ENDP-6.30.2012-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012.
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
Commission file number: 001-15989
_______________________________
ENDO HEALTH SOLUTIONS INC.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________
|
| |
Delaware | 13-4022871 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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100 Endo Boulevard Chadds Ford, Pennsylvania | 19317 |
(Address of Principal Executive Offices) | (Zip Code) |
(610) 558-9800 (Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
_______________________________
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x s No o
Indicate by check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | x | Accelerated filer | o |
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Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
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| | | | |
Common Stock, $0.01 par value | Shares outstanding as of | August 2, 2012 | : | 116,892,155 |
ENDO HEALTH SOLUTIONS INC.
INDEX
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PART I. FINANCIAL INFORMATION | |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. OTHER INFORMATION | |
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Item 1. | | |
Item 1A | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this document contain information that includes or is based on “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements, including estimates of future revenues, future expenses, future net income and future net income per share, contained in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in this document, are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed results of operations. We have tried, whenever possible, to identify such statements by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plan,” “projected,” “forecast,” “will,” “may” or similar expressions. We have based these forward-looking statements on our current expectations and projections about the growth of our business, our financial performance and the development of our industry. Because these statements reflect our current views concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption “Risk Factors” in Item 1A of this document and in Item 1A under the caption “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011, supplement and as otherwise enumerated herein, could affect our future financial results and could cause our actual results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document.
We do not undertake any obligation to update our forward-looking statements after the date of this document for any reason, even if new information becomes available or other events occur in the future. You are advised to consult any further disclosures we make on related subjects in our reports filed with the Securities and Exchange Commission (SEC). Also note that, in Item 1A of this document and in Item 1A under the caption “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011, we provide a cautionary discussion of the risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 27A of the Securities Act and Section 21E of the Exchange Act. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this to be a complete discussion of all potential risks or uncertainties.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data) |
| | | | | | | |
| June 30, 2012 | | December 31, 2011 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 391,946 |
| | $ | 547,620 |
|
Accounts receivable, net | 721,850 |
| | 733,222 |
|
Inventories, net | 327,603 |
| | 262,419 |
|
Prepaid expenses and other current assets | 36,206 |
| | 29,732 |
|
Income taxes receivable | 36,993 |
| | — |
|
Deferred income taxes | 223,850 |
| | 215,103 |
|
Total current assets | $ | 1,738,448 |
| | $ | 1,788,096 |
|
MARKETABLE SECURITIES | 1,691 |
| | 19,105 |
|
PROPERTY, PLANT AND EQUIPMENT, NET | 319,543 |
| | 297,731 |
|
GOODWILL | 2,565,253 |
| | 2,558,041 |
|
OTHER INTANGIBLES, NET | 2,353,455 |
| | 2,504,124 |
|
OTHER ASSETS | 123,485 |
| | 125,486 |
|
TOTAL ASSETS | $ | 7,101,875 |
| | $ | 7,292,583 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 284,484 |
| | $ | 260,385 |
|
Accrued expenses | 855,588 |
| | 732,831 |
|
Current portion of long-term debt | 115,966 |
| | 88,265 |
|
Acquisition-related contingent consideration | 5,972 |
| | 4,925 |
|
Income taxes payable | — |
| | 35,372 |
|
Total current liabilities | $ | 1,262,010 |
| | $ | 1,121,778 |
|
DEFERRED INCOME TAXES | 551,128 |
| | 617,677 |
|
ACQUISITION-RELATED CONTINGENT CONSIDERATION | 2,647 |
| | 3,762 |
|
LONG-TERM DEBT, LESS CURRENT PORTION, NET | 3,174,140 |
| | 3,424,329 |
|
OTHER LIABILITIES | 159,330 |
| | 85,446 |
|
COMMITMENTS AND CONTINGENCIES (NOTE 12) | | | |
STOCKHOLDERS’ EQUITY: | | | |
Preferred stock, $0.01 par value; 40,000,000 shares authorized; none issued | — |
| | — |
|
Common stock, $0.01 par value; 350,000,000 shares authorized; 139,468,415 and 138,337,002 shares issued; 116,799,075 and 117,158,880 shares outstanding at June 30, 2012 and December 31, 2011, respectively | 1,395 |
| | 1,383 |
|
Additional paid-in capital | 1,000,540 |
| | 952,325 |
|
Retained earnings | 1,474,030 |
| | 1,551,910 |
|
Accumulated other comprehensive loss | (11,464 | ) | | (9,436 | ) |
Treasury stock, 22,669,340 and 21,178,122 shares at June 30, 2012 and December 31, 2011, respectively | (571,593 | ) | | (518,492 | ) |
Total Endo Health Solutions Inc. stockholders’ equity | $ | 1,892,908 |
| | $ | 1,977,690 |
|
Noncontrolling interests | 59,712 |
| | 61,901 |
|
Total stockholders’ equity | $ | 1,952,620 |
| | $ | 2,039,591 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 7,101,875 |
| | $ | 7,292,583 |
|
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
REVENUES: | | | | | | | |
Net pharmaceutical product sales | $ | 598,061 |
| | $ | 527,563 |
| | $ | 1,102,661 |
| | $ | 1,033,347 |
|
Devices revenues | 128,131 |
| | 26,812 |
| | 258,297 |
| | 26,812 |
|
Service and other revenues | 58,996 |
| | 53,236 |
| | 114,863 |
| | 107,478 |
|
TOTAL REVENUES | $ | 785,188 |
| | $ | 607,611 |
| | $ | 1,475,821 |
| | $ | 1,167,637 |
|
COSTS AND EXPENSES: | | | | | | | |
Cost of revenues | 294,570 |
| | 236,697 |
| | 659,390 |
| | 468,255 |
|
Selling, general and administrative | 233,622 |
| | 178,133 |
| | 488,076 |
| | 337,519 |
|
Research and development | 45,427 |
| | 40,840 |
| | 134,115 |
| | 82,970 |
|
Patent litigation settlement expense | 131,361 |
| | — |
| | 131,361 |
| | — |
|
Asset impairment charges | 3,000 |
| | — |
| | 43,000 |
| | — |
|
Acquisition-related and integration items, net | 7,055 |
| | 17,626 |
| | 10,804 |
| | 23,699 |
|
OPERATING INCOME | $ | 70,153 |
| | $ | 134,315 |
| | $ | 9,075 |
| | $ | 255,194 |
|
INTEREST EXPENSE, NET | 45,985 |
| | 25,560 |
| | 92,881 |
| | 44,350 |
|
LOSS ON EXTINGUISHMENT OF DEBT | — |
| | 8,548 |
| | 5,426 |
| | 8,548 |
|
OTHER EXPENSE (INCOME), NET | 297 |
| | (125 | ) | | 748 |
| | 223 |
|
INCOME (LOSS) BEFORE INCOME TAX | $ | 23,871 |
| | $ | 100,332 |
| | $ | (89,980 | ) | | $ | 202,073 |
|
INCOME TAX | 1,776 |
| | 32,780 |
| | (37,550 | ) | | 66,226 |
|
CONSOLIDATED NET INCOME (LOSS) | $ | 22,095 |
| | $ | 67,552 |
| | $ | (52,430 | ) | | $ | 135,847 |
|
Less: Net income attributable to noncontrolling interests | 12,630 |
| | 12,969 |
| | 25,450 |
| | 25,477 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO ENDO HEALTH SOLUTIONS INC. | $ | 9,465 |
| | $ | 54,583 |
| | $ | (77,880 | ) | | $ | 110,370 |
|
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO ENDO HEALTH SOLUTIONS INC.: | | | | | | | |
Basic | $ | 0.08 |
| | $ | 0.47 |
| | $ | (0.67 | ) | | $ | 0.95 |
|
Diluted | $ | 0.08 |
| | $ | 0.44 |
| | $ | (0.67 | ) | | $ | 0.91 |
|
WEIGHTED AVERAGE SHARES: | | | | | | | |
Basic | 116,992 |
| | 116,663 |
| | 117,022 |
| | 116,509 |
|
Diluted | 121,080 |
| | 122,686 |
| | 117,022 |
| | 121,724 |
|
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
CONSOLIDATED NET INCOME (LOSS) | | | $ | 22,095 |
| | | | $ | 67,552 |
| | | | $ | (52,430 | ) | | | | $ | 135,847 |
|
OTHER COMPREHENSIVE LOSS, NET OF TAX: | | | | | | | | | | | | | | | |
Net unrealized gain (loss) on securities: | | | | | | | | | | | | | | | |
Unrealized gains (losses) arising during the period | $ | 1,561 |
| | | | $ | (1,532 | ) | | | | $ | 1,369 |
| | | | $ | (1,382 | ) | | |
Less: reclassification adjustments for gains (losses) realized in net income (loss) | — |
| | 1,561 |
| | — |
| | (1,532 | ) | | — |
| | 1,369 |
| | — |
| | (1,382 | ) |
Foreign currency translation (loss) gain | | | (6,640 | ) | | | | 1,000 |
| | | | (3,568 | ) | | | | 1,000 |
|
Fair value adjustment on derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | |
Fair value adjustment on derivatives designated as cash flow hedges arising during the period | $ | 993 |
| | | | $ | — |
| | | | $ | 195 |
| | | | $ | — |
| | |
Less: reclassification adjustments for cash flow hedges settled and included in net income (loss) | (184 | ) | | 809 |
| | — |
| | — |
| | (24 | ) | | 171 |
| | — |
| | — |
|
OTHER COMPREHENSIVE LOSS | | | $ | (4,270 | ) | | | | $ | (532 | ) | | | | $ | (2,028 | ) | | | | $ | (382 | ) |
CONSOLIDATED COMPREHENSIVE INCOME (LOSS) | | | $ | 17,825 |
| | | | $ | 67,020 |
| | | | $ | (54,458 | ) | | | | $ | 135,465 |
|
Less: Comprehensive income attributable to noncontrolling interests | | | 12,630 |
| | | | 12,969 |
| | | | 25,450 |
| | | | 25,477 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENDO HEALTH SOLUTIONS INC. | | | $ | 5,195 |
| | | | $ | 54,051 |
| | | | $ | (79,908 | ) | | | | $ | 109,988 |
|
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2012 | | 2011 |
OPERATING ACTIVITIES: | | | |
Consolidated net (loss) income | $ | (52,430 | ) | | $ | 135,847 |
|
Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities: | | | |
Depreciation and amortization | 139,563 |
| | 97,739 |
|
Stock-based compensation | 33,346 |
| | 18,772 |
|
Amortization of debt issuance costs and premium / discount | 17,521 |
| | 14,345 |
|
Selling, general and administrative expenses paid in shares of common stock | 239 |
| | 129 |
|
Deferred income taxes | (75,015 | ) | | 7,708 |
|
(Gain) loss on disposal of property, plant and equipment | (173 | ) | | 211 |
|
Change in fair value of acquisition-related contingent consideration | (68 | ) | | (7,230 | ) |
Loss on extinguishment of debt | 5,426 |
| | 8,548 |
|
Asset impairment charges | 43,000 |
| | — |
|
Changes in assets and liabilities which provided (used) cash: | | | |
Accounts receivable | 11,433 |
| | (31,093 | ) |
Inventories | (65,756 | ) | | (49,202 | ) |
Prepaid and other assets | (5,513 | ) | | (2,393 | ) |
Accounts payable | 23,297 |
| | 11,954 |
|
Accrued expenses | 127,444 |
| | 38,027 |
|
Other liabilities | 46,730 |
| | (9,775 | ) |
Income taxes payable/receivable | (72,705 | ) | | (19,274 | ) |
Net cash provided by operating activities | $ | 176,339 |
| | $ | 214,313 |
|
INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (47,321 | ) | | (23,905 | ) |
Proceeds from sale of property, plant and equipment | 907 |
| | 581 |
|
Acquisitions, net of cash acquired | 443 |
| | (2,342,556 | ) |
Proceeds from sale of marketable securities | 18,800 |
| | — |
|
Payment on contingent consideration | — |
| | (414 | ) |
License fees | (5,000 | ) | | (2,300 | ) |
Net cash used in investing activities | $ | (32,171 | ) | | $ | (2,368,594 | ) |
FINANCING ACTIVITIES: | | | |
Capital lease obligations repayments | (661 | ) | | — |
|
Proceeds from issuance of 2019 and 2022 Notes | — |
| | 900,000 |
|
Proceeds from issuance of Term Loans | — |
| | 2,200,000 |
|
Proceeds from other indebtedness | — |
| | 393 |
|
Principal payments on Term Loans | (233,125 | ) | | (400,000 | ) |
Payment on AMS Convertible Notes | (17 | ) | | (273,165 | ) |
Principal payments on other indebtedness | (303 | ) | | — |
|
Deferred financing fees | — |
| | (81,753 | ) |
Tax benefits of stock awards | 3,894 |
| | 5,067 |
|
Exercise of Endo Health Solutions Inc. stock options | 10,819 |
| | 20,328 |
|
Purchase of common stock | (56,000 | ) | | (34,701 | ) |
Issuance of common stock from treasury | 2,899 |
| | — |
|
Distributions to noncontrolling interests | (26,158 | ) | | (25,813 | ) |
Buy-out of noncontrolling interests, net of contributions | (1,481 | ) | | (524 | ) |
Net cash (used in) provided by financing activities | $ | (300,133 | ) | | $ | 2,309,832 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2012 | | 2011 |
Effect of foreign exchange rate | 291 |
| | 104 |
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | $ | (155,674 | ) | | $ | 155,655 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 547,620 |
| | 466,214 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 391,946 |
| | $ | 621,869 |
|
SUPPLEMENTAL INFORMATION: | | | |
Cash paid for interest | $ | 81,638 |
| | $ | 24,768 |
|
Cash paid for income taxes | $ | 106,185 |
| | $ | 80,460 |
|
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | | | |
Purchases of property, plant and equipment financed by capital leases | $ | 1,266 |
| | $ | 127 |
|
Accrual for purchases of property, plant and equipment | $ | 4,304 |
| | $ | 2,959 |
|
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
NOTE 1. BASIS OF PRESENTATION
At the Company’s Annual Meeting of Stockholders on May 23, 2012, the Company’s stockholders approved the proposal to amend and restate the Company’s Amended and Restated Certificate of Incorporation to change the name of the Company from Endo Pharmaceuticals Holdings Inc. to Endo Health Solutions Inc., which we refer to herein as the Company or we, our, us, or Endo.
The accompanying unaudited Condensed Consolidated Financial Statements of Endo Health Solutions Inc. have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of Endo and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of June 30, 2012 and the results of our operations and our cash flows for the periods presented. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board (FASB or the Board) issued Accounting Standards Update (ASU) 2011-05 on the presentation of comprehensive income. This ASU amends FASB Codification Topic 220, Comprehensive Income, to require an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011 and early adoption is permitted. In December 2011, the FASB issued ASU 2011-12 which amends ASU 2011-05 to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. The Company has adopted all current required provisions of ASU 2011-05. The adoption of this standard, as amended, will not have a significant impact on the Company’s Consolidated Financial Statements.
In July 2012, the FASB issued ASU 2012-02 on impairment testing for indefinite-lived intangible assets. This ASU amends FASB Codification Topic 350, Intangibles-Goodwill and Other to allow, but not require, an entity, when performing its annual or more frequent indefinite-lived intangible asset impairment test, to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is currently evaluating ASU 2012-02. The adoption of this ASU will not have a significant impact on the Company’s Consolidated Financial Statements.
NOTE 3. FAIR VALUE MEASUREMENTS
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable, acquisition-related contingent consideration, debt obligations, and derivative instruments. Included in cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at $1 per unit, which assists in ensuring adequate liquidity upon demand by the holder. Money market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values.
The following table presents the carrying amounts and estimated fair values of certain assets and liabilities as of June 30, 2012 and December 31, 2011 (in thousands):
|
| | | | | | | | | | | | | | | |
| June 30, 2012 | | December 31, 2011 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Current assets: | | | | | | | |
Derivative instruments | $ | 1,059 |
| | $ | 1,059 |
| | $ | 1,471 |
| | $ | 1,471 |
|
| $ | 1,059 |
| | $ | 1,059 |
| | $ | 1,471 |
| | $ | 1,471 |
|
Long-term assets: | | | | | | | |
Auction-rate securities | — |
| | — |
| | 17,463 |
| | 17,463 |
|
Equity securities | 1,691 |
| | 1,691 |
| | 1,642 |
| | 1,642 |
|
Equity and cost method investments | 15,498 |
| | N/A |
| | 20,661 |
| | N/A |
|
| $ | 17,189 |
| | | | $ | 39,766 |
| | |
Current liabilities: | | | | | | | |
Acquisition-related contingent consideration—short-term | $ | 5,972 |
| | $ | 5,972 |
| | $ | 4,925 |
| | $ | 4,925 |
|
Current portion of Term Loan A Facility Due 2016 | 112,500 |
| | 112,500 |
| | 84,375 |
| | 84,375 |
|
3.25% AMS Convertible Notes due 2036 | 841 |
| | 841 |
| | 841 |
| | 841 |
|
4.00% AMS Convertible Notes due 2041 | 114 |
| | 114 |
| | 131 |
| | 131 |
|
Current portion of other long-term debt | 2,511 |
| | 2,511 |
| | 2,918 |
| | 2,918 |
|
Derivative instruments | 17 |
| | 17 |
| | 119 |
| | 119 |
|
Minimum Voltaren® Gel royalties due to Novartis—short-term | 29,054 |
| | 29,054 |
| | 30,000 |
| | 30,000 |
|
Patent litigation settlement liability—short-term | 63,842 |
| | 63,842 |
| | — |
| | — |
|
Other | 1,000 |
| | 1,000 |
| | — |
| | — |
|
| $ | 215,851 |
| | $ | 215,851 |
| | $ | 123,309 |
| | $ | 123,309 |
|
Long-term liabilities: | | | | | | | |
Acquisition-related contingent consideration—long-term | $ | 2,647 |
| | $ | 2,647 |
| | $ | 3,762 |
| | $ | 3,762 |
|
1.75% Convertible Senior Subordinated Notes Due 2015, net | 310,041 |
| | 352,379 |
| | 299,222 |
| | 330,950 |
|
Term Loan A Facility Due 2016, less current portion | 1,331,250 |
| | 1,323,743 |
| | 1,387,500 |
| | 1,372,119 |
|
Term Loan B Facility Due 2018 | 233,250 |
| | 233,378 |
| | 438,250 |
| | 439,017 |
|
7.00% Senior Notes Due 2019 | 500,000 |
| | 542,500 |
| | 500,000 |
| | 532,500 |
|
7.00% Senior Notes Due 2020, net | 396,756 |
| | 433,500 |
| | 396,618 |
| | 424,750 |
|
7.25% Senior Notes Due 2022 | 400,000 |
| | 434,250 |
| | 400,000 |
| | 422,500 |
|
Other long-term debt, less current portion | 2,843 |
| | 2,843 |
| | 2,739 |
| | 2,739 |
|
Minimum Voltaren® Gel royalties due to Novartis—long-term | 6,392 |
| | 6,392 |
| | 20,100 |
| | 20,100 |
|
Patent litigation settlement liability—long-term | 67,519 |
| | 67,519 |
| | — |
| | — |
|
Other | 5,375 |
| | 5,375 |
| | — |
| | — |
|
| $ | 3,256,073 |
| | $ | 3,404,526 |
| | $ | 3,448,191 |
| | $ | 3,548,437 |
|
Equity securities consist of publicly traded common stock, the value of which is based on a quoted market price. These securities are not held to support current operations and are therefore classified as non-current assets. The acquisition-related contingent consideration, which is required to be measured at fair value on a recurring basis, consists primarily of contingent cash consideration related to the November 2010 acquisition of Generics International (US Parent), Inc. (doing business as Qualitest Pharmaceuticals). The fair value of our acquisition-related contingent consideration is determined using an income approach (present value technique), which is discussed in more detail below. The fair value of our 1.75% Convertible Senior Subordinated Notes (Convertible Notes) is based on an income approach known as the binomial lattice model which incorporated certain inputs and assumptions, including scheduled coupon and principal payments, the conversion feature inherent in the Convertible Notes, the put feature inherent in the Convertible Notes, and stock price volatility assumptions of 32% at June 30, 2012 and 33% at December 31, 2011 that were based on historic volatility of the Company’s common stock and other factors. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.
The fair values of Term Loan Facilities and 2019, 2020, and 2022 Notes were based on market quotes and transactions proximate to the valuation date. The Company had previously used an income approach to value these debt instruments; however, the valuation methodology was subsequently transitioned to a market-based approach given the volume of observable market transactions and quoted prices for these debt instruments. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
The total fair value of various foreign exchange forward contracts as of June 30, 2012 includes assets of $1.1 million reported in Prepaid expenses and other current assets and liabilities of less than $0.1 million, reported in Accrued expenses. We measure our derivative instruments at fair value on a recurring basis using significant observable inputs. Refer to Note 16. Derivative Instruments and Hedging Activities for more information regarding our derivative instruments.
The minimum Voltaren® Gel royalty due to Novartis AG was recorded at fair value at inception during 2008 using an income approach (present value technique) and is being accreted up to the maximum potential amount of $45.0 million, less payments made to date. We believe the carrying amount of this minimum royalty guarantee at June 30, 2012 and December 31, 2011 represents a reasonable approximation of the price that would be paid to transfer the liability in an orderly transaction between market participants at the measurement date. Accordingly, the carrying value approximates fair value as of June 30, 2012 and December 31, 2011.
The patent litigation settlement liability is discussed in Note 12. Commitments and Contingencies.
The fair value of equity method and cost method investments is not readily available nor have we estimated the fair value of these investments and disclosure is not required. The Company is not aware of any identified events or changes in circumstances that would have a significant adverse effect on the carrying value of any of our equity or cost method investments included in our Condensed Consolidated Balance Sheet at June 30, 2012 and December 31, 2011.
As of June 30, 2012, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
| |
• | Level 1—Quoted prices in active markets for identical assets or liabilities. |
| |
• | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
• | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date using |
June 30, 2012 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | |
Money market funds | $ | 19,223 |
| | $ | — |
| | $ | — |
| | $ | 19,223 |
|
Equity securities | 1,691 |
| | — |
| | — |
| | 1,691 |
|
Derivative instruments | — |
| | 1,059 |
| | — |
| | 1,059 |
|
Total | $ | 20,914 |
| | $ | 1,059 |
| | $ | — |
| | $ | 21,973 |
|
Liabilities: | | | | | | | |
Derivative instruments | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 17 |
|
Acquisition-related contingent consideration—short-term | — |
| | — |
| | 5,972 |
| | 5,972 |
|
Acquisition-related contingent consideration—long-term | — |
| | — |
| | 2,647 |
| | 2,647 |
|
Total | $ | — |
| | $ | 17 |
| | $ | 8,619 |
| | $ | 8,636 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date using |
December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | |
Money market funds | $ | 110,816 |
| | $ | — |
| | $ | — |
| | $ | 110,816 |
|
Equity securities | 1,642 |
| | — |
| | — |
| | 1,642 |
|
Derivative instruments | — |
| | 1,471 |
| | — |
| | 1,471 |
|
Auction-rate securities | — |
| | — |
| | 17,463 |
| | 17,463 |
|
Total | $ | 112,458 |
| | $ | 1,471 |
| | $ | 17,463 |
| | $ | 131,392 |
|
Liabilities: | | | | | | | |
Derivative instruments | $ | — |
| | $ | 119 |
| | $ | — |
| | $ | 119 |
|
Acquisition-related contingent consideration—short-term | — |
| | — |
| | 4,925 |
| | 4,925 |
|
Acquisition-related contingent consideration—long-term | — |
| | — |
| | 3,762 |
| | 3,762 |
|
Total | $ | — |
| | $ | 119 |
| | $ | 8,687 |
| | $ | 8,806 |
|
Auction-Rate Securities
In June 2012, our remaining auction-rate securities were called at par and we received proceeds of $18.8 million. Prior to being sold, these auction-rate securities had been classified as available-for-sale securities and had therefore been maintained at their fair value, with changes in value being recorded as part of Other comprehensive loss. Due to the fact that we received proceeds equal to par, the auction-rate securities were adjusted to their fair value of $18.8 million, with a corresponding gain to Other comprehensive income. The previously recognized cumulative unrealized holding loss associated with these securities of $1.5 million was reversed in its entirety. As a result, no gain or loss was realized.
Acquisition-Related Contingent Consideration
On November 30, 2010 (the Qualitest Pharmaceuticals Acquisition Date), Endo acquired Qualitest Pharmaceuticals, which was party to an asset purchase agreement with Teva Pharmaceutical Industries Ltd (Teva) (the Teva Agreement). Pursuant to this agreement, Qualitest Pharmaceuticals purchased certain pipeline generic products from Teva and could be obligated to pay consideration to Teva upon the achievement of certain future regulatory milestones (the Teva Contingent Consideration).
The range of the undiscounted amounts the Company could pay under the Teva Agreement is between zero and $12.5 million. The Company is accounting for the Teva Contingent Consideration in the same manner as if it had entered into that arrangement with respect to its acquisition of Qualitest Pharmaceuticals. Accordingly, the fair value was estimated based on a probability-weighted discounted cash flow model, or income approach. The resultant probability-weighted cash flows were then discounted using a discount rate of U.S. Prime plus 300 basis points. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. Using this valuation technique, the fair value of the contractual obligation to pay the Teva Contingent Consideration was determined to be $8.6 million at June 30, 2012, $8.7 million at December 31, 2011 and $9.0 million on the Qualitest Pharmaceuticals Acquisition Date.
The decrease from December 31, 2011 to June 30, 2012 primarily reflects changes of our present value assumptions associated with our valuation model. The decrease in the liability was recorded as a gain and is included in Acquisition-related and integration items, net in the accompanying Condensed Consolidated Statements of Operations.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2012 (in thousands):
|
| | | |
| Auction-rate Securities |
Assets: | |
April 1, 2012 | $ | 17,292 |
|
Securities sold or redeemed | (18,800 | ) |
Securities purchase or acquired | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | — |
|
Unrealized gains included in other comprehensive loss | 1,508 |
|
June 30, 2012 | $ | — |
|
|
| | | |
| Acquisition- related Contingent Consideration |
Liabilities: | |
April 1, 2012 | $ | (8,560 | ) |
Amounts (acquired) sold or (issued) settled, net | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | (59 | ) |
June 30, 2012 | $ | (8,619 | ) |
The following table presents changes to the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2011 (in thousands):
|
| | | |
| Auction-rate Securities |
Assets: | |
April 1, 2011 | $ | 17,409 |
|
Securities sold or redeemed | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | — |
|
Unrealized gains included in other comprehensive loss | 96 |
|
June 30, 2011 | $ | 17,505 |
|
|
| | | |
| Acquisition-related Contingent Consideration |
Liabilities: | |
April 1, 2011 | $ | (16,192 | ) |
Amounts (acquired) sold / (issued) settled, net | 414 |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | 6,545 |
|
June 30, 2011 | $ | (9,233 | ) |
The following table presents changes to the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2012 (in thousands):
|
| | | |
| Auction-rate Securities |
Assets: | |
January 1, 2012 | $ | 17,463 |
|
Securities sold or redeemed | (18,800 | ) |
Securities purchase or acquired | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | — |
|
Unrealized gains included in other comprehensive loss | 1,337 |
|
June 30, 2012 | $ | — |
|
|
| | | |
| Acquisition- related Contingent Consideration |
Liabilities: | |
January 1, 2012 | $ | (8,687 | ) |
Amounts (acquired) sold or (issued) settled, net | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | 68 |
|
June 30, 2012 | $ | (8,619 | ) |
The following table presents changes to the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2011 (in thousands):
|
| | | |
| Auction-rate Securities |
Assets: | |
January 1, 2011 | $ | 17,332 |
|
Securities sold or redeemed | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | — |
|
Unrealized gains included in other comprehensive loss | 173 |
|
June 30, 2011 | $ | 17,505 |
|
|
| | | |
| Acquisition-related Contingent Consideration |
Liabilities: | |
January 1, 2011 | $ | (16,050 | ) |
Amounts (acquired) sold / (issued) settled, net | (413 | ) |
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | 7,230 |
|
June 30, 2011 | $ | (9,233 | ) |
The following is a summary of available-for-sale securities held by the Company as of June 30, 2012 and December 31, 2011 (in thousands):
|
| | | | | | | | | | | | | | | |
| Available-for-sale |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
June 30, 2012 | | | | | | | |
Money market funds | $ | 19,223 |
| | $ | — |
| | $ | — |
| | $ | 19,223 |
|
Total included in cash and cash equivalents | 19,223 |
| | — |
| | — |
| | $ | 19,223 |
|
Equity securities | 1,766 |
| | — |
| | (75 | ) | | 1,691 |
|
Long-term available-for-sale securities | $ | 1,766 |
| | $ | — |
| | $ | (75 | ) | | $ | 1,691 |
|
Total available-for-sale securities | $ | 20,989 |
| | $ | — |
| | $ | (75 | ) | | $ | 20,914 |
|
|
| | | | | | | | | | | | | | | |
| Available-for-sale |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
December 31, 2011 | | | | | | | |
Money market funds | $ | 110,816 |
| | $ | — |
| | $ | — |
| | $ | 110,816 |
|
Total included in cash and cash equivalents | $ | 110,816 |
| | $ | — |
| | $ | — |
| | $ | 110,816 |
|
Auction-rate securities | 18,800 |
| | — |
| | (1,337 | ) | | 17,463 |
|
Equity securities | 1,766 |
| | — |
| | (124 | ) | | 1,642 |
|
Long-term available-for-sale securities | $ | 20,566 |
| | $ | — |
| | $ | (1,461 | ) | | $ | 19,105 |
|
Total available-for-sale securities | $ | 131,382 |
| | $ | — |
| | $ | (1,461 | ) | | $ | 129,921 |
|
At December 31, 2011, our investments in auction-rate securities consisted of two securities which, as of that date, had been in unrealized loss positions for more than twelve months. As previously discussed, the Company had determined that, as of December 31, 2011, the gross unrealized losses associated with the auction-rate securities were not other-than-temporary.
At June 30, 2012 and December 31, 2011, our equity securities consisted of investments in the stock of three publicly traded companies. As of June 30, 2012, one had been in an unrealized loss position for less than twelve months and one had been in an unrealized loss position for more than twelve months. As of December 31, 2011, two of these investments had been in an unrealized loss position for less than twelve months and one had been in an unrealized loss position for more than twelve months. The Company does not believe the remaining unrealized losses are other-than-temporary at June 30, 2012 or December 31, 2011 primarily because the Company has both the ability and intent to hold these investments for a period of time we believe will be sufficient to recover such losses.
Nonrecurring Fair Value Measurements
The Company's financial assets measured at fair value on a nonrecurring basis at June 30, 2012 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at June 30, 2012 using | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Expense |
Assets: | | | | | | | |
AMS IPR&D intangible asset | $ | — |
| | $ | — |
| | $ | 1,000 |
| | $ | (3,000 | ) |
Total | $ | — |
| | $ | — |
| | $ | 1,000 |
| | $ | (3,000 | ) |
Liabilities: | | | | | | | |
Patent litigation settlement liability | $ | — |
| | $ | — |
| | $ | 131,361 |
| | $ | (131,361 | ) |
Total | $ | — |
| | $ | — |
| | $ | 131,361 |
| | $ | (131,361 | ) |
See Note 9. Goodwill and Other Intangibles for a discussion of asset impairment charges. See Note 12. Commitments and Contingencies for a discussion of the patent litigation settlement liability.
NOTE 4. INVENTORIES
Inventories are comprised of the following at June 30, 2012 and December 31, 2011, respectively (in thousands):
|
| | | | | | | |
| June 30, 2012 | | December 31, 2011 |
Raw materials | $ | 117,488 |
| | $ | 103,064 |
|
Work-in-process | 52,989 |
| | 51,063 |
|
Finished goods | 157,126 |
| | 108,292 |
|
Total | $ | 327,603 |
| | $ | 262,419 |
|
Inventory amounts in the table above are shown net of obsolescence. Our reserve for obsolescence is not material to the Condensed Consolidated Balance Sheets for any of the periods presented and therefore has not been separately disclosed.
NOTE 5. ACQUISITIONS
American Medical Systems Holdings, Inc. (AMS)
On June 17, 2011 (the AMS Acquisition Date), the Company completed its acquisition of all outstanding shares of common stock of AMS for approximately $2.4 billion in aggregate consideration, including $70.8 million related to existing AMS stock-based compensation awards and certain other amounts, at which time AMS became a wholly-owned, indirect subsidiary of the Company. AMS’s shares were purchased at a price of $30.00 per share.
AMS is a worldwide developer and provider of technology solutions to physicians treating men’s and women’s pelvic health conditions. The AMS business and applicable services include:
Men’s Health.
AMS supplies surgical solutions for the treatment of male urinary incontinence, the involuntary release of urine from the body. The fully implantable AMS 800® system includes an inflatable urethral cuff to restrict flow through the urethra and a control pump that allows the patient to discreetly open the cuff when he wishes to urinate. Since 2000, AMS has also been selling the InVance® sling system, a less-invasive procedure for men with moderate incontinence, and in 2007, AMS released the AdVance® sling system for the treatment of mild to moderate stress urinary incontinence. AMS also offers the UroLume® endoprosthesis stent as a less invasive procedure for patients who may not be good surgical candidates, as well as for men suffering from bulbar urethral strictures.
AMS also supplies penile implants to treat erectile dysfunction, the inability to achieve or maintain an erection sufficient for sexual intercourse, with a series of semi-rigid malleable prostheses and a complete range of more naturally functioning inflatable prostheses, including the AMS 700® MS. AMS has refined its implants over the years with improvements to the AMS 700® series of inflatable prostheses, including the AMS 700 LGX® and the MS Pump®. Another key factor that distinguishes AMS’s products is the use of the InhibiZone® antibiotic coating, which received FDA approval in July 2009 for AMS’s product claim that InhibiZone® reduces the rate of revision surgery due to surgical infections.
Women’s Health.
AMS offers a broad range of systems, led by Monarc® and MiniArc®, to treat female stress urinary incontinence, which generally results from a weakening of the tissue surrounding the bladder and urethra which can be a result of pregnancy, childbirth and aging. Monarc® incorporates unique helical needles to place a self-fixating, sub-fascial hammock through the obturator foramin. AMS’s MiniArc® Single-Incision Sling for stress incontinence was released in 2007 and requires just one incision to surgically place a small sling under the urethra, which minimizes tissue disruption and potential for blood loss, thereby allowing the procedure to be done with less anesthesia on an outpatient basis. In 2010, AMS launched the MiniArc® PreciseTM, which is designed to enhance the ease and accuracy of placement of the MiniArc device.
AMS also offers solutions for pelvic floor prolapse and other pelvic floor disorders, which may be caused by pregnancy, labor, and childbirth. In 2008, AMS introduced the Elevate® transvaginal pelvic floor repair system, with no external incisions. Using an anatomically designed needle and self-fixating tips, Elevate® allows for safe, simple and precise mesh placement through a single vaginal incision. The posterior system was launched in 2008 and the anterior system was launched in 2009.
BPH Therapy.
AMS’s products can be used to relieve restrictions on the normal flow of urine from the bladder caused by bladder obstructions, generally the result of BPH or bulbar urethral strictures. AMS offers men experiencing a physical obstruction of the prostatic urethra an alternative to a transurethral resection of the prostate (TURP), with the GreenLightTM photovaporization of the prostate. This laser therapy is designed to reduce the comorbidities associated with TURP. AMS’s GreenLightTM XPS and MoXyTM Liquid Cooled Fiber provide shorter treatment times with similar long-term results compared to other laser systems. The GreenLightTM laser system offers an optimal laser beam that balances vaporization of tissue with coagulation to prevent blood loss and providing enhanced surgical control compared to other laser systems. AMS also offers the StoneLight® laser and SureFlexTM fiber optics for the treatment of urinary stones. StoneLight® is a lightweight and portable 15-watt holmium laser that offers the right amount of power to effectively fragment most urinary stones. The SureFlexTM fiber optic line is engineered to deliver more energy safely and effectively, even under maximum scope deflection, for high performance holmium laser lithotripsy.
AMS’s TherMatrx® product is designed for those men not yet to the point of urethral obstruction, but for whom symptomatic relief is desired. It is a less-invasive tissue ablation technique that can be performed in a physician’s office using microwave energy delivered to the prostate.
The acquisition of AMS furthers Endo’s evolution from a pharmaceutical product-driven company to a healthcare solutions provider, strengthens our leading core urology franchise and expands our presence in the medical devices market. We believe the combination of AMS with Endo’s existing platform will provide additional cost-effective solutions across the entire urology spectrum.
The operating results of AMS from and including June 18, 2011 are included in the accompanying Condensed Consolidated Statements of Operations. The Condensed Consolidated Balance Sheet as of June 30, 2012 reflects the acquisition of AMS. The following table summarizes the fair values of the assets acquired and liabilities assumed at the AMS Acquisition Date (in thousands):
|
| | | | | | | | | | | |
| June 17, 2011 (As initially reported) | | Measurement period adjustments | | June 17, 2011 (As adjusted) |
Cash and cash equivalents | $ | 47,289 |
| | $ | — |
| | $ | 47,289 |
|
Commercial paper | 71,000 |
| | — |
| | 71,000 |
|
Accounts receivable | 73,868 |
| | — |
| | 73,868 |
|
Other receivables | 791 |
| | (161 | ) | | 630 |
|
Inventories | 75,525 |
| | (537 | ) | | 74,988 |
|
Prepaid expenses and other current assets | 7,133 |
| | — |
| | 7,133 |
|
Income taxes receivable | 11,179 |
| | (2,025 | ) | | 9,154 |
|
Deferred income taxes | 15,360 |
| | 72 |
| | 15,432 |
|
Property, plant and equipment | 57,372 |
| | (959 | ) | | 56,413 |
|
Other intangible assets | 1,390,000 |
| | (130,000 | ) | | 1,260,000 |
|
Other assets | 4,581 |
| | — |
| | 4,581 |
|
Total identifiable assets | $ | 1,754,098 |
| | $ | (133,610 | ) | | $ | 1,620,488 |
|
Accounts payable | $ | 9,437 |
| | $ | 890 |
| | $ | 10,327 |
|
Accrued expenses | 45,648 |
| | 187 |
| | 45,835 |
|
Deferred income taxes | 507,019 |
| | (90,274 | ) | | 416,745 |
|
Long-term debt | 520,012 |
| | 363 |
| | 520,375 |
|
Other liabilities | 23,578 |
| | 2,313 |
| | 25,891 |
|
Total liabilities assumed | $ | 1,105,694 |
| | $ | (86,521 | ) | | $ | 1,019,173 |
|
Net identifiable assets acquired | $ | 648,404 |
| | $ | (47,089 | ) | | $ | 601,315 |
|
Goodwill | 1,752,427 |
| | 46,234 |
| | 1,798,661 |
|
Net assets acquired | $ | 2,400,831 |
| | $ | (855 | ) | | $ | 2,399,976 |
|
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the AMS Acquisition Date to estimate the fair value of assets acquired and liabilities assumed. At June 30, 2012, our measurement period adjustments are complete. Measurement period adjustments related primarily to revisions in estimated cash flows for certain products after obtaining additional information regarding facts and circumstances existing as of the AMS Acquisition Date.
The valuation of the intangible assets acquired and related amortization periods are as follows:
|
| | | | | |
| Valuation (in millions) | | Amortization Period (in years) |
Customer Relationships: | | | |
Men’s Health | $ | 97.0 |
| | 17 |
Women’s Health | 37.0 |
| | 15 |
BPH | 26.0 |
| | 13 |
Total | $ | 160.0 |
| | 16 |
Developed Technology: | | | |
Men’s Health | $ | 690.0 |
| | 18 |
Women’s Health | 150.0 |
| | 9 |
BPH | 161.0 |
| | 18 |
Total | $ | 1,001.0 |
| | 16 |
Tradename: | | | |
AMS | $ | 45.0 |
| | 30 |
GreenLight | 12.0 |
| | 15 |
Total | $ | 57.0 |
| | 27 |
In Process Research & Development: | | | |
Oracle | $ | 12.0 |
| | n/a |
Genesis | 14.0 |
| | n/a |
TOPAS | 8.0 |
| | n/a |
Other(1) | 8.0 |
| | n/a |
Total | $ | 42.0 |
| | n/a |
Total other intangible assets | $ | 1,260.0 |
| | n/a |
| |
(1) | A subsequent pre-tax non-cash impairment charge of $3.0 million was recorded in the second quarter of 2012. This impairment charge is further discussed in Note 9. Goodwill and Other Intangibles. |
The fair value of the developed technology, IPR&D and customer relationship assets were estimated using a discounted present value income approach. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. The fair value of the AMS and GreenLight tradenames were estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be received if the Company were to license the AMS or GreenLight tradename. Thus, we derived the hypothetical royalty income from the projected revenues of AMS and GreenLight products, respectively. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.
The $1,798.7 million of goodwill has been assigned to our AMS segment (formerly our Devices segment). The goodwill recognized is attributable primarily to strategic and synergistic opportunities across the entire urology spectrum, expected corporate synergies, the assembled workforce of AMS and other factors. Approximately $16.5 million of goodwill is expected to be deductible for income tax purposes.
Deferred tax assets of $15.4 million are related primarily to federal net operating loss and credit carryforwards of AMS and its subsidiaries. Deferred tax liabilities of $416.7 million are related primarily to the difference between the book basis and tax basis of identifiable intangible assets.
The Company recognized $1.6 million and $21.1 million of AMS acquisition-related and integration costs that were expensed during the three months ended June 30, 2012 and 2011, respectively. These costs are included in Acquisition-related and integration items, net in the accompanying Condensed Consolidated Statements of Operations and are comprised of the following items (in thousands):
|
| | | | | | | |
| Three Months Ended June 30, |
| 2012 | | 2011 |
Bank fees | $ | — |
| | $ | 16,070 |
|
Legal, separation, integration, and other costs | 1,606 |
| | 5,058 |
|
Total | $ | 1,606 |
| | $ | 21,128 |
|
The Company recognized $3.3 million and $23.3 million of AMS acquisition-related and integration costs that were expensed during the six months ended June 30, 2012 and 2011, respectively. These costs are included in Acquisition-related and integration items, net in the accompanying Condensed Consolidated Statements of Operations and are comprised of the following items (in thousands):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2012 | | 2011 |
Bank fees | $ | — |
| | $ | 16,070 |
|
Legal, separation, integration, and other costs | 3,326 |
| | 7,194 |
|
Total | $ | 3,326 |
| | $ | 23,264 |
|
The following supplemental pro forma information presents the financial results as if the acquisition of AMS had occurred on January 1, 2011 for the three and six months ended June 30, 2011. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2011, nor are they indicative of any future results.
|
| | | | | | | |
| Three Months Ended June 30, 2011 | | Six Months Ended June 30, 2011 |
Pro forma consolidated results (in thousands, except per share data): | | | |
Revenue | $ | 705,119 |
| | $ | 1,406,013 |
|
Net income attributable to Endo Health Solutions Inc. | $ | 14,810 |
| | $ | 89,740 |
|
Basic net income per share | $ | 0.13 |
| | $ | 0.77 |
|
Diluted net income per share | $ | 0.12 |
| | $ | 0.74 |
|
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of AMS to reflect factually supportable adjustments that give effect to events that are directly attributable to the AMS Acquisition, including borrowings to finance the acquisition as well as the additional depreciation and amortization that would have been charged assuming the fair value adjustments primarily to property, plant and equipment, inventory, and intangible assets, had been applied on January 1, 2011, together with the consequential tax effects.
Other
In the second half of 2011, as part of our effort to increase and broaden the relationships within the urology community, we acquired two electronic medical records software companies, Intuitive Medical Software, LLC and meridianEMR, Inc., which individually and combined represent immaterial acquisitions. These acquisitions provide electronic medical records for urologists. Together, these acquisitions provide access to more than 2,000 urologists using data platforms that will enhance service offerings in urology practice management.
NOTE 6. SEGMENT RESULTS
In the fourth quarter of 2011, as a result of our strategic planning process, the Company’s executive leadership team reorganized the manner in which it views our various business activities. Management’s intention was to enhance its level of understanding of the entity’s performance, better assess its prospects and future cash flow potential and ultimately make more informed operating decisions about resource allocation and the enterprise as a whole. Based on this change, we reassessed our reporting structure under the applicable accounting guidance and determined that the Company now has four reportable segments. We have retrospectively revised the segment presentation for all periods presented reflecting the change from three to four reportable segments. Additionally, consistent with the Company’s May 2012 enterprise-wide rebranding initiative and corporate name change, the Company changed the names of its reportable segments to better align with these efforts. These changes to our segments have no impact on the Company’s Condensed Consolidated Financial Statements for all periods presented.
The four reportable business segments in which the Company now operates include: (1) Endo Pharmaceuticals (formerly Branded Pharmaceuticals), (2) Qualitest (formerly Generics), (3) AMS (formerly Devices) and (4) HealthTronics (formerly Services).
Each segment derives revenue from the sales or licensing of their respective products or services and is discussed below.
We evaluate segment performance based on each segment’s adjusted income (loss) before income tax. We define adjusted income (loss) before income tax as income (loss) before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, net, cost reduction and integration-related initiatives, asset impairment charges, amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, and certain other items that the Company believes do not reflect its core operating performance.
Certain corporate general and administrative expenses are not allocated and are therefore included within Corporate unallocated. We calculate consolidated adjusted income (loss) before income tax by adding the adjusted income (loss) before income tax of each of our reportable segments to corporate unallocated adjusted income (loss) before income tax.
Endo Pharmaceuticals
The Endo Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this segment include Lidoderm®, Opana® ER, Percocet®, Voltaren® Gel, Frova®, Supprelin® LA, Vantas®, Valstar® and Fortesta® Gel.
Qualitest
The Qualitest segment is comprised of our legacy Endo non-branded generics portfolio and the portfolio from our recently acquired Qualitest Pharmaceuticals business. Our generics business has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. With the addition of Qualitest Pharmaceuticals, the segment’s product offerings now include products in the pain management, urology, central nervous system (CNS) disorders, immunosuppression, oncology, women’s health and hypertension markets, among others.
AMS
The AMS segment currently focuses on providing technology solutions to physicians treating men’s and women’s pelvic health conditions and operates in the following business lines: men’s health, women’s health, and BPH therapy. These business lines are discussed in greater detail within Note 5. Acquisitions. We distribute devices through our direct sales force and independent sales representatives in the U.S., Canada, Australia, Brazil, Japan and Western Europe. Additionally, we distribute devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of our devices customers or distributors accounted for ten percent or more of our total revenues during the three or six months ended June 30, 2012 or 2011. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe.
HealthTronics
The HealthTronics segment provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics across the U.S. These services are sold through the following business lines: lithotripsy services, prostate treatment services, anatomical pathology services, medical products manufacturing, sales and maintenance and electronic medical records services.
The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2012 and 2011 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Net revenues to external customers | | | | | | | |
Endo Pharmaceuticals | $ | 442,786 |
| | $ | 398,267 |
| | $ | 806,360 |
| | $ | 773,781 |
|
Qualitest | 159,895 |
| | 133,047 |
| | 305,240 |
| | 267,456 |
|
AMS(1) | 128,131 |
| | 26,812 |
| | 258,297 |
| | 26,812 |
|
HealthTronics | 54,376 |
| | 49,485 |
| | 105,924 |
| | 99,588 |
|
Total consolidated net revenues to external customers | $ | 785,188 |
| | $ | 607,611 |
| | $ | 1,475,821 |
| | $ | 1,167,637 |
|
Adjusted income (loss) before income tax | | | | | | | |
Endo Pharmaceuticals | $ | 229,373 |
| | $ | 209,619 |
| | $ | 408,199 |
| | $ | 402,875 |
|
Qualitest | 50,409 |
| | 21,126 |
| | 86,660 |
| | 47,513 |
|
AMS | 29,250 |
| | 9,733 |
| | 56,302 |
| | 9,733 |
|
HealthTronics | 13,006 |
| | 15,741 |
| | 25,414 |
| | 30,182 |
|
Corporate unallocated | (83,920 | ) | | (67,032 | ) | | (176,080 | ) | | (123,301 | ) |
Total consolidated adjusted income before income tax | $ | 238,118 |
| | $ | 189,187 |
| | $ | 400,495 |
| | $ | 367,002 |
|
_____________
| |
(1) | The following table displays our AMS segment revenue by geography (in thousands). International revenues were not material to any of our other segments for any of the periods presented. |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
AMS: | | | | | | | |
United States | $ | 83,935 |
| | $ | 15,571 |
| | $ | 170,905 |
| | $ | 15,571 |
|
International | 44,196 |
| | 11,241 |
| | 87,392 |
| | 11,241 |
|
Total AMS revenues | $ | 128,131 |
| | $ | 26,812 |
| | $ | 258,297 |
| | $ | 26,812 |
|
The table below provides reconciliations of our consolidated adjusted income before income tax to our consolidated income (loss) before income tax, which is determined in accordance with U.S. GAAP, for the three and six months ended June 30, 2012 and 2011 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Total consolidated adjusted income before income tax | $ | 238,118 |
| | $ | 189,187 |
| | $ | 400,495 |
| | $ | 367,002 |
|
Upfront and milestone payments to partners | (5,726 | ) | | (13,990 | ) | | (51,567 | ) | | (24,991 | ) |
Asset impairment charges | (3,000 | ) | | — |
| | (43,000 | ) | | — |
|
Acquisition-related and integration items, net | (7,055 | ) | | (17,626 | ) | | (10,804 | ) | | (23,699 | ) |
Separation benefits and other cost reduction initiatives | (3,754 | ) | | (533 | ) | | (15,368 | ) | | (3,995 | ) |
Amortization of intangible assets | (58,564 | ) | | (40,444 | ) | | (111,924 | ) | | (77,655 | ) |
Inventory step-up | 382 |
| | (2,995 | ) | | (880 | ) | | (16,781 | ) |
Non-cash interest expense | (5,169 | ) | | (4,719 | ) | | (10,145 | ) | | (9,260 | ) |
Loss on extinguishment of debt | — |
| | (8,548 | ) | | (5,426 | ) | | (8,548 | ) |
Accrual for payment to Impax related to sales of Opana® ER | — |
| | — |
| | (110,000 | ) | | — |
|
Patent litigation settlement expense | (131,361 | ) | | — |
| | (131,361 | ) | | — |
|
Total consolidated income (loss) before income tax | $ | 23,871 |
| | $ | 100,332 |
| | $ | (89,980 | ) | | $ | 202,073 |
|
The following represents additional selected financial information for our reportable segments three and six months ended June 30, 2012 and 2011 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Depreciation expense | | | | | | | |
Endo Pharmaceuticals | $ | 3,912 |
| | $ | 2,775 |
| | $ | 7,710 |
| | $ | 6,442 |
|
Qualitest | 2,998 |
| | 2,571 |
| | 5,935 |
| | 5,184 |
|
AMS | 2,542 |
| | 284 |
| | 5,198 |
| | 284 |
|
HealthTronics | 3,333 |
| | 3,012 |
| | 6,325 |
| | 6,105 |
|
Corporate unallocated | 1,107 |
| | 763 |
| | 2,171 |
| | 1,769 |
|
Total depreciation expense | $ | 13,892 |
| | $ | 9,405 |
| | $ | 27,339 |
| | $ | 19,784 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Amortization expense | | | | | | | |
Endo Pharmaceuticals | $ | 27,143 |
| | $ | 26,199 |
| | $ | 49,077 |
| | $ | 52,260 |
|
Qualitest | 10,381 |
| | 9,697 |
| | 20,762 |
| | 19,597 |
|
AMS | 19,400 |
| | 3,296 |
| | 38,806 |
| | 3,296 |
|
HealthTronics | 1,790 |
| | 1,401 |
| | 3,579 |
| | 2,802 |
|
Total amortization expense | $ | 58,714 |
| | $ | 40,593 |
| | $ | 112,224 |
| | $ | 77,955 |
|
Interest income and expense are considered corporate items and are not allocated to our segments. Asset information is not accounted for at the segment level and consequently is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
NOTE 7. INCOME TAXES
The effective income tax rate on earnings from continuing operations before income taxes was 7.4% and 41.7% for the three and six months ended June 30, 2012, respectively, compared to 32.7% and 32.8% for the three and six months ended June 30, 2011, respectively.
Income tax expense for the three months ended June 30, 2012 decreased 95% from the three months ended June 30, 2011. For the six months ended June 30, 2012 an income tax benefit of $37.6 million was recorded as compared to tax expense of $66.2 million for the six months ended June 30, 2011. These fluctuations are due to decreases in income before income tax and the recording of a $6.3 million benefit for a prior period adjustment during the three months ended June 30, 2012 related to the reversal of a 2010 capital loss valuation allowance recorded in connection with our acquisition of HealthTronics, Inc. The valuation allowance was reversed because of a 2011 transaction that resulted in a realized ordinary loss for income tax purposes.
NOTE 8. LICENSE AND COLLABORATION AGREEMENTS
Commercial Products
Novartis AG and Novartis Consumer Health, Inc.
On March 4, 2008, we entered into a License and Supply Agreement (the Voltaren® Gel Agreement) with and among Novartis AG and Novartis Consumer Health, Inc (Novartis) to obtain the exclusive U.S. marketing rights for the prescription medicine Voltaren® Gel (Voltaren® Gel or Licensed Product). Voltaren® Gel received regulatory approval in October 2007 from the FDA, becoming the first topical prescription treatment for use in treating pain associated with osteoarthritis and the first new product approved in the U.S. for osteoarthritis since 2001. Voltaren® Gel was granted marketing exclusivity in the U.S. as a prescription medicine until October 2010.
Under the terms of the five-year Voltaren® Gel Agreement, Endo made an upfront cash payment of $85 million. Endo agreed to pay royalties to Novartis on annual Net Sales of the Licensed Product, subject to certain thresholds as defined in the Voltaren® Gel Agreement. In addition, Endo agreed to make certain guaranteed minimum annual royalty payments of $30 million per year payable in the 4th and 5th year of the Voltaren® Gel Agreement, which may be reduced under certain circumstances, including Novartis’s failure to supply the Licensed Product, subject to certain limitations including the launch of a generic to the Licensed Product in the U.S. These guaranteed minimum royalties will be creditable against royalty payments on an annual basis such that Endo’s obligation with respect to each year is to pay the greater of (i) royalties payable based on annual net sales of the Licensed Product or (ii) the guaranteed minimum royalty for such Voltaren® Gel Agreement year. Novartis is also eligible to receive a one-time milestone payment of $25 million if annual net sales of Voltaren® Gel exceed $300 million in the U.S.
The $85 million upfront payment and the present value of the guaranteed minimum royalties was initially capitalized as an intangible asset in the amount of $129 million, representing the fair value of the exclusive license to market Voltaren® Gel. Due to Novartis’s failure to supply Voltaren® Gel during the first quarter of 2012 resulting from the temporary shutdown of its Lincoln, Nebraska manufacturing facility, we were not obligated to make our first and second quarter 2012 minimum royalty payments of $7.5 million to Novartis. Accordingly, during the first quarter of 2012, we recorded a reduction to the associated liability and a decrease in the intangible asset. We are amortizing this intangible asset into Cost of revenues over an estimated five-year useful life. Although no minimum royalty was due during the second quarter of 2012, sales of Voltaren® Gel did re-commence in the second quarter and therefore required us to record royalties on actual net sales of Voltaren® Gel in the amount of $6.6 million. These royalties have been expensed as a component of Cost of revenues during the three and six months ended June 30, 2012.
Endo is solely responsible to commercialize the Licensed Product during the term of the Voltaren® Gel Agreement. With respect to each year during the term of the Voltaren® Gel Agreement, subject to certain limitations, Endo is required to incur a minimum amount of annual advertising and promotional expenses on the commercialization of the Licensed Product, which may be reduced under certain circumstances including Novartis’s failure to supply the Licensed Product. In addition, Endo is required to perform a minimum number of face-to-face one-on-one discussions with physicians and other healthcare practitioners (Details) for the purpose of promoting the Licensed Product within its approved indication during each year of the Voltaren® Gel Agreement which may be reduced under certain circumstances including Novartis’s failure to supply the Licensed Product. Further, during the term of the Voltaren® Gel Agreement, Endo will share in the costs of certain clinical studies and development activities initiated at the request of the FDA or as considered appropriate by Novartis and Endo.
During the term of the Voltaren® Gel Agreement, Endo has agreed to purchase all of its requirements for the Licensed Product from Novartis. The price was fixed for the first year and subject to annual changes based upon changes in the producer price index and raw materials.
Novartis has the exclusive right, at its sole discretion, to effect a switch of the Licensed Product from a prescription product to an over-the-counter (OTC) product in the U.S. (an OTC Switch) by filing an amendment or supplement to the Licensed Product New Drug Application or taking any other action necessary or advisable in connection therewith to effect the OTC Switch, and thereafter to commercialize such OTC product. Notwithstanding the foregoing, Novartis shall not launch an OTC equivalent product prior to a time specified in the Voltaren® Gel Agreement, and Novartis shall not take any action that results in the loss of the prescription product status for the Licensed Product prior to such time. Novartis will notify Endo if it submits a filing to the FDA in respect of an OTC equivalent product. In the event that Novartis gains approval of an OTC equivalent product that results in the Licensed Product being declassified as a prescription product, then Novartis will make certain royalty payments to Endo on net sales of such OTC equivalent product in the U.S. by Novartis, its affiliates and their respective licensees or sublicensees as set forth in the Voltaren® Gel Agreement. As a condition to the payment of any and all such royalties, net sales of the Licensed Product in the U.S. must have exceeded a certain threshold prior to the launch of the OTC equivalent product by Novartis or its affiliates.
The initial term of the Voltaren® Gel Agreement will expire on June 30, 2013, and we have the option to extend it for two successive one year terms. If renewed, the Voltaren® Gel Agreement will remain in place unless either party provides written notice of non-renewal to the other party at least six months prior to the expiration of any renewal term after the first renewal term or the Voltaren® Gel Agreement is otherwise terminated in accordance with its terms. Among other standard and customary termination rights granted under the Voltaren® Gel Agreement, the Voltaren® Gel Agreement can be terminated by either party upon reasonable written notice, if either party has committed a material breach that has not been remedied within 90 days from the giving of written notice. Endo may terminate the Voltaren® Gel Agreement by written notice upon the occurrence of several events, including the launch in the U.S. of a generic to the Licensed Product. Novartis may terminate the Voltaren® Gel Agreement upon reasonable written notice (1) if Endo fails to deliver a set percentage of the minimum Details in any given six-month period under the Voltaren® Gel Agreement; or (2) on or after the launch in the U.S. of an OTC equivalent product by Novartis, 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 Voltaren® Gel Agreement are less than a certain defined dollar amount.
Hind Healthcare Inc.
In November 1998, Endo entered into a license agreement (the Hind License Agreement) with Hind Healthcare Inc. (Hind), for the sole and exclusive right to develop, use, market, promote and sell Lidoderm® in the U.S. Under the terms of the Hind License Agreement, Endo paid Hind approximately $10 million based upon the achievement of certain milestones and capitalized this amount as an intangible asset representing the fair value of these exclusive rights. In addition, we were required to pay Hind nonrefundable royalties based on net sales of Lidoderm® until this obligation expired on November 23, 2011 pursuant to the terms of the Hind License Agreement. Royalties were recorded as a reduction to net sales due to the nature of the license agreement and the characteristics of the license involvement by Hind in Lidoderm®. The royalty rate was 10% of net sales including a minimum royalty of at least $500,000 per year. No royalties were recorded in 2012. During the six months ended June 30, 2011, we recorded $42.1 million in royalties to Hind which we recorded as a reduction to net sales.
Vernalis Development Limited
In July 2004, we entered into a License Agreement with Vernalis Development Limited (Vernalis) under which Vernalis agreed to license, exclusively to us, rights to market frovatriptan succinate (Frova®) in North America (the Vernalis License Agreement). Frova® was launched June 2002 in the U.S. and indicated for the acute treatment of migraine headaches in adults. Under the terms of the Vernalis License Agreement, we paid Vernalis an upfront fee of $30 million and annual $15 million payments each in 2005 and 2006. We capitalized the $30 million up-front payment and the present value of the two $15 million anniversary payments. We are amortizing this intangible asset into Cost of revenues on a straight-line basis over its estimated life of 12.5 years.
In addition, Vernalis could receive one-time milestone payments for the achievement of defined annual net sales targets. These sales milestone payments increase based on increasing net sales targets ranging from a milestone of $10 million on $200 million in net sales to a milestone of $75 million on $1.2 billion in net sales. These sales milestones could total up to $255.0 million if all of the defined net sales targets are achieved. Beginning on January 1, 2007, we began paying royalties to Vernalis based on the net sales of Frova®. The term of the license agreement is for the shorter of the time (i) that there are valid claims on the Vernalis patents covering Frova® or there is market exclusivity granted by a regulatory authority, whichever is longer, or (ii) until the date on which a generic version of Frova® is first offered, but in no event longer than 20 years. We can terminate the license agreement under certain circumstances, including upon 1 years’ written notice. In July 2007, Vernalis and Endo entered into an Amendment (Amendment No. 3) to the License Agreement dated July 14, 2004. Under Amendment No. 3, Vernalis granted an exclusive license to Endo to make, have made, use, commercialize and have commercialized Frova® in Canada, under the Canadian Trademark.
In February 2008, we entered into Amendment No. 4 to the Vernalis License Agreement (Amendment No. 4). In addition to amending certain specific terms and conditions of the License Agreement, Amendment No. 4 sets forth an annual minimum net sales threshold such that no royalties will be due on annual U.S. net sales of Frova® less than $85 million. Prior to this amendment, royalties were payable by us to Vernalis on all net sales of Frova® in the U.S. Now, once the annual minimum net sales amount is reached, royalty payments will be due only on the portion of annual net sales that exceed the $85 million threshold. To date, annual net sales have not exceeded the $85 million threshold and, therefore, no royalties have been paid.
On August 15, 2011, the parties amended the Vernalis License Agreement (Amendment No. 5). Pursuant to Amendment No. 5, Vernalis assigned to the Company certain patents which were previously exclusively licensed by the Company. Amendment No. 5 did not alter the financial arrangement between the parties.
The Population Council
The Company markets certain of its products utilizing the hydrogel polymer technology pursuant to an agreement between Indevus (now, Endo Pharmaceuticals Solutions Inc.) and The Population Council. Unless earlier terminated by either party in the event of a material breach by the other party, the term of the agreement is the shorter of twenty-five years from October 1997 or until the date on which The Population Council receives approximately $40 million in payments from the Company. To date, we have made payments of $9.0 million to the Population Council. The Company is required to pay to The Population Council 3% of its net sales of Vantas® and any polymer implant containing a luteinizing hormone-releasing hormone (LHRH) analog. We are also obligated to pay royalties to The Population Council ranging from 0.5% of net sales to 4% of net sales under certain conditions. We are also obligated to pay the Population Council 30% of certain profits and payments received in certain territories by the Company from the licensing of Vantas® or any other polymer implant containing an LHRH analog and 5% for other implants.
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 two percent 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. Under the terms of the ProStrakan Agreement, Endo paid ProStrakan an up-front cash payment of $10 million, which was recorded as Research and development expense.
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 $7.5 million was triggered during the second quarter of 2011 pursuant to the terms of the ProStrakan Agreement, at which time it was recorded to Cost of revenues. ProStrakan could potentially receive up to approximately $167.5 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 Oxymorphone Agreement) with Grünenthal for the exclusive clinical development and commercialization rights in Canada and the U.S. for a new oral formulation of Opana® ER, which is designed to be crush-resistant. Under the terms of the Grünenthal Oxymorphone Agreement, we paid approximately $4.9 million for the successful completion of a clinical milestone in 2010, which was recorded as Research and development expense. In December 2011, the FDA approved a new formulation of Opana® ER designed to be crush-resistant, which will continue to be called Opana® ER.
In the fourth quarter of 2011, the Company capitalized a one-time approval milestone to Grünenthal, which was settled in early 2012 for $4.9 million. We are amortizing this intangible asset into Cost of revenues over its estimated useful life. Additional payments of approximately 55.4 million euros (approximately $69.7 million at June 30, 2012) 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 new formulation of Opana® ER approved by the FDA in December 2011. These payments are recorded in Cost of revenues in our Condensed Consolidated Financial Statements and must be paid in U.S. dollars within 45 days after each calendar quarter.
Products in Development
Impax Laboratories, Inc.
In June 2010, the Company entered into a Development and Co-Promotion Agreement (the Impax Development Agreement) with Impax Laboratories, Inc. (Impax), whereby the Company was granted a royalty-free license for the co-exclusive rights to
co-promote a next generation Parkinson’s disease product. Under the terms of the Impax Development Agreement, Endo paid Impax an upfront payment of $10 million in 2010, which was recorded as Research and development expense. The Company could be obligated to pay up to approximately $30.0 million in additional payments linked to the achievement of future clinical, regulatory, and commercial milestones related to the development product. Prior to the completion of Phase III trials, Endo may only terminate the Impax Development Agreement upon a material breach.
Bioniche Life Sciences Inc.
In July 2009, the Company entered into a License, Development and Supply Agreement (the Bioniche Agreement) with Bioniche Life Sciences Inc. and Bioniche Urology Inc. (collectively, Bioniche), whereby the Company licensed from Bioniche the exclusive rights to develop and market Bioniche’s proprietary formulation of Mycobacterial Cell Wall-DNA Complex (MCC), known as UrocidinTM, in the U.S. with an option for global rights. We exercised our option for global rights in the first quarter of 2010. UrocidinTM is a patented formulation of MCC developed by Bioniche for the treatment of non-muscle-invasive bladder cancer that is currently undergoing Phase III clinical testing. Under the terms of the Bioniche Agreement, Endo paid Bioniche an up-front cash payment of $20.0 million in July 2009 and milestone payments of $11.0 million in 2009 and $4.0 million in 2010 resulting from the achievement of contractual milestones, which were recorded as Research and development expense. In addition, Bioniche could potentially receive up to approximately $67.0 million and $26.0 million in additional payments linked to the achievement of future clinical, regulatory, and commercial milestones related to two separate indications for UrocidinTM. Bioniche will manufacture UrocidinTM and receive a transfer price for supply based on a percentage of Endo’s annual net sales of UrocidinTM. Endo may terminate the Bioniche Agreement upon 180 days’ prior written notice.
BayerSchering
In July 2005, Indevus (now, Endo Pharmaceuticals Solutions Inc.) licensed exclusive U.S. rights from Schering AG, Germany, now BayerSchering Pharma AG (BayerSchering) to market a long-acting injectable testosterone preparation for the treatment of male hypogonadism that we refer to as AveedTM (the BayerSchering Agreement). The Company is responsible for the development and commercialization of AveedTM in the U.S. BayerSchering is responsible for manufacturing and supplying the Company with finished product. As part of the BayerSchering Agreement, Indevus agreed to pay to BayerSchering up to $30.0 million in up-front, regulatory milestone, and commercialization milestone payments, including a $5.0 million payment due upon approval by the FDA to market AveedTM. Indevus also agreed to pay to BayerSchering 25% of net sales of AveedTM to cover both the cost of finished product and royalties. Either party may also terminate the BayerSchering Agreement in the event of a material breach by the other party.
In October 2006, Indevus entered into a supply agreement with BayerSchering pursuant to which BayerSchering agreed to manufacture and supply Indevus with all of its requirements for AveedTM for a supply price based on net sales of AveedTM. The supply price is applied against the 25% of net sales owed to BayerSchering pursuant to the BayerSchering Agreement. The BayerSchering Agreement expires ten years after the first commercial sale of AveedTM.
Hydron Technologies, Inc.
In November 1989, GP Strategies Corporation (GP Strategies), then known as National Patent Development Corporation, entered into an agreement (the Hydron Agreement) with Dento-Med Industries, Inc., now known as Hydron Technologies, Inc. In June 2000, Valera Pharmaceuticals, Inc. (Valera, now a wholly-owned, indirect subsidiary of the Company known as Endo Pharmaceuticals Valera Inc.) entered into a contribution agreement with GP Strategies, pursuant to which Valera acquired the assets of GP Strategies’ drug delivery business, including all intellectual property, and all of GP Strategies’ rights under the Hydron Agreement, and certain other agreements with The Population Council and Shire US, Inc.
Pursuant to the Hydron Agreement, the Company has the exclusive right to manufacture, sell and distribute any prescription drug or medical device and certain other products made with the hydrogel polymer technology. Hydron Technologies retained an exclusive, worldwide license to manufacture, market or use products composed of, or produced with the use of, the hydrogel polymer technology in certain consumer and oral health fields. Neither party is prohibited from manufacturing, exploiting, using or transferring the rights to any new non-prescription drug product containing the hydrogel polymer technology, subject to certain exceptions, for limited exclusivity periods. Subject to certain conditions and exceptions, the Company is obligated to supply certain types of polymer to Hydron Technologies and Hydron Technologies is obligated to purchase such products from the Company. Under the Hydron Agreement, the Company also had the title to the Hydron® trademark. Recently, the Company decided to stop using the Hydron® trademark and transferred the title to such trademark to Hydron Technologies pursuant to the Hydron Agreement. This agreement continues indefinitely, unless terminated earlier by the parties. Each party may owe royalties up to 5% to the other party on certain products under certain conditions.
BioDelivery Sciences International, Inc.
In January 2012, the Company signed a worldwide license and development agreement (the BioDelivery Agreement) with BioDelivery Sciences International, Inc. (BioDelivery) for the exclusive rights to develop and commercialize BEMA® Buprenorphine. BEMA® Buprenorphine is a transmucosal form of buprenorphine, a partial mu-opiate receptor agonist, which incorporates a bioerodible mucoadhesive (BEMA®) technology. BEMA® Buprenorphine is currently in phase III trials for the treatment of moderate to severe chronic pain. The Company made an upfront payment to BioDelivery for $30.0 million, which was expensed as Research and development in the first quarter of 2012. During the first quarter of 2012, $15.0 million of additional costs were incurred related to the achievement of certain regulatory milestones and were recorded as Research and development expense. We paid this amount in the second quarter of 2012. In the future, Endo could be obligated to pay royalties based on net sales of BEMA® Buprenorphine and commercial and regulatory milestone payments of up to approximately $135.0 million. Endo may terminate the BioDelivery Agreement at any time upon six months written notice. Unless terminated earlier, the BioDelivery Agreement shall expire, on a country by country basis, upon the later to occur of ten years from the date of first commercial sale in a particular country or the date on which the last valid claim of the applicable BioDelivery patents in a particular country has expired or been invalidated or found unenforceable.
Orion Corporation
In January 2011, the Company entered into a Discovery, Development and Commercialization Agreement (the 2011 Orion Agreement) with Orion Corporation (Orion) to exclusively co-develop products for the treatment of certain cancers and solid tumors. Under the terms of the 2011 Orion Agreement, Endo and Orion each contributed four research programs to the collaboration to be conducted pursuant to the agreement. The development of each research program shall initially be the sole responsibility of the contributing party. However, upon the achievement of certain milestones, the non-contribution party shall have the opportunity to, at its option, obtain a license to jointly develop and commercialize any research program contributed by the other party for amounts defined in the 2011 Orion Agreement. Subject to certain limitations, upon the first commercial sale of any successfully launched jointly developed product, Endo shall be obligated to pay royalties to Orion based on net sales of the corresponding product in North America (the Endo territory) and Orion shall be obligated to pay royalties to Endo on net sales of the corresponding product in certain European countries (the Orion territory). The 2011 Orion Agreement shall expire in January 2016, unless terminated early or extended pursuant to the terms of the agreement. In January 2011, Endo exercised its option to obtain a license to jointly develop and commercialize Orion’s Anti-Androgen program focused on castration-resistant prostate cancer, one of Orion’s four contributed research programs, and made a corresponding payment to Orion for $10 million, which was expensed as Research and development in the first quarter of 2011.
EpiCept Corp.
In December 2003, we entered into a license granting us exclusive, worldwide rights to certain patents of EpiCept Corp. (EpiCept) as well as exclusive, worldwide commercialization rights to EpiCept’s LidoPAIN® BP product (EpiCept Agreement). The EpiCept Agreement provides for Endo to pay EpiCept milestones as well as royalties on the net sales of EpiCept’s LidoPAIN® BP product. Under this Agreement, we made an upfront payment to EpiCept of $7.5 million which we capitalized as an intangible asset representing the fair value of the exclusive right and the patents. We are amortizing this intangible asset over its useful life of thirteen years. EpiCept has also retained an option to co-promote the LidoPAIN® BP product. Milestone payments made by Endo under this
agreement, including regulatory milestones and sales thresholds, could total up to $82.5 million. In addition, the EpiCept Agreement also contains terms and conditions customary for this type of arrangement, including representations, warranties, indemnities and termination rights. The EpiCept Agreement generally lasts until the underlying patents expire. In January 2009, EpiCept announced that it was discontinuing all drug discovery activities including the development of LidoPAIN® BP. However, the Company intends to maintain its patent rights conveyed by the EpiCept Agreement.
Other
We have entered into certain other collaboration and discovery agreements with third parties for the development of pain management and other products. These agreements require us to share in the development costs of such products and grant marketing rights to us for such products.
We have also licensed from universities and other similar firms, rights to certain technologies or intellectual property, generally in the field of pain management. We are generally required to make upfront payments as well as other payments upon successful completion of regulatory or sales milestones. In addition, these agreements generally require us to pay royalties on sales of the products arising from these agreements. These agreements generally permit Endo to terminate the agreement with no significant continuing obligation.
NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the six months ended June 30, 2012, are as follows:
|
| | | |
| Carrying Amount |
December 31, 2011 | $ | 2,558,041 |
|
Goodwill acquired during the period | 6,618 |
|
Measurement period adjustments | 2,625 |
|
Effect of currency translation | (2,031 | ) |
June 30, 2012 | $ | 2,565,253 |
|
The goodwill acquired during the period relates to an immaterial acquisition in the second quarter of 2012. Of the $2.6 billion of goodwill recorded on our Condensed Consolidated Balance Sheet at June 30, 2012, $290.8 million is assigned to our Endo Pharmaceuticals segment, $275.2 million is assigned to our Qualitest segment, $1.8 billion is assigned to our AMS segment and $207.2 million is assigned to our HealthTronics segment.
Other Intangible Assets
Our other intangible assets consist of the following at June 30, 2012 and December 31, 2011, respectively (in thousands):
|
| | | | | | | |
| June 30, 2012 | | December 31, 2011 |
Indefinite-lived intangibles: | | | |
In-process research and development | $ | 179,400 |
| | $ | 221,400 |
|
Total indefinite-lived intangibles | $ | 179,400 |
| | $ | 221,400 |
|
Definite-lived intangibles: | |