets and liabilities (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Balance at December 31, 2013 |
|||||||||||||
$ | $ | $ | $ | |||||||||||||
Assets |
||||||||||||||||
Derivative financial instruments |
624 | 624 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
624 | 624 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Contingent consideration obligations |
| | 29,659 | 29,659 | ||||||||||||
Long-term debt(1) |
1,267,199 | | 1,267,199 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
| 1,267,199 | 29,659 | 1,296,858 | |||||||||||||
|
|
|
|
|
|
|
|
24
Quoted prices in active markets for identical assets and liabilities (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Balance at September 30, 2013 |
|||||||||||||
$ | $ | $ | $ | |||||||||||||
Liabilities |
||||||||||||||||
Derivative financial instruments |
| 12,010 | | 12,010 | ||||||||||||
Contingent consideration obligations |
| | 29,594 | 29,594 | ||||||||||||
Long-term debt(1) |
| 925,819 | | 925,819 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
| 937,829 | 29,594 | 967,423 | |||||||||||||
|
|
|
|
|
|
|
|
(1) | Long-term debt is measured at amortized cost and shown in the table above at Fair Value. |
Derivative financial instruments represent interest rate swap and interest rate cap agreements as more fully described in Note 17 and are measured at fair value based on market observable interest rate curves as of the measurement date.
The contingent consideration obligations are related to the Rectiv Transaction and the fair value measurement is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a probability-weighted income approach. The measurement is based on unobservable inputs supported by little or no market activity based on the Companys assumptions. Significant unobservable inputs include the projected revenue estimates and the risk adjusted discount rate used to present value the probability weighted cash flows. Generally, a change in the discount rate assumption would result in a directionally opposite change in the contingent consideration obligation. The discount rate used in the fair value measurement is in the range of 7%-13% depending on the type of contingent payment. Changes in the fair value of the contingent consideration obligations are recorded in the Companys condensed consolidated statement of operations and included in operating income. The Company continues to monitor performance of Rectiv and may make adjustments to its valuation models in future periods. Given the sensitivity of the valuation in relation to changes in the above noted assumptions, such changes, if required, could have a material impact on our financial statements.
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2013:
Balance at October 1, 2013 |
Transfers into (out of) Level 3 |
Purchases and settlements, |
Accretion and fair value adjustments recorded in income |
Balance at September 30, 2013 |
||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Liabilities |
||||||||||||||||||||
Contingent consideration obligations |
29,594 | | (629 | ) | 694 | 29,659 |
Certain financial assets and financial liabilities are measured at estimated fair value on a non-recurring basis. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).
25
Financial assets and liabilities measured or disclosed at fair value on a non-recurring basis as at December 31, 2013 and September 30, 2013 are summarized below:
Quoted prices in active markets for identical assets and liabilities (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Balance at December 31, 2013 |
|||||||||||||
$ | $ | $ | $ | |||||||||||||
Assets |
||||||||||||||||
Intangible assets |
| | 574,439 | 574,439 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
| | 574,439 | 574,439 | |||||||||||||
|
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets and liabilities (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Balance at September 30, 2013 |
|||||||||||||
$ | $ | $ | $ | |||||||||||||
Assets |
||||||||||||||||
Intangible assets |
| | 589,173 | 589,173 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
| | 589,173 | 589,173 | |||||||||||||
|
|
|
|
|
|
|
|
The Company recorded an impairment charge and fair value changes of $71,708,000 related to its Rectiv and Lamictal intangible assets during the fiscal year ended September 30, 2013.
17. | Related Party Transactions |
The Company recorded charges pursuant to the terms of a management fee arrangement with a controlling shareholding company of $1,925,000 during the three months ended December 31, 2013 ($1,729,000 during the three months ended December 31, 2012). As at December 31, 2013, the Company accrued fees payable to a controlling shareholding company amounting to $2,216,000 ($1,724,000 as at September 30, 2013).
On October 4, 2013, the Company and certain other wholly-owned subsidiaries completed a refinancing and distributed $348,705,000 to the controlling shareholding company.
26
18. | Pending Litigation |
In October 2008, Eurand and Cephalon (which exclusively licenses certain patents from Eurand) received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Mylan Pharmaceuticals, Inc., or Mylan, and Barr Laboratories, Inc., or Barr, each requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of extended-release cyclobenzaprine hydrochloride (AMRIX). In November 2008, Eurand received a similar certification letter from Impax Laboratories, Inc., or Impax. In May 2009, Eurand received a similar certification letter from Anchen Pharmaceuticals, Inc., or Anchen. Mylan, Impax, and Anchen alleged that U.S. Patent Number 7,387,793, or the 793 Patent, entitled Modified Release Dosage Forms of Skeletal Muscle Relaxants, issued to Eurand, will not be infringed by the manufacture, use or sale of the product described in the applicable ANDA and reserved the right to challenge the validity and/or enforceability of the 793 Patent. Barr alleged that the 793 Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA. In late November 2008, Eurand filed a lawsuit with Cephalon, in the U.S. District Court in Delaware against Mylan (and its parent) and Barr (and its parent) for infringement of the 793 Patent. In January 2009, Eurand filed a lawsuit with Cephalon in the U.S. District Court in Delaware against Impax for infringement of the 793 Patent. In July 2009, Eurand filed a lawsuit with Cephalon in the U.S. District Court in Delaware against Anchen (and its parent) for infringement of the 793 Patent. Subsequently, in response to additional Paragraph IV certification letters regarding U.S. Patent Number 7,544,372, or the 372 Patent, entitled Modified Release Dosage Forms of Skeletal Muscle Relaxants Eurand and Cephalon also filed lawsuits against Mylan, Barr, and Anchen for the infringement of the 372 Patent. All cases were consolidated in one action in the U.S. District Court in Delaware, and were tried in a bench trial in September-October 2010.
On October 7, 2010, both Eurand and Anesta AG, or Anesta, a wholly-owned subsidiary of Cephalon, reached an agreement to settle the pending patent infringement litigation over AMRIX with Impax. Under terms of the settlement, both Eurand and Anesta will grant to Impax a non-exclusive, royalty-bearing license to market and sell a generic version of AMRIX in the United States beginning one year prior to expiration of the 793 Patent, which is expected to expire in February 2025, or earlier under certain circumstances.
On May 12, 2011, the U.S. District Court in Delaware rendered a decision against Eurand and Cephalon. On May 13, 2011, Mylan launched its product. Eurand and Cephalon appealed the District Courts finding of obviousness to the Federal Circuit, and on May 24, 2011, the District Court issued an injunction order enjoining Mylan from selling any additional products pending the Federal Circuits decision. On April 16, 2012, the Federal Circuit reversed and vacated the judgment of invalidity by the U.S. District Court in Delaware in the patent infringement lawsuit by Eurand and Cephalon. Mylan filed a petition for rehearing en banc and on July 25, 2012, the petition was denied. Subsequently Mylan filed a petition for certiorari to the United States Supreme Court on October 23, 2012 and on January 14, 2013, the petition was denied. The case was remanded to the District Court for consideration of the issue of damages. The trial on the issue of damages is scheduled to commence on September 2, 2014.
The Company is involved (and expects to continue to be involved from time to time) in patent litigation relating to ANDAs filed by potential competitors seeking to market generic versions of the Companys products. For example, in July 2013, in response to notice letters regarding the filings of ANDAs by Mylan Pharmaceuticals, Inc. and Mylan Inc. (collectively, Mylan), as well as Sandoz Inc. (Sandoz), seeking approval to market a generic version of CANASA, the Company filed patent infringement lawsuits alleging infringement of certain of its patents and seeking, among other things, injunctive relief. Mylan filed its Answer and Counterclaims in August 2013 and Sandoz filed its Answer and Counterclaims in September 2013, in each case contending that the Companys patents are invalid or not infringed. The Company believes the ANDAs were filed before the patents covering CANASA were listed in the Orange Book, which generally means that the Company is not entitled to the 30-month stay of the approval of these ANDAs provided for by the Hatch-Waxman Act. While the Company intends to vigorously defend these and other patents and pursue its legal rights, it can offer no assurance as to when the pending or any future litigation will be decided, whether such lawsuits will be successful or that a generic equivalent of one or more of its products will not be approved and enter the market. An adverse outcome in such patent litigation could materially and adversely affect the Companys revenues.
27
19. | Subsequent Events |
On January 8, 2014, the Company signed a definitive agreement to be acquired by Forest Laboratories, Inc. (NYSE: FRX), a leading, fully integrated, specialty pharmaceutical company. Forest has agreed to acquire the Company from its controlling shareholders, TPG, the global private investment firm, for $2.9 billion in cash, pending required reviews by anti-trust authorities. The transaction is expected to close in the first half of 2014, subject to regulatory review which was completed on January 24, 2014 and satisfactory completion of additional necessary closing conditions. All outstanding debt of the Company will be repaid upon close of the transaction. On January 29, 2014, in anticipation of a potential close, the Company cancelled its outstanding interest rate caps and incurred cancellation fees amounting to $1,150,000.
28
Exhibit 99.6
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information is presented to illustrate the estimated effects of (i) the pending acquisition of Forest Laboratories, Inc. (Forest) by Actavis plc (Actavis), which was announced on February 18, 2014 (the Forest Acquisition), (ii) the acquisition of Aptalis Holdings Inc. (Aptalis) by Forest, which closed on January 31, 2014 (the Aptalis Acquisition), (iii) the acquisition of Warner Chilcott plc (Warner Chilcott), which closed on October 1, 2013 (the Warner Chilcott Acquisition) and (iv) the related financings to fund the acquisitions on the historical financial position and results of operations of Actavis.
The fiscal years of Actavis, Warner Chilcott, Forest and Aptalis end on December 31, December 31, March 31 and September 30, respectively. The following unaudited pro forma combined balance sheet is prepared based on historical consolidated balance sheets of Actavis, Forest and Aptalis as of December 31, 2013. The following unaudited pro forma combined statement of operations is prepared based on (i) the historical consolidated statement of operations of Actavis for the fiscal year ended December 31, 2013, (ii) the historical consolidated statement of operations of Warner Chilcott for the nine months ended September 30, 2013, (iii) the historical consolidated statement of operations of Forest for the twelve months ended December 31, 2013, which was derived by adding the consolidated statement of operations for the nine months ended December 31, 2013 and subtracting the consolidated statement of operations for the nine months ended December 31, 2012 to and from the consolidated statement of operations for the fiscal year ended March 31, 2013 and (iv) the historical consolidated statement of operations of Aptalis for the twelve months ended December 31, 2013, which was derived by adding the consolidated statement of operations for the three months ended December 31, 2013 and subtracting the consolidated statement of operations for the three months ended December 31, 2012 to and from the consolidated statement of operations for the fiscal year ended September 30, 2013.
The following unaudited pro forma combined balance sheet as of December 31, 2013 and unaudited pro forma combined statement of operations for the year ended December 31, 2013 are based upon and derived from and should be read in conjunction with the historical audited financial statements of Actavis (which are available in Actavis Annual Report on Form 10-K for the year ended December 31, 2013), historical unaudited financial statements of Warner Chilcott (which are available in Actavis Current Report on Form 8-K filed on March 25, 2014), historical audited financial statements of Forest (which are available in Forests Annual Report on Form 10-K for the year ended March 31, 2013), historical unaudited financial statements of Forest (which are available in Forests Quarterly Reports on Form 10-Q for the nine months ended December 31, 2013 and 2012), historical audited financial statements of Aptalis (which are available in Forests Current Report on Form 8-K filed on January 27, 2014 and historical unaudited financial statements of Aptalis (which are available in Actavis Current Report on Form 8-K filed on March 25, 2014).
The Forest Acquisition, the Aptalis Acquisition and the Warner Chilcott Acquisition have been accounted for as business combinations using the acquisition method of accounting under the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) 805, Business Combinations, (ASC 805). The unaudited pro forma combined financial statements set forth below primarily give effect to the following:
| Application of the acquisition method of accounting in connection with the acquisitions; |
| Repayment of certain existing debt facilities and new borrowings under new debt facilities to fund the acquisitions; and |
| Transaction costs in connection with the acquisitions and financings. |
The pro forma adjustments are preliminary and are based upon available information and certain assumptions, described in the accompanying notes to the unaudited pro forma combined financial information that management believes are reasonable under the circumstances. Actual results may differ materially from the assumptions within the accompanying unaudited pro forma combined financial information. Under ASC 805, assets acquired and liabilities assumed are recorded at fair value. The fair value of identifiable tangible and intangible assets acquired and liabilities
1
assumed from the acquisitions of Forest and Aptalis are based on a preliminary estimate of fair value as of December 31, 2013. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed will be recognized as goodwill. Significant judgment is required in determining the estimated fair values of in-process research and development (IPR&D), identifiable intangible assets and certain other assets and liabilities. Such valuation requires estimates and assumptions including, but not limited to, determining the timing and estimated costs to complete each in-process research project, projecting the timing of regulatory approvals, estimating future cash flows and direct costs in addition to developing the appropriate discount rates and current market profit margins. Since the Forest Acquisition has not been consummated, our access to information to make such estimates relating to Forest and Aptalis is limited and therefore, certain market based assumptions were used when data was not available. Management believes the fair values recognized for the assets to be acquired and liabilities to be assumed are based on reasonable estimates and assumptions. Preliminary fair value estimates may change as additional information becomes available and such changes could be material.
The unaudited pro forma combined statement of operations for the fiscal year ended December 31, 2013 assumes the completion of the transactions occurred on January 1, 2013. The unaudited pro forma combined balance sheet as of December 31, 2013 assumes the transactions occurred on December 31, 2013, except for the acquisition of Warner Chilcott and the related financing, which was already reflected in Actavis historical balance sheet as of December 31, 2013. The unaudited pro forma combined financial information has been prepared by management in accordance with the regulations of the SEC and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the acquisitions occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that Actavis will experience after the acquisitions. In addition, the accompanying unaudited pro forma combined statement of operations does not include any pro forma adjustments to reflect expected cost savings or restructuring actions which may be achievable or the impact of any non-recurring activity and one-time transaction related costs.
Certain financial information of Forest, Aptalis and Warner Chilcott as presented in their respective consolidated financial statements have been reclassified to conform to the historical presentation in Actavis consolidated financial statements for purposes of preparation of the unaudited pro forma combined financial information.
This unaudited pro forma combined financial information should be read in conjunction with the accompanying notes as well as the historical consolidated financial statements and related notes of Actavis, and the historical consolidated financial statements and related notes of Warner Chilcott, Forest and Aptalis incorporated by reference into Actavis current report on Form 8-K to which this unaudited pro forma combined financial information is attached as an exhibit.
2
Actavis plc
Unaudited Pro Forma Combined Balance Sheet
As of December 31, 2013
(In millions) | Historical Actavis plc |
Historical Forest(4) |
Historical Aptalis(5) |
Aptalis Acquisition and Financing Adjustments |
Footnote Reference |
Forest Subtotal - After the Aptalis Acquisition |
Forest Acquisition Adjustments |
Forest Financing Adjustments |
Footnote Reference |
Pro Forma |
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ASSETS | ||||||||||||||||||||||||||||||||||||||||
Current assets: |
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Cash and cash equivalents |
$ | 329.0 | $ | 2,322.4 | $ | 104.2 | $ | (1,393.5 | ) | 7e | $ | 1,033.1 | $ | (7,084.6 | ) | $ | 5,722.5 | 7p,7v | $ | | ||||||||||||||||||||
Marketable securities |
2.5 | 701.7 | | | 701.7 | | | 704.2 | ||||||||||||||||||||||||||||||||
Accounts receivable, net |
1,404.9 | 369.9 | 104.1 | | 474.0 | | | 1,878.9 | ||||||||||||||||||||||||||||||||
Inventories, net |
1,786.3 | 438.0 | 61.5 | 123.7 | 7b | 623.2 | 547.8 | | 7m | 2,957.3 | ||||||||||||||||||||||||||||||
Prepaid expenses and other current assets |
409.2 | 186.1 | 17.1 | | 203.2 | | | 612.4 | ||||||||||||||||||||||||||||||||
Assets held for sale |
271.0 | | | | | | | 271.0 | ||||||||||||||||||||||||||||||||
Deferred tax assets |
231.8 | 275.0 | 8.9 | | 283.9 | | | 515.7 | ||||||||||||||||||||||||||||||||
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Total current assets |
4,434.7 | 4,293.1 | 295.8 | (1,269.8 | ) | 3,319.1 | (6,536.8 | ) | 5,722.5 | 6,939.5 | ||||||||||||||||||||||||||||||
Property, plant and equipment, net |
1,616.8 | 395.6 | 94.3 | | 489.9 | | | 2,106.7 | ||||||||||||||||||||||||||||||||
Investments and other assets |
137.5 | 1,584.8 | 24.6 | (1.0 | ) | 7f | 1,608.4 | | 103.1 | 7w | 1,849.0 | |||||||||||||||||||||||||||||
Deferred tax assets |
104.8 | | 0.3 | | 0.3 | | | 105.1 | ||||||||||||||||||||||||||||||||
Product rights and other intangibles |
8,234.5 | 2,072.1 | 574.4 | 2,190.3 | 7b | 4,836.8 | 8,959.9 | | 7m | 22,031.2 | ||||||||||||||||||||||||||||||
Goodwill |
8,197.6 | 713.1 | 180.7 | 445.2 | 7c | 1,339.0 | 12,742.2 | | 7n | 22,278.8 | ||||||||||||||||||||||||||||||
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Total assets |
$ | 22,725.9 | $ | 9,058.7 | $ | 1,170.1 | $ | 1,364.7 | $ | 11,593.5 | $ | 15,165.3 | $ | 5,825.6 | $ | 55,310.3 | ||||||||||||||||||||||||
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LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||||||||||
Current liabilities: |
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Accounts payable and accrued expenses |
$ | 2,343.2 | $ | 1,040.0 | $ | 156.4 | $ | | $ | 1,196.4 | $ | | $ | | $ | 3,539.6 | ||||||||||||||||||||||||
Income taxes payable |
96.6 | | 6.5 | | 6.5 | | | 103.1 | ||||||||||||||||||||||||||||||||
Current portion of long-term debt and capital leases |
534.6 | | 12.5 | (12.5 | ) | 7g | | | 2,000.6 | 7x | 2,535.2 | |||||||||||||||||||||||||||||
Deferred revenue |
38.8 | | 2.7 | | 2.7 | | | 41.5 | ||||||||||||||||||||||||||||||||
Liabilities held for sale |
246.6 | | | | | | | 246.6 | ||||||||||||||||||||||||||||||||
Deferred tax liabilities |
35.1 | | 0.2 | 29.8 | 7d | 30.0 | 115.0 | | 7o | 180.1 | ||||||||||||||||||||||||||||||
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Total current liabilities |
3,294.9 | 1,040.0 | 178.3 | 17.3 | 1,235.6 | 115.0 | 2,000.6 | 6,646.1 | ||||||||||||||||||||||||||||||||
Long-term debt and capital leases |
8,517.4 | 1,200.0 | 1,218.3 | 581.7 | 7g | 3,000.0 | | 3,825.0 | 7y | 15,342.4 | ||||||||||||||||||||||||||||||
Deferred revenue |
40.1 | | | | | | | 40.1 | ||||||||||||||||||||||||||||||||
Other long-term liabilities |
326.2 | 39.9 | 36.1 | | 76.0 | | | 402.2 | ||||||||||||||||||||||||||||||||
Other taxes payable |
187.3 | 528.5 | 4.5 | | 533.0 | | | 720.3 | ||||||||||||||||||||||||||||||||
Deferred tax liabilities |
822.9 | 257.0 | 64.8 | 527.9 | 7d | 849.7 | 1,881.6 | | 7o | 3,554.2 | ||||||||||||||||||||||||||||||
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Total liabilities |
13,188.8 | 3,065.4 | 1,502.0 | 1,126.9 | 5,694.3 | 1,996.6 | 5,825.6 | 26,705.3 | ||||||||||||||||||||||||||||||||
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Commitments and contingencies |
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Equity: |
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Ordinary shares |
| 43.4 | 0.1 | (0.1 | ) | 7h | 43.4 | (43.4 | ) | | 7q | | ||||||||||||||||||||||||||||
Additional paid-in capital |
8,012.6 | 1,951.1 | 307.5 | (307.5 | ) | 7i | 1,951.1 | 17,203.7 | | 7r | 27,167.4 | |||||||||||||||||||||||||||||
Retained earnings (accumulated deficit) |
1,432.3 | 9,166.6 | (593.9 | ) | 499.8 | 7j | 9,072.5 | (9,159.4 | ) | | 7s | 1,345.4 | ||||||||||||||||||||||||||||
Accumulated other comprehensive income |
90.5 | 3.9 | (45.6 | ) | 45.6 | 7k | 3.9 | (3.9 | ) | | 7t | 90.5 | ||||||||||||||||||||||||||||
Treasury shares, at cost |
(3.3 | ) | (5,171.7 | ) | | | (5,171.7 | ) | 5,171.7 | | 7u | (3.3 | ) | |||||||||||||||||||||||||||
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Total stockholders equity |
9,532.1 | 5,993.3 | (331.9 | ) | 237.8 | 5,899.2 | 13,168.7 | | 28,600.0 | |||||||||||||||||||||||||||||||
Noncontrolling interest |
5.0 | | | | | | | 5.0 | ||||||||||||||||||||||||||||||||
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Total equity |
9,537.1 | 5,993.3 | (331.9 | ) | 237.8 | 5,899.2 | 13,168.7 | | 28,605.0 | |||||||||||||||||||||||||||||||
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Total liabilities and equity |
$ | 22,725.9 | $ | 9,058.7 | $ | 1,170.1 | $ | 1,364.7 | $ | 11,593.5 | $ | 15,165.3 | $ | 5,825.6 | $ | 55,310.3 | ||||||||||||||||||||||||
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See the accompanying notes to the unaudited pro forma combined financial information.
3
Actavis plc
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2013
(In millions, except for per share data) |
Historical Actavis plc |
Historial Warner Chilcott(6) |
Warner Chilcott Acquisition and Financing Adjustments |
Footnote Reference |
Actavis plc Subtotal - After the Warner Chilcott Acquisition |
Historical Forest(4) |
Historical Aptalis(5) |
Aptalis Acquisition and Financing Adjustments |
Footnote Reference |
Forest Subtotal - After the Aptalis Acquisition |
Forest Acquisition Adjustments |
Forest Financing Adjustments |
Footnote Reference |
Pro Forma |
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Net revenues |
$ | 8,677.6 | $ | 1,807.0 | $ | (16.4 | ) | 8a | $ | 10,468.2 | $ | 3,368.5 | $ | 705.1 | $ | | $ | 4,073.6 | $ | (22.9 | ) | $ | | 8k | $ | 14,518.9 | ||||||||||||||||||||||||||||||
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Operating expenses: |
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Cost of sales (excludes amortization and impairment of acquired intangibles including product rights) |
4,690.7 | 227.0 | (18.3 | ) | 8a, 8b | 4,899.4 | 642.8 | 169.2 | | 812.0 | (22.9 | ) | | 8k | 5,688.5 | |||||||||||||||||||||||||||||||||||||||||
Research and development |
616.9 | 86.0 | 0.4 | 8b | 703.3 | 836.6 | 76.8 | | 913.4 | 105.7 | | 8l | 1,722.4 | |||||||||||||||||||||||||||||||||||||||||||
Selling and marketing |
1,020.3 | 322.0 | | 1,342.3 | 1,151.7 | 101.7 | | 1,253.4 | 145.5 | | 8l | 2,741.2 | ||||||||||||||||||||||||||||||||||||||||||||
General and administrative |
1,027.5 | 250.0 | (63.3 | ) | 8b, 8c | 1,214.2 | 445.6 | 93.8 | (8.9 | ) | 8g | 530.5 | 56.3 | | 8l | 1,801.0 | ||||||||||||||||||||||||||||||||||||||||
Amortization |
842.7 | 329.0 | 383.6 | 8d | 1,555.3 | 127.1 | 74.5 | 202.0 | 8h | 403.6 | 1,037.1 | | 8m | 2,996.0 | ||||||||||||||||||||||||||||||||||||||||||
Goodwill impairment |
647.5 | | | 647.5 | | | | | | | 647.5 | |||||||||||||||||||||||||||||||||||||||||||||
Loss on assets held for sale |
42.7 | | | 42.7 | | | | | | | 42.7 | |||||||||||||||||||||||||||||||||||||||||||||
Loss on asset sales, impairments, and contingent consideration adjustment, net |
212.5 | | | 212.5 | 2.1 | 5.8 | | 7.9 | | | 220.4 | |||||||||||||||||||||||||||||||||||||||||||||
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Total operating expenses |
9,100.8 | 1,214.0 | 302.4 | 10,617.2 | 3,205.9 | 521.8 | 193.1 | 3,920.8 | 1,321.7 | | 15,859.7 | |||||||||||||||||||||||||||||||||||||||||||||
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Operating (loss)/income |
(423.2 | ) | 593.0 | (318.8 | ) | (149.0 | ) | 162.6 | 183.3 | (193.1 | ) | 152.8 | (1,344.6 | ) | | (1,340.8 | ) | |||||||||||||||||||||||||||||||||||||||
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4
Actavis plc
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2013
(In millions, except for per share data) |
Historical Actavis plc |
Historial Warner Chilcott(6) |
Warner Chilcott Acquisition and Financing Adjustments |
Footnote Reference |
Actavis plc Subtotal - After the Warner Chilcott Acquisition |
Historical Forest(4) |
Historical Aptalis(5) |
Aptalis Acquisition and Financing Adjustments |
Footnote Reference |
Forest Subtotal - After the Aptalis Acquisition |
Forest Acquisition Adjustments |
Forest Financing Adjustments |
Footnote Reference |
Pro Forma |
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Non-Operating income (expense): |
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Interest income |
4.8 | | | 4.8 | 21.0 | 0.4 | | 21.4 | | | 26.2 | |||||||||||||||||||||||||||||||||||||||||||||
Interest expense |
(239.8 | ) | (179.0 | ) | 100.1 | 8e | (318.7 | ) | (3.5 | ) | (74.7 | ) | (73.3 | ) | 8i | (151.5 | ) | | (149.0 | ) | 8o | (619.2 | ) | |||||||||||||||||||||||||||||||||
Other income (expense), net |
19.8 | | | 19.8 | 2.9 | (5.9 | ) | | (3.0 | ) | | | 16.8 | |||||||||||||||||||||||||||||||||||||||||||
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Total other income (expense), net |
(215.2 | ) | (179.0 | ) | 100.1 | (294.1 | ) | 20.4 | (80.2 | ) | (73.3 | ) | (133.1 | ) | | (149.0 | ) | (576.2 | ) | |||||||||||||||||||||||||||||||||||||
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(Loss)/income before income taxes and noncontrolling interest |
(638.4 | ) | 414.0 | (218.7 | ) | (443.1 | ) | 183.0 | 103.1 | (266.4 | ) | 19.7 | (1,344.6 | ) | (149.0 | ) | (1,917.0 | ) | ||||||||||||||||||||||||||||||||||||||
Provision for income taxes |
112.7 | 80.0 | (43.7 | ) | 8f | 149.0 | 26.4 | 40.0 | (64.2 | ) | 8j | 2.2 | (282.4 | ) | (31.3 | ) | 8n, 8p | (162.5 | ) | |||||||||||||||||||||||||||||||||||||
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Net (loss)/income |
(751.1 | ) | 334.0 | (175.0 | ) | (592.1 | ) | 156.6 | 63.1 | (202.2 | ) | 17.5 | (1,062.2 | ) | (117.7 | ) | (1,754.5 | ) | ||||||||||||||||||||||||||||||||||||||
Loss/(income) attributable to noncontrolling interest |
0.7 | | | 0.7 | | | | | | | 0.7 | |||||||||||||||||||||||||||||||||||||||||||||
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Net (loss)/income attributable to common shareholders |
$ | (750.4 | ) | $ | 334.0 | $ | (175.0 | ) | $ | (591.4 | ) | $ | 156.6 | $ | 63.1 | $ | (202.2 | ) | $ | 17.5 | $ | (1,062.2 | ) | $ | (117.7 | ) | $ | (1,753.8 | ) | |||||||||||||||||||||||||||
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(Loss)/earnings per share attributable to common shareholders(9): |
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Basic |
$ | (5.27 | ) | $ | (7.60 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Diluted |
$ | (5.27 | ) | $ | (7.60 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Weighted average shares outstanding(9): |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic |
142.3 | 230.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Diluted |
142.3 | 230.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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See the accompanying notes to the unaudited pro forma combined financial information.
5
1. | Description of Transactions |
The Forest Acquisition: On February 17, 2014, Actavis entered into an Agreement and Plan of Merger with Forest, pursuant to which Actavis will acquire Forest in a series of merger transactions (the Mergers).
Each share of Forests common stock issued and outstanding immediately prior to the Merger will be converted into the right to receive, at the election of the holder of such shares of Forest common stock, (i) 0.3306 of an Actavis ordinary share and $26.04 in cash (the Standard Election Consideration), (ii) 0.4723 of an Actavis ordinary share (the Stock Election Consideration) or (iii) $86.81 in cash (the Cash Election Consideration). The Cash Election Consideration and Stock Election Consideration will be subject to proration to ensure that the total amount of cash paid and the total number of Actavis ordinary shares issued to Forest shareholders as a whole are equal to the total amount of cash and number of Actavis ordinary shares that would have been paid and issued if all Forest shareholders received the Standard Election Consideration. Refer to Note 7.l for further details.
Actavis plans to fund the Forest Acquisition through a combination of available cash on hand and third party debt financing consisting of unsecured cash bridge loans in an original aggregate principal amount of up to $3.0 billion, senior unsecured term loans in an aggregate principal amount of $2.0 billion and the issuance of up to $2.0 billion in aggregate principal amount of senior notes.
The acquisition is subject to customary conditions, including review and approval by the FTC under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Pending approval by the FTC, Actavis anticipates closing the transaction in the middle of the year ending December 31, 2014.
The Aptalis Acquisition: On January 31, 2014, Forest closed the Aptalis Acquisition in a series of merger transactions for an aggregate purchase price equal to the total enterprise value, plus the aggregate exercise price applicable to Aptalis outstanding options and other equity awards, plus the amount of closing date cash, minus Aptalis existing indebtedness, minus certain selling stockholders expenses. Refer to Note 7.a for further details. Forest funded the Aptalis Acquisition using the proceeds from its debt offerings.
The Warner Chilcott Acquisition: On October 1, 2013, Actavis acquired Warner Chilcott pursuant to a scheme of arrangement where each Warner Chilcott ordinary share was converted into 0.160 of Actavis ordinary share, or $5,833.9 million in equity consideration. Actavis historical consolidated statement of operations for the year ended December 31, 2013 includes results of operations of Warner Chilcott since October 1, 2013.
2. | Basis of Presentation |
The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisitions, (2) factually supportable, and (3) with respect to the unaudited pro forma combined statements of operations, are expected to have a continuing impact on the results of operations.
The unaudited pro forma combined financial information was prepared using the acquisition method of accounting in accordance with ASC 805, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date.
The acquisition method of accounting uses the fair value concepts defined in ASC 820, Fair Value Measurement (ASC 820) as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is an exit price concept for the valuation of an asset or liability. Market participants are assumed to be buyers or sellers in the most advantageous market for the asset or liability. Fair value measurement for an asset assumes the highest and best use by these market participants. Fair value measurements can be highly subjective and it is possible the application of reasonable judgment could develop different assumptions resulting in a range of alternative estimates using the same facts and circumstances.
6
3. | Accounting Policies |
Following the Forest Acquisition, Actavis will conduct a review of accounting policies of Forest, inclusive of Aptalis, in an effort to determine if differences in accounting policies require restatement or reclassification of results of operations or reclassification of assets or liabilities to conform to Actavis accounting policies and classifications. As a result of that review, Actavis may identify differences among the accounting policies of the companies that, when conformed, could have a material impact on this pro forma combined financial information. During the preparation of this pro forma combined financial information, Actavis was not aware of any material differences between accounting policies of the companies, except for certain reclassifications necessary to conform to Actavis financial presentation, and accordingly, this pro forma combined financial information does not assume any material differences in accounting policies among the companies.
4. | Historical Forest |
Financial information presented in the Historical Forest column in the unaudited pro forma combined balance sheet represents the historical consolidated balance sheet of Forest as of December 31, 2013. Financial information presented in the Historical Forest column in the unaudited pro forma combined statement of operations represents the historical consolidated statement of operations of Forest for the year ended December 31, 2013, which is derived by adding the consolidated statement of operations for the nine months ended December 31, 2013 and subtracting the consolidated statement of operations for the nine months ended December 31, 2012 to and from the consolidated statement of operations for the fiscal year ended March 31, 2013 as follows (in millions):
Year Ended March 31, 2013 |
Nine Months Ended December 31, 2013 |
Nine Months Ended December 31, 2012 |
Twelve Months Ended December 31, 2013 |
|||||||||||||
Total revenue |
$ | 3,094.0 | $ | 2,554.7 | $ | 2,280.2 | $ | 3,368.5 | ||||||||
Cost of goods sold |
649.1 | 511.4 | 471.3 | 689.2 | ||||||||||||
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Gross profit |
2,444.9 | 2,043.3 | 1,808.9 | 2,679.3 | ||||||||||||
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Operating expenses |
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Selling, general and administrative |
1,558.3 | 1,307.4 | 1,185.6 | 1,680.1 | ||||||||||||
Research and development |
963.6 | 596.3 | 723.3 | 836.6 | ||||||||||||
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Total operating expenses |
2,521.9 | 1,903.7 | 1,908.9 | 2,516.7 | ||||||||||||
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Operating (loss) income |
(77.0 | ) | 139.6 | (100.0 | ) | 162.6 | ||||||||||
Interest and other income (expense), net |
32.1 | 12.6 | 24.3 | 20.4 | ||||||||||||
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Income (loss) before income taxes |
(44.9 | ) | 152.2 | (75.7 | ) | 183.0 | ||||||||||
Income tax expense (benefit) |
(12.8 | ) | 41.0 | 1.8 | 26.4 | |||||||||||
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Net income (loss) |
$ | (32.1 | ) | $ | 111.2 | $ | (77.5 | ) | $ | 156.6 | ||||||
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Financial information presented in the Historical Forest column in the unaudited pro forma combined balance sheet and statement of operations has been reclassified or classified to conform to the historical presentation in Actavis consolidated financial statements as follows (in millions):
Reclassifications and classifications in the unaudited pro forma combined balance sheet
Before Reclassification |
Reclassification | After Reclassification |
||||||||||
Investments and other assets |
$ | 1,584.8 | (i) | $ | | $ | 1,584.8 | |||||
Product rights and other intangibles |
2,072.1 | (ii) | | 2,072.1 | ||||||||
Accounts payable and accrued expenses |
1,040.0 | (iii) | | 1,040.0 | ||||||||
Other taxes payable |
528.5 | (iv) | | 528.5 |
7
(i) | Includes Marketable securities and investments of $1,463.8 million and Other assets of $121.0 million. |
(ii) | Represents License agreements, product rights and other intangibles, net of $2,072.1 million. |
(iii) | Includes Accounts payable of $77.5 million and Accrued expenses and other current liabilities of $962.5 million. |
(iv) | Represents $528.5 million of uncertain tax positions. |
Reclassifications and classifications in the unaudited pro forma combined statement of operations
Before Reclassification |
Reclassification | After Reclassification |
||||||||||
Net revenues |
$ | 3,368.5 | (i) | $ | | $ | 3,368.5 | |||||
Cost of sales |
689.2 | (ii) | (46.4 | ) | 642.8 | |||||||
Selling and marketing |
1,680.1 | (iii) | (528.4 | ) | 1,151.7 | |||||||
General and administrative |
| 445.6 | 445.6 | |||||||||
Amortization |
| 127.1 | 127.1 | |||||||||
Loss on asset sales, impairments and contingent consideration adjustment, net |
| 2.1 | 2.1 | |||||||||
Interest income |
20.4 | (iv) | 0.6 | 21.0 | ||||||||
Interest expense |
| (3.5 | ) | (3.5 | ) | |||||||
Other income (expense), net |
| 2.9 | 2.9 |
(i) | Represents Total revenue of $3,368.5 million. |
(ii) | Includes amortization of $46.4 million. |
(iii) | Includes General and administrative expense of $445.6 million, Amortization of $80.7 million and Loss on asset sale of $2.1 million. |
(iv) | Represents Interest and other income (expense), net of $20.4 million. |
8
5. | Historical Aptalis |
Financial information presented in the Historical Aptalis column in the unaudited pro forma combined balance sheet represents the historical consolidated balance sheet of Aptalis as of December 31, 2013. Financial information presented in the Historical Aptalis column in the unaudited pro forma combined statement of operations represents the historical consolidated statement of operations of Aptalis for the year ended December 31, 2013, which is derived by adding the statement of operations for the three months ended December 31, 2013 and subtracting the statement of operations for the three months ended December 31, 2012 to and from the statement of operations for the fiscal year ended September 30, 2013 as follows (in millions):
Year Ended September 30, 2013 |
Three Months Ended December 31, 2013 |
Three Months Ended December 31, 2012 |
Twelve Months Ended December 31, 2013 |
|||||||||||||
Total revenue |
$ | 687.9 | $ | 191.5 | $ | 174.3 | $ | 705.1 | ||||||||
Cost of goods sold |
146.6 | 39.9 | 32.3 | 154.2 | ||||||||||||
Selling and administrative expenses |
172.5 | 56.6 | 42.7 | 186.4 | ||||||||||||
Management fees |
7.0 | 1.9 | 1.7 | 7.2 | ||||||||||||
Research and development expenses |
65.5 | 28.8 | 17.5 | 76.8 | ||||||||||||
Depreciation and amortization |
94.8 | 20.0 | 25.3 | 89.5 | ||||||||||||
Fair value adjustments to intangible assets and contingent consideration |
10.0 | 0.7 | 2.9 | 7.8 | ||||||||||||
Gain on disposal of product line |
(1.0 | ) | (2.0 | ) | (1.0 | ) | (2.0 | ) | ||||||||
Transaction, restructuring and integration costs |
2.4 | 0.1 | 0.6 | 1.9 | ||||||||||||
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Total operating expenses |
497.8 | 146.0 | 122.0 | 521.8 | ||||||||||||
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Operating income |
190.1 | 45.5 | 52.3 | 183.3 | ||||||||||||
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Financial expenses |
68.8 | 23.8 | 17.9 | 74.7 | ||||||||||||
Loss on extinguishment of debt |
| 5.3 | | 5.3 | ||||||||||||
Interest and other income |
(0.4 | ) | (0.1 | ) | (0.1 | ) | (0.4 | ) | ||||||||
Loss (gain) on foreign currencies |
0.1 | 0.1 | (0.4 | ) | 0.6 | |||||||||||
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Total other expenses |
68.5 | 29.1 | 17.4 | 80.2 | ||||||||||||
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Income before income taxes |
121.6 | 16.4 | 34.9 | 103.1 | ||||||||||||
Income tax expense |
34.7 | 13.5 | 8.2 | 40.0 | ||||||||||||
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Net income |
$ | 86.9 | $ | 2.9 | $ | 26.7 | $ | 63.1 | ||||||||
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Financial information presented in the Historical Aptalis column in the unaudited pro forma combined balance sheet and statement of operations has been reclassified or classified to conform to the historical presentation in Actavis consolidated financial statements as follows:
Reclassifications and classifications in the unaudited pro forma combined balance sheet
Before Reclassification |
Reclassification | After Reclassification |
||||||||||
Prepaid expenses and other current assets |
$ | 17.1 | (i) | $ | | $ | 17.1 | |||||
Investments and other assets |
24.6 | (ii) | | 24.6 | ||||||||
Accounts payable and accrued expenses |
159.1 | (2.7 | ) | 156.4 | ||||||||
Deferred revenue (Current) |
| 2.7 | 2.7 | |||||||||
Other long-term liabilities |
40.6 | (4.5 | )(iii) | 36.1 | ||||||||
Other taxes payable |
| 4.5 | (iii) | 4.5 |
9
(i) | Includes Income taxes receivable of $3.4 million and Prepaid and other current assets of $13.7 million. |
(ii) | Includes Deferred debt issue expenses, net of $23.9 million and Other long term assets of $0.7 million. |
(iii) | Represents reclassification of uncertain tax positions. |
Reclassifications and classifications in the unaudited pro forma combined statement of operations
Before Reclassification |
Reclassification | After Reclassification |
||||||||||
Net revenues |
$ | 705.1 | (i) | $ | | $ | 705.1 | |||||
Cost of sales |
154.2 | 15.0 | (viii) | 169.2 | ||||||||
Selling and marketing |
195.5 | (ii) | (93.8 | ) | 101.7 | |||||||
General and administrative |
| 93.8 | 93.8 | |||||||||
Amortization |
89.5 | (iii) | (15.0 | )(viii) | 74.5 | |||||||
Loss on asset sales, impairments and contingent consideration adjustment, net |
5.8 | (iv) | | 5.8 | ||||||||
Interest income |
0.4 | (v) | | 0.4 | ||||||||
Interest expense |
(74.7 | )(vi) | | (74.7 | ) | |||||||
Other income (expense), net |
(5.9 | )(vii) | | (5.9 | ) |
(i) | Represents Total revenue of $705.1 million. |
(ii) | Includes Selling and administrative expenses of $186.4 million, Management fees of $7.2 million and Transaction, restructuring and integration costs of $1.9 million. |
(iii) | Represents Depreciation and Amortization of $89.5 million. |
(iv) | Includes Fair value adjustments to intangible assets and contingent consideration of $7.8 million and Gain on disposal of product line of $(2.0) million. |
(v) | Represents Interest and other income of $0.4 million. |
(vi) | Represents Financial expenses of $74.7 million. |
(vii) | Includes Loss on extinguishment of debt of $5.3 million and Loss on foreign currencies of $0.6 million. |
(viii) | Represents reclassification of Depreciation expense of $15.0 million. |
6. | Historical Warner Chilcott |
Financial information presented in the Historical Warner Chilcott column in the unaudited pro forma combined statement of operations represents the historical consolidated statement of operations of Warner Chilcott for the nine months ended September 30, 2013. Results of operations of Warner Chilcott after October 1, 2013 (i.e., date of acquisition) are included in Historical Actavis plc column.
Financial information presented in the Historical Warner Chilcott column in the unaudited pro forma combined statement of operations has been reclassified to conform to the historical presentation in Actavis consolidated financial statements as follows (in million):
Before Reclassification |
Reclassification | After Reclassification |
||||||||||
Selling and marketing |
$ | 572.0 | (i) | $ | (250.0 | ) | $ | 322.0 | ||||
General and administrative |
| 250.0 | 250.0 |
(i) | Includes $575.0 million of Selling, general and administrative and $(3.0) million of Restructuring (income)/costs. |
10
7. | Unaudited Pro Forma Combined Balance Sheet Adjustments |
Adjustments included in the Aptalis Acquisition and Financing Adjustments column in the accompanying unaudited pro forma combined balance sheet at December 31, 2013 are as follows (in millions):
Note | Amount | |||||||
Purchase consideration |
|
|||||||
Cash consideration |
7a | $ | 1,793.5 | |||||
Payout of Aptalis equity awards |
7a | 74.6 | ||||||
|
|
|||||||
Fair value of total consideration transferred |
$ | 1,868.1 | ||||||
|
|
|||||||
Historical book value of net assets acquired |
|
|||||||
Book value of Aptalis historical net assets as of December 31, 2013 |
$ | (331.9 | ) | |||||
Less Aptalis M&A costs expected to incur |
(1.5 | ) | ||||||
|
|
|||||||
Net assets to be acquired |
$ | (333.4 | ) | |||||
|
|
|||||||
Adjustments to reflect preliminary fair value of assets acquired and liabilities assumed |
| |||||||
Inventories, net |
7b | $ | 123.7 | |||||
Product rights and other intangibles, net |
7b | 2,190.3 | ||||||
Goodwill |
7c | 445.2 | ||||||
Deferred tax liabilities |
7d | (557.7 | ) | |||||
|
|
|||||||
Total |
$ | 2,201.5 | ||||||
|
|
a. | Represents (a) the cash consideration paid by Forest to purchase Aptalis, equal to the enterprise value of $2,900.0 million (i) less the extinguishment of $1,250.0 million in principal of existing Aptalis debt as of December 31, 2013, (ii) less certain Aptalis shareholders expenses of $1.9 million, (iii) plus Aptalis cash on hand of $104.2 million as of December 31, 2013, (iv) plus the aggregate exercise price of Aptalis stock options of $41.2 million and (b) the payout of Aptalis equity awards of $74.6 million. |
All outstanding options, restricted stock units and long-term incentive plan awards of Aptalis were converted into the right to receive a certain amount of cash per share. In aggregate, $74.6 million was paid. No equity awards of Aptalis survived the merger and no replacement equity awards were granted.
b. | Represents the estimated fair value adjustment to step-up Aptalis inventory and identifiable intangible assets by $123.7 million and $2,190.3 million to their preliminary fair values of $185.2 million and $2,764.7 million, respectively. |
The estimated step-up in inventory is preliminary and is subject to change based upon managements final determination of the fair values of finished goods and work-in-process inventories. The final step-up in inventory will increase cost of sales as the acquired inventory is sold within the first year after the acquisition. As there is no continuing impact, the effect on cost of sales from the inventory step-up is not included in the unaudited pro forma combined statement of operations.
Identified intangible assets primarily represent product rights that are expected to be amortized over a weighted average useful life of 10 years. The fair value estimate for identifiable intangible assets is preliminary and is determined based on the assumptions that market participants would use in pricing these assets, based on the most advantageous market for the assets (i.e., its highest and best use). The final fair value determination for identified intangibles may differ from this preliminary determination.
The fair value of identifiable intangible assets is determined primarily using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of the identifiable intangible assets valuations, from the perspective of a market participant, include the estimated net cash flows for each year for each product (including net revenues, cost of sales, research and development costs, selling and marketing costs and working capital asset/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each assets life cycle, competitive
11
trends impacting the asset and each cash flow stream as well as other factors. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. Therefore, actual results may vary significantly from estimated results.
c. | Goodwill is calculated as the difference between the fair value of the consideration transferred and the values assigned to the identifiable assets acquired and liabilities assumed. The adjustment represents a net increase of goodwill by $445.2 million to present Forests total goodwill of $1,339.0 million after giving effect to the Aptalis Acquisition presented in the unaudited pro forma combined financial statements. |
d. | Represent a deferred income tax liability of $29.8 million (current) and $527.9 million (non-current), resulting from fair value adjustments for the inventory and identifiable intangible asset, respectively. This estimate of deferred tax liabilities was determined based on the excess book basis from fair value accounting over the tax basis of the inventory and identifiable intangible assets at a 24.1% weighted average statutory tax rate of the United States, Canada and Ireland, where most of Aptalis taxable income was generated historically. |
e. | Represents (a) cash inflows from Forests new borrowings of $1,050.0 million (4.375% notes) and $750.0 million (4.875% notes) to fund the Aptalis Acquisition and (b) cash outflows from (i) cash purchase consideration of $1,793.5 million, (ii) payout of Aptalis equity awards of $74.6 million, (iii) the repayment of existing Aptalis debt of $1,250.0 million, (iv) merger and acquisition (M&A) costs of Forest and Aptalis of $51.0 million and $1.5 million, respectively and (v) Forests financing costs of $22.9 million. |
f. | Represents the write-off of the deferred financing costs of $23.9 million related to the repayment of Aptalis existing debt, offset by the new deferred financing costs of $22.9 million related to the Forests new debt to finance the Aptalis Acquisition. |
g. | Represents the repayment of existing Aptalis long-term debt, net of discount, of $1,218.3 million and the current portion of long-term debt of $12.5 million (principal amount of $1,250.0 million in total), and Forests new long-term debt of $1,050.0 million (4.375% notes) and $750.0 million (4.875% notes). |
h. | Represents the elimination of Aptalis historical common stock. |
i. | Represents the elimination of Aptalis historical additional paid-in capital. |
j. | Represents (i) the elimination of Aptalis historical accumulated deficit of $593.9 million, (ii) Forests expected M&A costs of $51.0 million, (iii) the write-down of deferred financing costs of $23.9 million and a loss from the extinguishment of debt of $19.2 million, related to the repayment of existing Aptalis debt. |
k. | Represents the elimination of Aptalis historical accumulated other comprehensive income. |
Adjustments included in the Forest Acquisition Adjustments column in the accompanying unaudited pro forma combined balance sheet at December 31, 2013 are as follows (in millions):
Note | Amount | |||||||
Purchase consideration |
||||||||
Preliminary estimate of fair value of ordinary shares issued |
7l | $ | 18,486.6 | |||||
Preliminary estimate of fair value of equity awards issued |
7l | 668.2 | ||||||
Cash consideration |
7l | 6,977.7 | ||||||
|
|
|||||||
Fair value of total consideration transferred |
$ | 26,132.5 | ||||||
|
|
|||||||
Historical book value of net assets acquired |
||||||||
Book value of Forests historical net assets as of December 31, 2013 |
|
$ | 5,899.2 | |||||
Less Forests M&A costs expected to incur |
(20.0 | ) | ||||||
|
|
|||||||
Net assets to be acquired |
$ | 5,879.2 | ||||||
|
|
|||||||
Adjustments to reflect preliminary fair value of assets acquired and liabilities assumed |
| |||||||
Inventories, net |
7m | $ | 547.8 | |||||
Product rights and other intangibles, net |
7m | 8,959.9 | ||||||
Goodwill |
7n | 12,742.2 | ||||||
Deferred tax liabilities |
7o | (1,996.6 | ) | |||||
|
|
|||||||
Total |
$ | 20,253.3 | ||||||
|
|
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l. | Preliminary estimate of fair value of ordinary shares issued was estimated based on approximately 267,960 thousand shares of Forests common stock outstanding (excluding restricted stock) as of December 31, 2013, multiplied by the exchange ratio of 0.3306 and Actavis share price on March 10, 2014 of $208.68 per share. |
Almost all equity awards of Forest will be replaced with equity awards of Actavis with similar terms, except for restricted stock units with performance conditions. Preliminary estimate of fair value of equity awards issued represents the estimated aggregate fair value of Actavis replacement awards attributable to the service periods prior to the Forest Acquisition, which is considered as part of purchase consideration, and was calculated based on Forests equity awards outstanding (including restricted stock) as of December 31, 2013, multiplied by the exchange ratio of 0.4723 and estimated fair value of equity awards.
The number of Actavis ordinary shares and equity awards issued is dependent on the number of Forests common stock and equity awards outstanding on the date of the Forest Acquisition.
Fair value of common stock and equity awards was estimated based on the Actavis closing share price on March 10, 2014 of $208.68 per share. A 25% increase to the Actavis share price would increase the purchase price by $4,857.1 million, and a 25% decrease in share price would decrease the purchase price by $4,853.5 million, both with a corresponding change to our assets. The actual purchase price will fluctuate until the effective date of the acquisition and the final valuation could differ significantly from the current estimate.
m. | Represents the estimated fair value adjustment to step-up Forests inventory and identifiable intangible assets by $547.8 million and $8,959.9 million to their preliminary fair values of $1,171.0 million and $13,796.7 million, respectively. |
The estimated step-up in inventory is preliminary and is subject to change based upon managements final determination of the fair values of finished goods and work-in-process inventories. The final step-up in inventory will increase cost of sales as the acquired inventory is sold within the first year after the acquisition. As there is no continuing impact, the effect on cost of sales from the inventory step-up is not included in the unaudited pro forma combined statement of operations.
Identified intangible assets of $13,796.7 million primarily consist of (i) currently marketed products (CMP) of $8,848.0 million (weighted average useful life of 7.9 years), (ii) CMP obtained from the Aptalis Acquisition of $2,764.7 million (weighted average useful life of 10.0 years), (iii) IPR&D of $1,808.0 million and (iv) other intangible assets such as royalty agreements and technology contracts of $376.0 million (weighted average useful life of 8.5 years). The IPR&D amounts will be capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project and launch of the product, Actavis will make a separate determination of useful life of the IPR&D intangible and amortization will be recorded as an expense. As the IPR&D intangibles are not currently marketed, no amortization of these items is reflected in the unaudited pro forma combined statement of operations.
The fair value estimate for identifiable intangible assets is preliminary and is determined based on the assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). This preliminary fair value estimate could include assets that are not intended to be used, may be sold or are intended to be used in a manner other than their best use. For purposes of the accompanying unaudited pro forma combined financial information, it is assumed that all assets will be used in a manner that represents their highest and best use. The final fair value determination for identified intangibles, including the IPR&D intangibles, may differ from this preliminary determination.
The fair value of identifiable intangible assets is determined primarily using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participants expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of the identifiable intangible assets valuations, from the perspective of a market participant, include the estimated net cash flows for each year for each project or product (including net revenues, cost of sales, research and development costs, selling and marketing costs
13
and working capital asset/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each assets life cycle, 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 and regulatory risk. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change or the timely completion of each project to commercial success will occur. For these and other reasons, actual results may vary significantly from estimated results.
n. | Goodwill is calculated as the difference between the fair value of the consideration expected to be transferred and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. The adjustment represents a net increase of Actavis total goodwill to $22,278.8 million after giving effect to the Forest Acquisition. |
o. | Represent a deferred income tax liability of $115.0 million (current) and $1,881.6 million (non-current), resulting from fair value adjustments for the inventory and identifiable intangible asset, respectively. This estimate of deferred tax liabilities was determined based on the excess book basis from fair value accounting over the tax basis of the inventory and identifiable intangible assets at a 21.0% weighted average statutory tax rate of the United States and Ireland, where most of Forests taxable income was generated historically. |
In connection with the Forest Acquisition, Actavis will continue to consider the realization of deferred tax assets and any related valuation allowances. Recoverability of the deferred tax assets depends on a number of factors including certain tax limitations that may be triggered in connection with the acquisition, final tax structure, final intercompany and external debt structure and finalization of fair values under ASC 805 and related deferred taxes by jurisdiction. Due to the significant uncertainty involved and the non-continuing nature of the impact, the effect of the potential release of the valuation allowance is not reflected in the unaudited pro forma combined financial information.
p. | Represents cash outflows from the (i) payment of cash purchase consideration of $6,977.7 million and (ii) M&A costs of Actavis and Forest of $86.9 million and $20.0 million, respectively. |
q. | Represents the elimination of Forests ordinary shares. The aggregate par value of newly issued Actavis ordinary shares was not material. |
r. | Represents the issuance of Actavis ordinary shares (excluding restricted shares) of $18,486.6 million and the issuance of replacement equity awards (including restricted shares) of $668.2 million, partially offset by the elimination of Forests additional paid-in capital of $1,951.1 million. |
s. | Represents the elimination of Forests retained earnings of $9,072.5 million and Actavis estimated M&A costs of $86.9 million. |
t. | Represents the elimination of Forests historical accumulated other comprehensive income. |
u. | Represents the elimination of Forests historical treasury stock. |
Adjustments included in the Forest Financing Adjustments column in the accompanying unaudited pro forma combined balance sheet at December 31, 2013 are as follows (in millions):
v. | The accompanying unaudited combined financial information is prepared assuming that the Forest Acquisition will be funded through a combination of available cash on hand, senior unsecured term loans of $2,000.0 million, senior notes of $2,000.0 million and, to the extent it is necessary for a short term, cash bridge loans. |
Based on the estimated available cash generated from operating and investing activities between December 31, 2013 and the anticipated closing date in the second or third quarter of 2014, Actavis expects to have sufficient cash to close the Forest Acquisition without drawing the cash bridge loans. Even if the cash bridge loans are drawn, the loans are expected to be fully paid within a short period of time. However, the unaudited combined pro forma balance sheet should be presented based on historical cash balance as of December 31, 2013. Therefore, the unaudited combined pro forma balance sheet is presented as if cash bridge loans were drawn at closing based on cash on hand as of December 31, 2013.
14
Although Actavis can also draw its revolving credit facility under the Amended and Restated Actavis Revolving Credit and Guaranty Agreement, it is not expected that the revolving credit facility will be drawn to complete the Mergers. Therefore, the accompanying unaudited combined financial information does not reflect the use of Actavis revolving credit facility.
The adjustment represents (a) the cash inflows from (i) the senior unsecured term loans of $2,000.0 million, (ii) the senior notes of $2,000.0 million and (iii) the cash bridge loans of $1,825.6 million and (b) the cash outflows from the payment of financing costs of $103.1 million.
w. | Represents deferred financing costs of $103.1 million related to Actavis term loan and senior notes borrowings to fund the Forest Acquisition. |
x. | Represents current portion of borrowings. |
y. | Represents long-term portion of borrowings. |
8. | Unaudited Pro Forma Combined Statement of Operations Adjustments |
Adjustments included in the Warner Chilcott Acquisition and Financing Adjustments column in the accompanying unaudited pro forma combined statement of operations are as follows:
a. | Represents the elimination of net revenues and cost of sales of product sales and royalty payments of $16.4 million between Actavis and Warner Chilcott for the nine months ended September 30, 2013. |
b. | Actavis applied the acquisition method of accounting to the assets acquired and liabilities assumed from Warner Chilcott and the property and equipment of Warner Chilcott were recorded at fair value and their useful lives were adjusted. The adjustment represents a resulting change in depreciation for the nine months ended September 30, 2013. The change in depreciation is reflected as follows (in millions): |
Nine Months Ended September 30, 2013 |
||||
Cost of sales |
$ | (1.9 | ) | |
Research and development |
0.4 | |||
General and administrative |
(8.0 | ) | ||
|
|
|||
Total |
$ | (9.5 | ) | |
|
|
Note that as a result of the application of the acquisition method of accounting, inventories of Warner Chilcott were stepped up by $408.3 million, $173.5 million of which was sold during the fourth quarter of 2013, increasing cost of sales in the consolidated statement of operations of Actavis. Since such inventory step-up does not have a continuing impact, no adjustment was made to the unaudited combined pro forma statement of operations.
c. | Represents the stock-based compensation of $7.3 million in connection with the replacement equity awards granted at the close of the Warner Chilcott Acquisition and removal of M&A costs of $62.6 million recorded by Actavis and Warner Chilcott for the nine months ended September 30, 2013. |
d. | Represents increased amortization for the fair value of identified intangible assets with definite lives for the nine months ended September 30, 2013. The Company matches amortization over the economic benefit method as follows (in millions): |
Fair Value | Nine Months Ended September 30, 2013 |
|||||||||||
CMP intangible assets |
$ | 3,021.0 | $ | 712.6 | ||||||||
IPR&D |
Non-amortizable | 1,708.0 | | |||||||||
|
|
|
|
|||||||||
$ | 4,729.0 | $ | 712.6 | |||||||||
|
|
|||||||||||
Less historical amortization |
329.0 | |||||||||||
|
|
|||||||||||
$ | 383.6 | |||||||||||
|
|
15
e. | In connection with the Warner Chilcott Acquisition, Warner Chilcotts senior secured credit facilities were refinanced. Giving effect to the refinancing of the $2,000.0 million of Warner Chilcotts senior secured credit facilities, with a weighted average interest rate of 1.49%, interest expense including amortization of the debt issuance costs for the nine months ended September 30, 2013 is expected to decrease by $100.1 million. |
f. | Represents the income tax effect for unaudited pro forma combined statement of operations adjustments related to the Warner Chilcott Acquisition and financing using a 20.0% weighted average statutory tax rate of the United States and Puerto Rico, where most of Warner Chilcotts taxable income was generated historically. |
Adjustments included in the Aptalis Acquisition and Financing Adjustments column in the accompanying unaudited pro forma combined statement of operations are as follows:
g. | Represents (i) the reversal of the management fee of $7.2 million incurred by Aptalis, as the management contract was terminated upon the Aptalis Acquisition and (ii) the reversal of M&A costs of $1.7 million recorded by Forest and Aptalis in connection with the Aptalis Acquisition. |
h. | Represents increased amortization for the fair value of identified intangible assets with definite lives as follows (in millions): |
Weighted Average Useful Lives (Years) |
Fair Value | Year Ended December 31, 2013 |
||||||||||
CMP intangible assets |
10 | $ | 2,764.7 | $ | 276.5 | |||||||
Less historical amortization |
74.5 | |||||||||||
|
|
|||||||||||
$ | 202.0 | |||||||||||
|
|
i. | Represents (a) (i) new interest expense related to the $1,050.0 million of 4.375% notes due 2019 and $750.0 million of 4.875% notes due 2021, issued in January 2014 and (ii) $1,200 million of 5.000% notes due 2021 issued in December 2013, including amortization of deferred financing costs based on the effective interest rate method and (b) the elimination of Aptalis historical interest expense of $74.7 million in connection with the repayment of Aptalis existing long-term debt in the principal amount of $1,250.0 million upon the Aptalis Acquisition as follows (in millions): |
Year Ended December 31, 2013 |
||||
New interest expense from Forests 4.375% Notes |
$ | 48.4 | ||
New interest expense from Forests 4.875% Notes |
37.7 | |||
New interest expense from Forests 5.000% Notes |
61.9 | |||
Elimination of Aptalis historical interest expense |
(74.7 | ) | ||
|
|
|||
Total |
$ | 73.3 | ||
|
|
j. | Represents the income tax effect for unaudited pro forma combined statement of operations adjustments related to the Aptalis Acquisition and the related financing using a 24.1% weighted average blended statutory tax rate of the United States, Canada and Ireland, where most of Aptalis taxable income was generated historically. |
Adjustments included in the Forest Acquisition Adjustments column in the accompanying unaudited pro forma combined statement of operations are as follows:
k. | Represents the elimination of net revenues and cost of sales of product sales of $22.9 million between Actavis and Aptalis during the period which is reflected in the Forest subtotal after the Aptalis Acquisition. |
l. | Represents the stock-based compensation of $307.5 million in total in connection with the replacement equity awards to be granted at the close of the Forest Acquisition. |
16
m. | Represents increased amortization for the fair value of identified intangible assets with definite lives for the year ended December 31, 2013. The increase in amortization expense for intangible assets is calculated as follows (in millions): |
Weighted Average Useful Lives (Years) |
Fair Value | Amortization | ||||||||||
CMP intangible assets of Forest |
7.9 | $ | 8,848.0 | $ | 1,120.0 | |||||||
Other intangible assets of Forest |
8.5 | 376.0 | 44.2 | |||||||||
IPR&D of Forest |
Non-Amortizable | 1,808.0 | | |||||||||
CMP intangible assets acquired through the Aptalis Acquisition |
10 | 2,764.7 | 276.5 | |||||||||
|
|
|
|
|||||||||
$ | 13,796.7 | $ | 1,440.7 | |||||||||
|
|
|||||||||||
Less historical amortization |
403.6 | |||||||||||
|
|
|||||||||||
$ | 1,037.1 | |||||||||||
|
|
A $100.0 million increase or decrease in fair value of identified intangible assets would increase or decrease amortization by approximately $11.9 million.
n. | Represents the income tax effect for unaudited pro forma combined statement of operations adjustments related to the Forest acquisition using a 21.0% weighted average blended statutory tax rate of the United States and Ireland, where most of Forests taxable income was generated historically. |
Adjustments included in the Forest Financing Adjustments column in the accompanying unaudited pro forma combined statement of operations are as follows:
o. | Represents estimated interest expense, including amortization of deferred financing costs based on effective interest rate method, related to the new senior unsecured term loans and senior notes as follows (in millions): |
Year Ended December 31, 2013 |
||||
New senior unsecured term loans |
$ | 40.8 | ||
New senior notes |
108.2 | |||
|
|
|||
Total |
$ | 149.0 | ||
|
|
For the new senior unsecured term loans of $2,000.0 million, five year maturity was assumed. For the new senior notes in the principal amount of $1,000.0 million each, 10 year maturity and 30 year maturity were assumed, respectively. The assumed interest rate for these new borrowings was 3.27% on a weighted average basis. Interest expense from the cash bridge loans was not reflected in the unaudited combined pro forma statement of operations as it will not have a continuing impact due to the short-term nature, even if the cash bridge loans were drawn at closing.
There is no assurance that the underlying assumptions used in interest expense calculation will not change. For this and other reasons, the actual financing of the Forest Acquisition and related financial impacts may vary significantly from the estimates included herein.
A 1/8% increase or decrease in the variable interest rate on the new senior unsecured term loans would increase or decrease the annual interest expense by $2.5 million. A 1/8% increase or decrease in the interest rate on the new senior notes would increase or decrease the annual interest expense by $2.5 million.
p. | Represents the income tax effect for unaudited pro forma combined statement of operations adjustments related to the financing for the Forest Acquisition using a 21.0% weighted average blended statutory tax rate of the United States and Ireland, where most of Forests taxable income was generated historically. |
17
9. | Earnings per Share |
The unaudited pro forma combined basic and diluted earnings per share calculations are based on Actavis consolidated basic and diluted weighted-average number of shares. The historical basic and diluted weighted average shares of Forest are assumed to be replaced by the shares expected to be issued by Actavis. All equity awards, including the replacement equity awards from the Forest Acquisition, were not included in the dilutive earnings per share calculation as they were antidilutive.
18