Form 10-Q Endo International plc For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________________
(Mark One)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
or
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-36326
____________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) | (Zip Code) | |||||||
011-353 -1-268-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: | ||||||||
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. | ☒ | |||||||
| No | ☐ | |||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). | ☒ | |||||||
| No | ☐ | |||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | ||||||||||||||
☒ | Accelerated filer | ☐ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | |||||||
| No | ☒ | |||||||
The number of ordinary shares, nominal value $0.0001 per share outstanding as of August 1, 2022 was | ||
ENDO INTERNATIONAL PLC
INDEX
| Page | ||||||||
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 (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Forward-looking statements include, without limitation, any statements relating to the status and outcome of litigation, any future financial results, cost savings, revenues, expenses, net income and income per share, as well as future financing activities, the impact of the novel strain of coronavirus referred to as COVID-19 on the health and welfare of our employees and on our business (including any economic impact, anticipated return to historical purchasing decisions by customers, changes in consumer spending, decisions to engage in certain medical procedures, future governmental orders that could impact our operations and the ability of our manufacturing facilities and suppliers to fulfill their obligations to us), the expansion of our product pipeline and any development, approval, launch or commercialization activities, the outcome or progress of our contingency planning, including any potential bankruptcy filing, and any other statements that refer to Endo’s expected, estimated or anticipated future results. We have tried, whenever possible, to identify such statements with words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “forecast,” “will,” “may” or similar expressions. We have based these forward-looking statements on our current expectations, assumptions 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 including, without limitation, the risks related to the impact of COVID-19 (such as, without limitation, the scope and duration of the pandemic, governmental actions and restrictive measures, delays and cancellations of medical procedures, manufacturing and supply chain disruptions and other impacts to our business); the timing or results of any pending or future litigation, investigations or claims or actual or contingent liabilities, settlement discussions, negotiations or other adverse proceedings, including proceedings involving opioid-related matters, antitrust matters and tax matters with the United States (U.S.) Internal Revenue Service (IRS); our ability to reach a resolution with certain of our financial creditors and opioid-related plaintiffs in connection with ongoing restructuring and settlement discussions; unfavorable publicity regarding the misuse of opioids; changing competitive, market and regulatory conditions; changes in legislation; our ability to obtain and maintain adequate protection for our intellectual property rights; the impacts of competition such as those related to the loss of VASOSTRICT® exclusivity; the timing and uncertainty of the results of both the research and development and regulatory processes, including regulatory decisions, product recalls, withdrawals and other unusual items; domestic and foreign health care and cost containment reforms, including government pricing, tax and reimbursement policies; technological advances and patents obtained by competitors; the performance, including the approval, introduction and consumer and physician acceptance of new products and the continuing acceptance of currently marketed products; our ability to develop or expand our product pipeline and to continue to develop the market for QWO®, XIAFLEX® and other branded or unbranded products; the impact that known and unknown side effects may have on market perception and consumer preference; the success of any acquisition, licensing or commercialization; the effectiveness of advertising and other promotional campaigns; the timely and successful implementation of any strategic and/or optimization initiatives; the uncertainty associated with the identification of and successful consummation and execution of external corporate development initiatives and strategic partnering transactions; our ability to obtain and successfully manufacture, maintain and distribute a sufficient supply of products to meet market demand in a timely manner; the timing and uncertainty of the results of our strategic review and any related potential bankruptcy; and the other risks and uncertainties more fully described under the caption “Risk Factors” in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (SEC) on March 1, 2022 (the Annual Report), in Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 filed with the SEC on May 6, 2022 (the First Quarter 2022 Form 10-Q), in Part II, Item 1A of this report and in other reports that we file with the SEC. These risks and uncertainties, many of which are outside of our control, and any other risks and uncertainties that we are not currently able to predict or identify, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause our actual results to differ materially and adversely from those expressed in forward-looking statements contained or referenced in this document, including with respect to opioid, tax or antitrust related proceedings or any other litigation; our ability to adjust to changing market conditions; our ability to attract and retain key personnel; our ability to maintain compliance with our financial obligations under certain of our outstanding debt obligations and avoid related downgrades of our debt and long-term corporate credit ratings (which could increase our cost of capital) and/or potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ outstanding indebtedness; our ability to incur additional borrowings in compliance with the covenants in our then-existing facilities or to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate or other purposes, or to refinance our indebtedness; and/or the potential for a significant reduction in our short-term and long-term revenues and/or any other factor that could cause us to be unable to fund our operations and liquidity needs, such as future capital expenditures and payment of our indebtedness. As a result of the possibility or occurrence of any such result, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning may ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Pursuant to such remedial measures, we currently expect to seek protection from our creditors under Chapter 11 of the Bankruptcy Code, which could occur imminently and would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern, as further described herein. We would, in that event, also be subject to risks and uncertainties caused by the actions of creditors and other third parties with interests that may be inconsistent with our plans.
i
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, except as may be required under applicable securities laws. You are advised to consult any further disclosures we make on related subjects in our reports filed with the SEC and with securities regulators in Canada on the System for Electronic Document Analysis and Retrieval (SEDAR). Also note that, in Part I, Item 1A of the Annual Report, Part II, Item 1A of the First Quarter 2022 Form 10-Q and Part II, Item 1A of this report, we provide a cautionary discussion of 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.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENDO INTERNATIONAL PLC | |||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) | |||||||||||
(Dollars in thousands, except share and per share data) | |||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and cash equivalents | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income taxes receivable | |||||||||||
| Assets held for sale (NOTE 3) | |||||||||||
| Total current assets | $ | $ | |||||||||
| PROPERTY, PLANT AND EQUIPMENT, NET | |||||||||||
| OPERATING LEASE ASSETS | |||||||||||
| GOODWILL | |||||||||||
| OTHER INTANGIBLES, NET | |||||||||||
| DEFERRED INCOME TAXES | |||||||||||
| OTHER ASSETS | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Current portion of legal settlement accrual | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | $ | $ | |||||||||
| DEFERRED INCOME TAXES | |||||||||||
| LONG-TERM DEBT, LESS CURRENT PORTION, NET | |||||||||||
| LONG-TERM LEGAL SETTLEMENT ACCRUAL, LESS CURRENT PORTION | |||||||||||
| OPERATING LEASE LIABILITIES, LESS CURRENT PORTION | |||||||||||
| OTHER LIABILITIES | |||||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 14) | |||||||||||
| SHAREHOLDERS’ DEFICIT: | |||||||||||
Euro deferred shares, $ | |||||||||||
Ordinary shares, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ deficit | $ | ( | $ | ( | |||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||
1
ENDO INTERNATIONAL PLC | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | |||||||||||||||||||||||
(Dollars and shares in thousands, except per share data) | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| TOTAL REVENUES, NET | $ | $ | $ | $ | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Acquired in-process research and development | |||||||||||||||||||||||
| Litigation-related and other contingencies, net | |||||||||||||||||||||||
| Asset impairment charges | |||||||||||||||||||||||
| Acquisition-related and integration items, net | ( | ||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||||||||
| Other (income) expense, net | ( | ( | |||||||||||||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| INCOME TAX EXPENSE | |||||||||||||||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3) | ( | ( | ( | ( | |||||||||||||||||||
| NET (LOSS) INCOME | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| NET (LOSS) INCOME PER SHARE—BASIC: | |||||||||||||||||||||||
| Continuing operations | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Discontinued operations | ( | ( | ( | ( | |||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| NET (LOSS) INCOME PER SHARE—DILUTED: | |||||||||||||||||||||||
| Continuing operations | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Discontinued operations | ( | ( | ( | ( | |||||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| WEIGHTED AVERAGE SHARES: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||||||||||||||
2
ENDO INTERNATIONAL PLC | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) | |||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| NET (LOSS) INCOME | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME: | |||||||||||||||||||||||
| Net unrealized (loss) gain on foreign currency | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Total other comprehensive (loss) income | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||||||||||||||
3
ENDO INTERNATIONAL PLC | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |||||||||||
(Dollars in thousands) | |||||||||||
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile Net (loss) income to Net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Amortization of debt issuance costs and discount | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Change in fair value of contingent consideration | ( | ||||||||||
| Loss on extinguishment of debt | |||||||||||
| Acquired in-process research and development charges | |||||||||||
| Asset impairment charges | |||||||||||
| (Gain) loss on sale of business and other assets | ( | ||||||||||
| Changes in assets and liabilities which provided (used) cash: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ||||||||||
| Prepaid and other assets | |||||||||||
| Accounts payable, accrued expenses and other liabilities | ( | ( | |||||||||
| Income taxes payable/receivable, net | |||||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures, excluding capitalized interest | ( | ( | |||||||||
| Capitalized interest payments | ( | ( | |||||||||
| Proceeds from the U.S. Government Agreement | |||||||||||
| Acquisitions, including in-process research and development, net of cash and restricted cash acquired | ( | ||||||||||
| Product acquisition costs and license fees | ( | ||||||||||
| Proceeds from sale of business and other assets, net | |||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
4
ENDO INTERNATIONAL PLC | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |||||||||||
(Dollars in thousands) | |||||||||||
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Proceeds from issuance of notes, net | |||||||||||
| Proceeds from issuance of term loans, net | |||||||||||
| Repayments of notes | ( | ||||||||||
| Repayments of term loans | ( | ( | |||||||||
| Repayments of other indebtedness | ( | ( | |||||||||
| Payments for debt issuance and extinguishment costs | ( | ||||||||||
| Payments for contingent consideration | ( | ( | |||||||||
| Payments of tax withholding for restricted shares | ( | ( | |||||||||
| Proceeds from exercise of options | |||||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||
| Effect of foreign exchange rate | ( | ||||||||||
| NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS | $ | ( | $ | ||||||||
| CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF PERIOD | |||||||||||
| CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||
5
ENDO INTERNATIONAL PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
NOTE 1. BASIS OF PRESENTATION
Basis of Presentation
Endo International plc is an Ireland-domiciled specialty pharmaceutical company that conducts business through its operating subsidiaries. Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to Endo International plc and its subsidiaries.
The accompanying unaudited Condensed Consolidated Financial Statements of Endo International plc and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of Endo International plc and its subsidiaries, which are unaudited, include all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2022 and the results of its operations and its cash flows for the periods presented. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2021 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in the Annual Report.
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassification adjustments primarily relate to changes to the presentation of certain costs and expenses in our Condensed Consolidated Statements of Operations. Specifically, effective with the First Quarter 2022 Form 10-Q, the Company has added a new financial statement line item labeled Acquired in-process research and development. Any prior period amounts of acquired in-process research and development charges presented in this report have been reclassified to this line item from the existing financial statement line item labeled Research and development.
Going Concern
As previously disclosed, as a result of the possibility or occurrence of an unfavorable outcome with respect to any legal proceeding, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning may ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Some of these actions could take significant time to implement and others may require judicial or other third-party approval. As further described below, thousands of governmental and private plaintiffs have filed suit against us and/or certain of our subsidiaries alleging opioid-related claims. We have not been able to settle most of the opioid claims made against us and, as a result, we are exploring a wide array of potential actions as part of our contingency planning.
During the second quarter of 2022, our contingency planning process continued to advance. For example, we have been working with our external advisors to explore a range of options and have been engaging in dialogue with certain financial creditors and litigation claimants, together with their advisors. While continuing these discussions and our evaluation of strategic alternatives, we elected, for certain of our senior notes, to not make certain interest payments as they became due beginning on June 30, 2022. Under each of the indentures governing these notes, we have a 30 -day grace period from the respective due dates to make these interest payments before such non-payments constitute events of default with respect to such notes. As of the date of this report, these interest payments either: (i) had been paid before the end of any applicable grace periods or (ii) remained unpaid but were still within applicable grace periods. However, we remain in constructive negotiations with an ad hoc group of first lien creditors, among other parties, and, in light of the progress to date, we currently expect that these negotiations will likely result in a pre-arranged filing under Chapter 11 of the U.S. Bankruptcy Code by Endo International plc and substantially all of its subsidiaries, which could occur imminently. There can be no assurance of such an outcome. Despite a likely Chapter 11 filing, we retain substantial liquidity, with approximately $1.19 billion of unrestricted cash on our Condensed Consolidated Balance Sheets as of June 30, 2022, and we continue to meet our obligations to customers, vendors, counterparties and employees in the ordinary course of business.
6
As we continue discussions with certain of our creditors and/or consider further actions in connection with our evaluation of strategic alternatives, we cannot predict with certainty whether the remaining unpaid interest payments referenced above will be made by the end of any applicable grace periods or whether they and/or any of our future interest payments will be made timely, or at all. If one or more events of default were to occur under any of the agreements relating to our outstanding indebtedness, including without limitation as a result of us not making interest payments by the end of any applicable grace periods and/or us issuing audited financial statements containing an audit opinion with going concern or similar qualifications or exceptions, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to become due and payable immediately, terminate all commitments to extend further credit, foreclose against assets comprising the collateral securing or otherwise supporting the debt and pursue other legal remedies. Additionally, the instruments governing our debt contain cross-default or cross-acceleration provisions that may cause all of the debt issued under such instruments to become immediately due and payable as a result of a default under an unrelated debt instrument. Our assets and cash flows may be insufficient to fully repay borrowings under our outstanding debt instruments if the obligations thereunder were accelerated upon one or more events of default. Refer to the “Covenants and Events of Default” section of Note 13. Debt for further discussion.
Any of the circumstances above would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern, including, but not limited to, by causing increased difficulty obtaining and maintaining commercial relationships on competitive terms with customers, suppliers and other counterparties; increased difficulty retaining and motivating key employees, as well as attracting new employees; diversion of management’s time and attention to dealing with bankruptcy and restructuring activities rather than focusing exclusively on business operations; incurrence of substantial costs, fees and other expenses associated with bankruptcy proceedings; and loss of ability to maintain or obtain sufficient financing sources for operations or to fund any reorganization plan and meet future obligations. We would, in that event, also be subject to risks and uncertainties caused by the actions of creditors and other third parties with interests that may be inconsistent with our plans. Certain of these risks and uncertainties could also occur if our suppliers or other third parties believe that we may pursue one or more significant corporate transactions or other remedial measures.
Taken together, we believe the conditions and events described above raise substantial doubt about our ability to continue as a going concern within one year after the date of issuance of these unaudited Condensed Consolidated Financial Statements. While the accompanying unaudited Condensed Consolidated Financial Statements have been prepared under the going concern basis of accounting, we continue to evaluate plans to resolve our risks to continue to operate as a going concern. These plans, however, have not yet been finalized and are not fully within our control. As a result, management has concluded that its plans at this stage do not alleviate substantial doubt about Endo’s ability to continue as a going concern.
The unaudited Condensed Consolidated Financial Statements do not include any material adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty. See Note 18. Income Taxes for discussion regarding the impact of our going concern assessment on the valuation allowance related to our net deferred tax assets.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts and disclosures in our Condensed Consolidated Financial Statements, including the Notes thereto, and elsewhere in this report. For example, we are required to make significant estimates and assumptions related to revenue recognition, including sales deductions, long-lived assets, goodwill, other intangible assets, income taxes, contingencies, financial instruments and share-based compensation, among others. Some of these estimates can be subjective and complex. Uncertainties related to the continued magnitude and duration of the COVID-19 pandemic, the extent to which it will impact our estimated future financial results, worldwide macroeconomic conditions including interest rates, employment rates, consumer spending, health insurance coverage, the speed of the anticipated recovery and governmental and business reactions to the pandemic, including any possible re-initiation of shutdowns or renewed restrictions, have increased the complexity of developing these estimates, including the allowance for expected credit losses and the carrying amounts of long-lived assets, goodwill and other intangible assets. Furthermore, as further discussed in Note 1. Basis of Presentation, as a result of the possibility or occurrence of an unfavorable outcome with respect to any legal proceeding, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning may ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Any such action could ultimately result in, among other things, asset impairment charges that may be material. Although we believe that our estimates and assumptions are reasonable, there may be other reasonable estimates or assumptions that differ significantly from ours. Further, our estimates and assumptions are based upon information available at the time they were made. Actual results may differ significantly from our estimates, including as a result of the uncertainties described in this report, those described in our other reports filed with the SEC or other uncertainties.
7
Significant Accounting Policies Added or Updated since December 31, 2021
There have been no significant changes to our significant accounting policies since December 31, 2021. For additional discussion of the Company’s significant accounting policies, see Note 2. Summary of Significant Accounting Policies in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report.
NOTE 3. DISCONTINUED OPERATIONS AND HELD FOR SALE
Astora
The operating results of the Company’s Astora business, which the Board of Directors (the Board) resolved to wind down in 2016, are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The following table provides the operating results of Astora Discontinued operations, net of tax, for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Loss from discontinued operations before income taxes | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Income tax benefit | ( | ( | |||||||||||||||||||||
| Discontinued operations, net of tax | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Loss from discontinued operations before income taxes includes mesh-related legal defense costs and certain other items.
The cash flows from discontinued operating activities related to Astora included the impact of net losses of $11.2 million and $10.9 million for the six months ended June 30, 2022 and 2021, respectively, and the impact of cash activity related to vaginal mesh cases. During the periods presented above, there were no no
Certain Assets and Liabilities of Endo’s Retail Generics Business
In November 2020, we announced the initiation of several strategic actions to further optimize the Company’s operations and increase overall efficiency, which are collectively referred to as the 2020 Restructuring Initiative and are further discussed in Note 4. Restructuring. These actions include an initiative to exit certain of our manufacturing and other sites to optimize our retail generics business cost structure. As part of this initiative, certain of these sites were sold in 2021 as further discussed in the Annual Report. Additionally, during the second quarter of 2022, we entered into a definitive agreement to sell certain additional assets located in Chestnut Ridge, New York that supported our retail generics business to Ram Ridge Partners BH LLC (Ram Ridge Partners). As of June 30, 2022, the sale has not yet closed; it is expected to close in the third quarter of 2022.
During the second quarter of 2022, these assets, which include property, plant and equipment with a carrying amount of approximately $11 million as of June 30, 2022, met the criteria to be classified as held for sale in the Condensed Consolidated Balance Sheets. Depreciation expense is not recorded on assets held for sale. These assets, which primarily related to the Company’s Generic Pharmaceuticals segment, did not meet the requirements for treatment as a discontinued operation.
NOTE 4. RESTRUCTURING
2020 Restructuring Initiative
On November 5, 2020, the Company announced the initiation of several strategic actions to further optimize the Company’s operations and increase overall efficiency (the 2020 Restructuring Initiative). These actions were initiated with the expectation of generating significant cost savings to be reinvested, among other things, to support the Company’s key strategic priority to expand and enhance its product portfolio. These actions, which we have been progressing, include the following:
•Optimizing the Company’s retail generics business cost structure by exiting manufacturing and other sites in Irvine, California and Chestnut Ridge, New York, as well as certain sites in India. Certain of the sites have already been exited and certain products historically manufactured at these sites have been transferred to other internal and external sites within the Company’s manufacturing network.
•Improving operating flexibility and reducing general and administrative costs by transferring certain transaction processing activities to third-party global business process service providers.
•Increasing organizational effectiveness by further integrating the Company’s commercial, operations and research and development functions, respectively, to support the Company’s key strategic priorities.
8
As a result of the 2020 Restructuring Initiative, the Company’s global workforce is ultimately expected to be reduced by up to approximately 500 net full-time positions. The Company expects to realize annualized pre-tax cash savings (without giving effect to the costs described below) of approximately $85 million to $95 million by the first half of 2023, primarily related to reductions in Cost of revenues of approximately $65 million to $70 million and other expenses, including Selling, general and administrative and Research and development expenses, of approximately $20 million to $25 million.
As a result of the 2020 Restructuring Initiative, the Company expects to incur total pre-tax restructuring-related expenses of approximately $170 million to $185 million, of which approximately $140 million to $155 million relates to the Generic Pharmaceuticals segment, with the remaining amounts relating to our other segments and certain corporate unallocated costs. The estimated expenses consist of accelerated depreciation charges of approximately $50 million to $55 million, asset impairment charges of approximately $50 million, employee separation, continuity and other benefit-related costs of approximately $55 million to $60 million and certain other restructuring costs of approximately $15 million to $20 million. Cash outlays associated with the 2020 Restructuring Initiative are expected to be approximately $75 million and consist primarily of employee separation, continuity and other benefit-related costs and certain other restructuring costs. By the end of 2022, the Company expects that substantially all of these costs will have been incurred and substantially all related cash payments will have been made.
The following pre-tax net amounts related to the 2020 Restructuring Initiative are included in the Company’s Condensed Consolidated Statements of Operations during the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net restructuring (charge reversals) charges related to: | |||||||||||||||||||||||
| Accelerated depreciation | $ | $ | $ | $ | |||||||||||||||||||
| Inventory adjustments | |||||||||||||||||||||||
| Employee separation, continuity and other benefit-related costs | ( | ||||||||||||||||||||||
| Certain other restructuring costs | |||||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | ||||||||||||||||||
These pre-tax net amounts were primarily attributable to our Generic Pharmaceuticals segment, which incurred $0.1 million and $5.1 million of pre-tax net charges during the three and six months ended June 30, 2022, respectively, and $7.6 million and $22.5 million of pre-tax net charges during the three and six months ended June 30, 2021, respectively. The remaining amounts related to our other segments and certain corporate unallocated costs.
As of June 30, 2022, cumulative amounts incurred to date include charges related to accelerated depreciation of approximately $51.0 million, asset impairments related to certain identifiable intangible assets, operating lease assets and disposal groups totaling approximately $49.5 million, inventory adjustments of approximately $11.1 million, employee separation, continuity and other benefit-related costs, net of approximately $54.4 million and certain other restructuring costs of approximately $3.4 million. Of these amounts, approximately $133.9 million was attributable to the Generic Pharmaceuticals segment, with the remaining amounts relating to our other segments and certain corporate unallocated costs.
The following pre-tax net amounts related to the 2020 Restructuring Initiative are included in the Company’s Condensed Consolidated Statements of Operations during the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net restructuring (charge reversals) charges included in: | |||||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative | ( | ||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | ||||||||||||||||||
9
Changes to the liability for the 2020 Restructuring Initiative during the six months ended June 30, 2022 were as follows (in thousands):
| Employee Separation, Continuity and Other Benefit-Related Costs | Certain Other Restructuring Costs | Total | |||||||||||||||
| Liability balance as of December 31, 2021 | $ | $ | $ | ||||||||||||||
| Net charges | |||||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||
| Liability balance as of June 30, 2022 | $ | $ | $ | ||||||||||||||
Of the liability at June 30, 2022, approximately $2.5 million is classified as current and is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets, with the remaining amount classified as noncurrent and included in Other liabilities.
2022 Restructuring Initiative
On April 28, 2022, the Company communicated the initiation of actions to streamline and simplify certain functions, including its commercial organization, to increase its overall organizational effectiveness and better align with current and future needs (the 2022 Restructuring Initiative). These actions were initiated with the expectation of generating cost savings, with a portion to be reinvested to support the Company’s key strategic priority to expand and enhance its product portfolio.
As a result of the 2022 Restructuring Initiative, the Company’s global workforce is ultimately expected to be reduced by up to approximately 125 net full-time positions. The Company expects to realize annualized pre-tax cash savings (without giving effect to the costs described below) of approximately $55 million to $65 million by the second quarter of 2023, primarily related to reductions in Selling, general and administrative expenses.
As a result of the 2022 Restructuring Initiative, the Company expects to incur total pre-tax restructuring-related expenses of approximately $40 million to $55 million, the majority of which relates to the Branded Pharmaceuticals segment, with the remaining amounts relating to our other segments and certain corporate unallocated costs. These estimates consist of employee separation, continuity and other benefit-related costs of approximately $25 million to $35 million and certain other restructuring costs of approximately $15 million to $20 million. Cash outlays associated with the 2022 Restructuring Initiative are expected to be approximately $30 million and consist primarily of employee separation, continuity and other benefit-related costs. The Company anticipates these actions will be substantially completed by the second quarter of 2023, with substantially all cash payments made by then.
The following pre-tax net amounts related to the 2022 Restructuring Initiative are included in the Company’s Condensed Consolidated Statements of Operations during the three and six months ended June 30, 2022 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
| 2022 | 2022 | ||||||||||
| Net restructuring charges (charge reversals) related to: | |||||||||||
| Inventory adjustments | $ | $ | |||||||||
| Employee separation, continuity and other benefit-related costs | ( | ||||||||||
| Certain other restructuring costs | |||||||||||
| Total | $ | $ | |||||||||
These pre-tax net amounts were primarily attributable to our Branded Pharmaceuticals segment, which incurred $0.6 million and $17.0 million of pre-tax net charges during the three and six months ended June 30, 2022, respectively. The remaining amounts related to our Generic Pharmaceuticals segment and certain corporate unallocated costs.
10
The following pre-tax net amounts related to the 2022 Restructuring Initiative are included in the Company’s Condensed Consolidated Statements of Operations during the three and six months ended June 30, 2022 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
| 2022 | 2022 | ||||||||||
| Net restructuring charges (charge reversals) included in: | |||||||||||
| Cost of revenues | $ | $ | |||||||||
| Selling, general and administrative | ( | ||||||||||
| Research and development | |||||||||||
| Total | $ | $ | |||||||||
Changes to the liability for the 2022 Restructuring Initiative during the six months ended June 30, 2022 were as follows (in thousands):
| Employee Separation, Continuity and Other Benefit-Related Costs | Total | ||||||||||
| Liability balance as of December 31, 2021 | $ | $ | |||||||||
| Net charges | |||||||||||
| Cash payments | ( | ( | |||||||||
| Liability balance as of June 30, 2022 | $ | $ | |||||||||
Of the liability at June 30, 2022, approximately $7.3 million is classified as current and is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets, with the remaining amount classified as noncurrent and included in Other liabilities.
NOTE 5. SEGMENT RESULTS
The Company’s four reportable business segments are Branded Pharmaceuticals, Sterile Injectables, Generic Pharmaceuticals and International Pharmaceuticals. These segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on Segment adjusted income from continuing operations before income tax, which we define as (Loss) income from continuing operations before income tax and before acquired in-process research and development charges; acquisition-related and integration items, including transaction costs and changes in the fair value of contingent consideration; cost reduction and integration-related initiatives such as separation benefits, continuity payments, other exit costs and certain costs associated with integrating an acquired company’s operations; certain amounts related to strategic review initiatives; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; certain legal costs; gains or losses from early termination of debt; debt modification costs; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate expenses incurred by the Company are not directly attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated costs.” Interest income and expense are also considered corporate items and not allocated to any of the Company’s segments. The Company’s Total segment adjusted income from continuing operations before income tax is equal to the combined results of each of its segments.
Branded Pharmaceuticals
Our Branded Pharmaceuticals segment includes a variety of branded products in the areas of urology, orthopedics, endocrinology, medical aesthetics and bariatrics, among others. The products in this segment include XIAFLEX®, SUPPRELIN® LA, NASCOBAL® Nasal Spray, AVEED®, QWO®, PERCOCET®, TESTOPEL® and EDEX®, among others.
Sterile Injectables
Our Sterile Injectables segment consists primarily of branded sterile injectable products such as VASOSTRICT®, ADRENALIN® and APLISOL®, among others, and certain generic sterile injectable products, including ertapenem for injection (the authorized generic of Merck Sharp & Dohme Corp.’s (Merck) Invanz®) and ephedrine sulfate injection, among others.
11
Generic Pharmaceuticals
Our Generic Pharmaceuticals segment consists of a product portfolio including solid oral extended-release, solid oral immediate-release, liquids, semi-solids, patches, powders, ophthalmics and sprays and includes products that treat and manage a wide variety of medical conditions.
International Pharmaceuticals
Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). The key products of this segment serve various therapeutic areas, including attention deficit hyperactivity disorder, pain, women’s health, oncology and transplantation.
The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues from external customers: | |||||||||||||||||||||||
| Branded Pharmaceuticals | $ | $ | $ | $ | |||||||||||||||||||
| Sterile Injectables | |||||||||||||||||||||||
| Generic Pharmaceuticals | |||||||||||||||||||||||
| International Pharmaceuticals (1) | |||||||||||||||||||||||
| Total net revenues from external customers | $ | $ | $ | $ | |||||||||||||||||||
| Segment adjusted income from continuing operations before income tax: | |||||||||||||||||||||||
| Branded Pharmaceuticals | $ | $ | $ | $ | |||||||||||||||||||
| Sterile Injectables | |||||||||||||||||||||||
| Generic Pharmaceuticals | |||||||||||||||||||||||
| International Pharmaceuticals | |||||||||||||||||||||||
| Total segment adjusted income from continuing operations before income tax | $ | $ | $ | $ | |||||||||||||||||||
__________
(1)Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada.
There were no material revenues from external customers attributed to an individual country outside of the U.S. during any of the periods presented.
12
The table below provides reconciliations of our Total consolidated (loss) income from continuing operations before income tax, which is determined in accordance with U.S. GAAP, to our Total segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Total consolidated (loss) income from continuing operations before income tax | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Corporate unallocated costs (1) | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Acquired in-process research and development charges | |||||||||||||||||||||||
| Amounts related to continuity and separation benefits, cost reductions and strategic review initiatives (2) | |||||||||||||||||||||||
| Certain litigation-related and other contingencies, net (3) | |||||||||||||||||||||||
| Certain legal costs (4) | ( | ||||||||||||||||||||||
| Asset impairment charges (5) | |||||||||||||||||||||||
| Acquisition-related and integration items, net (6) | ( | ||||||||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||||||||
| Foreign currency impact related to the remeasurement of intercompany debt instruments | ( | ( | |||||||||||||||||||||
| Other, net (7) | ( | ( | |||||||||||||||||||||
| Total segment adjusted income from continuing operations before income tax | $ | $ | $ | $ | |||||||||||||||||||
__________
(1)Amounts include certain corporate overhead costs, such as headcount, facility and corporate litigation expenses and certain other income and expenses.
(2)Amounts for the three months ended June 30, 2022 include net employee separation, continuity and other benefit-related charges of $11.7 million, accelerated depreciation charges of $0.1 million and other net charges, including those related to strategic review initiatives, of $25.5 million. Amounts for the six months ended June 30, 2022 include net employee separation, continuity and other benefit-related charges of $44.1 million, accelerated depreciation charges of $3.8 million and other net charges, including those related to strategic review initiatives, of $47.1 million. Amounts for the three months ended June 30, 2021 include net employee separation, continuity and other benefit-related charges of $1.6 million, accelerated depreciation charges of $9.1 million and other net charges, including those related to strategic review initiatives, of $4.4 million. Amounts for the six months ended June 30, 2021 include net employee separation, continuity and other benefit-related charges of $10.1 million, accelerated depreciation charges of $16.0 million and other net charges, including those related to strategic review initiatives, of $12.7 million. These amounts relate primarily to our restructuring activities as further described in Note 4. Restructuring, certain continuity and transitional compensation arrangements, certain other cost reduction initiatives and certain strategic review initiatives.
(3)Amounts include adjustments to our accruals for litigation-related settlement charges. Our material legal proceedings and other contingent matters are described in more detail in Note 14. Commitments and Contingencies.
(4)Amounts relate to opioid-related legal expenses. The amount during the second quarter of 2022 reflects the recovery of certain previously-incurred opioid-related legal expenses.
(5)Amounts primarily relate to charges to impair goodwill and intangible assets. For additional information, refer to Note 9. Goodwill and Other Intangibles.
(6)Amounts primarily relate to changes in the fair value of contingent consideration.
(7)Amounts for the six months ended June 30, 2021 primarily relate to $3.9 million of third-party fees incurred in connection with the March 2021 Refinancing Transactions, which were accounted for as debt modification costs. Refer to Note 13. Debt for additional information. Other amounts in this row relate to gains and losses on sales of businesses and other assets and certain other items.
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
13
During the three and six months ended June 30, 2022 and 2021, the Company disaggregated its revenue from contracts with customers into the categories included in the table below (in thousands). The Company believes these categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Branded Pharmaceuticals: | |||||||||||||||||||||||
| Specialty Products: | |||||||||||||||||||||||
| XIAFLEX® | $ | $ | $ | $ | |||||||||||||||||||
| SUPPRELIN® LA | |||||||||||||||||||||||
| Other Specialty (1) | |||||||||||||||||||||||
| Total Specialty Products | $ | $ | $ | $ | |||||||||||||||||||
| Established Products: | |||||||||||||||||||||||
| PERCOCET® | $ | $ | $ | $ | |||||||||||||||||||
| TESTOPEL® | |||||||||||||||||||||||
| Other Established (2) | |||||||||||||||||||||||
| Total Established Products | $ | $ | $ | $ | |||||||||||||||||||
| Total Branded Pharmaceuticals (3) | $ | $ | $ | $ | |||||||||||||||||||
| Sterile Injectables: | |||||||||||||||||||||||
| VASOSTRICT® | $ | $ | $ | $ | |||||||||||||||||||
| ADRENALIN® | |||||||||||||||||||||||
| Other Sterile Injectables (4) | |||||||||||||||||||||||
| Total Sterile Injectables (3) | $ | $ | $ | $ | |||||||||||||||||||
| Total Generic Pharmaceuticals (5) | $ | $ | $ | $ | |||||||||||||||||||
| Total International Pharmaceuticals (6) | $ | $ | $ | $ | |||||||||||||||||||
| Total revenues, net | $ | $ | $ | $ | |||||||||||||||||||
__________
(1)Products included within Other Specialty include NASCOBAL® Nasal Spray, AVEED® and QWO®.
(2)Products included within Other Established include, but are not limited to, EDEX®.
(3)Individual products presented above represent the top two performing products in each product category for either the three or six months ended June 30, 2022 and/or any product having revenues in excess of $25
(4)Products included within Other Sterile Injectables include ertapenem for injection, APLISOL® and others.
(5)The Generic Pharmaceuticals segment is comprised of a portfolio of products that are generic versions of branded products, are distributed primarily through the same wholesalers, generally have no intellectual property protection and are sold within the U.S. During the three and six months ended June 30, 2022, varenicline tablets (our generic version of Pfizer Inc.’s Chantix®), which launched in September 2021, made up 13 % and 12 %, respectively, of consolidated total revenues. No other individual product within this segment has exceeded 5% of consolidated total revenues for the periods presented.
(6)The International Pharmaceuticals segment, which accounted for less than 5
NOTE 6. FAIR VALUE MEASUREMENTS
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.
Financial Instruments
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted 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 pay dividends that generally reflect short-term interest rates. Due to their initial maturities, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.
14
Restricted Cash and Cash Equivalents
The following table presents current and noncurrent restricted cash and cash equivalent balances at June 30, 2022 and December 31, 2021 (in thousands):
| Balance Sheet Line Items | June 30, 2022 | December 31, 2021 | |||||||||||||||
| Restricted cash and cash equivalents—current (1) | Restricted cash and cash equivalents | $ | $ | ||||||||||||||
| Restricted cash and cash equivalents—noncurrent (2) | Other assets | ||||||||||||||||
| Total restricted cash and cash equivalents | $ | $ | |||||||||||||||
__________
(1)Amounts at June 30, 2022 and December 31, 2021 include: (i) restricted cash and cash equivalents associated with litigation-related matters, including $68.2 million and $78.4 million, respectively, held in Qualified Settlement Funds (QSFs) for mesh- and/or opioid-related matters, and (ii) approximately $45.0 40 million to approximately $85 million, which resulted in a corresponding decrease to unrestricted cash and cash equivalents. See Note 14. Commitments and Contingencies for further information about litigation-related matters.
(2)The amount at June 30, 2022 relates to the TLC Agreement (as defined below). See Note 10. License, Collaboration and Asset Acquisition Agreements for further information about this amount.
Acquisition-Related Contingent Consideration
The fair value of contingent consideration liabilities is determined using unobservable inputs; hence, these instruments represent Level 3 measurements within the above-defined fair value hierarchy. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. The estimates of fair value are uncertain and changes in any of the estimated inputs used as of the date of this report could have resulted in significant adjustments to fair value. See the “Recurring Fair Value Measurements” section below for additional information on acquisition-related contingent consideration.
Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021 were as follows (in thousands):
| Fair Value Measurements at June 30, 2022 using: | |||||||||||||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Acquisition-related contingent consideration—current | $ | $ | $ | $ | |||||||||||||||||||
| Acquisition-related contingent consideration—noncurrent | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements at December 31, 2021 using: | |||||||||||||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Acquisition-related contingent consideration—current | $ | $ | $ | $ | |||||||||||||||||||
| Acquisition-related contingent consideration—noncurrent | $ | $ | $ | $ | |||||||||||||||||||
At June 30, 2022 and December 31, 2021, money market funds include $13.5 million and $16.2 million, respectively, in QSFs to be disbursed to litigation claimants. Amounts in QSFs are considered restricted cash equivalents. See Note 14. Commitments and Contingencies for further discussion of our litigation. At June 30, 2022 and December 31, 2021, the differences between the amortized cost and the fair value of our money market funds were not material, individually or in the aggregate.
15
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Amounts settled | ( | ( | ( | ( | |||||||||||||||||||
| Changes in fair value recorded in earnings | ( | ||||||||||||||||||||||
| Effect of currency translation | ( | ( | |||||||||||||||||||||
| End of period | $ | $ | $ | $ | |||||||||||||||||||
At June 30, 2022, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from 10.0 % to 15.0 % (weighted average rate of approximately 10.8 %, weighted based on relative fair value). Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items, net. Amounts recorded for the current and noncurrent portions of acquisition-related contingent consideration are included in Accounts payable and accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.
The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the six months ended June 30, 2022 by acquisition (in thousands):
| Balance as of December 31, 2021 | Changes in Fair Value Recorded in Earnings | Amounts Settled and Other | Balance as of June 30, 2022 | ||||||||||||||||||||
| Auxilium acquisition | $ | $ | $ | ( | $ | ||||||||||||||||||
| Lehigh Valley Technologies, Inc. acquisitions | ( | ( | |||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2022 were as follows (in thousands):
| Fair Value Measurements during the Six Months Ended June 30, 2022 (1) using: | Total Expense for the Six Months Ended June 30, 2022 | ||||||||||||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||||||||
| Intangible assets, excluding goodwill (2)(3) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Certain property, plant and equipment | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ||||||||||||||||||
__________
(1)The fair value amounts are presented as of the date of the fair value measurement as these assets are not measured at fair value on a recurring basis. Such measurements generally occur in connection with our quarter-end financial reporting close procedures.
(2)These fair value measurements were determined using risk-adjusted discount rates ranging from 9.5 % to 12.0 % (weighted average rate of approximately 11.6 %, weighted based on relative fair value).
(3)The Company also performed fair value measurements in connection with its goodwill impairment tests. Refer to Note 9. Goodwill and Other Intangibles for additional information on goodwill and other intangible asset impairment tests, including information about the valuation methodologies used.
NOTE 7. INVENTORIES
Inventories consist of the following at June 30, 2022 and December 31, 2021 (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials (1) | $ | $ | |||||||||
| Work-in-process (1) | |||||||||||
| Finished goods (1) | |||||||||||
| Total | $ | $ | |||||||||
__________
(1)The components of inventory shown in the table above are net of allowance for obsolescence.
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NOTE 8. LEASES
The following table presents information about the Company’s right-of-use assets and lease liabilities at June 30, 2022 and December 31, 2021 (in thousands):
| Balance Sheet Line Items | June 30, 2022 | December 31, 2021 | |||||||||||||||
| Right-of-use assets: | |||||||||||||||||
| Operating lease right-of-use assets | Operating lease assets | $ | $ | ||||||||||||||
| Finance lease right-of-use assets | |||||||||||||||||
| Total right-of-use assets | $ | $ | |||||||||||||||
| Operating lease liabilities: | |||||||||||||||||
| Current operating lease liabilities | Current portion of operating lease liabilities | $ | $ | ||||||||||||||
| Noncurrent operating lease liabilities | Operating lease liabilities, less current portion | ||||||||||||||||
| Total operating lease liabilities | $ | $ | |||||||||||||||
| Finance lease liabilities: | |||||||||||||||||
| Current finance lease liabilities | $ | $ | |||||||||||||||
| Noncurrent finance lease liabilities | |||||||||||||||||
| Total finance lease liabilities | $ | $ | |||||||||||||||
The following table presents information about lease costs and expenses and sublease income for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| Statement of Operations Line Items | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Operating lease cost | Various (1) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||||||||
| Amortization of right-of-use assets | Various (1) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Interest on lease liabilities | Interest expense, net | $ | $ | $ | $ | ||||||||||||||||||||||||
| Other lease costs and income: | |||||||||||||||||||||||||||||
| Variable lease costs (2) | Various (1) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Finance lease right-of-use asset impairment charges | Asset impairment charges | $ | $ | $ | $ | ||||||||||||||||||||||||
| Sublease income | Various (1) | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
__________
(1)Amounts are included in the Condensed Consolidated Statements of Operations based on the function that the underlying leased asset supports. The following table presents the components of such aggregate amounts for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | $ | $ | $ | $ | |||||||||||||||||||
(2)Amounts represent variable lease costs incurred that were not included in the initial measurement of the lease liability such as common area maintenance and utilities costs associated with leased real estate and certain costs associated with our automobile leases.
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The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the six months ended June 30, 2022 and 2021 (in thousands):
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash payments for operating leases | $ | $ | |||||||||
| Operating cash payments for finance leases | $ | $ | |||||||||
| Financing cash payments for finance leases | $ | $ | |||||||||
NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amounts of our goodwill for the six months ended June 30, 2022 were as follows (in thousands):
| Branded Pharmaceuticals | Sterile Injectables | Generic Pharmaceuticals | International Pharmaceuticals | Total | |||||||||||||||||||||||||
| Goodwill as of December 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Goodwill impairment charges | ( | ( | |||||||||||||||||||||||||||
| Goodwill as of June 30, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The carrying amounts of goodwill at June 30, 2022 and December 31, 2021 are net of the following accumulated impairments (in thousands):
| Branded Pharmaceuticals | Sterile Injectables | Generic Pharmaceuticals | International Pharmaceuticals | Total | |||||||||||||||||||||||||
| Accumulated impairment losses as of December 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Accumulated impairment losses as of June 30, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Other Intangible Assets
Changes in the amounts of other intangible assets for the six months ended June 30, 2022 are set forth in the table below (in thousands).
| Cost basis: | Balance as of December 31, 2021 | Acquisitions | Impairments | Effect of Currency Translation | Balance as of June 30, 2022 | ||||||||||||||||||||||||
Licenses (weighted average life of | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Tradenames | |||||||||||||||||||||||||||||
Developed technology (weighted average life of | ( | ( | |||||||||||||||||||||||||||
Total other intangibles (weighted average life of | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Accumulated amortization: | Balance as of December 31, 2021 | Amortization | Impairments | Effect of Currency Translation | Balance as of June 30, 2022 | ||||||||||||||||||||||||
| Licenses | $ | ( | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||
| Tradenames | ( | ( | |||||||||||||||||||||||||||
| Developed technology | ( | ( | ( | ||||||||||||||||||||||||||
| Total other intangibles | $ | ( | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||
| Net other intangibles | $ | $ | |||||||||||||||||||||||||||
Amortization expense for the three and six months ended June 30, 2022 totaled $87.6 million and $177.8 million, respectively. Amortization expense for the three and six months ended June 30, 2021 totaled $94.1 million and $189.2 million, respectively. Amortization expense is included in Cost of revenues in the Condensed Consolidated Statements of Operations.
Impairments
Goodwill and, if applicable, indefinite-lived intangible assets are tested for impairment annually and when events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1.
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As part of our goodwill and intangible asset impairment assessments, we estimate the fair values of our reporting units and our intangible assets using an income approach that utilizes a discounted cash flow model or, where appropriate, a market approach.
The discounted cash flow models are dependent upon our estimates of future cash flows and other factors including estimates of (i) future operating performance, including future sales, long-term growth rates, gross margins, operating expenses, discount rate and the probability of achieving the estimated cash flows and (ii) future economic conditions. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rates applied to the estimated cash flows are determined depending on the overall risk associated with the particular assets and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to Asset impairment charges in our Condensed Consolidated Statements of Operations.
Beginning in May 2022, our share price and the aggregate estimated fair value of our debt experienced significant declines. We believe these declines, which persisted through the end of the second quarter of 2022, were predominantly attributable to continuing and increasing investor and analyst uncertainty with respect to: (i) ongoing opioid and other litigation matters for which we have been unable to reach a broad-based resolution of outstanding claims and (ii) speculation surrounding the possibility of a future bankruptcy filing. Further, rising inflation and interest rates unfavorably affected the cost of borrowing, which is one of several inputs used in the determination of the discount rates used in our discounted cash flow models. For example, the U.S. Federal Reserve raised its benchmark interest rate by 50 basis points in May 2022 and by an additional 75 basis points in June 2022. Taken together, we determined that these factors represented triggering events that required the performance of interim goodwill impairments tests for both our Sterile Injectables and Branded Pharmaceuticals reporting units as of June 30, 2022.
When performing these goodwill impairment tests, we estimated the fair values of our reporting units taking into consideration management’s continued commitment to Endo’s strategic plans and the corresponding projected cash flows, as well as the fact that management’s views on litigation risk have not materially changed since our annual goodwill impairment tests performed on October 1, 2021. However, when analyzing our aggregated estimated internal valuation of our reporting units as of June 30, 2022 compared to our market capitalization, we also considered the increased level of investor and analyst uncertainty described above, coupled with our belief that investors and analysts are unlikely to modify their projections or valuation models unless or until we can demonstrate significant progression on the resolution of outstanding litigation matters and/or demonstrate that the risks of potential future strategic alternatives, including the possibility of a future bankruptcy filing, are no longer applicable. After performing this analysis, we made certain adjustments to incorporate these factors into the valuations of our reporting units and determined that: (i) the estimated fair value of our Sterile Injectables reporting unit was less than its carrying amount, resulting in a pre-tax non-cash goodwill impairment charge of $1,748.0 million, and (ii) while the estimated fair value declined, there was no goodwill impairment for our Branded Pharmaceuticals reporting unit, for which the estimated fair value exceeded the carrying amount by more than 10%. The discount rates used in the June 30, 2022 goodwill tests were 13.5 % and 18.5 % for the Branded Pharmaceuticals and Sterile Injectables reporting units, respectively.
With respect to other intangible assets, we recorded asset impairment charges of $30.0 million and $50.0 million during the three and six months ended June 30, 2022, respectively, and $4.9 million and $7.8 million during the three and six months ended June 30, 2021, respectively. These pre-tax non-cash asset impairment charges related primarily to certain developed technology intangible assets that were tested for impairment following changes in market conditions and certain other factors impacting recoverability.
NOTE 10. LICENSE, COLLABORATION AND ASSET ACQUISITION AGREEMENTS
We have entered into certain license, collaboration and discovery agreements with third parties for product development. Generally speaking, these agreements require us to share in the development costs of such product candidates with third parties who in turn grant us marketing rights for such product candidates. Under these agreements we are generally required to: (i) make upfront payments and/or other payments upon successful completion of regulatory, sales and/or other milestones and/or (ii) pay royalties on sales of the products arising from these agreements. We have also, from time to time, entered into agreements to directly acquire certain assets from third parties.
Nevakar Agreement
In May 2022, we announced that our Endo Ventures Limited subsidiary had entered into an agreement to acquire six development-stage ready-to-use injectable product candidates from Nevakar Injectables, Inc., a subsidiary of Nevakar, Inc., for an upfront cash payment of $35.0 million (the Nevakar Agreement). The acquisition closed during the second quarter of 2022. The acquired set of assets and activities did not meet the definition of a business. As a result, we accounted for the transaction as an asset acquisition. Upon closing, the upfront payment was recorded as Acquired in-process research and development in the Condensed Consolidated Statements of Operations.
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The product candidates, which relate to our Sterile Injectables segment, are in various stages of development. The first commercial launch is expected in 2025; however, there can be no assurance this will occur within this timeframe or at all. With this acquisition, the Company will control all remaining development, regulatory, manufacturing and commercialization activities for the acquired product candidates.
TLC Agreement
In June 2022, we announced that our Endo Ventures Limited subsidiary had entered into an agreement with Taiwan Liposome Company, Ltd. (TLC) to commercialize TLC599 (the TLC Agreement). We are accounting for the agreement as an asset acquisition. TLC599 is an injectable compound in Phase 3 development for the treatment of osteoarthritis knee pain. The TLC Agreement provides us the opportunity to commercialize this differentiated nonsurgical product candidate to complement our Branded Pharmaceuticals segment’s current on-market and in-development orthopedic-focused opportunities. We currently expect to launch TLC599 in the U.S. in 2025; however, there can be no assurance this will occur within this timeframe or at all.
Under the terms of the TLC Agreement, TLC will primarily be responsible for the development of the product and we will primarily be responsible for obtaining regulatory approval and for commercialization of the product in the U.S. Upon receipt of regulatory approval, we will have exclusive rights to manufacture, market, sell and distribute the product in the U.S.
During the second quarter of 2022, we made an upfront payment of $30.0 million to TLC and recorded a corresponding charge to Acquired in-process research and development in the Condensed Consolidated Statements of Operations. TLC is also eligible to receive: (i) payments of up to an additional $110.0 million based on the achievement of certain development, regulatory and manufacturing milestones related to the initial indication for the treatment of osteoarthritis knee pain; (ii) payments of up to an additional $30.0 million based on the achievement of certain development and regulatory milestones related to certain potential future indications; (iii) payments of up to an additional $500.0 million based on the achievement of certain commercial milestones; and (iv) tiered royalties based on net sales of TLC599 in the U.S. Unless terminated earlier or extended, the term of the TLC Agreement generally extends until the 20-year anniversary of the first commercial sale of TLC599.
Pursuant to the terms of the TLC Agreement, we have deposited approximately $85.0 million of cash into a bank account which may be used to fund certain future obligations under the TLC Agreement, or returned to us upon satisfaction of certain conditions. As further described in Note 6. Fair Value Measurements, this amount is considered restricted cash as of June 30, 2022 and is included in our Condensed Consolidated Balance Sheets at June 30, 2022 as Other assets.
NOTE 11. CONTRACT ASSETS AND LIABILITIES
Our revenue consists almost entirely of sales of our products to customers, whereby we ship products to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. At June 30, 2022, the unfulfilled performance obligations for these types of contracts relate to ordered but undelivered products. We generally expect to fulfill the performance obligations and recognize revenue within one week of entering into the underlying contract. Based on the short-term initial contract duration, additional disclosure about the remaining performance obligations is not required.
Certain of our other revenue-generating contracts, including license and collaboration agreements, may result in contract assets and/or contract liabilities. For example, we may recognize contract liabilities upon receipt of certain upfront and milestone payments from customers when there are remaining performance obligations.
The following table shows the opening and closing balances of contract assets and contract liabilities from contracts with customers (dollars in thousands):
| June 30, 2022 | December 31, 2021 | $ Change | % Change | ||||||||||||||||||||
| Contract assets (1) | $ | $ | $ | ( | ( | % | |||||||||||||||||
| Contract liabilities (2) | $ | $ | $ | ( | ( | % | |||||||||||||||||
__________
(1)At June 30, 2022 and December 31, 2021, approximately $2.2 million and $2.8 million, respectively, of these contract asset amounts are classified as current and are included in Prepaid expenses and other current assets in the Company’s Condensed Consolidated Balance Sheets. The remaining amounts are classified as noncurrent and are included in Other assets. The decrease in contract assets during the six months ended June 30, 2022 primarily relates to: (i) reclassifications of certain amounts to receivables as a result of rights to consideration becoming unconditional and (ii) changes in estimates with respect to amounts of consideration expected to be received from sales of certain intellectual property rights.
(2)At June 30, 2022 and December 31, 2021, approximately $0.6 million and $0.6 million, respectively, of these contract liability amounts are classified as current and are included in Accounts payable and accrued expenses in the Company’s Condensed Consolidated Balance Sheets. The remaining amounts are classified as noncurrent and are included in Other liabilities. During the six months ended June 30, 2022, approximately $0.3 million of revenue was recognized that was included in the contract liability balance at December 31, 2021.
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NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at June 30, 2022 and December 31, 2021 (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Trade accounts payable | $ | $ | |||||||||
| Returns and allowances | |||||||||||
| Rebates | |||||||||||
| Chargebacks | |||||||||||
| Other sales deductions | |||||||||||
| Accrued interest | |||||||||||
| Accrued payroll and related benefits | |||||||||||
| Accrued royalties and other distribution partner payables | |||||||||||
| Acquisition-related contingent consideration—current | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
NOTE 13. DEBT
The following table presents information about the Company’s total indebtedness at June 30, 2022 and December 31, 2021 (dollars in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Effective Interest Rate | Principal Amount | Carrying Amount | Effective Interest Rate | Principal Amount | Carrying Amount | ||||||||||||||||||||||||||||||
| $ | $ | % | $ | $ | |||||||||||||||||||||||||||||||
| % | |||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| % | % | ||||||||||||||||||||||||||||||||||
| Term Loan Facility | % | % | |||||||||||||||||||||||||||||||||
| Revolving Credit Facility | % | % | |||||||||||||||||||||||||||||||||
| Total (1) | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
__________
(1)As of June 30, 2022, $26.1 million of the carrying amount of the Company’s long-term debt is classified as a current liability and is included in the Current portion of long-term debt line in the Condensed Consolidated Balance Sheets. As of December 31, 2021, $200.3 million of the carrying amount of the Company’s long-term debt is classified as a current liability and is included in the Current portion of long-term debt line in the Condensed Consolidated Balance Sheets. Any long-term debt not classified as a current liability is included in the Long-term debt, less current portion, net line in the Condensed Consolidated Balance Sheets.
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The Company and its subsidiaries, with certain customary exceptions, guarantee or serve as issuers or borrowers of the debt instruments representing substantially all of the Company’s indebtedness at June 30, 2022. The obligations under (i) the 5.875 % Senior Secured Notes due 2024, (ii) the 7.50 % Senior Secured Notes due 2027, (iii) the 6.125 % Senior Secured Notes due 2029 and (iv) the Credit Agreement (as defined below) and related loan documents are secured on a pari passu basis by a first priority lien (subject to certain permitted liens) on the collateral securing such instruments, which collateral represents substantially all of the assets of the issuers or borrowers and the guarantors party thereto (subject to customary exceptions). The obligations under the 9.50 % Senior Secured Second Lien Notes due 2027 are secured by a second priority lien (subject to certain permitted liens) on, and on a junior basis with respect to, the collateral securing the obligations under the Credit Agreement, the 5.875 % Senior Secured Notes due 2024, the 7.50 % Senior Secured Notes due 2027 and the 6.125 % Senior Secured Notes due 2029 and the related guarantees. Our senior unsecured notes are unsecured and effectively subordinated in right of priority to the obligations under the Credit Agreement, the 5.875 % Senior Secured Notes due 2024, the 7.50 % Senior Secured Notes due 2027, the 9.50 % Senior Secured Second Lien Notes due 2027 and the 6.125 % Senior Secured Notes due 2029, in each case to the extent of the value of the collateral securing such instruments.
The aggregate estimated fair value of the Company’s long-term debt, which was estimated using inputs based on quoted market prices for the same or similar debt issuances, was $4.9 billion and $8.0 billion at June 30, 2022 and December 31, 2021, respectively. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
Credit Facilities
The Company and certain of its subsidiaries are party to the Credit Agreement, which, immediately following the March 2021 Refinancing Transactions (as defined and further described below) provided for (i) a $1,000.0 million senior secured revolving credit facility (the Revolving Credit Facility) and (ii) a $2,000.0 million senior secured term loan facility (the Term Loan Facility and, together with the Revolving Credit Facility, the Credit Facilities). Current amounts outstanding as of June 30, 2022 under the Credit Facilities are set forth in the table above. As of June 30, 2022, $76.0 million of commitments under the Revolving Credit Facility have matured and $924.0 million of commitments remain outstanding under the Revolving Credit Facility. After giving effect to net borrowings under the Revolving Credit Facility and issued and outstanding letters of credit, approximately $640.1 million of remaining credit is available under the Revolving Credit Facility as of June 30, 2022. Additionally, the Company’s outstanding debt agreements contain a number of restrictive covenants, including certain limitations on the Company’s ability to incur additional indebtedness.
Covenants and Events of Default
As further described below and in the Annual Report, the agreements relating to our outstanding indebtedness contain certain covenants and events of default. The events of default are subject to certain grace periods, may require the administrative agent, trustee, lenders and/or holders, as applicable, to take certain action to accelerate our indebtedness and may be waived or amended in a number of circumstances.
As of June 30, 2022 and December 31, 2021, we were in compliance with all covenants contained in the Credit Agreement and the indentures governing our various senior notes and senior secured notes.
Beginning during the second quarter of 2022, we elected to not make the following interest payments on or prior to their scheduled due dates: (i) approximately $38 million that was due on June 30, 2022 with respect to our outstanding 6.00 % Senior Notes due 2028; (ii) approximately $2 million that was due on July 15, 2022 with respect to our outstanding 5.375 % Senior Notes due 2023 and 6.00 % Senior Notes due 2023; (iii) approximately $45 million that was due on July 31, 2022 with respect to our outstanding 9.50 % Senior Secured Second Lien Notes due 2027; and (iv) approximately $1 million that was due on August 1, 2022 with respect to our outstanding 6.00 % Senior Notes due 2025. Under each of the indentures governing these notes, we have a 30 -day grace period from the respective due dates to make these interest payments before such non-payments constitute events of default with respect to such notes. We chose to enter these grace periods while continuing discussions with certain creditors in connection with our evaluation of strategic alternatives. Our decision to enter these grace periods was not driven by liquidity constraints, as we had approximately $1.19 billion in cash as of June 30, 2022. Accordingly, our day-to-day operations are not impacted by the decision at this time. We made the $38 million interest payment that became due on June 30, 2022 with respect to our outstanding 6.00 % Senior Notes due 2028 on July 28, 2022, which was prior to the end of the applicable grace period.
Additionally, as further described in Note 1. Basis of Presentation, we believe there is substantial doubt about our ability to continue as a going concern. Pursuant to the terms of the Credit Agreement, in the event we issue audited financial statements in the future that contain an audit opinion with going concern or similar qualifications or exceptions, it could result in, among other things, an event of default with respect to our Credit Facilities.
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If one or more events of default were to occur under any of the agreements relating to our outstanding indebtedness, including without limitation as a result of us not making interest payments by the end of any applicable grace periods and/or us issuing audited financial statements containing an audit opinion with going concern or similar qualifications or exceptions, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to become due and payable immediately, terminate all commitments to extend further credit, foreclose against assets comprising the collateral securing or otherwise supporting the debt and pursue other legal remedies. Additionally, the instruments governing our debt contain cross-default or cross-acceleration provisions that may cause all of the debt issued under such instruments to become immediately due and payable as a result of a default under an unrelated debt instrument. Our assets and cash flows may be insufficient to fully repay borrowings under our outstanding debt instruments if the obligations thereunder were accelerated upon one or more events of default. We may need to conduct asset sales or pursue other alternatives, including proceedings under applicable insolvency laws relating to some or all of our business.
Debt Financing Transactions
Set forth below are certain disclosures relating to debt financing transactions that occurred during the six months ended June 30, 2022 or the year ended December 31, 2021. For additional disclosures relating to debt financing transactions that occurred during the year ended December 31, 2021, refer to Note 15. Debt in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report.
March 2021 Refinancing
In March 2021, the Company executed certain transactions (the March 2021 Refinancing Transactions) that included:
•refinancing in full its previously-existing term loans, which had approximately $3,295.5 million of principal outstanding immediately before refinancing (the Existing Term Loans), with the proceeds from: (i) a new $2,000.0 million term loan (the Term Loan Facility) and (ii) $1,295.0 million of newly issued 6.125 % Senior Secured Notes due 2029 (collectively, the Term Loan Refinancing);
•extending the maturity of approximately $675.3 million of existing revolving commitments under the Revolving Credit Facility to March 2026; and
•making certain other modifications to the credit agreement that was in effect immediately prior to the March 2021 Refinancing Transactions (the Prior Credit Agreement).
The changes to the Credit Facilities and the Prior Credit Agreement were effected pursuant to an amendment and restatement agreement entered into by the Company in March 2021 (the Restatement Agreement), which amended and restated the Prior Credit Agreement (as amended and restated by the Restatement Agreement, the Credit Agreement), among Endo International plc, certain of its subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender.
The $2,000.0 million portion of the Term Loan Refinancing associated with the new term loan was accounted for as a debt modification, while the $1,295.0 million portion associated with the new notes issued was accounted for as an extinguishment. During the first quarter of 2021, in connection with the Term Loan Refinancing, $7.8 million of deferred and unamortized costs associated with the Existing Term Loans, representing the portion associated with the extinguishment, was charged to expense and is included in the Loss on extinguishment of debt line item in the Condensed Consolidated Statements of Operations. The Company also incurred an additional $56.7 million of new costs and fees, of which: (i) $29.2 million and $17.6 million have been deferred to be amortized as interest expense over the terms of the Term Loan Facility and the newly issued 6.125 % Senior Secured Notes due 2029, respectively; (ii) $6.0 million was considered debt extinguishment costs and was charged to expense in the first quarter of 2021 and is included in the Loss on extinguishment of debt line item in the Condensed Consolidated Statements of Operations; and (iii) $3.9 million was considered debt modification costs and was charged to expense in the first quarter of 2021 and is included in the Selling, general and administrative expense line item in the Condensed Consolidated Statements of Operations.
During the first quarter of 2021, the Company also incurred $2.1 million of new costs and fees associated with the extension of the Revolving Credit Facility, which have been deferred and are being amortized as interest expense over the new term of the Revolving Credit Facility.
October 2021 Revolving Credit Facility Repayment and January 2022 Senior Notes Repayments
In October 2021, commitments under the Revolving Credit Facility of approximately $76.0 million matured, thereby reducing the remaining commitments outstanding under the Revolving Credit Facility. This maturity, which reduced the remaining credit available under the Revolving Credit Facility, occurred because the 7.25 % Senior Notes due 2022 and the 5.75 % Senior Notes due 2022 were not refinanced or repaid in full prior to the date that was 91 days prior to their January 15, 2022 maturity dates. As a result of this maturity, the Company repaid approximately $22.8 million of borrowings in October 2021, representing the amount that had been borrowed pursuant to these matured commitments. The 7.25 % Senior Notes due 2022 and the 5.75 % Senior Notes due 2022 were repaid in January 2022.
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NOTE 14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings and Investigations
We and certain of our subsidiaries are involved in various claims, legal proceedings and internal and governmental investigations (collectively, proceedings) arising from time to time, including, among others, those relating to product liability, intellectual property, regulatory compliance, consumer protection, tax and commercial matters. While we cannot predict the outcome of these proceedings and we intend to vigorously prosecute or defend our position as appropriate, there can be no assurance that we will be successful or obtain any requested relief. An adverse outcome in any of these proceedings could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are subject to a number of matters that are not being disclosed herein because, in the opinion of our management, these matters are immaterial both individually and in the aggregate with respect to our financial position, results of operations and cash flows.
We believe that certain settlements and judgments, as well as legal defense costs, relating to certain product liability or other matters are or may be covered in whole or in part under our insurance policies with a number of insurance carriers. In certain circumstances, insurance carriers reserve their rights to contest or deny coverage. We intend to contest vigorously any disputes with our insurance carriers and to enforce our rights under the terms of our insurance policies. Accordingly, we will record receivables with respect to amounts due under these policies only when the realization of the potential claim for recovery is considered probable.
Notwithstanding the foregoing, amounts recovered under our insurance policies could be materially less than stated coverage limits and may not be adequate to cover damages, other relief and/or costs relating to claims. In addition, there is no guarantee that insurers will pay claims in the amounts we expect or that coverage will otherwise be available. We may not have and may be unable to obtain or maintain insurance on acceptable terms or with adequate coverage against potential liabilities or other losses, including costs, judgments, settlements and other liabilities incurred in connection with current or future legal proceedings, regardless of the success or failure of the claim. For example, we do not have insurance sufficient to satisfy all of the opioid claims that have been made against us and, should we suffer an adverse judgment, appeal and similar bonds may not be available in such amounts as may be necessary to further challenge all or part of such judgment. We also generally no longer have product liability insurance to cover claims in connection with the mesh-related litigation described herein. Additionally, we may be limited by the surviving insurance policies of acquired entities, which may not be adequate to cover potential liabilities or other losses. Even where claims are submitted to insurance carriers for defense and indemnity, there can be no assurance that the claims will be covered by insurance or that the indemnitors or insurers will remain financially viable or will not challenge our right to reimbursement in whole or in part. The failure to generate sufficient cash flow or to obtain other financing could affect our ability to pay the amounts due under those liabilities not covered by insurance. Additionally, the nature of our business, the legal proceedings to which we are exposed and any losses we suffer may increase the cost of insurance, which could impact our decisions regarding our insurance programs.
As a result of the possibility or occurrence of an unfavorable outcome with respect to any legal proceeding, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning may ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Some of these actions could take significant time to implement and others may require judicial or other third-party approval. As further described below, thousands of governmental and private plaintiffs have filed suit against us and/or certain of our subsidiaries alleging opioid-related claims. We have not been able to settle most of the opioid claims made against us and, as a result, we are exploring a wide array of potential actions as part of our contingency planning. We have been working with our external advisors to explore a range of options and have been engaging in dialogue with certain financial creditors and litigation claimants, together with their advisors. We remain in constructive negotiations with an ad hoc group of first lien creditors, among other parties, and, in light of the progress to date, we currently expect that these negotiations will likely result in a pre-arranged filing under Chapter 11 of the U.S. Bankruptcy Code by Endo International plc and substantially all of its subsidiaries, which could occur imminently. There can be no assurance of such an outcome. Any of the circumstances above would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern, including, but not limited to, by causing increased difficulty obtaining and maintaining commercial relationships on competitive terms with customers, suppliers and other counterparties; increased difficulty retaining and motivating key employees, as well as attracting new employees; diversion of management’s time and attention to dealing with bankruptcy and restructuring activities rather than focusing exclusively on business operations; incurrence of substantial costs, fees and other expenses associated with bankruptcy proceedings; and loss of ability to maintain or obtain sufficient financing sources for operations or to fund any reorganization plan and meet future obligations. We would, in that event, also be subject to risks and uncertainties caused by the actions of creditors and other third parties with interests that may be inconsistent with our plans. Certain of these risks and uncertainties could also occur if our suppliers or other third parties believe that we may pursue one or more significant corporate transactions or other remedial measures.
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As of June 30, 2022, our accrual for loss contingencies totaled $395.8 million, the most significant components of which relate to: (i) product liability and related matters associated with transvaginal surgical mesh products, which we have not sold since March 2016 and (ii) various opioid-related matters as further described herein. Although we believe there is a possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time. As of June 30, 2022, $390.8 million of our accrual for loss contingencies is classified in the Current portion of legal settlement accrual in the Condensed Consolidated Balance Sheets, with the remainder classified as Long-term legal settlement accrual, less current portion. The timing of the resolution of certain of these matters remains uncertain.
Vaginal Mesh Matters
Since 2008, we and certain of our subsidiaries, including American Medical Systems Holdings, Inc. (AMS) (subsequently converted to Astora Women’s Health Holding LLC and merged into Astora Women’s Health LLC and referred to herein as AMS and/or Astora), have been named as defendants in multiple lawsuits in various state and federal courts in the U.S., Canada, Australia and other countries, alleging personal injury resulting from the use of transvaginal surgical mesh products designed to treat pelvic organ prolapse (POP) and stress urinary incontinence (SUI). We have not sold such products since March 2016. Plaintiffs claim a variety of personal injuries, including chronic pain, incontinence, inability to control bowel function and permanent deformities, and seek compensatory and punitive damages, where available.
Various Master Settlement Agreements (MSAs) and other agreements have resolved approximately 71,000 filed and unfiled U.S. mesh claims as of June 30, 2022. These MSAs and other agreements were entered into at various times between June 2013 and the present, were solely by way of compromise and settlement and were not an admission of liability or fault by us or any of our subsidiaries. All MSAs are subject to a process that includes guidelines and procedures for administering the settlements and the release of funds. In certain cases, the MSAs provide for the creation of QSFs into which the settlement funds will be deposited, establish participation requirements and allow for a reduction of the total settlement payment in the event participation thresholds are not met. Funds deposited in QSFs are considered restricted cash and/or restricted cash equivalents. Distribution of funds to any individual claimant is conditioned upon the receipt of documentation substantiating product use, the dismissal of any lawsuit and the release of the claim as to us and all affiliates. Prior to receiving funds, an individual claimant must represent and warrant that liens, assignment rights or other claims identified in the claims administration process have been or will be satisfied by the individual claimant. Confidentiality provisions apply to the settlement funds, amounts allocated to individual claimants and other terms of the agreements.
The following table presents the changes in the mesh-related QSFs and liability accrual balances during the six months ended June 30, 2022 (in thousands):
| Mesh Qualified Settlement Funds | Mesh Liability Accrual | ||||||||||
| Balance as of December 31, 2021 | $ | $ | |||||||||
| Cash received for reversionary interests, net of cash contributions to Qualified Settlement Funds | ( | — | |||||||||
| Cash distributions to settle disputes from Qualified Settlement Funds | ( | ( | |||||||||
| Other cash distributions to settle disputes | — | ( | |||||||||
| Other (1) | ( | ||||||||||
| Balance as of June 30, 2022 | $ | $ | |||||||||
__________
(1)Amounts deposited in the QSFs may earn interest, which is generally used to pay administrative costs of the funds and is reflected in the table above as an increase to the QSF and Mesh Liability Accrual balances. Any interest remaining after all claims have been paid will generally be distributed to the claimants who participated in that settlement. Also included within this line are foreign currency adjustments for settlements not denominated in U.S. dollars.
Charges related to vaginal mesh liability and associated legal fees and other expenses for all periods presented are reported in Discontinued operations, net of tax in our Condensed Consolidated Statements of Operations.
As of June 30, 2022, the Company has made total cumulative mesh liability payments of approximately $3.6 billion, $67.5 million of which remains in the QSFs as of June 30, 2022. We currently expect to fund all of the remaining payments under all previously executed mesh settlement agreements within the next 12 months. As funds are disbursed out of the QSFs from time to time, the liability accrual will be reduced accordingly with a corresponding reduction to restricted cash and cash equivalents.
In addition, we may pay cash distributions to settle disputes separate from the QSFs, which will also decrease the liability accrual and decrease cash and cash equivalents.
We were contacted in October 2012 regarding a civil investigation initiated by various U.S. state attorneys general into mesh products, including transvaginal surgical mesh products designed to treat POP and SUI. In November 2013, we received a subpoena relating to this investigation from the state of California, and we subsequently received additional subpoenas from California and other states. We are cooperating with the investigations.
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We will continue to vigorously defend any unresolved claims and to explore other options as appropriate in our best interests. The next trial is currently scheduled to begin in September 2022. Trials may occur earlier or later than currently scheduled, as timing remains uncertain due to the impact of COVID-19 and other factors.
Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred.
Although the Company believes it has appropriately estimated the probable total amount of loss associated with all mesh-related matters as of the date of this report, litigation is ongoing in certain cases that have not settled, and it is reasonably possible that further claims may be filed or asserted and that adjustments to our overall liability accrual may be required. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Opioid-Related Matters
Since 2014, multiple U.S. states as well as other governmental persons or entities and private plaintiffs in the U.S. and Canada have filed suit against us and/or certain of our subsidiaries, including Endo Health Solutions Inc. (EHSI), Endo Pharmaceuticals Inc. (EPI), Par Pharmaceutical, Inc. (PPI), Par Pharmaceutical Companies, Inc. (PPCI), Endo Generics Holdings, Inc. (EGHI), Vintage Pharmaceuticals, LLC, Generics Bidco I, LLC, DAVA Pharmaceuticals, LLC, Par Sterile Products, LLC (PSP LLC) and in Canada, Paladin and Endo Ventures Limited, as well as various other manufacturers, distributors, pharmacies and/or others, asserting claims relating to the defendants’ alleged sales, marketing and/or distribution practices with respect to prescription opioid medications, including certain of our products. As of August 1, 2022, pending cases in the U.S. of which we were aware include, but are not limited to, approximately 15 cases filed by or on behalf of states; approximately 2,570 cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately 310 cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers and approximately 220 cases filed by individuals, including but not limited to legal guardians of children born with neonatal abstinence syndrome. Certain of the U.S. cases have been filed as putative class actions; to date, however, no court has certified a litigation class. The Canadian cases include an action filed by British Columbia on behalf of a proposed class of all federal, provincial and territorial governments and agencies in Canada that paid healthcare, pharmaceutical and treatment costs related to opioids; an action filed in Alberta by the City of Grand Prairie, Alberta, and The Corporation of the City of Brantford, Ontario, on behalf of a proposed class of all local or municipal governments in Canada; an action filed in Saskatchewan by the Peter Ballantyne Cree Nation and the Lac La Ronge Indian Band, on behalf of a proposed class of all First Nations communities and local or municipal governments in Canada; and five additional putative class actions, filed in British Columbia, Manitoba, Ontario and Quebec, seeking relief on behalf of Canadian residents who were prescribed and/or consumed opioid medications.
The complaints in the cases assert a variety of claims, including but not limited to statutory claims asserting violations of public nuisance, consumer protection, unfair trade practices, racketeering, Medicaid fraud and/or drug dealer liability laws and/or common law claims for public nuisance, fraud/misrepresentation, strict liability, negligence and/or unjust enrichment. The claims are generally based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or alleged failures to take adequate steps to identify and report suspicious orders and to prevent abuse and diversion. Plaintiffs seek various remedies including, without limitation, declaratory and/or injunctive relief; compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees, costs and/or other relief. The damages sought exceed our applicable insurance.
Many of the U.S. cases have been coordinated in a federal multidistrict litigation (MDL) pending in the U.S. District Court for the Northern District of Ohio; however, in April 2022, the Judicial Panel on Multidistrict Litigation issued an order suggesting that, based on the progress of the MDL, it would no longer transfer new cases filed in or removed to federal court to the MDL. Other cases are pending in various federal or state courts. A case in Superior Court in Orange County, California, People of the State of California v. Purdue Pharma L.P., et al., has been tried to verdict. The plaintiffs in the case, Orange, Santa Clara and Los Angeles Counties and the City of Oakland, asserted claims against EPI and EHSI, among others, for public nuisance, alleged violations of California’s Unfair Competition Law and alleged violations of California’s False Advertising Law. Following a bench trial on liability, the court issued a final decision in defendants’ favor on all counts in December 2021. The plaintiffs filed a notice of appeal in February 2022. Other opioid-related cases are at various stages in the litigation process. Certain cases have been stayed pending settlement discussions; excluding such cases the next trial is currently set to begin in early 2023. Trials may occur earlier or later than currently scheduled, as timing remains uncertain due to the impact of COVID-19 and other factors.
In September 2019, EPI, EHSI, PPI and PPCI received subpoenas from the New York State Department of Financial Services (DFS) seeking documents and information regarding the marketing, sale and distribution of opioid medications in New York. In June 2020, DFS commenced an administrative action against the Company, EPI, EHSI, PPI and PPCI alleging violations of the New York Insurance Law and New York Financial Services Law. In July 2021, DFS filed an amended statement of charges. The amended statement of charges alleges that fraudulent or otherwise wrongful conduct in the marketing, sale and/or distribution of opioid medications caused false claims to be submitted to insurers. DFS seeks civil penalties for each allegedly fraudulent prescription as well as injunctive relief. In July 2021, EPI, EHSI, PPI and PPCI, among others, filed a petition in New York state court seeking to prohibit DFS from proceeding with its administrative enforcement action. In December 2021, DFS filed a motion to dismiss that petition, which the court granted in June 2022. The Company’s subsidiaries, among others, appealed that ruling in July 2022.
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In February 2022, the court in Dunaway, et al. v. Purdue Pharma, L.P., et al. (now known as Bedford County, et al. v. AmerisourceBergen Drug Corp., et al.), a case pending in the Circuit Court for Cumberland County, Tennessee, entered an order imposing certain sanctions, including a default judgment on liability, against EPI and EHSI based on alleged discovery improprieties in a different case which EPI and EHSI had settled in August 2021. Because discovery in the earlier case had also been provided to the Dunaway plaintiffs, the Dunaway court deemed the alleged discovery improprieties to have occurred in Dunaway as well. The sanctions order also severed EPI and EHSI from the remaining defendants and set a damages trial to begin in April 2023. In a separate order, the Dunaway court denied a motion by EPI and EHSI to disqualify the judge based on, among other things, statements he made about the lawsuit to the press and on Facebook. In March 2022, EPI and EHSI appealed both orders. In April 2022, the Tennessee Court of Appeals, ruling on the appeal of the disqualification order, reversed the trial court’s order denying disqualification, vacated the sanctions order and remanded the case for reassignment to a different judge. It also denied the separate appeal of the sanctions order as moot.
Since 2019, the Company and/or certain of its subsidiaries have executed a number of settlement agreements to resolve governmental opioid claims brought by certain states, counties, cities and/or other governmental entities. Certain related developments include but are not limited to the following:
•In September 2019, EPI, EHSI, PPI and PPCI executed a settlement agreement with two Ohio counties providing for payments totaling $10 million and up to $1 million of VASOSTRICT® and/or ADRENALIN®. The settlement amount was paid during the third quarter of 2019 and there is no remaining liability accrual for this matter as of June 30, 2022.
•In January 2020, EPI and PPI executed a settlement agreement with the state of Oklahoma providing for a payment of $8.75 million. The settlement amount was paid during the first quarter of 2020 and there is no remaining liability accrual for this matter as of June 30, 2022.
•In August 2021, EPI, EHSI, nine counties in eastern Tennessee, eighteen municipalities within those counties and a minor individual executed a settlement agreement providing for a payment of $35 million. The settlement amount was paid during the third quarter of 2021 and there is no remaining liability accrual for this matter as of June 30, 2022.
•In September 2021, Endo International plc, EPI, EHSI, PPI and PPCI executed a settlement agreement with the state of New York and two of its counties providing for a payment of $50 million. The settlement amount was paid during the third quarter of 2021 and there is no remaining liability accrual for this matter as of June 30, 2022.
•In October 2021, EPI and EHSI executed a settlement agreement with the Alabama Attorney General’s office intended to resolve opioid-related cases and claims of the state and other Alabama governmental persons and entities in exchange for a total payment of $25 million, subject to certain participation thresholds. The settlement amount has not yet been paid; the parties dispute whether the required participation thresholds have been satisfied. In July 2022, the Alabama Attorney General filed a motion to compel payment in the Circuit Court for Montgomery County, Alabama, which the court granted before EPI and EHSI filed a response. EPI and EHSI have filed a motion to reconsider and stay enforcement of the court’s order, which remains pending, as does a motion by the Alabama Attorney General to convert the court’s order into a final judgment. The full settlement amount is included in our liability accrual as of June 30, 2022.
•In December 2021, Endo International plc, EPI, EHSI, PPI and PPCI executed a settlement agreement with the Texas Attorney General’s office and four Texas counties intended to resolve opioid-related cases and claims of the state and other Texas governmental persons and entities in exchange for a total payment of $63 million, subject to certain participation thresholds. The settlement amount was deposited into a QSF during the first quarter of 2022 and, as of June 30, 2022, there is no remaining liability accrual for this matter.
•In January 2022, EPI and EHSI executed a settlement agreement with the Florida Attorney General’s office intended to resolve opioid-related cases and claims of the state and other Florida governmental persons and entities in exchange for a total payment of up to $65 million, subject to certain participation thresholds. The settlement amount was deposited into a QSF during the second quarter of 2022 and, as of June 30, 2022, the remaining liability accrual for this matter was not material.
•In February 2022, EPI and EHSI executed a settlement agreement with the Louisiana Attorney General’s office intended to resolve opioid-related cases and claims of the state and other Louisiana governmental persons and entities in exchange for a total payment of $7.5 million, subject to certain participation thresholds. The settlement amount has not yet been paid; certain conditions for payment remain outstanding. The full settlement amount is included in our liability accrual as of June 30, 2022
•In March 2022, EPI, EHSI and PPI executed a settlement agreement with the West Virginia Attorney General’s office intended to resolve opioid-related cases and claims of the state and other West Virginia governmental persons and entities in exchange for a total payment of $26 million, subject to certain participation thresholds. The settlement amount has not yet been paid; certain conditions for payment remain outstanding. The full settlement amount is included in our liability accrual as of June 30, 2022.
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•In June 2022, EPI and EHSI executed a settlement agreement with the Arkansas Attorney General’s office and certain Arkansas local governments intended to resolve opioid-related cases and claims of the state and other Arkansas governmental persons and entities in exchange for a total payment of $9.75 million, subject to certain participation thresholds. With the exception of certain amounts held back pursuant to the MDL common benefit fund order discussed below, the settlement amount was paid during the third quarter of 2022. The full settlement amount is included in our liability accrual as of June 30, 2022.
•In July 2022, EPI and EHSI executed a settlement agreement with the Mississippi Attorney General’s office intended to resolve opioid-related cases and claims of the state and other Mississippi governmental persons and entities in exchange for a total payment of $9 million, subject to certain participation thresholds. The settlement amount is not yet due and has not been paid. The full settlement amount is included in our liability accrual as of June 30, 2022.
•In July 2022, EPI, EHSI, PPI and PPCI executed a settlement agreement with the City and County of San Francisco providing for an initial payment of $5 million and subsequent payments of $500,000 a year over ten years . The settlement amount is not yet due and has not been paid. The full settlement amount is included in our liability accrual as of June 30, 2022.
While the specific terms of the agreements vary, each agreement was solely by way of compromise and settlement and was not in any way an admission of wrongdoing, fault or liability of any kind by us or any of our subsidiaries. Certain agreements provide for injunctive relief. Some agreements provide for additional payments in the event certain conditions, such as a comprehensive resolution of government-related opioid claims, are met; Florida may also be entitled to additional payments in the event we enter into a settlement with the attorney general of a state with a smaller population than Florida for an amount greater than $65 million prior to November 15, 2022.
Some settlement agreements may be subject to a May 2022 order of the MDL court generally requiring that a percentage of certain settlement amounts be held back from payment to plaintiffs and paid into an MDL common-benefit fund. Certain plaintiffs have filed motions with the MDL court or taken other procedural steps to vacate aspects of the order, seek clarification that the order does not apply to their settlements and/or request relief from the order. Such plaintiffs do not seek an increase of any settlement amount but rather in certain instances dispute that a portion of the total amount should be held back for the MDL common-benefit fund and argue that this portion should instead be paid to the settling plaintiffs.
In some states, certain governmental entities have declined to participate in the settlements and/or actively taken steps to try to challenge the release of their claims. For example:
•The plaintiffs in Mobile County Board of Health, et al. v. Richard Sackler, et al., a case pending in the Circuit Court of Mobile County, Alabama, initially refused to dismiss their claims against our subsidiaries. In April 2022, EPI and EHSI filed a motion in State of Alabama v. Endo Health Solutions Inc., et al., filed in the Circuit Court of Montgomery County, Alabama, seeking an order enjoining the Mobile County Board of Health plaintiffs from continuing their case and directing their compliance with the Alabama settlement. The court granted this motion and the Mobile County Board of Health plaintiffs dismissed their claims in June 2022.
•In March 2022, two public hospitals in Florida filed an emergency motion to intervene in State of Florida v. Walgreen Co. to stay court approval of our subsidiaries’ settlement in Florida. In April 2022, the court denied the motion to intervene and entered a final consent judgment dismissing the state’s claims against EPI and EHSI with prejudice. Meanwhile, the Florida Attorney General commenced a separate declaratory judgment action against those same public hospitals, as well as additional public hospitals and a school board, in a different Florida state court, seeking a judicial declaration that their claims were released by the Florida Attorney General’s settlements with EPI, EHSI and other companies. The declaratory judgment action remains pending.
It is reasonably possible that other governmental persons or entities in states where we have reached settlements will bring similar challenges or otherwise continue to bring and/or litigate claims against us and our subsidiaries notwithstanding the settlements. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Certain settlement agreements provide for the creation of QSFs into which settlement funds have been or will be deposited and/or provide for the repayment of some or all of the settlement amount under certain conditions. Depending on the terms of the respective agreements, funds deposited in QSFs have been and may continue to be considered restricted cash and/or restricted cash equivalents for a period of time subsequent to the initial funding. Distribution of funds from the QSFs is conditioned upon certain criteria that vary by agreement.
We recorded total charges for opioid-related matters of $10.0 million during the six months ended June 30, 2022 and as of June 30, 2022 our corresponding accrual totaled $141.4 million. In addition to the developments described above, our accrual for opioid-related matters as of June 30, 2022 includes amounts relating to certain unresolved matters for which, based on the progress of ongoing settlement negotiations and/or certain other factors, the Company believes a loss is probable and can reasonably be estimated. As further described below, the Company may be exposed to additional losses in excess of the amounts currently accrued, which could be material.
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To the extent unresolved, we will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests, including entering into settlement negotiations and settlements even in circumstances where we believe we have meritorious defenses. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition to the lawsuits and administrative matters described above, the Company and/or its subsidiaries have received certain subpoenas, civil investigative demands (CIDs) and informal requests for information concerning the sale, marketing and/or distribution of prescription opioid medications, including but not limited to the following:
Various state attorneys general have served subpoenas and/or CIDs on EHSI and/or EPI. We are cooperating with the investigations.
In January 2018, EPI received a federal grand jury subpoena from the U.S. District Court for the Southern District of Florida seeking documents and information related to OPANA® ER, other oxymorphone products and marketing of opioid medications. We are cooperating with the investigation.
In December 2020, the Company received a subpoena issued by the U.S. Attorney’s Office for the Western District of Virginia seeking documents related to McKinsey & Company. The Company received a related subpoena in May 2021, also issued by the U.S. Attorney’s Office for the Western District of Virginia. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Ranitidine Matters
In June 2020, an MDL pending in the U.S. District Court for the Southern District of Florida, In re Zantac (Ranitidine) Products Liability Litigation, was expanded to add PPI and numerous other manufacturers and distributors of generic ranitidine as defendants. The claims are generally based on allegations that under certain conditions the active ingredient in Zantac® and generic ranitidine medications can break down to form an alleged carcinogen known as N-Nitrosodimethylamine (NDMA). The complaints assert a variety of claims, including but not limited to various product liability, breach of warranty, fraud, negligence, statutory and unjust enrichment claims. Plaintiffs generally seek various remedies including, without limitation, compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees and costs as well as injunctive and/or other relief. Similar complaints against various defendants, in some instances including PPI, have also been filed in certain state courts, including but not limited to California, Illinois and Pennsylvania. Neither PPI nor its subsidiaries have manufactured or sold ranitidine since 2016.
The MDL court has issued various case management orders, including orders directing the filing of “master” and short-form complaints, establishing a census registry process for potential claimants and addressing various discovery issues. In December 2020, the court dismissed the master complaints as to PPI and other defendants with leave to amend certain claims. Certain plaintiffs, including third-party payers pursuing class action claims, have appealed the dismissal orders to the U.S. Court of Appeals for the Eleventh Circuit. In February 2021, various other plaintiffs filed an amended master personal injury complaint, a consolidated amended consumer economic loss class action complaint and a consolidated medical monitoring class action complaint. PPI was not named as a defendant in the consumer economic loss complaint or the medical monitoring complaint. In July 2021, the MDL court dismissed all claims in the master complaints as to PPI and other generic defendants with prejudice on federal preemption grounds. In November 2021, the MDL court issued a final judgment as to PPI and other generic defendants. Certain MDL plaintiffs have appealed the July 2021 dismissal order and/or the November 2021 judgment.
In July 2022, claimants who alleged certain types of injuries were “exited” from the MDL census registry. Some of these claimants subsequently filed lawsuits in various courts.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Generic Drug Pricing Matters
Since March 2016, various private plaintiffs, state attorneys general and other governmental entities have filed cases against our subsidiary PPI and/or, in some instances, the Company, Generics Bidco I, LLC, DAVA Pharmaceuticals, LLC, DAVA International, LLC, EPI, EHSI and/or PPCI, as well as other pharmaceutical manufacturers and, in some instances, other corporate and/or individual defendants, alleging price-fixing and other anticompetitive conduct with respect to generic pharmaceutical products. These cases, which include proposed class actions filed on behalf of direct purchasers, end-payers and indirect purchaser resellers, as well as non-class action suits, have generally been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Eastern District of Pennsylvania; three cases commenced by writ of summons in Pennsylvania state court are in deferred status. There is also a proposed class action filed in the Federal Court of Canada on behalf of a proposed class of Canadian purchasers.
The various complaints and amended complaints generally assert claims under federal and/or state antitrust law, state consumer protection statutes and/or state common law, and seek damages, treble damages, civil penalties, disgorgement, declaratory and injunctive relief, costs and attorneys’ fees. Some claims are based on alleged product-specific conspiracies; other claims allege broader, multiple-product conspiracies. Under these overarching conspiracy theories, plaintiffs generally seek to hold all alleged participants in a particular conspiracy jointly and severally liable for all harms caused by the alleged conspiracy, not just harms related to the products manufactured and/or sold by a particular defendant.
The MDL court has issued various case management and substantive orders, including orders denying certain motions to dismiss, and discovery is ongoing. In June 2022, the MDL court dismissed certain state attorney general claims for disgorgement.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In December 2014, our subsidiary PPI received from the Antitrust Division of the U.S. Department of Justice (DOJ) a federal grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania addressed to “Par Pharmaceuticals.” The subpoena requested documents and information focused primarily on product and pricing information relating to the authorized generic version of Lanoxin® (digoxin) oral tablets and generic doxycycline products, and on communications with competitors and others regarding those products. We are cooperating with the investigation.
In May 2018, we and our subsidiary PPCI each received a CID from the DOJ in relation to a False Claims Act investigation concerning whether generic pharmaceutical manufacturers engaged in price-fixing and market allocation agreements, paid illegal remuneration and caused the submission of false claims. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Antitrust Matters
Beginning in June 2014, multiple alleged purchasers of OPANA® ER sued our subsidiaries EHSI and EPI and other pharmaceutical companies, including Impax Laboratories, LLC (formerly Impax Laboratories, Inc. and referred to herein as Impax) and Penwest Pharmaceuticals Co., which our subsidiary EPI had acquired, alleging violations of antitrust law arising out of an agreement between EPI and Impax to settle certain patent infringement litigation and EPI’s introduction of reformulated OPANA® ER. Some cases were filed on behalf of putative classes of direct and indirect purchasers, while others were filed on behalf of individual retailers or health care benefit plans. The cases were consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Illinois. The various complaints asserted claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally sought damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. In June 2021, the court certified a direct purchaser class and an end-payer class; in August 2021, following an appeal and remand from the U.S. Court of Appeals for the Seventh Circuit, the district court amended its class certification order to certify a narrower end-payer class. Trial on all plaintiffs’ claims began in June 2022. In July 2022, the jury returned a verdict in favor of defendants. Later that month, plaintiffs filed a motion for judgment as a matter of law or for a new trial, which remains pending.
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Beginning in February 2009, the U.S. Federal Trade Commission (FTC) and certain private plaintiffs sued our subsidiaries PPCI (since June 2016, EGHI) and/or PPI as well as other pharmaceutical companies alleging violations of antitrust law arising out of the settlement of certain patent litigation concerning the generic version of AndroGel® and seeking damages, treble damages, equitable relief and attorneys’ fees and costs. The cases were consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Georgia. In May 2016, plaintiffs representing a putative class of indirect purchasers voluntarily dismissed their claims with prejudice. In February 2017, the FTC voluntarily dismissed its claims against EGHI with prejudice. In June 2018, the MDL court granted in part and denied in part various summary judgment and evidentiary motions filed by defendants. In particular, among other things, the court rejected two of the remaining plaintiffs’ causation theories and rejected damages claims related to AndroGel® 1.62%. In July 2018, the court denied certain plaintiffs’ motion for certification of a direct purchaser class. In November 2019, PPI and PPCI entered into settlement agreements with all but one of the plaintiffs remaining in the MDL; a settlement with the remaining plaintiff was reached in April 2021. The settlement agreements were solely by way of compromise and settlement and were not in any way an admission of wrongdoing, fault or liability of any kind. Separately, in August 2019, several alleged direct purchasers filed suit in the U.S. District Court for the Eastern District of Pennsylvania asserting claims substantially similar to those asserted in the MDL, as well as additional claims against other defendants relating to other alleged conduct. In January 2020, the U.S. District Court for the Eastern District of Pennsylvania denied defendants’ motion to transfer venue to the Northern District of Georgia. The case is currently in discovery.
Beginning in May 2018, multiple complaints were filed in the U.S. District Court for the Southern District of New York against PPI, EPI and/or us, as well as other pharmaceutical companies, alleging violations of antitrust law arising out of the settlement of certain patent litigation concerning the generic version of Exforge® (amlodipine/valsartan). Some cases were filed on behalf of putative classes of direct and indirect purchasers; others are non-class action suits. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In September 2018, the putative class plaintiffs stipulated to the dismissal without prejudice of their claims against EPI and us, and the retailer plaintiffs later did the same. PPI filed a partial motion to dismiss certain claims in September 2018; the court granted the motion in August 2019. In March 2022, the putative class plaintiffs filed motions for class certification. In May 2022, defendants filed motions for summary judgment. The court has ordered that the cases be trial-ready by January 2023.
Beginning in August 2019, multiple complaints were filed in the U.S. District Court for the Southern District of New York against PPI and other pharmaceutical companies alleging violations of antitrust law arising out the settlement of certain patent litigation concerning generic versions of Seroquel XR® (extended-release quetiapine fumarate). The claims against PPI are based on allegations that PPI entered into an exclusive acquisition and license agreement with Handa Pharmaceuticals, LLC (Handa) in 2012 pursuant to which Handa assigned to PPI certain rights under a prior settlement agreement between Handa and AstraZeneca resolving certain patent litigation. Some cases were filed on behalf of putative classes of direct and indirect purchasers; others are non-class action suits. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In October 2019, the defendants filed various motions to dismiss and, in the alternative, moved to transfer the litigation to the U.S. District Court for the District of Delaware. In August 2020, the Southern District of New York granted the motion to transfer without ruling on the motions to dismiss. In January 2021, the defendants filed motions to dismiss in the District of Delaware. In July 2022, the court dismissed certain claims asserted under state law but otherwise denied defendants’ motions to dismiss.
Beginning in June 2020, multiple complaints were filed against Jazz Pharmaceuticals and other pharmaceutical companies, including PPI, alleging violations of state and/or federal antitrust laws in connection with the settlement of certain patent litigation concerning generic versions of Xyrem® (sodium oxybate). Some cases were filed on behalf of putative classes of indirect purchasers; others are non-class action suits. The cases have generally been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of California; a case filed by Aetna Inc. in May 2022 is pending in California state court. The various complaints allege that Jazz entered into a series of “reverse-payment” settlements, including with PPI, to delay generic competition for Xyrem® and assert claims under Sections 1 and 2 of the Sherman Act, Section 16 of the Clayton Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In April 2021, the defendants moved to dismiss the MDL complaints that had been filed as of that time. In August 2021, the MDL court issued an order dismissing certain aspects of the plaintiffs’ claims but otherwise denying the motions to dismiss. Discovery is ongoing. In July 2022, PPI, among others, filed a motion to quash the Aetna action for lack of personal jurisdiction; the defendants also filed a demurrer, motion to strike and motion to stay Aetna’s action.
Beginning in June 2021, multiple complaints were filed on behalf of a putative class of direct purchasers in the U.S. District Court for the District of Massachusetts against Takeda Pharmaceuticals, PPI and us, alleging violations of federal antitrust law in connection with the settlement of certain patent litigation related to generic versions of Amitiza® (lubiprostone). The complaints allege that Takeda and PPI entered into a settlement agreement that delayed the entry of generic Amitiza® and assert claims under Section 1 and Section 2 of the Sherman Act. Plaintiffs seek damages, treble damages and attorneys’ fees and costs. In September 2021, the plaintiffs voluntarily dismissed all claims against Endo International plc. In December 2021, PPI filed a motion to dismiss, which remains pending. Trial is currently scheduled to begin in February 2023.
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In August 2021, a putative class action complaint was filed in the U.S. District Court for the Eastern District of Pennsylvania against Takeda Pharmaceuticals, EPI, PPI and others, alleging violations of federal antitrust law in connection with the settlement of certain patent litigation related to generic versions of Colcrys® (colchicine). In particular, the complaint alleged, among other things, that a distribution agreement between Takeda and PPI with respect to an authorized generic was in effect an output restriction conspiracy; the plaintiff asserted claims under Section 1 and Section 2 of the Sherman Act and sought damages, treble damages and attorneys’ fees and costs. In December 2021, the court dismissed the complaint for failure to state a claim (the plaintiff had already voluntarily dismissed all claims against EPI in November 2021). In January 2022, the plaintiff filed an amended complaint. In February 2022, the defendants filed a motion to dismiss the amended complaint, which the court granted in part and denied in part in March 2022. The case is currently in discovery.
In January 2021, the FTC filed a lawsuit in the U.S. District Court for the District of Columbia against us, EPI, Impax Laboratories, LLC and Amneal Pharmaceuticals, Inc., generally alleging that the 2017 settlement of a contract dispute between EPI and Impax (now Amneal) constituted unfair competition in violation of Section 5(a) of the FTC Act. The complaint generally sought injunctive and equitable monetary relief. In April 2021, the defendants filed motions to dismiss, which the court granted in March 2022. The FTC filed a notice of appeal in May 2022.
To the extent unresolved, we will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Securities Litigation
In June 2020, a putative class action entitled Benoit Albiges v. Endo International plc, Paul V. Campanelli, Blaise Coleman, and Mark T. Bradley was filed in the U.S. District Court for the District of New Jersey by an individual shareholder on behalf of himself and all similarly situated shareholders. The lawsuit alleges violations of Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder relating to the marketing and sale of opioid medications and the New York Department of Financial Services’ administrative action against the Company, EPI, EHSI, PPI and PPCI. In September 2020, the court appointed Curtis Laakso lead plaintiff in the action. In November 2020, the plaintiffs filed an amended complaint that among other things added Matthew J. Maletta as a defendant. In January 2021, the defendants filed a motion to dismiss, which the court granted in August 2021. In November 2021, the plaintiffs filed a second amended complaint, which among other things added allegations about discovery issues in certain opioid-related lawsuits. In January 2022, the defendants moved to dismiss the second amended complaint.
To the extent unresolved, we will continue to vigorously defend the foregoing matter and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matter may be expanded. We are unable to predict the outcome of this matter or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Government Investigations
In March 2022, EPI received a CID from the Texas Attorney General’s office seeking documents and information related to hormone blocker products. This followed the Texas Attorney General’s December 2021 announcement of an investigation into whether EPI and AbbVie Inc. had advertised or promoted such products, including SUPPRELIN® LA and VANTAS®, for unapproved uses. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matter may be expanded or result in litigation. We are unable to predict the outcome of this matter or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
VASOSTRICT® Related Matters
Beginning in April 2018, PSP LLC and PPI received notice letters from Eagle Pharmaceuticals, Inc. (Eagle) and other companies advising of the filing by such companies of Abbreviated New Drug Applications (ANDAs)/New Drug Applications (NDAs) for generic versions of VASOSTRICT® (vasopressin IV solution (infusion)) 20 units/ml and/or 200 units/10 ml. Beginning in May 2018, PSP LLC, PPI and Endo Par Innovation Company, LLC (EPIC) filed lawsuits against Eagle and other generic filers in the U.S. District Court for the District of Delaware or New Jersey within the 45-day deadline to invoke a 30-month stay of U.S. Food and Drug Administration (FDA) approval pursuant to the Hatch-Waxman statutory framework. We reached settlements and voluntarily dismissed the suits against many of these filers. The remaining Delaware cases against Eagle and Amneal Pharmaceuticals LLC were consolidated and a trial was held in July 2021. In August 2021, the court issued an opinion holding that Eagle’s proposed generic product will not infringe PPI’s asserted patent claims. The court made no finding regarding the validity of the patents. We appealed the ruling. The appellate argument was held in July 2022 before the Federal Circuit.
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In December 2020, we separately filed suit against Eagle, Amneal Pharmaceuticals LLC, Dr. Reddy’s Laboratories, Inc. and Aurobindo Pharma Limited in the U.S. District Court for the District of New Jersey in connection with a newly issued VASOSTRICT® genotyping patent. All of these cases have since been dismissed.
During the first quarter of 2022, multiple competitive generic alternatives to VASOSTRICT® 20 units/ml were launched, beginning with Eagle’s generic that was launched at risk and began shipping toward the end of January 2022. Since then, additional competitive alternatives have entered the market, including authorized generics. These launches began to significantly impact both Endo’s market share and product price toward the middle of the first quarter of 2022, and the effects of competition have since increased and are likely to continue to increase throughout 2022 and beyond. This competition could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In March 2022, PSP LLC, PPI and EPIC received a notice letter from Cipla Limited (Cipla) advising of its filing of an ANDA for generic versions of VASOSTRICT® (vasopressin injection) for IV use 40 units/100 ml and 60 units/100 ml. In May 2022, PSP LLC and PPI filed a complaint against Cipla in the District Court of New Jersey within the 45 -day statutory period to invoke a 30 -month stay of FDA approval pursuant to the Hatch-Waxman statutory framework. The 30-month stay expires in September 2024.
Other Proceedings and Investigations
Proceedings similar to those described above may also be brought in the future. Additionally, we are involved in, or have been involved in, arbitrations or various other proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these other proceedings. Currently, neither we nor our subsidiaries are involved in any other proceedings that we expect to have a material effect on our business, financial condition, results of operations and cash flows.
NOTE 15. OTHER COMPREHENSIVE (LOSS) INCOME
During the three and six months ended June 30, 2022 and 2021, there were no no
NOTE 16. SHAREHOLDERS’ DEFICIT
The following table presents a reconciliation of the beginning and ending balances in Total shareholders’ deficit for the three and six months ended June 30, 2022 (in thousands):
| Euro Deferred Shares | Ordinary Shares | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Shareholders’ Deficit | ||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Compensation related to share-based awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding for restricted shares | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | ( | — | — | ||||||||||||||||||||||||||||||||
| BALANCE, MARCH 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Compensation related to share-based awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding for restricted shares | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| BALANCE, JUNE 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
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The following table presents a reconciliation of the beginning and ending balances in Total shareholders’ deficit for the three and six months ended June 30, 2021 (in thousands):
| Euro Deferred Shares | Ordinary Shares | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Shareholders’ Deficit | ||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Compensation related to share-based awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of options | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding for restricted shares | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||
| BALANCE, MARCH 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Compensation related to share-based awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding for restricted shares | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| BALANCE, JUNE 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
Share-Based Compensation
The Company recognized share-based compensation expense of $2.7 million and $7.7 million during the three and six months ended June 30, 2022, respectively, and $4.4 million and $14.4 million during the three and six months ended June 30, 2021, respectively. As of June 30, 2022, the total remaining unrecognized compensation cost related to non-vested share-based compensation awards amounted to $15.2 million.
As of June 30, 2022, the weighted average remaining requisite service period for non-vested restricted stock units and performance share units was 1.4 years.
NOTE 17. OTHER (INCOME) EXPENSE, NET
The components of Other (income) expense, net for the three and six months ended June 30, 2022 and 2021 are as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net (gain) loss on sale of business and other assets (1) | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Foreign currency (gain) loss, net (2) | ( | ( | |||||||||||||||||||||
| Net loss from our investments in the equity of other companies (3) | |||||||||||||||||||||||
| Other miscellaneous, net | ( | ( | ( | ( | |||||||||||||||||||
| Other (income) expense, net | $ | ( | $ | $ | ( | $ | |||||||||||||||||
__________
(1)Amounts primarily relate to the sales of certain intellectual property rights and certain other assets.
(2)Amounts relate to the remeasurement of the Company’s foreign currency denominated assets and liabilities.
(3)Amounts relate to the income statement impacts of our investments in the equity of other companies, including investments accounted for under the equity method.
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NOTE 18. INCOME TAXES
The following table displays our (Loss) income from continuing operations before income tax, Income tax expense and Effective tax rate for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (Loss) income from continuing operations before income tax | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Income tax expense | $ | $ | $ | $ | |||||||||||||||||||
| Effective tax rate | ( | % | % | ( | % | % | |||||||||||||||||
The change in Income tax expense for the three and six months ended June 30, 2022 compared to the prior year period primarily relates to the 2021 discrete tax expense related to Canadian uncertain tax positions and changes in the geographic mix of pre-tax earnings.
As discussed in Note 1. Basis of Presentation, in the second quarter of 2022, the Company concluded that there was substantial doubt about its ability to continue as a going concern within one year after the date of issuance of the Condensed Consolidated Financial Statements. The Company considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. As a result, an immaterial increase in valuation allowance on the Company’s net deferred tax assets was recorded in various jurisdictions during the second quarter of 2022.
The Company maintains a full valuation allowance against the net deferred tax assets in the U.S., Luxembourg and certain other foreign tax jurisdictions as of June 30, 2022. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of these valuation allowances would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment and prospective earnings.
On June 3, 2020, in connection with the IRS’s examination of our U.S. income tax return for the fiscal year ended December 31, 2015 (2015 Return), we received an acknowledgement of facts (AoF) from the IRS related to transfer pricing positions taken by Endo U.S., Inc. and its subsidiaries (Endo U.S.). The AoF asserted that Endo U.S. overpaid for certain pharmaceutical products that it purchased from certain non-U.S. related parties and proposed a specific adjustment to our 2015 U.S. income tax return position. On September 4, 2020, we received a Form 5701 Notice of Proposed Adjustment (NOPA) that is consistent with the previously disclosed AoF. We believe that the terms of the subject transactions are consistent with comparable transactions for similarly situated unrelated parties, and we intend to contest the proposed adjustment. While the NOPA is not material to our business, financial condition, results of operations or cash flows, the IRS could seek to apply its position to subsequent tax periods and propose similar adjustments. The aggregate impact of these adjustments, if sustained, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.
In connection with the IRS’s examination of our 2015 Return, on December 31, 2020, the IRS issued a Technical Advice Memorandum (TAM) that we previously disclosed regarding the portion of our 2015 NOL that we believe qualifies as a specified product liability loss (SLL). The TAM concurred in part with our positions on the 2015 Return but disagreed with our position that the AMS worthless stock loss qualifies as an SLL. On April 23, 2021, we received draft NOPAs from the IRS consistent with the TAM. We continue to disagree with the IRS’s position and the draft NOPAs received and, if necessary, intend to contest any additional tax determined to be owed with respect to the NOPAs. However, if we were unsuccessful in contesting the IRS’s position, we have preliminarily estimated that we would have additional cash taxes payable to the IRS of between $70 million and $250 million excluding interest. We continue to discuss this position with the IRS and the actual amount that may be owed to the IRS if we are unsuccessful may be different than our preliminary estimate. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.
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NOTE 19. NET (LOSS) INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of basic and diluted net (loss) income per share for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| (Loss) income from continuing operations | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Net (loss) income | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| For basic per share data—weighted average shares | |||||||||||||||||||||||
| Dilutive effect of ordinary share equivalents | |||||||||||||||||||||||
| For diluted per share data—weighted average shares | |||||||||||||||||||||||
Basic per share amounts are computed based on the weighted average number of ordinary shares outstanding during the period. Diluted per share amounts are computed based on the weighted average number of ordinary shares outstanding and, if there is net income from continuing operations during the period, the dilutive effect of ordinary share equivalents outstanding during the period.
The dilutive effect of ordinary share equivalents is measured using the treasury stock method. Any stock options and/or awards that have been issued but for which a grant date has not yet been established are not considered in the calculation of basic or diluted weighted average shares.
The following table presents, for the three and six months ended June 30, 2022 and 2021, outstanding stock options and stock awards that could potentially dilute per share amounts in the future that were not included in the computation of diluted per share amounts for the periods presented because to do so would have been antidilutive (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Stock awards | |||||||||||||||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources and critical accounting estimates of Endo International plc. This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements and the related Notes thereto and the Annual Report. The Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial and operating results. Except for the historical information contained in this report, including the following discussion, this report contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” beginning on page i of this report.
Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to Endo International plc and its subsidiaries.
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RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past and may continue to fluctuate. These fluctuations may be due to the business and financial statement effects of, among other things, new product launches by us or our competitors; market acceptance of our products; purchasing patterns of our customers; changes in pricing; changing inflation and interest rates; changes in the availability of our products; litigation-related and other contingencies; mergers, acquisitions, divestitures and other related activity; restructurings and other cost-reduction initiatives; strategic review initiatives; financing transactions; COVID-19; acquired in-process research and development charges; asset impairment charges; share-based and other long-term incentive compensation; and changes in the fair value of financial instruments. The following summary highlights certain recent developments that have resulted in and/or could in the future result in fluctuations in our results of operations and/or changes in our liquidity and capital resources:
•Since 2019, developments related to COVID-19 have continued to evolve rapidly and are likely to continue to do so. The duration and severity of the direct and indirect effects of COVID-19 on our results remain difficult to anticipate and, in many instances, outside of our control. As such, the impacts from COVID-19 on our consolidated results and the results of our business segments to date may not be directly comparable to any historical period and are not necessarily indicative of its impact on our results for any future periods, and the evolving nature of the COVID-19 pandemic could increase the degree to which our results, including the results of our business segments, fluctuate in the future. Additionally, the numerous uncertainties related to COVID-19 have impacted our ability to forecast our future operations; however, any future impact could be material.
•In November 2020, we announced the initiation of several strategic actions, collectively referred to as the 2020 Restructuring Initiative, to further optimize operations and increase overall efficiency. We have been progressing these actions. For example, during the second quarter of 2022, we entered into a definitive agreement to sell certain assets located in Chestnut Ridge, New York. We have recorded and expect to record certain charges to complete these activities in anticipation of realizing annualized cost savings. For further discussion of this initiative, including a discussion of amounts recognized and expected future charges, refer to Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1.
•In March 2021, we completed a series of financing transactions, collectively referred to herein as the March 2021 Refinancing Transactions, which are further discussed in Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1.
•In March 2021, we launched QWO® (collagenase clostridium histolyticum-aaes) for the treatment of moderate to severe cellulite in the buttocks of adult women. We have been progressing and expect to continue to progress our cellulite treatment development programs for QWO®. For example, during the second quarter of 2022, we launched a new multi-cohort, open-label study relevant to the use of QWO® for the treatment of moderate to severe cellulite in the buttocks of adult women. This study, which is designed to test different interventions to assess their potential impact on reduction of bruising, has been created with the flexibility to add cohorts in order to test additional interventions over time if desired.
•In November 2021, our PSP LLC subsidiary entered into a cooperative agreement with the U.S. government to expand our Sterile Injectables segment’s fill-finish manufacturing production capacity and capabilities at our Rochester, Michigan plant to support the U.S. government’s national defense efforts regarding production of critical medicines advancing pandemic preparation. Refer to Note 16. Commitments and Contingencies in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report for additional discussion of the terms of this agreement.
•During the first quarter of 2022, multiple competitive generic alternatives to VASOSTRICT® were launched, beginning with a generic that was launched at risk and began shipping toward the end of January 2022. Since then, additional competitive alternatives have entered the market, including authorized generics. These launches began to significantly impact both Endo’s market share and product price toward the middle of the first quarter of 2022, and the effects of competition have since increased and are likely to continue to increase throughout 2022 and beyond. Additionally, beginning late in the first quarter of 2022, COVID-19-related hospital utilization levels began to decline, resulting in significantly decreased market volumes for both branded and competing generic alternatives to VASOSTRICT®. As a result of these factors, we experienced a period of significant VASOSTRICT® vial destocking during the second quarter of 2022, which resulted in significant reductions to VASOSTRICT® revenues in this period.
•In February 2022, we launched VASOSTRICT® in a ready-to-use bottle, representing the first and only ready-to-use formulation of the drug. While we have seen some market conversion to the bottle since its launch, the factors described in the preceding bullet point have had and could continue to have a material adverse effect on our business, financial condition, results of operations and cash flows.
•In April 2022, we communicated the initiation of certain actions, collectively referred to as the 2022 Restructuring Initiative, to streamline and simplify certain functions, including our commercial organization, to increase our overall organizational effectiveness and better align with current and future needs. We have recorded and expect to record certain charges to complete these actions in anticipation of realizing annualized cost savings. For further discussion of this initiative, including a discussion of amounts recognized and expected future charges, refer to Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1.
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•In May 2022, we announced that our Endo Ventures Limited subsidiary had entered into an agreement to acquire six development-stage ready-to-use injectable product candidates from Nevakar Injectables, Inc., a subsidiary of Nevakar, Inc., for an upfront cash payment of $35.0 million, which was recorded as an Acquired in-process research and development charge in the Condensed Consolidated Statements of Operations in the second quarter of 2022. For further discussion of this agreement, see Note 10. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1.
•In June 2022, we announced that our Endo Ventures Limited subsidiary had entered into an agreement with TLC to commercialize TLC599, an injectable compound in Phase 3 development. During the second quarter of 2022, we made an upfront cash payment of $30.0 million to TLC, which was recorded as an Acquired in-process research and development charge in the Condensed Consolidated Statements of Operations in the second quarter of 2022. Pursuant to this agreement, we could become obligated to make significant additional milestone and/or royalty payments to TLC in the future. For further discussion of this agreement, see Note 10. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1.
•Beginning in June 2022, we elected to enter certain 30-day grace periods related to senior notes interest payments that were originally due to be paid between June 30, 2022 and August 1, 2022. Under the related indentures governing these notes, we have a 30-day grace period from the respective due dates to make these interest payments before such non-payments constitute events of default with respect to such notes. As of the date of this report, these interest payments either: (i) had been paid before the end of any applicable grace periods or (ii) remained unpaid but were still within applicable grace periods. Refer to Note 1. Basis of Presentation and Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion.
•In addition to our other legal proceedings, we, along with others, are the subject of various legal proceedings regarding the sale, marketing and/or distribution of prescription opioid medications. We have not been able to settle most of the opioid claims made against us and, as a result, there are opioid-related claims pending against us at various stages in the litigation process. It is possible that our legal proceedings, including those relating to opioid claims, could have a material adverse effect on our business, financial condition, results of operations and cash flows, including in the short term. The implications of these legal proceedings could result in a possible restructuring of our or our subsidiaries’ obligations through a bankruptcy filing which would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern. For further discussion, refer to Note 1. Basis of Presentation and Note 14. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1, as well as Part II, Item 1A. “Risk Factors” herein and Part I, Item 1A. “Risk Factors” in the Annual Report.
COVID-19 Update and Other Key Trends
We are closely monitoring the ongoing impact of COVID-19 on all aspects of our business, the pharmaceutical industry and the economy as a whole, including how it has and will continue to impact our workforce, our customers and the patients they serve, our manufacturing and supply chain operations, our research and development (R&D) programs and regulatory approval processes and our liquidity and access to capital. For example, we have continued to experience changes in customer demand as the COVID-19 pandemic continues to evolve, which are difficult to predict.
When compared to pre-COVID-19 levels, VASOSTRICT® has generally experienced increased sales volumes as a result of the COVID-19 pandemic based primarily on increased utilization levels associated with treating patients infected with COVID-19, including those with vasodilatory shock. However, COVID-19 has also contributed to significant fluctuations in VASOSTRICT® revenues from period to period based on both: (i) increases and decreases in utilization levels based on variability in the COVID-19 pandemic and (ii) channel inventory stocking and destocking patterns over time. Most recently, VASOSTRICT® has begun to experience significant revenue declines as a result of generic competition, which began in late January 2022, as well as changes in the COVID-19 pandemic. Specifically, beginning late in the first quarter of 2022, COVID-19-related hospital utilization levels began to decline, resulting in significantly decreased market volumes for both branded and competing generic alternatives to VASOSTRICT®. As a result of these factors, we experienced a period of significant VASOSTRICT® vial destocking during the second quarter of 2022, which resulted in significant reductions to VASOSTRICT® revenues in this period.
On the other hand, certain of our products that are physician administered, including XIAFLEX®, have generally experienced decreased sales volumes during the COVID-19 pandemic due to reduced physician office activity and patient office visits because of the COVID-19 pandemic. While these products have generally been recovering since early 2020, they have at times continued to be impacted by COVID-19-related market conditions for specialty product office-based procedures, including medical and administrative staff shortages in physicians’ offices, reduced physician office activity and lower numbers of in-person patient office visits. While we have seen improving market conditions and a recovery in demand beginning in March 2022, these conditions have continued to contribute to variability in these products’ recoveries, as well as uncertainty about future revenues.
Future changes in the COVID-19 pandemic could further impact future revenues for these and/or other products.
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We continue to closely monitor the evolving situation and implement plans intended to limit the impact of COVID-19 on our business so that we can continue to produce the critical care medicines that hospitals and healthcare providers need to treat patients, including those with COVID-19. For additional information about the impact of COVID-19 on our business, related risks and uncertainties and actions we have taken to date, refer to the discussion below, together with the discussion contained in the Annual Report.
Consolidated Results Review
The following table displays our revenue, gross margin, gross margin percentage and other pre-tax expense or income for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
| Three Months Ended June 30, | % Change | Six Months Ended June 30, | % Change | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||
| Total revenues, net | $ | 569,114 | $ | 713,830 | (20) | % | $ | 1,221,373 | $ | 1,431,749 | (15) | % | |||||||||||||||||||||||
| Cost of revenues | 263,786 | 318,480 | (17) | % | 537,001 | 623,773 | (14) | % | |||||||||||||||||||||||||||
| Gross margin | $ | 305,328 | $ | 395,350 | (23) | % | $ | 684,372 | $ | 807,976 | (15) | % | |||||||||||||||||||||||
| Gross margin percentage | 53.6 | % | 55.4 | % | 56.0 | % | 56.4 | % | |||||||||||||||||||||||||||
| Selling, general and administrative | $ | 180,830 | $ | 177,619 | 2 | % | $ | 407,991 | $ | 364,793 | 12 | % | |||||||||||||||||||||||
| Research and development | 29,788 | 29,669 | — | % | 65,918 | 59,408 | 11 | % | |||||||||||||||||||||||||||
| Acquired in-process research and development | 65,000 | 5,000 | NM | 67,900 | 5,000 | NM | |||||||||||||||||||||||||||||
| Litigation-related and other contingencies, net | 208 | 35,195 | (99) | % | 25,362 | 35,832 | (29) | % | |||||||||||||||||||||||||||
| Asset impairment charges | 1,781,063 | 4,929 | NM | 1,801,016 | 8,238 | NM | |||||||||||||||||||||||||||||
| Acquisition-related and integration items, net | 1,825 | 97 | NM | 448 | (4,925) | NM | |||||||||||||||||||||||||||||
| Interest expense, net | 139,784 | 141,553 | (1) | % | 274,733 | 275,894 | — | % | |||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | NM | — | 13,753 | (100) | % | ||||||||||||||||||||||||||||
| Other (income) expense, net | (19,438) | 372 | NM | (18,149) | 1,284 | NM | |||||||||||||||||||||||||||||
| (Loss) income from continuing operations before income tax | $ | (1,873,732) | $ | 916 | NM | $ | (1,940,847) | $ | 48,699 | NM | |||||||||||||||||||||||||
__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
Total revenues, net. The decreases in revenues for the three and six months ended June 30, 2022 were primarily due to revenue decreases related to VASOSTRICT® and the Established Products portfolio of our Branded Pharmaceuticals segment, partially offset by increased revenues from our Generic Pharmaceuticals segment. Our revenues are further disaggregated and described below under the heading “Business Segment Results Review.”
Cost of revenues and gross margin percentage. During the three and six months ended June 30, 2022 and 2021, Cost of revenues includes certain amounts that impact its comparability among periods, as well as the comparability of gross margin percentage, including amortization expense and amounts related to continuity and separation benefits, cost reductions and strategic review initiatives. The following table summarizes such amounts (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Amortization of intangible assets (1) | $ | 87,568 | $ | 94,070 | $ | 177,802 | $ | 189,200 | |||||||||||||||
| Amounts related to continuity and separation benefits, cost reductions and strategic review initiatives (2) | $ | 5,107 | $ | 4,970 | $ | 20,844 | $ | 20,266 | |||||||||||||||
__________
(1)Amortization expense fluctuates based on changes in the total amount of amortizable intangible assets and the rate of amortization in effect for each intangible asset, both of which can vary based on factors such as the amount and timing of acquisitions, dispositions, asset impairment charges, transfers between indefinite- and finite-lived intangibles assets, changes in foreign currency rates and changes in the composition of our intangible assets impacting the weighted average useful lives and amortization methodologies being utilized. The decreases during the three and six months ended June 30, 2022 were primarily driven by prior asset impairment charges and decreases in the rate of amortization expense for certain assets, partially offset by the impact of certain in-process research and development assets previously put into service.
(2)Amounts include, among other things, certain accelerated depreciation charges, inventory adjustments and employee separation, continuity and other benefit-related costs, including amounts related to restructurings. For further discussion of our restructuring initiatives, including a discussion of amounts recognized and expected future charges, refer to Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1.
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The decreases in Cost of revenues for the three and six months ended June 30, 2022 were primarily due to decreased revenues and decreased amortization expense, partially offset by unfavorable changes in product mix resulting primarily from decreased VASOSTRICT® revenues.
The decreases in gross margin percentage for the three and six months ended June 30, 2022 were primarily due to unfavorable changes in product mix resulting primarily from decreased VASOSTRICT® revenues, partially offset by decreased amortization expense.
Selling, general and administrative. The increases for the three and six months ended June 30, 2022 were primarily due to increased costs associated with certain strategic review initiatives, restructuring and other cost reduction initiatives and our investment in consumer marketing efforts supporting XIAFLEX®, partially offset by the recovery of certain previously-incurred opioid-related legal expenses during the second quarter of 2022. Additionally, during the six months ended June 30, 2022, Selling, general and administrative expenses increased as a result of increased costs associated with certain legal matters. Refer to Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of certain restructuring initiatives, including a discussion of amounts recognized and expected future charges.
Research and development. Our R&D efforts are focused on the development of a diversified portfolio of innovative and clinically differentiated product candidates. The amount of R&D expense we record in any period varies depending on the nature and stage of development of our R&D programs, certain of which are further described below.
We continue to invest in our Branded Pharmaceuticals segment. In early 2020, we announced that we had initiated our XIAFLEX® development programs for the treatment of plantar fibromatosis, for which we subsequently initiated a Phase 2 study in the fourth quarter of 2021, and adhesive capsulitis, for which we announced top-line results from our Phase 2 in the second quarter of 2022. While Phase 2 adhesive capsulitis study participants receiving XIAFLEX® showed some improvement, the difference compared to those study participants receiving placebo was not statistically significant. We have also been progressing and expect to continue to progress our cellulite treatment development programs for QWO®, which was launched in March 2021 for the treatment of moderate to severe cellulite in the buttocks of adult women. For example, during the second quarter of 2022, we launched a new multi-cohort, open-label study relevant to the use of QWO® for the treatment of moderate to severe cellulite in the buttocks of adult women. This study, which is designed to test different interventions to assess their potential impact on reduction of bruising, has been created with the flexibility to add cohorts in order to test additional interventions over time if desired. Additionally, during the second quarter of 2022, we entered into the TLC Agreement, which, as further described in Note 10. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1, is intended to complement our Branded Pharmaceuticals segment’s current on-market and in-development orthopedic-focused opportunities.
We also expect to continue to focus investments in ready-to-use and other product candidates in our Sterile Injectables segment, potentially including acquisitions and/or license and commercialization agreements such as the second-quarter 2022 Nevakar Agreement that is further described in Note 10. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1.
The increase in R&D expense for the six months ended June 30, 2022 was primarily driven by increased costs associated with our XIAFLEX® development programs, as well as increased costs associated with certain restructuring and other cost reduction initiatives. Refer to Note 4. Restructuring of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of certain restructuring initiatives, including a discussion of amounts recognized and expected future charges.
As our development programs progress, it is possible that our R&D expenses could increase.
Acquired in-process research and development. We recognize Acquired in-process research and development charges in periods in which we acquire in-process research and development from third parties or incur (up to the point of regulatory approval) expenses related to upfront or milestone payments to third parties. The increases in Acquired in-process research and development charges for the three and six months ended June 30, 2022 were primarily driven by the incurrence, during the second quarter of 2022, of expenses related to upfront payments associated with the Nevakar Agreement and the TLC Agreement of $35.0 million and $30.0 million, respectively, which are further described in Note 10. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1. To the extent we enter into agreements to acquire in-process research and development in the future and/or incur expenses related to upfront or milestone payments to third parties associated with existing or potential future agreements, Acquired in-process research and development charges could increase in the future, and the amounts of any increases could be material.
Litigation-related and other contingencies, net. Included within Litigation-related and other contingencies, net are changes to our accruals for litigation-related settlement charges. Our material legal proceedings and other contingent matters are described in more detail in Note 14. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1. As further described therein, adjustments to the corresponding liability accruals may be required in the future, including in the short term. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Asset impairment charges. The following table presents the components of our total Asset impairment charges for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Goodwill impairment charges | $ | 1,748,000 | $ | — | $ | 1,748,000 | $ | — | |||||||||||||||
| Other intangible asset impairment charges | 30,000 | 4,929 | 49,953 | 7,811 | |||||||||||||||||||
| Property, plant and equipment impairment charges | 3,063 | — | 3,063 | 427 | |||||||||||||||||||
| Total asset impairment charges | $ | 1,781,063 | $ | 4,929 | $ | 1,801,016 | $ | 8,238 | |||||||||||||||
For additional information, refer to Note 6. Fair Value Measurements and Note 9. Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1, as well as the “CRITICAL ACCOUNTING ESTIMATES” section herein.
Acquisition-related and integration items, net. Acquisition-related and integration items, net primarily consist of the net expense (benefit) from changes in the fair value of acquisition-related contingent consideration liabilities resulting from changes to our estimates regarding the timing and amount of the future revenues of the underlying products and changes in other assumptions impacting the probability of incurring, and extent to which we could incur, related contingent obligations. See Note 6. Fair Value Measurements of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of our acquisition-related contingent consideration.
Interest expense, net. The components of Interest expense, net for the three and six months ended June 30, 2022 and 2021 are as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest expense | $ | 139,931 | $ | 141,643 | $ | 275,006 | $ | 276,340 | |||||||||||||||
| Interest income | (147) | (90) | (273) | (446) | |||||||||||||||||||
| Interest expense, net | $ | 139,784 | $ | 141,553 | $ | 274,733 | $ | 275,894 | |||||||||||||||
The decreases in interest expense for the three and six months ended June 30, 2022 were primarily attributable to decreases to the principal amount of our indebtedness, which were primarily attributable to the partial repayment of the Revolving Credit Facility in October 2021 and the January 2022 Senior Notes Repayments, partially offset by increases in the weighted average interest rate applicable to our total indebtedness. Refer to Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of these transactions. Changes in interest rates could increase our interest expense in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Interest income varies primarily based on the amounts of our interest-bearing investments, such as money market funds, as well as changes in the corresponding interest rates.
Loss on extinguishment of debt. The amount during the six months ended June 30, 2021 relates to the March 2021 Refinancing Transactions. Refer to Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion.
Other (income) expense, net. The components of Other (income) expense, net for the three and six months ended June 30, 2022 and 2021 are as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net (gain) loss on sale of business and other assets | $ | (11,880) | $ | (264) | $ | (11,745) | $ | 91 | |||||||||||||||
| Foreign currency (gain) loss, net | (2,280) | 876 | (568) | 2,261 | |||||||||||||||||||
| Net loss from our investments in the equity of other companies | 140 | 159 | 226 | 310 | |||||||||||||||||||
| Other miscellaneous, net | (5,418) | (399) | (6,062) | (1,378) | |||||||||||||||||||
| Other (income) expense, net | $ | (19,438) | $ | 372 | $ | (18,149) | $ | 1,284 | |||||||||||||||
For additional information on the components of Other (income) expense, net, refer to Note 17. Other (Income) Expense, Net of the Condensed Consolidated Financial Statements included in Part I, Item 1.
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Income tax expense. The following table displays our (Loss) income from continuing operations before income tax, Income tax expense and Effective tax rate for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (Loss) income from continuing operations before income tax | $ | (1,873,732) | $ | 916 | $ | (1,940,847) | $ | 48,699 | |||||||||||||||
| Income tax expense | $ | 7,151 | $ | 11,100 | $ | 5,336 | $ | 11,824 | |||||||||||||||
| Effective tax rate | (0.4) | % | 1,211.8 | % | (0.3) | % | 24.3 | % | |||||||||||||||
Our tax rate is affected by recurring items, such as tax rates in non-U.S. jurisdictions as compared to the notional U.S. federal statutory tax rate, and the relative amount of income or loss in those various jurisdictions. It is also impacted by certain items that may occur in any given period, but are not consistent from period to period.
The change in Income tax expense for the three and six months ended June 30, 2022 compared to the prior year period primarily relates to the 2021 discrete tax expense related to Canadian uncertain tax positions and changes in the geographic mix of pre-tax earnings.
As discussed in Note 1. Basis of Presentation of the Condensed Consolidated Financial Statements included in Part I, Item 1, in the second quarter of 2022, the Company concluded that there was substantial doubt about its ability to continue as a going concern within one year after the date of issuance of the Condensed Consolidated Financial Statements. The Company considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. As a result, an immaterial increase in valuation allowance on the Company’s net deferred tax assets was recorded in various jurisdictions during the second quarter of 2022.
The Company maintains a full valuation allowance against the net deferred tax assets in the U.S., Luxembourg and certain other foreign tax jurisdictions as of June 30, 2022. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of these valuation allowances would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment and prospective earnings.
We are incorporated in Ireland and also maintain subsidiaries in, among other jurisdictions, the U.S., Canada, India, the United Kingdom and Luxembourg. The IRS and other taxing authorities may continue to challenge our tax positions. The IRS presently is examining certain of our subsidiaries’ U.S. income tax returns for fiscal years ended between December 31, 2011 and December 31, 2015 and, in connection with those examinations, is reviewing our tax positions related to, among other things, certain intercompany arrangements, including the level of profit earned by our U.S. subsidiaries pursuant to such arrangements, and a product liability loss carryback claim. For additional information, including a discussion of related recent developments and their potential impact on us, refer to Note 18. Income Taxes of the Condensed Consolidated Financial Statements included in Part I, Item 1.
During the third quarter of 2020, the IRS opened an examination into certain of our subsidiaries’ U.S. income tax returns for fiscal years ended between December 31, 2016 and December 31, 2018. The IRS will likely examine our tax returns for other fiscal years and/or for other tax positions. Similarly, other tax authorities are currently examining our non-U.S. tax returns. Additionally, other jurisdictions where we are not currently under audit remain subject to potential future examinations. Such examinations may lead to proposed or actual adjustments to our taxes that may be material, individually or in the aggregate. See the risk factor “The IRS and other taxing authorities may continue to challenge our tax positions and we may not be able to successfully maintain such positions” in Part I, Item 1A. “Risk Factors” in the Annual Report for more information.
Discontinued operations, net of tax. The operating results of the Company’s Astora business, which the Board resolved to wind down in 2016, are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The following table provides the operating results of Astora Discontinued operations, net of tax, for the three and six months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Loss from discontinued operations before income taxes | $ | (4,544) | $ | (5,873) | $ | (11,218) | $ | (12,094) | |||||||||||||||
| Income tax benefit | — | (557) | — | (1,243) | |||||||||||||||||||
| Discontinued operations, net of tax | $ | (4,544) | $ | (5,316) | $ | (11,218) | $ | (10,851) | |||||||||||||||
The pre-tax amounts during the three and six months ended June 30, 2022 and 2021 were primarily related to mesh-related legal defense costs and certain other items. For additional discussion of mesh-related matters, refer to Note 14. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1.
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Business Segment Results Review
Revenues, net. The following table displays our revenue by reportable segment for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
| Three Months Ended June 30, | % Change | Six Months Ended June 30, | % Change | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||
| Branded Pharmaceuticals | $ | 218,952 | $ | 228,040 | (4) | % | $ | 423,813 | $ | 434,675 | (2) | % | |||||||||||||||||||||||
| Sterile Injectables | 123,171 | 294,600 | (58) | % | 363,199 | 603,345 | (40) | % | |||||||||||||||||||||||||||
| Generic Pharmaceuticals | 203,377 | 167,272 | 22 | % | 389,321 | 348,145 | 12 | % | |||||||||||||||||||||||||||
| International Pharmaceuticals (1) | 23,614 | 23,918 | (1) | % | 45,040 | 45,584 | (1) | % | |||||||||||||||||||||||||||
| Total net revenues from external customers | $ | 569,114 | $ | 713,830 | (20) | % | $ | 1,221,373 | $ | 1,431,749 | (15) | % | |||||||||||||||||||||||
__________
(1)Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada.
Branded Pharmaceuticals. The following table displays the significant components of our Branded Pharmaceuticals revenues from external customers for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
| Three Months Ended June 30, | % Change | Six Months Ended June 30, | % Change | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||
| Specialty Products: | |||||||||||||||||||||||||||||||||||
XIAFLEX® | $ | 120,878 | $ | 111,487 | 8 | % | $ | 220,362 | $ | 206,757 | 7 | % | |||||||||||||||||||||||
SUPPRELIN® LA | 24,739 | 27,568 | (10) | % | 53,569 | 55,596 | (4) | % | |||||||||||||||||||||||||||
| Other Specialty (1) | 18,246 | 28,036 | (35) | % | 38,990 | 48,068 | (19) | % | |||||||||||||||||||||||||||
| Total Specialty Products | $ | 163,863 | $ | 167,091 | (2) | % | $ | 312,921 | $ | 310,421 | 1 | % | |||||||||||||||||||||||
| Established Products: | |||||||||||||||||||||||||||||||||||
PERCOCET® | $ | 26,256 | $ | 26,156 | — | % | $ | 52,431 | $ | 51,781 | 1 | % | |||||||||||||||||||||||
TESTOPEL® | 10,021 | 9,439 | 6 | % | 18,901 | 20,628 | (8) | % | |||||||||||||||||||||||||||
| Other Established (2) | 18,812 | 25,354 | (26) | % | 39,560 | 51,845 | (24) | % | |||||||||||||||||||||||||||
| Total Established Products | $ | 55,089 | $ | 60,949 | (10) | % | $ | 110,892 | $ | 124,254 | (11) | % | |||||||||||||||||||||||
| Total Branded Pharmaceuticals (3) | $ | 218,952 | $ | 228,040 | (4) | % | $ | 423,813 | $ | 434,675 | (2) | % | |||||||||||||||||||||||
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(1)Products included within Other Specialty include NASCOBAL® Nasal Spray, AVEED® and QWO®.
(2)Products included within Other Established include, but are not limited to, EDEX®.
(3)Individual products presented above represent the top two performing products in each product category for either the three or six months ended June 30, 2022 and/or any product having revenues in excess of $25 million during any completed quarterly period in 2022 or 2021.
Specialty Products
As noted above, certain of our products that are physician administered, including XIAFLEX®, have generally experienced decreased sales volumes during the COVID-19 pandemic due to reduced physician office activity and patient office visits because of the COVID-19 pandemic. While these products have generally been recovering since early 2020, they have at times continued to be impacted by COVID-19-related market conditions for specialty product office-based procedures, including medical and administrative staff shortages in physicians’ offices, reduced physician office activity and lower numbers of in-person patient office visits. While we have seen improving market conditions and a recovery in demand beginning in March 2022, these conditions have continued to contribute to variability in these products’ recoveries, as well as uncertainty about future revenues. Further changes as a result the COVID-19 pandemic could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The increases in XIAFLEX® revenues for the three and six months ended June 30, 2022 were primarily attributable to increased net price, partially offset by slightly lower volumes resulting primarily from COVID-19-related market conditions as noted above.
The decreases in SUPPRELIN® LA revenues for the three and six months ended June 30, 2022 were primarily attributable to decreased net price, partially offset by increased volumes.
Established Products
The increase in TESTOPEL® revenues for the three months ended June 30, 2022 was primarily attributable to increased net price, partially offset by lower volumes. The decrease in TESTOPEL® revenues for the six months ended June 30, 2022 was primarily attributable to decreased volumes, partially offset by increased net price.
The decreases in Other Established Products revenues for the three and six months ended June 30, 2022 were primarily attributable to ongoing competitive pressures impacting this product portfolio and certain other factors.
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Sterile Injectables. The following table displays the significant components of our Sterile Injectables revenues from external customers for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
| Three Months Ended June 30, | % Change | Six Months Ended June 30, | % Change | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||
VASOSTRICT® | $ | 35,630 | $ | 197,121 | (82) | % | $ | 191,520 | $ | 421,067 | (55) | % | |||||||||||||||||||||||
ADRENALIN® | 26,774 | 29,977 | (11) | % | 60,597 | 59,414 | 2 | % | |||||||||||||||||||||||||||
Other Sterile Injectables (1) | 60,767 | 67,502 | (10) | % | 111,082 | 122,864 | (10) | % | |||||||||||||||||||||||||||
| Total Sterile Injectables (2) | $ | 123,171 | $ | 294,600 | (58) | % | $ | 363,199 | $ | 603,345 | (40) | % | |||||||||||||||||||||||
__________
(1)Products included within Other Sterile Injectables include ertapenem for injection, APLISOL® and others.
(2)Individual products presented above represent the top two performing products within the Sterile Injectables segment for either the three or six months ended June 30, 2022 and/or any product having revenues in excess of $25 million during any completed quarterly period in 2022 or 2021.
The decreases in VASOSTRICT® revenues for the three and six months ended June 30, 2022 were primarily driven by decreases to both net price and volume, which were primarily attributable to the impact of generic competition as well as lower overall market demand as COVID-19-related hospital utilization levels declined. During the first quarter of 2022, multiple competitive generic alternatives to VASOSTRICT® were launched, beginning with a generic that was launched at risk and began shipping toward the end of January 2022. Since then, additional competitive alternatives have entered the market, including authorized generics. These launches began to significantly impact both Endo’s market share and product price toward the middle of the first quarter of 2022, and the effects of competition have since increased and are likely to continue to increase throughout 2022 and beyond. Additionally, beginning late in the first quarter of 2022, COVID-19-related hospital utilization levels began to decline, resulting in significantly decreased market volumes for both branded and competing generic alternatives to VASOSTRICT®. As a result of these factors, we experienced a period of significant VASOSTRICT® vial destocking during the second quarter of 2022, which resulted in significant reductions to VASOSTRICT® revenues in this period. In February 2022, we launched VASOSTRICT® in a ready-to-use bottle, representing the first and only ready-to-use formulation of the drug. While we have seen some market conversion to the bottle since its launch, the factors described above have had and could continue to have a material adverse effect on our business, financial condition, results of operations and cash flows. For additional information, refer to Note 14. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 under the heading “VASOSTRICT® Related Matters.”
The decrease in ADRENALIN® revenues for the three months ended June 30, 2022 was primarily attributable to decreased volume. The increase in ADRENALIN® revenues for the six months ended June 30, 2022 was primarily attributable to increased net price, partially offset by decreased volume.
The decreases in Other Sterile Injectables revenues for the three and six months ended June 30, 2022 were primarily attributable to competitive pressures across multiple products within the product portfolio.
Generic Pharmaceuticals. The increases in Generic Pharmaceuticals revenues for the three and six months ended June 30, 2022 were primarily attributable to revenues from varenicline tablets (our generic version of Pfizer Inc.’s Chantix®), which launched in September 2021, partially offset by competitive pressures on certain generic products. The timing and extent to which we could face competition on varenicline tablets cannot be predicted with certainty; however, competition could occur at any time, including in the near term, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Segment adjusted income from continuing operations before income tax. The following table displays our Segment adjusted income from continuing operations before income tax (the measure we use to evaluate segment performance) by reportable segment for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
| Three Months Ended June 30, | % Change | Six Months Ended June 30, | % Change | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||
| Branded Pharmaceuticals | $ | 88,613 | $ | 101,659 | (13) | % | $ | 166,279 | $ | 195,428 | (15) | % | |||||||||||||||||||||||
| Sterile Injectables | $ | 68,397 | $ | 226,983 | (70) | % | $ | 259,651 | $ | 469,622 | (45) | % | |||||||||||||||||||||||
| Generic Pharmaceuticals | $ | 83,337 | $ | 20,922 | NM | $ | 149,719 | $ | 55,026 | NM | |||||||||||||||||||||||||
| International Pharmaceuticals | $ | 8,472 | $ | 10,102 | (16) | % | $ | 12,853 | $ | 17,573 | (27) | % | |||||||||||||||||||||||
__________
NM indicates that the percentage change is not meaningful or is greater than 100%.
Branded Pharmaceuticals. The decreases in Segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2022 were primarily attributable to increased costs associated with our investment in consumer marketing efforts supporting XIAFLEX® and certain legal matters.
Sterile Injectables. The decreases in Segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2022 were primarily attributable to the gross margin effect of the decreased revenues further described above.
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Generic Pharmaceuticals. The increases in Segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2022 were primarily attributable to the gross margin effects of the increased revenues further described above and favorable changes in product mix.
International Pharmaceuticals. The decreases in Segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2022 were primarily attributable to changes in product mix.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is cash generated from operations. Our principal liquidity requirements are primarily for working capital for operations, licenses, capital expenditures, mergers and acquisitions (including upfront and milestone payments to third parties), contingent liabilities, debt service payments, income taxes and litigation-related matters. The Company’s working capital was $1,018.2 million at June 30, 2022 compared to working capital of $1,084.6 million at December 31, 2021. The amounts at June 30, 2022 and December 31, 2021 include restricted cash and cash equivalents associated with litigation-related matters, including $68.2 million and $78.4 million, respectively, held in QSFs for mesh- and/or opioid-related matters. Although these amounts in QSFs are included in working capital, they are required to be used for legal settlements.
Cash and cash equivalents, which primarily consisted of bank deposits and money market accounts, totaled $1,191.6 million at June 30, 2022 compared to $1,507.2 million at December 31, 2021.
Our business is exposed to a variety of material risks as further described herein and in the Annual Report. For example, we may face decreased revenues as a result of COVID-19 and, to the extent COVID-19 has resulted in any increase to our Cash and cash equivalents, including as a result of any increase in revenues, such increase could be temporary. We may face unexpected costs in connection with our business operations, our ongoing and future legal proceedings, governmental investigations and other contingent liabilities, including potential costs related to settlements and judgments, as well as legal defense costs, and the implementation of our COVID-19 related policies and procedures. As a result of the possibility or occurrence of an unfavorable outcome with respect to any legal proceeding, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning may ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Pursuant to such remedial measures, we currently expect to seek protection from our creditors under Chapter 11 of the Bankruptcy Code, which could occur imminently and would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern, as further described herein and in Part I, Item 1A. “Risk Factors” in the Annual Report. Additionally, the agreements relating to our outstanding indebtedness contain certain covenants and events of default. As further discussed in Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1, if one or more events of default were to occur under any of the agreements relating to our outstanding indebtedness, including without limitation as a result of us not making interest payments by the end of any applicable grace periods and/or us issuing audited financial statements containing an audit opinion with going concern or similar qualifications or exceptions, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to become due and payable immediately, terminate all commitments to extend further credit, foreclose against assets comprising the collateral securing or otherwise supporting the debt and pursue other legal remedies, and our assets and cash flows may be insufficient to fully repay borrowings under our outstanding debt instruments if this were to occur. On a longer-term basis, we may not be able to accurately predict the effect of certain developments on our sales and gross margins, such as the degree of market acceptance, patent protection and exclusivity of our products, pricing pressures (including those due to the impact of competition), the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop, receive approval for and successfully launch our product candidates. Furthermore, we may not be successful in implementing, or may face unexpected changes or expenses in connection with, our strategic direction, including the potential for opportunistic corporate development transactions. As further discussed in Note 1. Basis of Presentation of the Condensed Consolidated Financial Statements included in Part I, Item 1, management has concluded that there is substantial doubt regarding our ability to continue as a going concern. Any of the above could have a material adverse effect on our business, financial condition, results of operations and cash flows and require us to seek additional sources of liquidity and capital resources as described below.
To the extent our operating cash flows, together with our cash, cash equivalents, restricted cash and restricted cash equivalents, become insufficient to cover our liquidity and capital requirements, including funds for any future acquisitions and other corporate transactions, we may be required to seek third-party financing, including additional draws on our Revolving Credit Facility or additional credit facilities, and/or engage in one or more capital market transactions. There can be no assurance that we would be able to obtain any required financing on a timely basis or at all. Further, lenders and other financial institutions could require us to agree to more restrictive covenants, grant liens on our assets as collateral (resulting in an increase in our total outstanding secured indebtedness) and/or accept other terms that are not commercially beneficial to us in order to obtain financing. Such terms could further restrict our operations and exacerbate any impact on our results of operations and liquidity that may result from any of the factors described above or other factors.
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We may also, from time to time, seek to enter into certain transactions to reduce our leverage and/or interest expense and/or to extend the maturities of our outstanding indebtedness or obtain greater covenant flexibility. Such transactions could include, for example, transactions to exchange existing indebtedness for our ordinary shares or other debt (including exchanges of unsecured debt for secured debt), to issue equity (including convertible securities) or to repurchase, redeem, exchange or refinance our existing indebtedness (including the Credit Agreement) as well as our outstanding senior notes. Any of these transactions could impact our liquidity or results of operations, including requiring us to take charges. Further, the terms of any such transactions, including the amount of any exchange consideration and terms of any refinanced debt, could also be less favorable than we have been able to obtain in the past.
We may also require additional financing to fund our future operational needs or for future corporate transactions, including acquisitions. We have historically had broad access to financial markets that provide liquidity; however, we cannot be certain that funding will be available to us in the future on terms acceptable to us, or at all. Any issuances of equity securities or convertible securities, in connection with an acquisition or otherwise, could have a dilutive effect on the ownership interest of our current shareholders and may adversely impact net income per share in future periods. An acquisition may be accretive or dilutive and, by its nature, involves numerous risks and uncertainties. As a result of acquisition efforts, if any, we are likely to experience significant charges to earnings for merger and related expenses (whether or not the acquisitions are consummated) that may include transaction costs, closure costs or costs of restructuring activities.
Indebtedness. The Company and certain of its subsidiaries are party to the Credit Agreement governing the Credit Facilities and the indentures governing our various senior secured and senior unsecured notes. As of June 30, 2022, approximately $2.0 billion was outstanding under the Term Loan Facility, approximately $0.3 billion was outstanding under the Revolving Credit Facility and approximately $5.9 billion was outstanding under the senior secured and senior unsecured notes.
After giving effect to net borrowings under the Revolving Credit Facility and issued and outstanding letters of credit, approximately $0.6 billion of remaining credit was available under the Revolving Credit Facility at June 30, 2022. Additionally, the Company’s outstanding debt agreements contain a number of restrictive covenants, including certain limitations on the Company’s ability to incur additional indebtedness.
Refer to Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and Note 15. Debt in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report for additional information about our indebtedness, including our debt financing transactions and information about maturities, interest rates, security, priority, events of default and our compliance with covenants.
Credit ratings. The Company’s corporate credit ratings assigned by Moody’s Investors Service and Standard & Poor’s are Caa3 with a stable outlook and CC, respectively. No report of any rating agency is being incorporated by reference herein.
Working capital. The components of our working capital and our liquidity at June 30, 2022 and December 31, 2021 are below (dollars in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Total current assets | $ | 2,199,904 | $ | 2,714,586 | |||||||
| Less: total current liabilities | 1,181,672 | 1,629,962 | |||||||||
| Working capital | $ | 1,018,232 | $ | 1,084,624 | |||||||
| Current ratio (total current assets divided by total current liabilities) | 1.9:1 | 1.7:1 | |||||||||
Net working capital decreased by $66.4 million from December 31, 2021 to June 30, 2022. During this period, working capital benefited from the favorable impacts to net current assets resulting from revenues and gross margins, which are further described above. This benefit was more than offset by, among other things, the following current period activity: (i) Capital expenditures, excluding capitalized interest, net of Proceeds from the U.S. Government Agreement, of $40.2 million; (ii) a $20.4 million decrease to working capital resulting from certain net charges related to litigation-related and other contingencies, which are further described in Note 14. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report; (iii) Acquired in-process research and development charges of $67.9 million and (iv) certain expenses incurred for restructuring and other cost reduction initiatives.
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The following table summarizes our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (in thousands):
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash flow provided by (used in): | |||||||||||
| Operating activities | $ | 67,903 | $ | 398,816 | |||||||
| Investing activities | (111,746) | (45,050) | |||||||||
| Financing activities | (196,950) | (65,747) | |||||||||
| Effect of foreign exchange rate | (452) | 711 | |||||||||
| Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents | $ | (241,245) | $ | 288,730 | |||||||
Operating activities. Net cash provided by operating activities represents the cash receipts and cash disbursements from all of our activities other than investing activities and financing activities. Changes in cash from operating activities reflect, among other things, the timing of cash collections from customers, payments to suppliers, managed care organizations, government agencies, collaborative partners and employees in the ordinary course of business, as well as the timing and amount of cash payments and/or receipts related to interest, litigation-related matters, restructurings, income taxes and certain other items.
The $330.9 million decrease in Net cash provided by operating activities during the six months ended June 30, 2022 compared to the prior year period was primarily due to reduced VASOSTRICT® revenues and increased payments for opioid-related matters, partially offset by the fact that, during the second quarter of 2022, we elected to enter a 30-day grace period related to an interest payment of approximately $38 million that was originally due to be paid on June 30, 2022, but, as further described in Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1, was not actually paid until July 2022. It is possible that operating cash flows could decline in the future as a result of, among other things, cash outflows for litigation-related matters and further reductions in VASOSTRICT® revenues.
Investing activities. The $66.7 million increase in Net cash used in investing activities during the six months ended June 30, 2022 compared to the prior year period was primarily attributable to: (i) an increase in Acquisitions, including in-process research and development, net of cash and restricted cash acquired of $89.5 million and (ii) an increase in Capital expenditures, excluding capitalized interest of $6.2 million. The changes were partially offset by: (i) an increase in Proceeds from sale of business and other assets, net of $19.8 million and (ii) an increase in Proceeds from the U.S. Government Agreement of $7.3 million.
Financing activities. During the six months ended June 30, 2022, Net cash used in financing activities primarily related to: (i) Repayments of notes of $180.3 million and (ii) Repayments of term loans of $10.0 million.
During the six months ended June 30, 2021, Net cash used in financing activities primarily related to the March 2021 Refinancing Transactions, including the payment of approximately $42.6 million of associated costs and fees. The remaining amount primarily related to Payments of tax withholding for restricted shares of $14.1 million and Repayments of term loans subsequent to the March 2021 Refinancing Transactions of $5.0 million.
Cash Requirements for Contractual and Other Obligations. As of June 30, 2022, there were no material changes in our cash requirements for contractual and other obligations from those disclosed in the Annual Report except for those related to: (i) our indebtedness as further described in Note 13. Debt of the Condensed Consolidated Financial Statements included in Part I, Item 1 and (ii) the transactions that are further described in Note 10. License, Collaboration and Asset Acquisition Agreements of the Condensed Consolidated Financial Statements included in Part I, Item 1.
Fluctuations. As further discussed above, our quarterly results have fluctuated in the past and may continue to fluctuate. Additionally, a substantial portion of our total revenues are through three wholesale drug distributors who in turn supply our products to pharmacies, hospitals and physicians. Accordingly, we are potentially subject to a concentration of credit risk with respect to our trade receivables.
Inflation. We do not believe that inflation had a material adverse effect on our financial statements for the periods presented. However, materials, equipment and labor shortages, shipping, logistics and other delays and other supply chain and manufacturing disruptions, whether due to the evolving effects of the COVID-19 pandemic or otherwise, continue to make it more difficult and costly for us to obtain raw materials, supplies or services from third parties, to manufacture our own products and to pursue clinical development activities. Economic or political instability or disruptions, such as the conflict in Ukraine, could negatively affect our supply chain or increase our costs. If these types of events or disruptions continue to occur, they could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Off-balance sheet arrangements. We have no off-balance sheet arrangements.
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CRITICAL ACCOUNTING ESTIMATES
Updates to our critical accounting estimates since December 31, 2021 are detailed below. For additional discussion of the Company’s critical accounting estimates, see “Critical Accounting Estimates” in Item 7 of the Annual Report.
We have not made any substantial changes to our methodology used in our impairment tests since our previous assessment. Determination of the fair value of a reporting unit is a matter of judgment and involves the use of estimates and assumptions, which are based on management’s best estimates at the time. The use of different assumptions would increase or decrease our estimated discounted future cash flows and the resulting estimated fair values of our reporting units.
As further described in Note 9. Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1, we performed certain goodwill impairment tests during the second quarter of 2022. The discount rates used in these tests were 13.5% and 18.5% for the Branded Pharmaceuticals and Sterile Injectables reporting units, respectively, compared to 14.5% and 11.0%, respectively, used in the October 1, 2021 goodwill tests. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. As a result of the June 30, 2022 tests, we recorded a pre-tax non-cash goodwill impairment charge of $1,748.0 million for our Sterile Injectables reporting unit and determined there was no impairment of goodwill for our Branded Pharmaceuticals reporting unit, for which the estimated fair value exceeded the carrying amount by more than 10%. A 50 basis point increase in the assumed discount rate utilized in the Branded Pharmaceuticals test would not have changed the outcome of that test; however, a 50 basis point increase in the assumed discount rate utilized in the Sterile Injectables test would have increased the goodwill impairment charge for this reporting unit by approximately $50 million.
As of June 30, 2022, our Branded Pharmaceuticals and Sterile Injectables reporting units had remaining goodwill of approximately $0.8 billion and $0.6 billion, respectively, and the carrying amount of our other intangible assets totaled approximately $2.1 billion. As a result, if the assumptions used in our impairment tests change, it is possible that additional impairment charges could be recorded in future periods and that these charges could be material.
Each of our segments is subject to risks and uncertainties related to future competition. For example, our Sterile Injectables segment has experienced significant revenue declines resulting from competitive generic alternatives to VASOSTRICT® that were introduced beginning in late January 2022 and may continue to be introduced. If actual results for our segments differ from our expectations, as a result of competition or otherwise, and/or if we make changes to our assumptions for these segments relating to competition or any other risks or uncertainties, the estimated future revenues and cash flows could be significantly reduced, which could ultimately result in asset impairment charges that may be material. For example, the discounted cash flows used in the most recent goodwill impairment test for our Sterile Injectables reporting unit reflected assumptions related to: (i) the overall market size for both branded and generic versions of VASOSTRICT®, including anticipated changes in demand driven in part by changes in COVID-19-related hospital utilization; (ii) the timing and extent of potential competitive impacts on VASOSTRICT® revenues; (iii) the extent and speed of any conversion of the market for VASOSTRICT® to the RTU pre-mix VASOSTRICT® bottle we launched in February 2022; and (iv) various assumptions regarding our pipeline Sterile Injectables products, including probability of success, launch timing and the competitive landscape at the time of planned launch, among other factors. Future performance is subject to many factors that are outside of our control and subject to significant uncertainty and are therefore inherently difficult to predict. Actual results going forward could differ significantly from our expectations and, if unfavorable, could result in interim impairment tests and additional impairment charges which could be material. Similarly, market-based factors such as rising interest rates could continue to impact our determination of fair value in the future, which could also result in or increase future impairment charges.
Additionally, we are continuing to closely monitor the impact of COVID-19 on our business. It is possible that COVID-19 could result in reductions to the estimated fair values of our goodwill and other intangible assets, which could ultimately result in asset impairment charges that may be material.
Furthermore, as further discussed in Note 1. Basis of Presentation of the Condensed Consolidated Financial Statements included in Part I, Item 1, as a result of the possibility or occurrence of an unfavorable outcome with respect to any legal proceeding, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning may ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Any such action could ultimately result in, among other things, asset impairment charges that may be material.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2. Summary of Significant Accounting Policies of the Condensed Consolidated Financial Statements included in Part I, Item 1, as applicable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in the financial markets, including interest rates and foreign currency exchange rates.
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Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable-rate indebtedness associated with our Credit Facilities. At June 30, 2022 and December 31, 2021, the aggregate principal amounts of such variable-rate indebtedness were $2,252.2 million and $2,262.2 million, respectively. Borrowings under the Credit Facilities may from time to time bear interest at variable rates, in certain cases subject to a floor. At June 30, 2022 and December 31, 2021, a hypothetical 1% increase in the applicable rate over the floor would have resulted in $22.5 million and $22.6 million, respectively, of incremental interest expense (representing the annual rate of expense) related to our variable-rate debt borrowings.
To the extent that we utilize additional amounts under the Revolving Credit Facility or otherwise increase the amount of our variable-rate indebtedness, we will be exposed to additional interest rate risk.
As of June 30, 2022 and December 31, 2021, we had no other assets or liabilities with significant interest rate sensitivity.
Foreign Currency Exchange Rate Risk
We operate and transact business in various foreign countries and are therefore subject to risks associated with foreign currency exchange rate fluctuations. The Company manages this foreign currency risk, in part, through operational means including managing foreign currency revenues in relation to same-currency costs and foreign currency assets in relation to same-currency liabilities. The Company is also exposed to potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans. Additionally, certain of the Company’s subsidiaries maintain their books of record in currencies other than their respective functional currencies. These subsidiaries’ financial statements are remeasured into their respective functional currencies. Such remeasurement adjustments could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The assets and liabilities of certain of our international subsidiaries are also translated to U.S. dollars at period-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in Accumulated other comprehensive loss. Gains and losses on foreign currency transactions and short-term intercompany receivables from foreign subsidiaries are included in Other (income) expense, net in the Condensed Consolidated Statements of Operations. Refer to Note 17. Other (Income) Expense, Net of the Condensed Consolidated Financial Statements included in Part I, Item 1 for the amounts of Foreign currency (gain) loss, net.
Based on the Company’s significant foreign currency denominated intercompany loans, we separately considered the hypothetical impact of a 10% change in the underlying currencies of our foreign currency denominated intercompany loans, relative to the U.S. dollar, at June 30, 2022 and December 31, 2021. A 10% change at June 30, 2022 and December 31, 2021 would have resulted in approximately $11 million in incremental foreign currency losses on such dates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The disclosures under Note 14. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 are incorporated into this Part II, Item 1 by reference.
Item 1A. Risk Factors
For a discussion of our risk factors, see the information in Part I, Item 1A. “Risk Factors” in the Annual Report and Part II, Item 1A. “Risk Factors” of our First Quarter 2022 Form 10-Q. There have been no material changes to our risk factors from those described therein except as set forth below.
The uncertainty surrounding, among other things, our ability to reach a resolution with certain of our financial creditors and opioid-related plaintiffs in connection with ongoing restructuring and settlement discussions has raised substantial doubt about our ability to continue as a going concern. We currently expect to seek protection from our creditors under Chapter 11 of the Bankruptcy Code or an involuntary petition for bankruptcy may be filed against us, either of which could have a material adverse effect on our business, financial condition, results of operations and cash flows and could place our shareholders at significant risk of losing all of their investment in our ordinary shares.
As we have previously disclosed, our business is exposed to a variety of material risks, including opioid-related claims, other lawsuits and significant existing indebtedness. As a result of these uncertainties, management has concluded that there is substantial doubt regarding our ability to continue as a going concern. We have been working with our external advisors to explore a range of options and have been engaging in dialogue with certain financial creditors and litigation claimants, together with their advisors. We remain in constructive negotiations with an ad hoc group of first lien creditors, among other parties, and, in light of the progress to date, we currently expect that these negotiations will likely result in a pre-arranged filing under Chapter 11 of the U.S. Bankruptcy Code by Endo International plc and substantially all of its subsidiaries, which could occur imminently. There can be no assurance of such an outcome. Any of the circumstances above would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern, including, but not limited to, by causing increased difficulty obtaining and maintaining commercial relationships on competitive terms with customers, suppliers and other counterparties; increased difficulty retaining and motivating key employees, as well as attracting new employees; diversion of management’s time and attention to dealing with bankruptcy and restructuring activities rather than focusing exclusively on business operations; incurrence of substantial costs, fees and other expenses associated with bankruptcy proceedings; and loss of ability to maintain or obtain sufficient financing sources for operations or to fund any reorganization plan and meet future obligations.
We would, in that event, also be subject to risks and uncertainties caused by the actions of creditors and other third parties with interests that may be inconsistent with our plans. For example, a bankruptcy filing could ultimately give rise to one or more events of default under the Credit Agreement governing our Credit Facilities and/or the indentures governing certain of our senior notes. Additionally, pursuant to the terms of the Credit Agreement, even if we do not ultimately declare bankruptcy, in the event we issue audited financial statements in the future that contain an audit opinion with going concern or similar qualifications or exceptions, it could result in, among other things, an event of default with respect to our Credit Facilities.
If one or more events of default were to occur under any of the agreements relating to our outstanding indebtedness, including without limitation as a result of us not making interest payments by the end of any applicable grace periods and/or us issuing audited financial statements containing an audit opinion with going concern or similar qualifications or exceptions, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to become due and payable immediately, terminate all commitments to extend further credit, foreclose against assets comprising the collateral securing or otherwise supporting the debt and pursue other legal remedies. Additionally, the instruments governing our debt contain cross-default or cross-acceleration provisions that may cause all of the debt issued under such instruments to become immediately due and payable as a result of a default under an unrelated debt instrument. Our assets and cash flows may be insufficient to fully repay borrowings under our outstanding debt instruments if the obligations thereunder were accelerated upon one or more events of default.
All of our indebtedness and litigation liabilities are senior to the existing ordinary shares in our capital structure. As a result, we believe that seeking bankruptcy court protection under a Chapter 11 proceeding could cause our ordinary shares to be canceled, resulting in no recovery for holders of our ordinary shares.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no purchases or sales of equity securities by the Company during the three months ended June 30, 2022.
Item 3. Defaults Upon Senior Securities
None.
50
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On August 9, 2022, the Company announced that it completed a calculation indicating that the net assets of Endo International plc, on an unconsolidated standalone basis and in accordance with the Companies Act 2014 and Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland, are half or less of the amount of its called-up share capital. Pursuant to Section 1111 of the Irish Companies Act 2014, where the net assets of a public limited company (PLC) are half or less of the amount of the PLC’s called-up share capital, the directors of the PLC shall, not later than 28 days after the earliest day on which that fact is known to a director of the PLC (the relevant day), duly convene an extraordinary general meeting of the PLC for the purpose of considering whether any, and if so what, measures should be taken to deal with the situation. In compliance with Section 1111, the Company will convene an extraordinary general meeting not later than 28 days after the relevant day for such purpose. The extraordinary general meeting will be convened for a date not later than 56 days after the relevant day.
Item 6. Exhibits
| Incorporated by Reference from: | ||||||||||||||
| Number | Description | File Number | Filing Type | Filing Date | ||||||||||
| 31.1 | Not applicable; filed herewith | |||||||||||||
| 31.2 | Not applicable; filed herewith | |||||||||||||
| 32.1 | Not applicable; furnished herewith | |||||||||||||
| 32.2 | Not applicable; furnished herewith | |||||||||||||
| 101.INS | iXBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | Not applicable; submitted herewith | ||||||||||||
| 101.SCH | iXBRL Taxonomy Extension Schema Document | Not applicable; submitted herewith | ||||||||||||
| 101.CAL | iXBRL Taxonomy Extension Calculation Linkbase Document | Not applicable; submitted herewith | ||||||||||||
| 101.DEF | iXBRL Taxonomy Extension Definition Linkbase Document | Not applicable; submitted herewith | ||||||||||||
| 101.LAB | iXBRL Taxonomy Extension Label Linkbase Document | Not applicable; submitted herewith | ||||||||||||
| 101.PRE | iXBRL Taxonomy Extension Presentation Linkbase Document | Not applicable; submitted herewith | ||||||||||||
| 104 | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101 | Not applicable; submitted herewith | ||||||||||||
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENDO INTERNATIONAL PLC | |||||
| (Registrant) | |||||
| /S/ BLAISE COLEMAN | |||||
| Name: | Blaise Coleman | ||||
| Title: | President and Chief Executive Officer | ||||
| (Principal Executive Officer) | |||||
| /S/ MARK T. BRADLEY | |||||
| Name: | Mark T. Bradley | ||||
| Title: | Executive Vice President, Chief Financial Officer | ||||
| (Principal Financial Officer) | |||||
Date: August 9, 2022
52
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Blaise Coleman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Endo International plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /S/ BLAISE COLEMAN | |||||
Blaise Coleman | |||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||
| Date: | August 9, 2022 | ||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Mark T. Bradley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Endo International plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /S/ MARK T. BRADLEY | |||||
Mark T. Bradley | |||||
| Executive Vice President, Chief Financial Officer (Principal Financial Officer) | |||||
| Date: | August 9, 2022 | ||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Blaise Coleman, as President and Chief Executive Officer of Endo International plc (the Company), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2022 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /S/ BLAISE COLEMAN | |||||||||||
| Name: | Blaise Coleman | ||||||||||
| Title: | President and Chief Executive Officer (Principal Executive Officer) | ||||||||||
Date: August 9, 2022
A signed original of this written statement required by Section 906 has been provided to, and will be retained by, Endo International plc and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark T. Bradley, as Chief Financial Officer of Endo International plc (the Company), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2022 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /S/ MARK T. BRADLEY | |||||||||||
| Name: | Mark T. Bradley | ||||||||||
| Title: | Executive Vice President, Chief Financial Officer (Principal Financial Officer) | ||||||||||
Date: August 9, 2022
A signed original of this written statement required by Section 906 has been provided to, and will be retained by, Endo International plc and furnished to the Securities and Exchange Commission or its staff upon request.
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