NOTE 11. LICENSE AND COLLABORATION AGREEMENTS

Novartis AG, Novartis Consumer Health, Inc. and Sandoz, Inc.

The Company has exclusive U.S. marketing rights to Voltaren^® Gel (Voltaren^® Gel) pursuant to a License and Supply Agreement entered into in 2008 with and among Novartis AG and Novartis Consumer Health, Inc. (Novartis) (the 2008 Voltaren^® Gel Agreement).

During the term of the 2008 Voltaren^® Gel Agreement, the Company is solely responsible to commercialize Voltaren^® Gel and has agreed to purchase all of its requirements for Voltaren^® Gel from Novartis. The price of product purchased under the 2008 Voltaren^® Gel Agreement is fixed for the first year and subject to annual changes based upon changes in the producer price index and raw materials. Amounts purchased pursuant to the 2008 Voltaren^® Gel Agreement were $53.4 million, $55.0 million and $50.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Further, the minimum A&P Expenditures set forth in the 2008 Voltaren^® Gel Agreement are determined based on a percentage of net sales of Voltaren^® Gel, which may be reduced under certain circumstances, including Novartis’s failure to supply Voltaren^® Gel. Amounts incurred for such A&P Expenditures were $5.0 million, $5.5 million and $8.1 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Voltaren^® Gel royalties incurred during the years ended December 31, 2015, 2014 and 2013 were $30.0 million, $30.0 million and $30.0 million, respectively, representing minimum royalties pursuant to the 2008 Voltaren^® Gel Agreement.

Effective March 1, 2015, Novartis Consumer Health, Inc. assigned the 2008 Voltaren^® Gel Agreement to its affiliate, Sandoz, Inc.

On December 11, 2015, Endo, Novartis AG and Sandoz entered into a new License and Supply Agreement (the 2015 Voltaren^® Gel Agreement) effectively renewing our exclusive U.S. marketing and license rights to commercialize Voltaren^® Gel (the Branded Licensed Product) and granting the Company the exclusive right to launch an authorized generic of Voltaren^® Gel (the Generic Licensed Product, and, together with the Branded Licensed Product, the Licensed Product). Pursuant to the 2015 Voltaren^® Gel Agreement, the former 2008 Voltaren^® Gel Agreement will expire on June 30, 2016 in accordance with its terms. The 2015 Voltaren^® Gel Agreement will become effective on July 1, 2016 and will be accounted for as a business combination as of the effective date.

Under the 2015 Voltaren^® Gel Agreement, Endo will pay royalties to Novartis AG or Sandoz (as designated by Sandoz) on annual net sales of the Branded Licensed Product, subject to certain thresholds specified in the 2015 Voltaren^® Gel Agreement. In addition, Endo has agreed to make certain guaranteed minimum annual royalty payments of $30.0 million and contingent royalty payments, subject to certain limitations specified in the Agreement. The guaranteed minimum royalties will be creditable against royalty payments on an 2015 Voltaren^® Gel Agreement year basis such that Endo’s obligation with respect to each Agreement year is to pay the greater of (i) royalties payable based on annual net sales of the Branded Licensed Product or (ii) the guaranteed minimum royalty for such 2015 Voltaren^® Gel Agreement year. Endo and Novartis AG or Sandoz (as designated by Sandoz) will share any profits relating to net sales of the Generic Licensed Product as specified in the 2015 Voltaren^® Gel Agreement. Novartis AG or Sandoz (as designated by Sandoz) is also eligible to receive a one-time milestone payment of $25.0 million if annual sales of the Licensed Product exceed $300.0 million.

During the term of the 2015 Voltaren^® Gel Agreement, Endo has agreed to purchase all of its requirements for the Licensed Product from Sandoz. The price of product purchased by Endo under the 2015 Voltaren^® Gel Agreement is fixed for the first year and is subject to annual changes based upon changes in the producer price index and raw materials as set forth in the 2015 Voltaren^® Gel Agreement.

The exclusive marketing and license rights do not include the right to commercialize over-the-counter (OTC) equivalent product in the United States. The OTC rights are held by GlaxoSmithKline Consumer Healthcare Holdings Limited (GSK), who has agreed not to launch an OTC equivalent product prior to a specified time. In the event that GSK launches an OTC equivalent product before any person, other than GSK or its affiliates, launches either (i) an OTC version of 1% diclofenac gel product, or (ii) a generic to Voltaren^® Gel, then Endo will receive certain royalty payments on net sales of such OTC equivalent product in the United States as set forth in the 2015 Voltaren^® Gel Agreement; provided that, and subject to certain limitations and provisions as set forth in the 2015 Voltaren^® Gel Agreement, as a condition to the payment of any and all such royalties, net sales of the Licensed Product in the United States must have exceeded a certain threshold as defined in the 2015 Voltaren^® Gel Agreement prior to the launch of the OTC equivalent product.

The initial term of the 2015 Voltaren^® Gel Agreement will be seven years, expiring on June 30, 2023. Thereafter, the 2015 Voltaren^® Gel Agreement will automatically be extended for successive one year terms (each a Renewal Term) unless any party provides written notice of non-renewal to the other parties at least six months prior to the expiration of any Renewal Term after the first Renewal Term.

Among other standard and customary termination rights granted under the 2015 Voltaren^® Gel Agreement, the 2015 Voltaren^® Gel Agreement can be terminated by any party upon reasonable written notice, if the other party has committed a material breach that has not been remedied within ninety days from the giving of written notice. Endo may terminate the 2015 Voltaren^® Gel Agreement by written notice upon the occurrence of specified events, including the launch in the United States of a generic to the Licensed Product. Sandoz may terminate the 2015 Voltaren^® Gel Agreement upon reasonable written notice on or after the launch in the United States of an over-the-counter equivalent product by Sandoz, its affiliates or any third party that does not result in the declassification of the Licensed Product as a prescription product, following which net sales in any six month period under the 2015 Voltaren^® Gel Agreement are less than a certain defined dollar amount.

Strakan International Limited

In August 2009, we entered into a License and Supply Agreement with Strakan International Limited, a subsidiary of ProStrakan Group plc. (ProStrakan), which was subsequently acquired by Kyowa Hakko Kirin Co. Ltd., for the exclusive right to commercialize Fortesta^® Gel in the U.S. (the ProStrakan Agreement). Fortesta^® Gel is a patented 2% testosterone transdermal gel for testosterone replacement therapy in male hypogonadism. A metered dose delivery system permits accurate dose adjustment to increase the ability to individualize patient treatment.

The Company received FDA approval for Fortesta^® Gel in December 2010, which triggered a one-time approval milestone to ProStrakan for $12.5 million. The approval milestone was recorded as an intangible asset and is being amortized into Cost of revenues on a straight-line basis over its estimated useful life. An additional milestone payment of $5.0 million was triggered during the fourth quarter of 2015 pursuant to the terms of the ProStrakan Agreement. The milestone was recorded as an intangible asset and is being amortized into Cost of revenue. ProStrakan could potentially receive up to approximately $150.0 million in additional payments linked to the achievement of future commercial milestones related to Fortesta^® Gel.

ProStrakan will exclusively supply Fortesta^®Gel to Endo at a supply price based on a percentage of annual net sales subject to a minimum floor price as defined in the ProStrakan Agreement. Endo may terminate the ProStrakan Agreement upon six months’ prior written notice at no cost to the Company.

Grünenthal GmbH

In December 2007, we entered into a License, Development and Supply Agreement (the Grünenthal Agreement) with Grünenthal for the exclusive clinical development and commercialization rights in Canada and the U.S. for an oral formulation of OPANA^® ER, which is designed to be crush-resistant. In December 2011, the FDA approved a formulation of OPANA^® ER designed to be crush-resistant, which is called OPANA^® ER.

In the fourth quarter of 2011, the Company capitalized a one-time approval milestone to Grünenthal for $4.9 million. We are amortizing this intangible asset into Cost of revenues over its estimated useful life. In the fourth quarter of 2013, the Company recorded an additional $10.4 million as Cost of Revenues related to a commercial milestone. Additional amounts of approximately 53.9 million euros (approximately $58.7 million at December 31, 2015) may become due upon achievement of additional future predetermined regulatory and commercial milestones. Endo will also make payments to Grünenthal based on net sales of any such product or products commercialized under this agreement, including the formulation of OPANA^® ER approved by the FDA in December 2011.

Effective December 19, 2012, the Company and Grünenthal amended the Grünenthal Agreement whereby the Company became responsible for planning of packaging of finished product and certain other routine packaging quality obligations and Grünenthal agreed to reimburse the Company for the third-party costs incurred related to packaging as well as pay the Company a periodic packaging fee. The amendment also changed certain of the terms with respect to the floor price required to be paid by the Company in consideration for product supplied by Grünenthal. On February 18, 2014, the Company and Grünenthal amended the Grünenthal Agreement to define the responsibilities of the parties for certain additional clinical work to be performed for OPANA^® ER.

Bayer Schering

In July 2005, we licensed exclusive U.S. rights from Schering AG, Germany, now Bayer Schering Pharma AG (Bayer Schering) to market a long-acting injectable testosterone preparation for the treatment of male hypogonadism that we refer to as Aveed^®(the Bayer Schering Agreement). We were responsible for the development and commercialization of Aveed^®in the U.S. Bayer Schering is responsible for manufacturing and supplying us with finished product. As part of the Bayer Schering Agreement, we agreed to pay to Bayer Schering up to $30.0 million in up-front, regulatory, and commercialization milestone payments, including a $5.0 million payment due upon approval by the FDA to market Aveed^®. We also agreed to pay to Bayer Schering 25% of net sales of Aveed^®to cover both the cost of finished product and royalties. The Bayer Schering Agreement expires ten years from the first commercial sale of Aveed^®.

In October 2006, we entered into a supply agreement with Bayer Schering pursuant to which Bayer Schering agreed to manufacture and supply Indevus with all of its requirements for Aveed^®for a supply price based on net sales of Aveed^®. The supply price is applied against the 25% of net sales owed to Bayer Schering pursuant to the Bayer Schering Agreement. Either party may also terminate the BayerSchering Agreement in the event of a material breach by the other party.

On March 6, 2014, we announced that the FDA approved Aveed^® for the treatment of hypogonadism in adult men, which is associated with a deficiency or absence of the male hormone testosterone. Aveed^® became available in early March. Upon approval, EPSI made the aforementioned milestone payment of $5.0 million to Bayer Schering. The approval milestone was recorded as an intangible asset and is being amortized into Cost of revenues on a straight-line basis over its estimated useful life. In the future, we could be obligated to pay milestones of up to approximately $17.5 million based on continued market exclusivity of Aveed^® or upon certain future sales milestones.

BioSpecifics Technologies Corp.

On January 29, 2015, we acquired Auxilium, which is party to a development and license agreement, as amended (the BioSpecifics Agreement) with BioSpecifics Technologies Corp. (BioSpecifics). The BioSpecifics Agreement was originally entered into by Auxilium in June 2004 to obtain exclusive worldwide rights to develop, market and sell certain products containing BioSpecifics’ enzyme, which we refer to as XIAFLEX^®. Auxilium’s licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration, and currently, Auxilium’s licensed rights cover the indications of Dupuytren’s contracture (DC), Dupuytren’s Nodules, Peyronie’s Disease (PD), Adhesive Capsulitis, cellulite, canine lipomas, Plantar Fibromatosis and Lateral Hip Fat. Auxilium may further expand the BioSpecifics Agreement, at its option, to cover other indications as they are developed by Auxilium or BioSpecifics.

Under the BioSpecifics Agreement, we are responsible, at our own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. BioSpecifics is currently conducting a CCH Phase II clinical trial for the treatment of lipomas in humans. The Company has the option to license development and marketing rights to the CCH human lipoma indication based on a full analysis of the data from the Phase II clinical trial, which would transfer responsibility for the future development costs to the Company and trigger an opt-in payment and potential future milestone and royalty payments to BioSpecifics. In 2013, BioSpecifics also concluded a CCH Phase II clinical trial for the treatment of lipomas in canines. The trial did not meet its primary endpoint of a statistically significant post-treatment difference in the mean percent change in lipoma; however, statistical significance was shown in secondary endpoints. The Company has opted in to the development of CCH in canine lipomas.

The BioSpecifics Agreement extends, on a country-by-country and product-by-product basis, for the longer of the patent life, the expiration of any regulatory exclusivity period or twelve years. Either party may terminate the BioSpecifics Agreement as a result of the other party’s breach or bankruptcy. We may terminate the BioSpecifics Agreement with 90 days’ written notice.

We must pay BioSpecifics on a country-by-country and product-by-product basis a specified percentage within a range of 5% to 15% of net sales for products covered by the BioSpecifics Agreement. This royalty applies to net sales by the Company or its sublicensees, including Actelion Pharmaceuticals Ltd (Actelion), Asahi Kasei Pharma Corporation (Asahi Kasei) and Swedish Orphan Biovitrum AB (Sobi). We are also obligated to pay a percentage of any future regulatory or commercial milestone payments received from such sublicensees. In addition, the Company and its affiliates pays BioSpecifics an amount equal to a specified mark-up on the cost of goods related to supply of XIAFLEX^® (which mark-up is capped at a specified percentage within the range of 5% to 15% of the cost of goods of XIAFLEX^® for the applicable country) for products sold by the Company and its affiliates or its sublicensees.

XIAFLEX^® and XIAPEX^® Out-license Agreements

We are party to certain out-licensing agreements with Actelion, Asahi Kasei and Sobi (the XIAFLEX^® Sublicensees), pursuant to which the XIAFLEX^® Sublicensees have marketing, development and/or commercial rights for XIAFLEX^® and XIAPEX^® (the European Union trade name for XIAFLEX^®) in a variety of countries outside of the U.S.

These agreements were entered into from 2011 to 2013 and extend, pursuant to the terms of each respective agreement and subject to each party’s termination rights, as follows:

•

The agreement with Actelion extends on a product-by-product and country-by-country basis from the date of the agreement until the last to occur of (i) the date on which the product is no longer covered by a valid claim of a patent or patent application controlled by the Company in such country, (ii) the 15th anniversary of the first commercial sale of the product in such country after receipt of required regulatory approvals, (iii) the achievement of a specified market share of generic versions of the product in such country, or (iv) the loss of certain marketing rights or data exclusivity in such country.


•	The agreement with Asahi Kasei extends on a product-by-product basis from the date of the agreement until the last to occur of (i) the date on which the product is no longer covered by a valid claim of a patent, (ii) the 15th anniversary of the first commercial sale of the product, or (iii) the entry of a generic to XIAFLEX^® in the Japanese market.


•	The agreement with Sobi extends on a product-by-product basis from the date of the agreement until its 10th anniversary. The term will be automatically extended for sequential two year periods unless a notice of non-renewal is provided in writing to the other party at least six months prior to expiration of the then current term.

Under the Actelion and Sobi agreements, the Company, through its affiliate, is entitled to receive royalties based on net sales of the licensed product by the XIAFLEX^® Sublicensees. These royalties are tiered as follows:


•	Actelion—15%-25%, 20%-30%, and 25%-35% based on net sales of the licensed product;


•	Sobi—45%-55%, 50%-60% and 55%-65% based on net sales of the licensed product, which also include payments for product supply and which percentages will decrease by approximately 10% upon the occurrence of certain manufacturing milestones or July 1, 2016, whichever is earlier.

The applicable royalty percentages increase from tier to tier upon the achievement of a specified threshold of aggregate annual net sales of the licensed product and may decrease if a generic is marketed in the applicable territory. Pursuant to each of these out-licensing agreements, the Company will be responsible for all clinical and commercial drug manufacturing and supply and, in certain cases, for development costs. The Company has determined that these contractual responsibilities, together with the development and commercialization rights provided by the Company, constitute multiple deliverables. In accordance with the accounting guidance on revenue recognition for multiple-element agreements, certain elements of these agreements meet the criteria for separation and are treated as a single unit of accounting, with the corresponding revenue recognized when earned. Deliverables that do not have stand-alone value to the XIAFLEX^® Sublicensees are being accounted for as one unit of accounting, with the related revenue being recorded on a straight-line basis over the respective performance period.

The Japanese Ministry of Health, Labour and Welfare (MHLW) approved XIAFLEX^® for manufacturing and marketing in Japan on July 3, 2015 for the indication of Dupuytren's contracture with a palpable cord and was subsequently listed on the Japanese National Health Insurance drug price standard on August 31, 2015. The Company’s partner, Asahi Kasei Pharma Corporation, commercially launched the product in Japan in September 2015. Under the terms of the Asahi Kasei agreement, Endo received a $20.0 million gross milestone payment in October 2015 as a result of the first commercial sale of XIAFLEX^® in Japan. The Company will recognize the $20.0 million of milestone revenue on a straight-line basis over the remaining term of the license agreement.

Revenue recognized related to these agreements was not material to the Consolidated Financial Statements for any of the periods presented.

BioDelivery Sciences International, Inc.

The Company is party to a worldwide license and development agreement (the BioDelivery Agreement) with BioDelivery Sciences International, Inc. (BioDelivery) for the exclusive rights to develop and commercialize BELBUCA™ (buprenorphine HCl) Buccal Film. The drug is a transmucosal form of buprenorphine, a partial mu-opiate receptor agonist, which incorporates a bioerodible mucoadhesive (BEMA^®) technology. The NDA for BELBUCA™ was submitted in December 2014 and accepted by the U.S. Food and Drug Administration (FDA) in February 2015. On October 23, 2015, the FDA approved BELBUCA™ for the management of severe pain. BELBUCA™ became commercially available in the U.S. during February 2016.

As a result of the FDA approval of BELBUCA™, the Company capitalized a one-time approval milestone payment to BioDelivery for $44.0 million in the fourth quarter of 2015. The Company is amortizing this intangible asset into Cost of revenues in the Consolidated Statements of Operations over its estimated useful life. During each of the first, second and fourth quarters of 2014, $10.0 million of milestones were incurred related to the achievement of certain clinical milestones, resulting in a total of $30.0 million recorded as Research and development expense during 2014. In addition, the Company will pay royalties based on net sales of the drug and could be obligated to pay additional commercial milestones of up to $55.0 million.