NOTES TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. DESCRIPTION OF BUSINESS
AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a biopharmaceutical company focused on developing and delivering important therapeutics, conducting clinical research in areas of unmet need and creating education and support programs for the patients and families we serve. Our products support the health of patients in the areas of maternal health, anemia management and cancer supportive care, including Makena
®
(hydroxyprogesterone caproate injection), Feraheme
®
(ferumoxytol) for intravenous (“IV”) use and MuGard
®
Mucoadhesive Oral Wound Rinse. Through services related to the preservation of umbilical cord blood stem cell and cord tissue units (the “CBR Services”) operated through Cord Blood Registry
®
(“CBR”), we also help families to preserve newborn stem cells, which are used today in transplant medicine for certain cancers and blood, immune and metabolic disorders, and have the potential to play a valuable role in the ongoing development of regenerative medicine.
Throughout this Quarterly Report on Form 10-Q, AMAG Pharmaceuticals, Inc. and our consolidated subsidiaries are collectively referred to as “the Company,” “AMAG,” “we,” “us,” or “our.”
B. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and results of operations of the Company for the interim periods presented. Such adjustments consisted only of normal recurring items. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
In accordance with GAAP for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Our accounting policies are described in the Notes to the Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2015
(our “Annual Report”). Interim results are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our Annual Report.
Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Our results of operations for the
three and nine
months ended
September 30, 2016
, include the results of CBR, which we acquired in August 2015. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used to determine amounts and values of, but are not limited to: revenue recognition related to product sales and services revenue; product sales allowances and accruals; allowance for doubtful accounts; investments; inventory; acquisition date fair value and subsequent fair value estimates used to assess impairment of long-lived assets, including goodwill, in-process research and development (“IPR&D”) and other intangible assets; contingent consideration; debt obligations; certain accrued liabilities, including clinical trial accruals and restructuring liabilities; income taxes and equity-based compensation expense. Actual results could differ materially from those estimates.
Concentrations and Significant Customer Information
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, investments, and accounts receivable. We currently hold our excess cash primarily in institutional money market funds, corporate debt securities, U.S. treasury and government agency securities, commercial paper, certificates of deposit and municipal securities. As of
September 30, 2016
, we did not have a material concentration in any single investment.
Our operations are located entirely within the U.S. We focus primarily on developing, manufacturing, and commercializing
Makena
and
Feraheme
and marketing and selling the CBR Services. We perform ongoing credit evaluations of our product sales customers and generally do not require collateral. The following table sets forth customers who represented
10%
or more of our total revenues for the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
AmerisourceBergen Drug Corporation
|
20
|
%
|
|
28
|
%
|
|
22
|
%
|
|
25
|
%
|
Caremark LLC (Specialty Pharmacy)
|
10
|
%
|
|
<10
|
%
|
|
10
|
%
|
|
—
|
%
|
McKesson Corporation
|
<10
|
%
|
|
13
|
%
|
|
<10
|
%
|
|
11
|
%
|
In addition, approximately
17%
of our total revenues for the
nine
months ended
September 30, 2015
were principally related to deferred
Feraheme
revenue recognized in connection with the termination of our license, development and commercialization agreement (the “Takeda Agreement”) with Takeda Pharmaceutical Company Limited (“Takeda”), which is headquartered in Japan, and which revenues were thus generated from outside the U.S. Substantially all of the revenues generated during the
nine
months ended
September 30, 2016
were generated within the U.S.
Our net accounts receivable primarily represented amounts due for products sold directly to wholesalers, distributors, and specialty pharmacies and amounts due for CBR Services sold directly to consumers. Accounts receivable for our products and services are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts.
Customers which represented greater than
10%
of our accounts receivable balance as of
September 30, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
AmerisourceBergen Drug Corporation
|
12
|
%
|
|
43
|
%
|
Caremark LLC (Specialty Pharmacy)
|
10
|
%
|
|
<10
|
%
|
We are currently dependent on a single supplier for
Feraheme
drug substance (produced in two separate facilities) and finished drug product. In addition, we rely on single sources for certain materials required to support the CBR Services. We would be exposed to a significant loss of revenue from the sale of our products and services if our suppliers and/or manufacturers could not fulfill demand for any reason.
Revenue Recognition
Our primary sources of revenue during the reporting periods were: (a) product revenues from
Makena
and
Feraheme
; (b) service revenues associated with the CBR Services; and (c) license fees, collaboration and other revenues, which primarily included milestone payments received from our collaboration agreements, royalties received from our license agreements, and international product revenues of
Feraheme
derived from our former collaboration agreement with Takeda. Revenue is recognized when the following criteria are met:
|
|
•
|
Persuasive evidence of an arrangement exists;
|
|
|
•
|
Delivery of product has occurred or services have been rendered;
|
|
|
•
|
The sales price charged is fixed or determinable; and
|
|
|
•
|
Collection is reasonably assured.
|
Product Revenue
Our U.S. product sales, which primarily represented revenues from
Makena
and
Feraheme
for the
three and nine
months ended
September 30, 2016
and
2015
, were offset by provisions for allowances and accruals as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Gross U.S. product sales
|
$
|
201,303
|
|
|
$
|
145,131
|
|
|
$
|
530,076
|
|
|
$
|
407,238
|
|
Provision for U.S. product sales allowances and accruals:
|
|
|
|
|
|
|
|
|
|
|
|
Contractual adjustments
|
61,504
|
|
|
41,851
|
|
|
161,023
|
|
|
116,236
|
|
Governmental rebates
|
24,022
|
|
|
14,363
|
|
|
60,729
|
|
|
40,018
|
|
Total provision for U.S. product sales allowances and accruals
|
85,526
|
|
|
56,214
|
|
|
221,752
|
|
|
156,254
|
|
U.S. product sales, net
|
$
|
115,777
|
|
|
$
|
88,917
|
|
|
$
|
308,324
|
|
|
$
|
250,984
|
|
We recognize U.S. product sales net of certain allowances and accruals in our condensed consolidated statement of operations at the time of sale. Our contractual adjustments include provisions for returns, pricing and prompt payment discounts, as well as wholesaler distribution fees, rebates to hospitals that qualify for 340B pricing, and volume-based and other commercial rebates. Governmental rebates relate to our reimbursement arrangements with state Medicaid programs.
We did not materially adjust our product sales allowances and accruals during the
three and nine
months ended
September 30, 2016
. During the nine months ended
September 30, 2015
, we reduced our
Makena
related Medicaid and chargeback reserves, which were initially recorded at the time we consummated our acquisition of Lumara Health Inc. (“Lumara Health”), which acquisition was completed on November 12, 2014 (the “Lumara Health Acquisition Date”), by
$5.3 million
and
$1.9 million
, respectively. These adjustments were recorded to goodwill during the quarter ended
September 30, 2015
, as it was within one year of the Lumara Health Acquisition Date. If we determine in future periods that our actual experience is not indicative of our expectations, if our actual experience changes, or if other factors affect our estimates, we may be required to adjust our allowances and accruals estimates, which would affect our net product sales in the period of the adjustment and could be significant.
Multiple Element Arrangements
For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. We determine the selling price to be used for allocating revenue to deliverables as follows: (a) vendor specific objective evidence; (b) third-party evidence of selling price and (c) the best estimate of the selling price. Vendor specific objective evidence generally exists only when we sell the deliverable separately and it is the price actually charged by us for that deliverable. Any discounts given to the customer are allocated by applying the relative selling price method.
Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in our condensed consolidated balance sheets. Deferred revenue associated with our service revenues includes (a) amounts collected in advance of unit processing and (b) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenues.
Service Revenue
Our service revenues for the CBR Services include the following
two
deliverables: (a) enrollment, including the provision of a collection kit and cord blood and cord tissue unit processing, which are delivered at the beginning of the relationship (the “processing services”), with revenue for this deliverable recognized after the collection and successful processing of the cord blood and cord tissue; and (b) the storage of newborn cord blood and cord tissue units (the “storage services”), for either an annual fee or a prepayment of
18
years or the lifetime of the newborn donor (the “lifetime option”), with revenue for this deliverable recognized ratably over the applicable storage period. For the lifetime option, storage fees are not charged during the lifetime of the newborn donor. However, if the newborn donor dies and his/her legal guardian chooses to continue to store the newborn stem cells and/or cord tissue, the number of remaining years of storage covered by the lifetime option without additional charge is calculated by taking the average of male and female life expectancies based on lifetime actuarial tables published by the Social Security Administration in effect at the time of the newborn’s birth and subtracting the age at death. As there are other vendors who provide processing services and storage services at separately stated list prices, the processing services and storage services, including the first year storage, each have standalone value to the customer, and therefore represent separate deliverables. The selling price for the processing services is estimated based on the best estimate of selling price because we do not have vendor specific objective evidence or third-party evidence of selling price for these elements. The selling price for the storage services is determined based on vendor specific objective evidence as we have standalone renewals to support the selling price.
Reclassifications
Certain amounts in the prior period have been reclassified in order to conform to the current period presentation. In accordance with Accounting Standards Update (“ASU”) No. 2015-3,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
, which we adopted in the first quarter of 2016, we reclassified total debt issuance costs related to our outstanding debt obligations from other long-term assets to the carrying amount of our debt, as a direct deduction, in our condensed consolidated balance sheets as of December 31, 2015. See Note S, “
Recently Issued and Proposed Accounting Pronouncements
” for additional information.
C. BUSINESS COMBINATIONS
As part of our strategy to expand our product and service portfolio, in August 2015, we acquired CBR and the CBR Services and in November 2014, we acquired Lumara Health and its product
Makena
. In addition, in June 2013, we entered into a license agreement (the “MuGard License Agreement”) with Abeona Therapeutics, Inc. (“Abeona”) pursuant to which we acquired the U.S. commercial rights to
MuGard
for the management of oral mucositis and stomatitis (the “MuGard Rights”).
CBR Acquisition
On August 17, 2015 (the “CBR Acquisition Date”), we acquired CBR for
$700.0 million
in cash consideration, subject to estimated working capital, indebtedness and other adjustments. We believe CBR is a strong strategic fit for our growing business and offers a unique opportunity to reach a broader population of expectant mothers who may benefit from our product offerings in the maternal health space, including
Makena.
We accounted for the acquisition of CBR as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price of an acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. We have allocated the purchase price to the net tangible and intangible assets acquired and liabilities assumed, based on available information and various assumptions we believed were reasonable, with the remaining purchase price recorded as goodwill.
The following table summarizes the components of the total purchase price paid for CBR, as adjusted for the final net working capital, indebtedness and other adjustments (in thousands):
|
|
|
|
|
|
Total Acquisition
Date Fair Value
|
Cash consideration
|
$
|
700,000
|
|
Estimated working capital, indebtedness and other adjustments
|
(17,837
|
)
|
Purchase price paid at closing
|
682,163
|
|
Cash paid on finalization of the net working capital, indebtedness and other adjustments
|
193
|
|
Total purchase price
|
$
|
682,356
|
|
The following table summarizes the fair values assigned to the CBR assets acquired and liabilities assumed by us along with the resulting goodwill at the CBR Acquisition Date, as adjusted for certain measurement period adjustments for CBR recorded since the CBR Acquisition Date (in thousands):
|
|
|
|
|
|
Total Acquisition Date Fair Value
|
Accounts receivable
|
$
|
8,660
|
|
Inventories
|
3,825
|
|
Prepaid and other current assets
|
8,480
|
|
Restricted cash - short-term
|
30,752
|
|
Property, plant and equipment
|
29,401
|
|
Customer relationships
|
297,000
|
|
Trade name and trademarks
|
65,000
|
|
Favorable lease asset
|
358
|
|
Deferred income tax assets
|
5,062
|
|
Other long-term assets
|
496
|
|
Accounts payable
|
(2,853
|
)
|
Accrued expenses
|
(13,770
|
)
|
Deferred revenues - short-term
|
(3,100
|
)
|
Payable to former CBR shareholders
|
(37,947
|
)
|
Deferred income tax liabilities
|
(149,873
|
)
|
Other long-term liabilities
|
(506
|
)
|
Total estimated identifiable net assets
|
$
|
240,985
|
|
Goodwill
|
441,371
|
|
Total
|
$
|
682,356
|
|
During 2016, we recorded measurement period adjustments related to the filing of pre-acquisition federal and state income tax returns and the finalization of other tax-related matters. These measurement period adjustments resulted in a net increase to goodwill of
$0.3 million
and were reflected as current period adjustments during the second quarter of 2016 in accordance with the guidance in ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
(“ASU 2015-16”).
The gross contractual amount of accounts receivable at the CBR Acquisition Date of
$11.7 million
was adjusted to its fair value of
$8.7 million
. The fair value amounts for CBR’s customer relationships, trade names and trademarks were determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the assets (i.e., its highest and best use). We determined the fair value of the customer relationships, using an income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining life. Some of the more significant assumptions used in the income approach from the perspective of a market participant include the estimated net cash flows for each year for the identifiable intangible asset, the discount rate that measures the risk inherent in each cash flow stream, as well as other factors. The fair value of the trade names and trademarks was determined using the relief from royalty method, which is also an income approach. We believe the fair values assigned to the CBR customer relationships, and the trade names and trademarks are based upon reasonable estimates and assumptions given available facts and circumstances as of the CBR Acquisition Date. If these assets are not successful, sales and profitability may be adversely affected in future periods, and as a result, the value of the assets may become impaired.
The customer relationships will be amortized to selling, general and administrative expenses based on an economic consumption model over an expected useful life of approximately
20 years
. The trade names and trademark intangible asset is deemed to be an indefinite-lived asset, which is not amortized but will be subject to periodic assessments of impairment.
Based on the fair value adjustments primarily related to deferred revenue and identifiable intangible assets acquired, we recorded a net deferred tax liability of
$144.8 million
in acquisition accounting using a combined federal and state statutory income tax rate of
37.0%
. The net deferred tax liability represents the
$149.9 million
of deferred tax liabilities recorded in acquisition accounting, primarily related to the fair value adjustments to CBR’s deferred revenue and identifiable intangible assets, partially offset by
$5.1 million
of deferred tax assets acquired from CBR.
During the third quarter of 2016, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the CBR Acquisition Date.
Lumara Health Acquisition
On November 12, 2014, the Lumara Health Acquisition Date, we acquired Lumara Health at which time Lumara Health became our wholly-owned subsidiary. By virtue of the acquisition, we acquired Lumara Health’s existing commercial product,
Makena
. Under the terms of the acquisition agreement, we acquired
100%
of the equity ownership of Lumara Health, excluding the assets and liabilities of the Women’s Health Division and certain other assets and liabilities, which were divested by Lumara Health prior to closing, for
$600.0 million
in cash, subject to certain net working capital and other adjustments, and issued approximately
3.2 million
shares of our common stock, having a value of approximately
$112.0 million
at the time of closing, to the holders of common stock of Lumara Health. The acquisition of Lumara Health provided a strategic commercial entry into the maternal health business. The addition of
Makena
, the only FDA-approved therapy to reduce the risk of preterm birth in certain at-risk women, added a complementary commercial platform to our portfolio and transformed us into a multi-product specialty pharmaceutical company.
We agreed to pay additional merger consideration, up to a maximum of
$350.0 million
, based upon the achievement of certain net sales milestones of
Makena
for the period from December 1, 2014 through December 31, 2019. This contingent consideration is recorded as a liability and measured at fair value based upon significant unobservable inputs. During the three months ended
September 30, 2016
, based on our achievement of the
$300.0 million
annual net
Makena
sales milestone, the first
$100.0 million
milestone to the former Lumara Health security holders was triggered, which we expect to pay in the fourth quarter of 2016.
See Note E, “
Fair Value Measurements
,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and Note C, “
Business Combinations
,” to the Financial Statements in our Annual Report for additional information.
The following table summarizes the components of the total purchase price paid for Lumara Health, as adjusted for the final net working capital and other adjustments (in thousands):
|
|
|
|
|
|
Total Acquisition Date Fair Value
|
Cash consideration
|
$
|
600,000
|
|
Fair value of AMAG common stock issued
|
111,964
|
|
Fair value of contingent milestone payments
|
205,000
|
|
Estimated working capital and other adjustments
|
821
|
|
Purchase price paid at closing
|
917,785
|
|
Less:
|
|
Cash received on finalization of the net working capital and other adjustments
|
(562
|
)
|
Cash acquired from Lumara Health
|
(5,219
|
)
|
Total purchase price
|
$
|
912,004
|
|
At the closing,
$35.0 million
of the cash consideration was contributed to a separate escrow fund to secure the former Lumara Health security holders’ obligations to indemnify us for certain matters, including breaches of representations and warranties, covenants included in the Lumara Health acquisition agreement, payments made by us to dissenting stockholders, specified tax claims, excess parachute claims, and certain claims related to the Women’s Health Division of Lumara Health, which was divested by Lumara Health prior to the closing. As of
September 30, 2016
, the funds held in escrow have been fully distributed to the former Lumara Health security holders.
The following table summarizes the fair values assigned to assets acquired and liabilities assumed by us along with the resulting goodwill at the Lumara Health Acquisition Date, as adjusted for certain measurement period adjustments for Lumara Health recorded during 2015 (in thousands):
|
|
|
|
|
|
Total Acquisition Date Fair Value
|
Accounts receivable
|
$
|
36,852
|
|
Inventories
|
30,300
|
|
Prepaid and other current assets
|
3,322
|
|
Deferred income tax assets
|
102,355
|
|
Property and equipment
|
60
|
|
Makena base technology
|
797,100
|
|
IPR&D
|
79,100
|
|
Restricted cash - long term
|
1,997
|
|
Other long-term assets
|
3,412
|
|
Accounts payable
|
(3,807
|
)
|
Accrued expenses
|
(36,561
|
)
|
Deferred income tax liabilities
|
(295,676
|
)
|
Other long-term liabilities
|
(4,563
|
)
|
Total estimated identifiable net assets
|
$
|
713,891
|
|
Goodwill
|
198,113
|
|
Total
|
$
|
912,004
|
|
During 2015, we finalized the fair values assigned to the assets acquired and liabilities assumed by us at the Lumara Health Acquisition Date. See Note C, “
Business Combinations
,” to the Financial Statements in our Annual Report for additional information.
Unaudited Pro Forma Supplemental Information
The following supplemental unaudited pro forma information presents our revenues and net income (loss) on a pro forma basis, assuming that the CBR acquisition occurred on January 1, 2014. For purposes of preparing the following pro forma information, certain items recorded during the
three and nine
months ended
September 30, 2015
, such as
$8.5 million
and
$11.2 million
of acquisition-related costs, respectively,
$10.4 million
loss on debt extinguishment and
$9.2 million
of other one-time fees and expenses incurred in connection with the CBR acquisition financing, are reflected in 2014 and 2015 as if the CBR acquisition occurred on January 1, 2014. The pro forma amounts do not include any expected cost savings or restructuring actions which may be achievable or which have occurred subsequent to the acquisition of CBR or the impact of any non-recurring activity. The following table presents unaudited pro forma results (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2015
|
|
Nine Months Ended
September 30, 2015
|
Pro forma revenues
|
$
|
110,244
|
|
|
$
|
381,650
|
|
Pro forma net income (loss)
|
$
|
(5,116
|
)
|
|
$
|
24,220
|
|
Pro forma net income (loss) per diluted share
|
$
|
(0.15
|
)
|
|
$
|
0.69
|
|
The pro forma adjustments reflected in the pro forma net income (loss) in the above table primarily represent adjustments to historical amortization of intangible assets, adjustments to historical depreciation of property, plant and equipment and reductions to historical CBR revenues due to fair value adjustments in purchase accounting to intangible assets, property, plant and equipment and deferred revenue, respectively. In addition, the pro forma combined net income (loss) includes increased interest expense due to the increase in total term loan borrowings and the issuance of the 2023 Senior Notes (as defined below) in connection with the CBR acquisition. Income taxes for all periods were adjusted accordingly. This pro forma financial information is not necessarily indicative of our consolidated operating results that would have been reported had the transactions been completed as described herein, nor is such information necessarily indicative of our consolidated results for any future period.
Goodwill
In connection with the CBR acquisition, we recognized
$441.4 million
of goodwill, primarily due to the synergies expected from combining our operations with CBR and to deferred tax liabilities related to fair value adjustments of intangible assets and deferred revenue. In connection with the Lumara Health acquisition, we recognized
$198.1 million
of goodwill, primarily due to the net deferred tax liabilities recorded on the fair value adjustments to Lumara Health’s inventories and identifiable intangible asset. The
$639.5 million
of goodwill resulting from the CBR and Lumara Health acquisitions is not deductible for income tax purposes.
D. INVESTMENTS
As of
September 30, 2016
and
December 31, 2015
, our investments equaled
$308.8 million
and
$237.6 million
, respectively, and consisted of securities classified as available-for-sale in accordance with accounting standards which provide guidance related to accounting and classification of certain investments in debt and equity securities.
The following is a summary of our investments as of
September 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Corporate debt securities
|
|
|
|
|
|
|
|
Due in one year or less
|
$
|
116,674
|
|
|
$
|
7
|
|
|
$
|
(84
|
)
|
|
$
|
116,597
|
|
Due in one to three years
|
135,719
|
|
|
398
|
|
|
(20
|
)
|
|
136,097
|
|
U.S. treasury and government agency securities
|
|
|
|
|
|
|
|
|
Due in one year or less
|
1,032
|
|
|
1
|
|
|
—
|
|
|
1,033
|
|
Due in one to three years
|
8,891
|
|
|
25
|
|
|
(2
|
)
|
|
8,914
|
|
Commercial paper
|
|
|
|
|
|
|
|
|
Due in one year or less
|
31,852
|
|
|
—
|
|
|
—
|
|
|
31,852
|
|
Certificates of deposit
|
|
|
|
|
|
|
|
Due in one year or less
|
11,800
|
|
|
—
|
|
|
—
|
|
|
11,800
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
Due in one year or less
|
2,500
|
|
|
—
|
|
|
(1
|
)
|
|
2,499
|
|
Total investments
|
$
|
308,468
|
|
|
$
|
431
|
|
|
$
|
(107
|
)
|
|
$
|
308,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Corporate debt securities
|
|
|
|
|
|
|
|
Due in one year or less
|
$
|
27,964
|
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
|
$
|
27,926
|
|
Due in one to three years
|
173,652
|
|
|
3
|
|
|
(904
|
)
|
|
172,751
|
|
Commercial paper
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
34,452
|
|
|
2
|
|
|
(5
|
)
|
|
34,449
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
2,500
|
|
|
—
|
|
|
—
|
|
|
2,500
|
|
Total investments
|
$
|
238,568
|
|
|
$
|
5
|
|
|
$
|
(947
|
)
|
|
$
|
237,626
|
|
Impairments and Unrealized Gains and Losses on Investments
We did not recognize any other-than-temporary impairment losses in our condensed consolidated statements of operations related to our securities during the three or
nine
months ended
September 30, 2016
and
2015
. We considered various factors, including the length of time that each security was in an unrealized loss position and our ability and intent to hold these securities until the recovery of their amortized cost basis occurs. As of
September 30, 2016
,
none
of our investments has been in an unrealized loss position for more than one year. Future events may occur, or additional information may become available, which may cause us to identify credit losses where we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of a security and may necessitate the recording of future realized losses on securities in our portfolio. Significant losses in the estimated fair values of our investments could have a material adverse effect on our earnings in future periods.
E. FAIR VALUE MEASUREMENTS
The following tables represent the fair value hierarchy as of
September 30, 2016
and
December 31, 2015
, for those assets and liabilities that we measure at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2016 Using:
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
5,689
|
|
|
$
|
5,689
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
252,694
|
|
|
—
|
|
|
252,694
|
|
|
—
|
|
U.S. treasury and government agency securities
|
9,947
|
|
|
—
|
|
|
9,947
|
|
|
—
|
|
Commercial paper
|
31,852
|
|
|
—
|
|
|
31,852
|
|
|
—
|
|
Certificates of deposit
|
11,800
|
|
|
—
|
|
|
11,800
|
|
|
—
|
|
Municipal securities
|
2,499
|
|
|
—
|
|
|
2,499
|
|
|
—
|
|
Total Assets
|
$
|
314,481
|
|
|
$
|
5,689
|
|
|
$
|
308,792
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Lumara Health
|
$
|
225,137
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
225,137
|
|
Contingent consideration - MuGard
|
2,316
|
|
|
—
|
|
|
—
|
|
|
2,316
|
|
Total Liabilities
|
$
|
227,453
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
227,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015 Using:
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
73,676
|
|
|
$
|
73,676
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities
|
200,677
|
|
|
—
|
|
|
200,677
|
|
|
—
|
|
Commercial paper
|
34,449
|
|
|
—
|
|
|
34,449
|
|
|
—
|
|
Municipal securities
|
2,500
|
|
|
—
|
|
|
2,500
|
|
|
—
|
|
Total Assets
|
$
|
311,302
|
|
|
$
|
73,676
|
|
|
$
|
237,626
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration - Lumara Health
|
$
|
214,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
214,895
|
|
Contingent consideration - MuGard
|
7,664
|
|
|
—
|
|
|
—
|
|
|
7,664
|
|
Total Liabilities
|
$
|
222,559
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
222,559
|
|
Investments
Our cash equivalents are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our investments are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analyses of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analyses, we did not adjust or override any fair value measurements provided by our pricing services as of
September 30, 2016
. In addition, there were
no
transfers or reclassifications of any securities between Level 1 and Level 2 during the
nine
months ended
September 30, 2016
.
Contingent consideration
There were
no
contingent consideration obligations related to the CBR acquisition. The fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations are classified as Level 3 assets under the fair value hierarchy as these assets have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.
The following table presents a reconciliation of contingent consideration obligations related to the acquisition of Lumara Health and the MuGard Rights (in thousands):
|
|
|
|
|
Balance as of December 31, 2015
|
$
|
222,559
|
|
Payments made
|
(212
|
)
|
Adjustments to fair value of contingent consideration
|
5,106
|
|
Balance as of September 30, 2016
|
$
|
227,453
|
|
The
$5.1 million
of adjustments to the fair value of the contingent consideration liability during the
nine
months ended
September 30, 2016
were due to a
$10.2 million
increase to the
Makena
contingent consideration and a
$5.1 million
decrease to the
MuGard
contingent consideration. During the second quarter of 2016, we revised our forecast of total projected net sales for
MuGard
and reassessed the fair value of the contingent consideration liability related to the MuGard Rights. As a result, we reduced our
MuGard
-related contingent consideration liability by
$5.6 million
. These adjustments were included in selling, general and administrative expenses in our condensed consolidated statements of operations. We have classified
$100.0 million
of the
Makena
contingent consideration and
$0.4 million
of the
MuGard
contingent consideration as short-term liabilities in our condensed consolidated balance sheet as of
September 30, 2016
. The
$100.0 million
Makena
contingent consideration reflects a
$100.0 million
milestone payment to be paid in the fourth quarter of 2016 to the former Lumara Health security holders based on the achievement of a net sales milestone of
Makena
in the third quarter of 2016
.
The fair value of the contingent milestone payments payable by us to the former stockholders of Lumara Health was determined based on our probability-adjusted discounted cash flows estimated to be realized from the net sales of
Makena
from December 1, 2014 through December 31, 2019. The cash flows were discounted at a rate of
5.0%
, which we believe is reasonable given the estimated likelihood of the pay-out. As of
September 30, 2016
, the total undiscounted milestone payment amounts we could pay in connection with the Lumara Health acquisition was
$350.0 million
through December 31, 2019, including the
$100.0 million
milestone payment to be paid in the fourth quarter of 2016.
The fair value of the contingent royalty payments payable by us to Abeona was determined based on various market factors, including an analysis of estimated sales using a discount rate of approximately
9%
. As of
September 30, 2016
, we estimated that the undiscounted royalty amounts we could pay under the MuGard License Agreement, based on current projections, may range from
$2.0 million
to
$6.0 million
over the remainder of the
ten
year period which commenced on June 6, 2013, the acquisition date, which is our best estimate of the period over which we expect the majority of the asset’s cash flows to be derived.
We believe the estimated fair values of Lumara Health and the MuGard Rights are based on reasonable assumptions, however, our actual results may vary significantly from the estimated results.
Debt
We estimate the fair value of our debt obligations by using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input. As of
September 30, 2016
, the estimated fair value of our 2023 Senior Notes, Convertible Notes and 2015 Term Loan Facility (each as defined below) was
$473.0 million
,
$223.0 million
and
$336.9 million
, respectively, which differed from their carrying values. See Note Q, "
Debt
" for additional information on our debt obligations.
F. INVENTORIES
Our major classes of inventories were as follows as of
September 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
14,825
|
|
|
$
|
19,673
|
|
Work in process
|
3,185
|
|
|
1,985
|
|
Finished goods
|
20,147
|
|
|
18,987
|
|
Total inventories
|
$
|
38,157
|
|
|
$
|
40,645
|
|
G. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following as of
September 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Land
|
$
|
700
|
|
|
$
|
700
|
|
Land improvements
|
300
|
|
|
300
|
|
Building and improvements
|
9,500
|
|
|
9,500
|
|
Computer equipment and software
|
13,866
|
|
|
13,193
|
|
Furniture and fixtures
|
2,299
|
|
|
1,725
|
|
Leasehold improvements
|
3,683
|
|
|
1,717
|
|
Laboratory and production equipment
|
5,938
|
|
|
5,683
|
|
Construction in progress
|
678
|
|
|
786
|
|
|
36,964
|
|
|
33,604
|
|
Less: accumulated depreciation
|
(11,709
|
)
|
|
(4,879
|
)
|
Property, plant and equipment, net
|
$
|
25,255
|
|
|
$
|
28,725
|
|
H. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Our
$639.5 million
goodwill balance consisted of
$198.1 million
of goodwill acquired through the November 2014 Lumara Health acquisition and
$441.4 million
acquired through the August 2015 CBR acquisition. During the
nine months ended September 30, 2016
, the CBR goodwill increased by
$0.3 million
related to measurement period net tax adjustments. These measurement period adjustments have been reflected as current period adjustments in accordance with ASU 2015-16, discussed below in Note S, “
Recently Issued and Proposed Accounting Pronouncements
.” As of
September 30, 2016
, we had
no
accumulated impairment losses related to goodwill.
Intangible Assets
As of
September 30, 2016
and
December 31, 2015
, our identifiable intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
Amortization
|
|
Impairments
|
|
Net
|
|
Cost
|
|
Amortization
|
|
Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Makena
base technology
|
$
|
797,100
|
|
|
$
|
105,207
|
|
|
$
|
—
|
|
|
$
|
691,893
|
|
|
$
|
797,100
|
|
|
$
|
56,540
|
|
|
$
|
740,560
|
|
CBR customer relationships
|
297,000
|
|
|
10,458
|
|
|
—
|
|
|
286,542
|
|
|
297,000
|
|
|
1,061
|
|
|
295,939
|
|
CBR Favorable lease
|
358
|
|
|
119
|
|
|
239
|
|
|
—
|
|
|
358
|
|
|
63
|
|
|
295
|
|
MuGard Rights
|
16,893
|
|
|
1,169
|
|
|
15,724
|
|
|
—
|
|
|
16,893
|
|
|
1,016
|
|
|
15,877
|
|
|
1,111,351
|
|
|
116,953
|
|
|
15,963
|
|
|
978,435
|
|
|
1,111,351
|
|
|
58,680
|
|
|
1,052,671
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Makena
IPR&D
|
79,100
|
|
|
—
|
|
|
—
|
|
|
79,100
|
|
|
79,100
|
|
|
—
|
|
|
79,100
|
|
CBR trade names and trademarks
|
65,000
|
|
|
—
|
|
|
—
|
|
|
65,000
|
|
|
65,000
|
|
|
—
|
|
|
65,000
|
|
Total intangible assets
|
$
|
1,255,451
|
|
|
$
|
116,953
|
|
|
$
|
15,963
|
|
|
$
|
1,122,535
|
|
|
$
|
1,255,451
|
|
|
$
|
58,680
|
|
|
$
|
1,196,771
|
|
As of
September 30, 2016
, the weighted average remaining amortization period for our finite-lived intangible assets was approximately
nine
years.
The
Makena
base technology and IPR&D intangible assets were acquired in November 2014 in connection with our acquisition of Lumara Health. Amortization of the
Makena
base technology asset is being recognized using an economic consumption model over
20 years
, which we believe is an appropriate amortization period due to the estimated economic lives of the product rights and related intangibles.
The CBR intangible assets (the CBR customer relationships, favorable lease and trade names and trademarks) were acquired in August 2015 in connection with our acquisition of CBR. Amortization of the CBR customer relationships is being recognized using an estimated useful life of
20 years
, which we believe is an appropriate amortization period due to the estimated economic lives of the CBR intangible assets. The favorable lease was being amortized on a straight-line basis over the remaining term of the lease. On May 4, 2016, we entered into a sublease arrangement for a portion of our CBR office space in San Bruno, California with a sublessee at a rate lower than the market rate used to determine the favorable lease intangible asset. We reevaluated the favorable lease asset based on the negotiated sublease rate, resulting in an impairment charge for the full
$0.2 million
net intangible asset in the second quarter of 2016.
The MuGard Rights were acquired from Abeona in June 2013. Amortization of the MuGard Rights was being recognized using an economic consumption model over
ten years
, which represented our best estimate of the period over which we expected the majority of the asset’s cash flows to be derived. Based on events in the second quarter of 2016, we determined that broader reimbursement coverage for MuGard by government payors was unlikely based on recent interactions with those agencies and assessed the MuGard Rights for potential impairment. From this assessment, we concluded that based on the lack of broad reimbursement and insurance coverage for MuGard and the resulting decrease in expected revenues and cash flows, the projected undiscounted cash flows were less than the book value, indicating impairment of this intangible asset. As a result of an analysis of the fair value of the net MuGard Rights intangible asset as compared to its recorded book value, we recognized an impairment charge for the full
$15.7 million
net intangible asset in the second quarter of 2016.
See Note C, “
Business Combinations
,” for additional information on our intangible assets.
Total amortization expense for the
nine
months ended
September 30, 2016
and
2015
, was
$58.3 million
and
$13.9 million
, respectively. Amortization expense for
Makena
base technology and the MuGard Rights is recorded in cost of product sales in our condensed consolidated statements of operations. Amortization expense for the CBR related intangibles is recorded in selling, general and administrative expenses in our condensed consolidated statements of operations. We expect amortization expense related to our finite-lived intangible assets to be as follows (in thousands):
|
|
|
|
|
|
Estimated
|
|
Amortization
|
Period
|
Expense
|
Remainder of Year Ending December 31, 2016
|
$
|
21,121
|
|
Year Ending December 31, 2017
|
90,826
|
|
Year Ending December 31, 2018
|
97,992
|
|
Year Ending December 31, 2019
|
68,993
|
|
Year Ending December 31, 2020
|
46,271
|
|
Thereafter
|
653,232
|
|
Total
|
$
|
978,435
|
|
I. CURRENT AND LONG-TERM LIABILITIES
Accrued Expenses
Accrued expenses consisted of the following as of
September 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Commercial rebates, fees and returns
|
$
|
78,371
|
|
|
$
|
45,161
|
|
Professional, license, and other fees and expenses
|
28,376
|
|
|
27,070
|
|
Interest expense
|
5,761
|
|
|
18,411
|
|
Salaries, bonuses, and other compensation
|
13,328
|
|
|
12,838
|
|
Restructuring expense
|
527
|
|
|
2,883
|
|
Total accrued expenses
|
$
|
126,363
|
|
|
$
|
106,363
|
|
Deferred Revenues
Our deferred revenue balances as of
September 30, 2016
and
December 31, 2015
were primarily related to our CBR Services revenues and includes: (a) amounts collected in advance of unit processing and (b) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts.
J. INCOME TAXES
The following table summarizes our effective tax rate and income tax expense (benefit) for the
three and nine
months ended
September 30, 2016
and
2015
(in thousands except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Effective tax rate
|
24
|
%
|
|
41
|
%
|
|
32
|
%
|
|
27
|
%
|
Income tax expense (benefit)
|
$
|
5,069
|
|
|
$
|
(14,130
|
)
|
|
$
|
3,725
|
|
|
$
|
9,513
|
|
For the
three and nine
months ended
September 30, 2016
, we recognized an income tax expense of
$5.1 million
and
$3.7 million
, respectively, representing an effective tax rate of
24%
and
32%
, respectively. The difference between the expected statutory federal tax rate of
35%
and the effective tax rates for the
three and nine
months ended
September 30, 2016
, was primarily attributable to contingent consideration associated with Lumara Health, including the tax deductible portion of the anticipated payout, and federal research and development and orphan drug tax credits, partially offset by the impact of state income taxes, non-deductible stock compensation, and other non-deductible expenses. The effective tax rate for the
nine months ended September 30, 2016
, was also impacted by the impairment of the net intangible asset for the MuGard Rights and related contingent consideration fair value adjustment. We recorded a net tax benefit in the second quarter of 2016 for these discrete events at a combined federal and state statutory income tax rate of
39%
.
For the
three and nine
months ended
September 30, 2015
, we recognized income tax benefit and expense of
$14.1 million
and
$9.5 million
, respectively, representing an effective tax rate of
41%
and
27%
, respectively. The difference between the expected statutory federal tax rate of
35%
and the
41%
effective tax rate for the
three months ended September 30, 2015
, was
attributable to the impact of a valuation allowance release related to certain deferred tax assets and the impact of state income taxes, partially offset by non-deductible transaction costs associate with the acquisition of CBR and non-deductible contingent consideration expense associated with Lumara Health. The difference between the expected statutory federal tax rate of
35%
and the
27%
effective tax rate for the
nine months ended September 30, 2015
, was attributable to the impact of a valuation allowance release related to certain deferred tax assets, partially offset by the impact of state income taxes, non-deductible transaction costs associated with the acquisition of CBR, and non-deductible contingent consideration expense associated with Lumara Health.
K. ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
The table below presents information about the effects of net income (loss) of significant amounts reclassified out of accumulated other comprehensive income (loss), net of tax, associated with unrealized gains (losses) on securities during the
three and nine
months ended
September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
(3,058
|
)
|
|
$
|
(3,948
|
)
|
|
$
|
(4,205
|
)
|
|
$
|
(3,617
|
)
|
Other comprehensive income (loss) before reclassifications
|
(336
|
)
|
|
228
|
|
|
811
|
|
|
(107
|
)
|
Reclassification adjustment for (losses) gains included in net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Ending balance
|
$
|
(3,394
|
)
|
|
$
|
(3,720
|
)
|
|
$
|
(3,394
|
)
|
|
$
|
(3,720
|
)
|
L. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
We compute basic net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the relevant period. Diluted net income (loss) per common share has been computed by dividing net income (loss) by the diluted number of common shares outstanding during the period. Except where the result would be antidilutive to net income (loss), diluted net income (loss) per common share would be computed assuming the impact of the conversion of the
$200.0 million
of
2.5%
convertible senior notes due February 15, 2019 (the “Convertible Notes”), the exercise of outstanding stock options, the vesting of restricted stock units (“RSUs”), and the exercise of warrants.
We have a choice to settle the conversion obligation under the Convertible Notes in cash, shares or any combination of the two. Pursuant to certain covenants in our
six
-year
$350.0 million
term loan facility (the “2015 Term Loan Facility”), which we entered into in 2015 to partially fund the acquisition of CBR, we may be restricted from settling the conversion obligation in whole or in part with cash unless certain conditions in the 2015 Term Loan Facility are satisfied. We utilize the if-converted method to reflect the impact of the conversion of the Convertible Notes. This method assumes the conversion of the Convertible Notes into shares of our common stock and reflects the elimination of
$1.9 million
of interest expense related to the Convertible Notes during the three months ended
September 30, 2016
.
The dilutive effect of the warrants, stock options and RSUs has been calculated using the treasury stock method.
The components of basic and diluted net income (loss) per share for the
three and nine
months ended
September 30, 2016
and
2015
, were as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income (loss)
|
$
|
16,196
|
|
|
$
|
(20,584
|
)
|
|
$
|
8,074
|
|
|
$
|
25,578
|
|
Weighted average common shares outstanding
|
34,171
|
|
|
33,223
|
|
|
34,377
|
|
|
30,379
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and RSUs
|
558
|
|
|
—
|
|
|
387
|
|
|
1,568
|
|
Warrants
|
—
|
|
|
—
|
|
|
—
|
|
|
3,015
|
|
Convertible 2.5% notes
|
7,382
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares used in calculating dilutive net income (loss) per share
|
42,111
|
|
|
33,223
|
|
|
34,764
|
|
|
34,962
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.47
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.23
|
|
|
$
|
0.84
|
|
Diluted
|
$
|
0.43
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.23
|
|
|
$
|
0.73
|
|
The following table sets forth the potential common shares issuable upon the exercise of outstanding options, the vesting of RSUs, the exercise of warrants (prior to consideration of the treasury stock method), and the conversion of the Convertible Notes, which were excluded from our computation of diluted net income (loss) per share because their inclusion would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Options to purchase shares of common stock
|
2,218
|
|
|
2,989
|
|
|
2,778
|
|
|
791
|
|
Shares of common stock issuable upon the vesting of RSUs
|
249
|
|
|
712
|
|
|
654
|
|
|
157
|
|
Warrants
|
7,382
|
|
|
7,382
|
|
|
7,382
|
|
|
—
|
|
Convertible 2.5% notes
|
—
|
|
|
7,382
|
|
|
7,382
|
|
|
7,382
|
|
Total
|
9,849
|
|
|
18,465
|
|
|
18,196
|
|
|
8,330
|
|
In connection with the issuance of the Convertible Notes, in February 2014, we entered into convertible bond hedges. The convertible bond hedges are not included for purposes of calculating the number of diluted shares outstanding, as their effect would be anti-dilutive. The convertible bond hedges are generally expected, but not guaranteed, to reduce the potential dilution and/or offset the cash payments we are required to make upon conversion of the Convertible Notes.
M. EQUITY‑BASED COMPENSATION
We currently maintain
four
equity compensation plans, namely our Third Amended and Restated 2007 Equity Incentive Plan, as amended (the “2007 Plan”), our Amended and Restated 2000 Stock Plan (the “2000 Plan”), the Lumara Health Inc. Amended and Restated 2013 Incentive Compensation Plan (the “Lumara Health 2013 Plan”) and our 2015 Employee Stock Purchase Plan (“2015 ESPP”). All outstanding stock options granted under each of our equity compensation plans other than our 2015 ESPP (discussed below) have an exercise price equal to the closing price of a share of our common stock on the grant date.
Our 2007 Plan was originally approved by our stockholders in November 2007, and succeeded our 2000 Plan, under which no further grants may be made. Any shares that remained available for issuance under the 2000 Plan as of the date of adoption of the 2007 Plan are included in the number of shares that may be issued under the 2007 Plan. Any shares subject to outstanding awards granted under the 2000 Plan that expire or terminate for any reason prior to exercise will be added to the total number of shares of our stock available for issuance under the 2007 Plan. The total number of shares issuable pursuant to awards under the 2007 Plan is
6,995,325
. As of
September 30, 2016
, there were
1,722,478
shares remaining available for issuance under the 2007 Plan, which excludes shares subject to outstanding awards under the 2000 Plan. All outstanding options under the 2007 Plan have either a
seven
or
ten
-year term and all outstanding options under the 2000 Plan have a
ten
-year term.
In November 2014, we assumed the Lumara Health 2013 Plan in connection with the acquisition of Lumara Health. The total number of shares issuable pursuant to awards under this plan as of the effective date of the acquisition and after taking into account any adjustments as a result of the acquisition, is
200,000
shares. As of
September 30, 2016
, there were
40,356
shares remaining available for issuance under the Lumara Health 2013 Plan, which are available for grants to certain employees,
officers, directors, consultants, and advisors of AMAG and our subsidiaries who are newly-hired or who previously performed services for Lumara Health. All outstanding options under the Lumara Health 2013 Plan have a
ten
-year term.
In May 2015, our stockholders approved our 2015 ESPP, which authorizes the issuance of up to
200,000
shares of our common stock to eligible employees. The terms of the 2015 ESPP permit eligible employees to purchase shares (subject to certain plan and tax limitations) in semi-annual offerings through payroll deductions of up to an annual maximum of
10%
of the employee’s “compensation” as defined in the 2015 ESPP. Shares are purchased at a price equal to
85%
of the fair market value of our common stock on either the first or last business day of the offering period, whichever is lower. Plan periods consist of
six
-month periods typically commencing June 1 and ending November 30 and commencing December 1 and ending May 31. As of
September 30, 2016
,
41,679
shares have been issued under our 2015 ESPP.
During the
nine
months ended
September 30, 2016
, we also granted equity through inducement grants outside of these plans to certain employees to induce them to accept employment with us (collectively, “Inducement Grants”). The options were granted at an exercise price equal to the fair market value of a share of our common stock on the respective grant dates and will be exercisable in
four
equal annual installments beginning on the first anniversary of the respective grant dates. The RSU grants will vest in
three
equal annual installments beginning on the first anniversary of the respective grant dates. The foregoing grants were made pursuant to inducement grants outside of our stockholder approved equity plans as permitted under the NASDAQ Stock Market listing rules. We assessed the terms of these awards and determined there was no possibility that we would have to settle these awards in cash and therefore, equity accounting was applied.
Stock Options
The following table summarizes stock option activity for the
nine months ended September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Equity
|
|
2000 Equity
|
|
2013 Lumara
|
|
Inducement
|
|
|
|
Plan
|
|
Plan
|
|
Equity Plan
|
|
Grants
|
|
Total
|
Outstanding at December 31, 2015
|
1,963,162
|
|
|
14,040
|
|
|
96,000
|
|
|
830,975
|
|
|
2,904,177
|
|
Granted
|
532,659
|
|
|
—
|
|
|
56,150
|
|
|
110,000
|
|
|
698,809
|
|
Exercised
|
(86,584
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(86,584
|
)
|
Expired or terminated
|
(191,938
|
)
|
|
—
|
|
|
(47,532
|
)
|
|
(86,250
|
)
|
|
(325,720
|
)
|
Outstanding at September 30, 2016
|
2,217,299
|
|
|
14,040
|
|
|
104,618
|
|
|
854,725
|
|
|
3,190,682
|
|
Restricted Stock Units
The following table summarizes RSU activity for the
nine months ended September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Equity
|
|
2000 Equity
|
|
2013 Lumara
|
|
Inducement
|
|
|
|
Plan
|
|
Plan
|
|
Equity Plan
|
|
Grants
|
|
Total
|
Outstanding at December 31, 2015
|
446,330
|
|
|
—
|
|
|
52,350
|
|
|
155,675
|
|
|
654,355
|
|
Granted
|
652,226
|
|
|
—
|
|
|
—
|
|
|
64,500
|
|
|
716,726
|
|
Vested
|
(194,970
|
)
|
|
—
|
|
|
(16,749
|
)
|
|
(58,569
|
)
|
|
(270,288
|
)
|
Expired or terminated
|
(88,424
|
)
|
|
—
|
|
|
(8,990
|
)
|
|
(5,500
|
)
|
|
(102,914
|
)
|
Outstanding at September 30, 2016
|
815,162
|
|
|
—
|
|
|
26,611
|
|
|
156,106
|
|
|
997,879
|
|
Equity-based compensation expense
Equity-based compensation expense for the
three and nine
months ended
September 30, 2016
and
2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of product sales
|
$
|
118
|
|
|
$
|
159
|
|
|
$
|
395
|
|
|
$
|
254
|
|
Research and development
|
858
|
|
|
1,028
|
|
|
2,583
|
|
|
2,071
|
|
Selling, general and administrative
|
4,492
|
|
|
3,701
|
|
|
13,831
|
|
|
9,247
|
|
Total equity-based compensation expense
|
$
|
5,468
|
|
|
$
|
4,888
|
|
|
$
|
16,809
|
|
|
$
|
11,572
|
|
Income tax effect
|
(1,568
|
)
|
|
(871
|
)
|
|
(4,637
|
)
|
|
(3,464
|
)
|
After-tax effect of equity-based compensation expense
|
$
|
3,900
|
|
|
$
|
4,017
|
|
|
$
|
12,172
|
|
|
$
|
8,108
|
|
We reduce the compensation expense being recognized to account for estimated forfeitures, which we estimate based primarily on historical experience, adjusted for unusual events such as corporate restructurings, which may result in higher than expected turnover and forfeitures. Under current accounting guidance, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We have not recognized any excess tax benefits from equity-based compensation in additional paid-in capital because the excess tax benefits have not yet reduced cash taxes paid. Accordingly, there was no impact recorded in cash flows from financing activities or cash flows from operating activities as reported in the accompanying condensed consolidated statements of cash flows.
N. STOCKHOLDERS’ EQUITY
Share Repurchase Program
In January 2016, we announced that our board of directors authorized a program to repurchase up to
$60.0 million
in shares of our common stock. The repurchase program does not have an expiration date and may be suspended for periods or discontinued at any time. Under the program, we may purchase our stock from time to time at the discretion of management in the open market or in privately negotiated transactions. The number of shares repurchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, along with working capital requirements, general business conditions and other factors. We may also from time to time establish a trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934 to facilitate purchases of our shares under this program. During the
nine months ended September 30, 2016
, we repurchased and retired
831,744
shares of common stock under this repurchase program for
$20.0 million
at an average purchase price of
$24.05
per share. We did not repurchase any of our common stock during the
third
quarter of
2016
.
Change in Stockholders’ Equity
Total stockholders’ equity increased by
$5.7 million
during the
nine
months ended
September 30, 2016
. This increase was primarily driven by
$8.1 million
from our net income,
$16.8 million
related to equity-based compensation expense, partially offset by
$20.0 million
related to the repurchase of our securities under our stock repurchase program.
O. COMMITMENTS AND CONTINGENCIES
Commitments
Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. These include commitments related to our facility leases, purchases of inventory and other purchases related to our products, debt obligations, and other purchase obligations.
Contingencies
Legal Proceedings
We accrue a liability for legal contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. For certain matters referenced below, the liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, we will provide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, we will provide disclosure to that effect. We expense legal costs as they are incurred.
Sandoz Patent Infringement Lawsuit
On February 5, 2016, we received a Paragraph IV certification notice letter regarding an Abbreviated New Drug Application submitted to the FDA by Sandoz Inc. (“Sandoz”) requesting approval to engage in commercial manufacture, use and sale of a generic version of ferumoxytol. A generic version of
Feraheme
can be marketed only with the approval of the FDA of the respective application for such generic version. The Drug Price Competition and Patent Term Restoration Act of 1984, as amended, requires an applicant whose subject drug is a drug listed in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known as the “Orange Book,” to notify the patent‑holder of their application
and potential infringement of their patent rights. The Paragraph IV certification notice is required to contain a detailed factual and legal statement explaining the basis for the applicant’s opinion that the proposed product does not infringe the subject patents, that such patents are invalid, or both. Receipt of the certification notice triggers a
45
day window during which a patent infringement suit may be filed in federal district court against the applicant seeking approval of a product. In its notice letter, Sandoz claims that our ferumoxytol patents are invalid, unenforceable and/or not infringed by Sandoz’s manufacture, use, sale or offer for sale of the generic version. In March 2016, we initiated a patent infringement suit alleging that Sandoz’ ANDA filing itself constituted an act of infringement and that if it is approved, the manufacture, use, offer for sale, sale or importation of Sandoz’ ferumoxytol products would infringe our patents. By the filing of this complaint, the FDA is generally prohibited from granting approval of Sandoz’ application until the earliest of 30 months from the date the FDA accepted the application for filing, the conclusion of litigation in the generic’s favor, or expiration of the patent(s) (though such stay may be shortened or lengthened if either party fails to cooperate in the litigation). If the litigation is resolved in favor of the applicant or the challenged patent expires during the 30 months stay period, the stay is lifted and the FDA may thereafter approve the application based on the applicable standards for approval. On May 2, 2016, Sandoz filed a response to our patent infringement suit. Any future unfavorable outcome in this matter could negatively affect the magnitude and timing of future
Feraheme
revenues. We intend to vigorously enforce our intellectual property rights relating to ferumoxytol.
European Patent Organization Appeal
In July 2010, Sandoz filed with the European Patent Office (the “EPO”) an opposition to a previously issued patent which covers ferumoxytol in EU jurisdictions. In October 2012, at an oral hearing, the Opposition Division of the EPO revoked this patent. We recorded a notice of appeal at the EPO in December 2012, which suspended the revocation of our patent. The oral proceedings for the appeal occurred in June 2015, where the decision revoking the patent was set aside and remitted back to the Opposition Division for further consideration. In June 2016, we elected not to continue to challenge the opposition at the EPO, which will result in the loss of our European patent rights for ferumoxytol. This decision was based on a number of factors, including the fact that we withdrew ferumoxytol from the EU market in 2015 and our strategic focus of resources on U.S.-based commercial efforts. The decision not to challenge the opposition will not affect the fact that in the event that we seek to obtain a new marketing authorization for ferumoxytol in the future, under EU regulations ferumoxytol may still be entitled to the remaining part of the
eight
years of data protection and
ten
years of market exclusivity granted at the date of its original approval, which we believe could create barriers to entry for any generic version of ferumoxytol into the EU market until sometime between 2020 and 2022.
Other
On July 20, 2015, the Federal Trade Commission (the “FTC”) notified us that it is conducting an investigation into whether Lumara Health or its predecessor engaged in unfair methods of competition with respect to
Makena
or any hydroxyprogesterone caproate product. We have fully cooperated with the FTC and provided a thorough response to the FTC in August 2015 and are awaiting their review of our response. The FTC noted in its letter that the existence of the investigation does not indicate that the FTC has concluded that Lumara Health or its predecessor has violated the law and we believe that our contracts and practices comply with relevant law and policy, including the federal Drug Quality and Security Act (the “DQSA”), which was enacted in November 2013, and public statements from and enforcement actions by the FDA regarding its implementation of the DQSA. We have provided the FTC with a response that provides a brief overview of the DQSA for context, which we believe will be helpful, including: (a) how the statute outlined that large-scale compounding of products that are copies or near-copies of FDA-approved drugs (like
Makena
) is not in the interests of public safety; (b) our belief that the DQSA has had a significant impact on the compounding of hydroxyprogesterone caproate; and (c) how our contracts with former compounders allow those compounders to continue to serve physicians and patients with respect to supplying medically necessary alternative/altered forms of hydroxyprogesterone caproate.
On or about April 6, 2016, we received Notice of a Lawsuit and Request to Waive Service of a Summons in a case entitled Plumbers’ Local Union No. 690 Health Plan v. Actavis Group et. al. (“Plumbers’ Union”), which was filed in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania and, after removal to federal court, is now pending in the United States District Court for the Eastern District of Pennsylvania (Civ. Action No. 16-65-AB). Thereafter, we were also made aware of a related complaint entitled Delaware Valley Health Care Coalition v. Actavis Group et. al. (“Delaware Valley”), which was filed with the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania District Court of Pennsylvania (Case ID: 160200806). The complaints name K-V Pharmaceutical Company (“KV”) (Lumara Health’s predecessor company), certain of its successor entities, subsidiaries and affiliate entities (the “Subsidiaries”), along with a number of other pharmaceutical companies. We acquired Lumara Health in November 2014, a year after KV emerged from bankruptcy protection, at which time it, along with its then existing subsidiaries, became our wholly-owned subsidiary. We have not been served with process or waived service of summons in either case. The actions are being brought alleging unfair and deceptive trade practices with regard to certain pricing practices that allegedly resulted in certain payers overpaying for certain of KV’s generic products. On July 21, 2016, the Plaintiff in the Plumbers’ Union case
dismissed KV with prejudice to refiling and on October 6, 2016, all claims against the Subsidiaries were dismissed without prejudice. We are in discussions with Plaintiff’s counsel to similarly dismiss all claims in the Delaware Valley case. Because the Delaware Valley case is in the earliest stages and we have not been served with process this case, we are currently unable to predict the outcome or reasonably estimate the range of potential loss associated with this matter, if any.
We may periodically become subject to other legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which we are focused. Other than the above actions, we are not aware of any material claims against us as of
September 30, 2016
.
P. COLLABORATION, LICENSE AND OTHER STRATEGIC AGREEMENTS
Our commercial strategy includes expanding our portfolio through the in-license or acquisition of additional pharmaceutical products or companies, including revenue-generating commercial products and late-state development assets. As of
September 30, 2016
, we were a party to the following collaborations:
Velo
In July 2015, we entered into an option agreement with Velo Bio, LLC (“Velo”), a privately held life-sciences company that granted us an option to acquire the rights (the “DIF Rights”) to an orphan drug candidate, digoxin immune fab (“DIF”), a polyclonal antibody in clinical development for the treatment of severe preeclampsia in pregnant women. We made an upfront payment of
$10.0 million
in the third quarter of 2015 for the option to acquire the DIF Rights. DIF has been granted both orphan drug and fast-track review designations by the FDA for use in treating severe preeclampsia. Under the option agreement, Velo will complete a Phase 2b/3a clinical study, which we expect to begin in the first half of 2017. Following the conclusion of the DIF Phase 2b/3a study, we may terminate, or, for additional consideration, exercise or extend, our option to acquire the DIF Rights. If we exercise the option to acquire the DIF Rights, we would be responsible for additional costs in pursuing FDA approval, and would be obligated to pay certain milestone payments and single-digit royalties based on regulatory approval and commercial performance of the product to Velo. If we exercise the option, we will be responsible for payments totaling up to
$65.0 million
(including the payment of the option exercise price and the regulatory milestone payments) and up to an additional
$250.0 million
in sales milestone payments based on the achievement of annual sales milestones at targets ranging from
$100.0 million
to
$900.0 million
.
We have determined that Velo is a variable interest entity (“VIE”) as it does not have enough equity to finance its activities without additional financial support. As we do not have the power to direct the activities of the VIE that most significantly affect its economic performance, which we have determined to be the Phase 2b/3a clinical study, we are not the primary beneficiary of and do not consolidate the VIE.
Antares
In September 2014, Lumara Health entered into a development and license agreement (the “Antares Agreement”) with Antares Pharma, Inc. (“Antares”), which in connection with our acquisition of Lumara Health in November of 2014, grants us an exclusive, worldwide, royalty-bearing license, with the right to sublicense, to certain intellectual property rights, including know-how, patents and trademarks, to develop, use, sell, offer for sale and import and export an Antares’ auto-injection system for use with hydroxyprogesterone caproate (the “auto-injector”). In consideration for the license, to support joint meetings and a development strategy with the FDA, and for initial tooling and process validation, Lumara Health paid Antares an up-front payment in October 2014. Under the Antares Agreement, we are responsible for the clinical development and preparation, submission and maintenance of all regulatory applications in each country where we desire to market and sell the auto-injector, including the U.S. We are required to pay royalties to Antares on net sales of the auto-injector commencing on the launch of the auto-injector in a particular country until the auto-injector is no longer developed, marketed, sold or offered for sale in such country (“Antares Royalty Term”). The royalty rates range from high single digit to low double digits and are tiered based on levels of net sales of the auto-injector and decrease after the expiration of licensed patents or where there are generic equivalents to the auto-injector being sold in a particular country. Antares is the exclusive supplier of the device components of our auto-injector system and Antares remains responsible for the manufacture and supply of the device components and assembly of the auto-injector. We are responsible for the supply of the drug to be used in the assembly of the finished auto-injector. The development and license agreement terminates at the end of the Antares Royalty Term, but is subject to early termination by us for convenience, by Antares if we do not submit regulatory filings in the U.S. by a certain date and by either party upon an uncured breach by or bankruptcy of the other party.
Abeona
Please refer to Note C, “
Business Combinations
,” to the Financial Statements in our Annual Report for a detailed description of the MuGard License Agreement.
Q. DEBT
Our outstanding debt obligations as of
September 30, 2016
and
December 31, 2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
2023 Senior Notes
|
$
|
489,320
|
|
|
$
|
488,481
|
|
2015 Term Loan Facility
|
321,340
|
|
|
332,688
|
|
Convertible Notes
|
177,146
|
|
|
170,749
|
|
Total long-term debt
|
987,806
|
|
|
991,918
|
|
Less: current maturities
|
62,791
|
|
|
17,500
|
|
Long-term debt, net of current maturities
|
$
|
925,015
|
|
|
$
|
974,418
|
|
2023 Senior Notes
On August 17, 2015, in connection with the CBR acquisition, we completed a private placement of
$500 million
aggregate principal amount of
7.875%
Senior Notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes were issued pursuant to an Indenture, dated as of August 17, 2015 (the “Indenture”), by and among us, certain of our subsidiaries acting as guarantors of the 2023 Senior Notes and Wilmington Trust, National Association, as trustee. The Indenture contains certain customary negative covenants, which are subject to a number of limitations and exceptions. Certain of the covenants will be suspended during any period in which the 2023 Senior Notes receive investment grade ratings.
The 2023 Senior Notes, which are senior unsecured obligations of the Company, will mature on September 1, 2023 and bear interest at a rate of
7.875%
per year, with interest payable semi-annually on September 1 and March 1 of each year, beginning on March 1, 2016. We may redeem some or all of the 2023 Senior Notes at any time, or from time to time, on or after September 1, 2018 at the redemption prices listed in the Indenture, plus accrued and unpaid interest to, but not including, the date of redemption. In addition, prior to September 1, 2018, we may redeem up to
35%
of the aggregate principal amount of the 2023 Senior Notes utilizing the net cash proceeds from certain equity offerings, at a redemption price of
107.875%
of the principal amount thereof, plus accrued and unpaid interest to, but not including, the date of redemption; provided that at least
65%
of the aggregate amount of the 2023 Senior Notes originally issued under the Indenture remain outstanding after such redemption. We may also redeem all or some of the 2023 Senior Notes at any time, or from time to time, prior to September 1, 2018, at a price equal to
100%
of the principal amount of the 2023 Senior Notes to be redeemed, plus a “make-whole” premium plus accrued and unpaid interest, if any, to the date of redemption. Upon the occurrence of a “change of control,” as defined in the Indenture, we are required to offer to repurchase the 2023 Senior Notes at
101%
of the aggregate principal amount thereof, plus any accrued and unpaid interest to, but not including, the repurchase date. The Indenture contains customary events of default, which allow either the trustee or the holders of not less than
25%
in aggregate principal amount of the then-outstanding 2023 Senior Notes to accelerate, or in certain cases, which automatically cause the acceleration of, the amounts due under the 2023 Senior Notes.
At
September 30, 2016
, the principal amount of the outstanding borrowings was
$500 million
and the carrying value of the outstanding borrowings, net of issuance costs and other lender fees and expenses, was
$489.3 million
.
2015 Term Loan Facility
On August 17, 2015, to fund a portion of the purchase price of CBR, we entered into a credit agreement with a group of lenders, including Jefferies Finance LLC as administrative and collateral agent, that provided us with, among other things, a
six
-year
$350.0 million
term loan facility. We borrowed the full
$350.0 million
available under the 2015 Term Loan Facility on August 17, 2015. The credit agreement also allows for the incurrence of incremental loans in an amount up to
$225.0 million
. At
September 30, 2016
, the principal amount of the outstanding borrowings was
$332.5 million
and the carrying value of the outstanding borrowings, net of issuance costs and other lender fees and expenses, was
$321.3 million
. The unamortized original issue costs and other lender fees and expenses, including a prepayment penalty, included
$6.8 million
of the unamortized original issue costs and other lender fees and expenses from our then existing
five
-year term loan facility as a result of accounting guidance for the modification of debt arrangements.
The 2015 Term Loan Facility bears interest, at our option, at the London Interbank Offered Rate (“LIBOR”) plus a margin of
3.75%
or the prime rate plus a margin of
2.75%
. The LIBOR is subject to a
1.00%
floor and the prime rate is subject to a
2.00%
floor. As of
September 30, 2016
, the stated interest rate, based on the LIBOR, was
4.75%
, and the effective interest rate was
5.65%
.
We must repay the 2015 Term Loan Facility in installments of
$4.4 million
per quarter due on the last day of each quarter beginning with the quarter ended
December 31, 2015
. The 2015 Term Loan Facility matures on
August 17, 2021
.
The 2015 Term Loan Facility includes an annual mandatory prepayment of the debt in an amount equal to
50%
of our excess cash flow (as defined in the 2015 Term Loan Facility) as measured on an annual basis, beginning with the year ending
December 31, 2016
. As a result, as of
September 30, 2016
,
$45.3 million
was estimated and reclassified from long-term debt to current portion of long-term debt in our condensed consolidated balance sheet as the first excess payment is expected to be made in April 2017. On or after
December 31, 2016
, the applicable excess cash flow percentage shall be reduced based on the total net leverage ratio as of the last day of the period. Excess cash flow is generally defined as our adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) less debt service costs, unfinanced capital expenditures, unfinanced acquisition expenditures, contingent consideration paid, and current income taxes as well as other adjustments specified in the credit agreement.
The 2015 Term Loan Facility has a lien on substantially all of our assets, including a pledge of
100%
of the equity interests in our domestic subsidiaries and a pledge of
65%
of the voting equity interests and
100%
of the non-voting equity interests in our direct foreign subsidiaries. The 2015 Term Loan Facility contains customary events of default and affirmative and negative covenants for transactions of this type. All obligations under the 2015 Term Loan Facility are unconditionally guaranteed by substantially all of our direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of such subsidiaries, with certain exclusions.
2.5%
Convertible Notes
On February 14, 2014, we issued
$200.0 million
aggregate principal amount of the Convertible Notes. We received net proceeds of
$193.3 million
from the sale of the Convertible Notes, after deducting fees and expenses of
$6.7 million
. We used
$14.1 million
of the net proceeds from the sale of the Convertible Notes to pay the cost of the convertible bond hedges, as described below (after such cost was partially offset by the proceeds to us from the sale of warrants in the warrant transactions described below).
The Convertible Notes are governed by the terms of an indenture between us, as issuer, and Wilmington Trust, National Association, as the trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of
2.5%
per year, payable semi-annually in arrears on February 15 and August 15 of each year. The Convertible Notes will mature on
February 15, 2019
, unless earlier repurchased or converted. Upon conversion of the Convertible Notes, at a holder’s election, such Convertible Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election (subject to certain limitations in the 2015 Term Loan Facility), at a conversion rate of approximately
36.9079
shares of common stock per
$1,000
principal amount of the Convertible Notes, which corresponds to an initial conversion price of approximately
$27.09
per share of our common stock.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends. At any time prior to the close of business on the business day immediately preceding May 15, 2018, holders may convert their Convertible Notes at their option only under the following circumstances:
|
|
1)
|
during any calendar quarter (and only during such calendar quarter), if the last reported sale price of our common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the conversion price on each applicable trading day;
|
|
|
2)
|
during the
five
business day period after any
five
consecutive trading day period (the “measurement period”) in which the trading price per
$1,000
principal amount of the Convertible Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
|
|
|
3)
|
upon the occurrence of specified corporate event.
|
On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of
$1,000
principal amount, at the
option of the holder regardless of the foregoing circumstances. Based on the last reported sale price of our common stock during the last
30
trading days of the second quarter of 2016, the Convertible Notes were not convertible as of
September 30, 2016
.
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity components of the Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option (“equity component”) due to our ability to settle the Convertible Notes in cash, common stock or a combination of cash and common stock, at our option (subject to certain limitations in the 2015 Term Loan Facility). The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the Convertible Notes and the fair value of the liability of the Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over five years. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
Our outstanding Convertible Note balances as of
September 30, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
September 30, 2016
|
Liability component:
|
|
|
Principal
|
$
|
199,998
|
|
Less: debt discount and issuance costs, net
|
(22,852
|
)
|
Net carrying amount
|
$
|
177,146
|
|
Equity component
|
$
|
38,188
|
|
In connection with the issuance of the Convertible Notes, we incurred approximately
$6.7 million
of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total
$6.7 million
of debt issuance costs,
$1.3 million
was allocated to the equity component and recorded as a reduction to additional paid-in capital and
$5.4 million
was allocated to the liability component and is now recorded as a reduction of the Convertible Notes in our condensed consolidated balance sheets. The portion allocated to the liability component is amortized to interest expense using the effective interest method over
five
years.
We determined the expected life of the debt was equal to the
five
-year term on the Convertible Notes. As of
September 30, 2016
, the principal amount of the Convertible Notes was
$200.0 million
and the carrying value of the Convertible Notes was
$177.1 million
. The effective interest rate on the liability component was
7.23%
for the period from the date of issuance through
September 30, 2016
. As of
September 30, 2016
, the “if-converted value” did not exceed the remaining principal amount of the Convertible Notes.
The following table sets forth total interest expense recognized related to the Convertible Notes during the three and
nine
months ended
September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Contractual interest expense
|
$
|
1,250
|
|
|
$
|
1,250
|
|
|
$
|
3,750
|
|
|
$
|
3,750
|
|
Amortization of debt issuance costs
|
273
|
|
|
253
|
|
|
797
|
|
|
733
|
|
Amortization of debt discount
|
1,920
|
|
|
1,777
|
|
|
5,602
|
|
|
5,153
|
|
Total interest expense
|
$
|
3,443
|
|
|
$
|
3,280
|
|
|
$
|
10,149
|
|
|
$
|
9,636
|
|
Convertible Bond Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes and in order to reduce the potential dilution to our common stock and/or offset cash payments due upon conversion of the Convertible Notes, in February 2014 we entered into convertible bond hedge transactions covering approximately
7.4 million
shares of our common stock underlying the
$200.0 million
aggregate principal amount of the Convertible Notes with the call spread counterparties. The convertible bond hedges have an exercise price of approximately
$27.09
per share, subject to adjustment upon certain events, and are exercisable when and if the Convertible Notes are converted. If upon conversion of the Convertible Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the call spread counterparties will deliver shares of our common stock and/or
cash with an aggregate value approximately equal to the difference between the price of our common stock at the conversion date and the exercise price, multiplied by the number of shares of our common stock related to the convertible bond hedges being exercised. The convertible bond hedges are separate transactions entered into by us and are not part of the terms of the Convertible Notes or the warrants, discussed below. Holders of the Convertible Notes will not have any rights with respect to the convertible bond hedges. We paid
$39.8 million
for these convertible bond hedges and recorded this amount as a reduction to additional paid-in capital, net of tax, in 2014.
In February 2014, we also entered into separate warrant transactions with each of the call spread counterparties relating to, in the aggregate, approximately
7.4 million
shares of our common stock underlying the
$200.0 million
aggregate principal amount of the Convertible Notes. The initial exercise price of the warrants is
$34.12
per share, subject to adjustment upon certain events, which is
70%
above the last reported sale price of our common stock of
$20.07
on February 11, 2014. The warrants would separately have a dilutive effect to the extent that the market value per share of our common stock, as measured under the terms of the warrants, exceeds the applicable exercise price of the warrants. The warrants were issued to the call spread counterparties pursuant to the exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended. We received
$25.7 million
for these warrants and recorded this amount to additional paid-in capital in 2014.
Aside from the initial payment of
$39.8 million
to the call spread counterparties for the convertible bond hedges, which was partially offset by the receipt of
$25.7 million
for the warrants, we are not required to make any cash payments to the call spread counterparties under the convertible bond hedges and will not receive any proceeds if the warrants are exercised.
R. RESTRUCTURING
In connection with the CBR and Lumara Health acquisitions, we initiated restructuring programs in the third quarter of 2015 and the fourth quarter of 2014, respectively, which included severance benefit expenses primarily related to certain former CBR and Lumara Health employees. As a result of these restructurings, we recorded
no
charges and approximately
$0.7 million
in the three and
nine
months ended
September 30, 2016
, respectively, as compared to
$0.7 million
and
$1.8 million
in the same periods in
2015
. We expect to pay substantially all of these restructuring costs by the end of
2016
.
The following table outlines the components of our restructuring expenses which were included in current liabilities for the three and
nine months ended September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Accrued restructuring, beginning of period
|
$
|
1,107
|
|
|
$
|
1,253
|
|
|
$
|
2,883
|
|
|
$
|
1,953
|
|
Employee severance, benefits and related costs
|
—
|
|
|
635
|
|
|
898
|
|
|
1,490
|
|
Payments
|
(580
|
)
|
|
(736
|
)
|
|
(3,254
|
)
|
|
(2,291
|
)
|
Accrued restructuring, end of period
|
$
|
527
|
|
|
$
|
1,152
|
|
|
$
|
527
|
|
|
$
|
1,152
|
|
S. RECENTLY ISSUED AND PROPOSED ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB”) or other standard setting bodies that are adopted by us as of the specified effective date.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). The new standard clarifies existing guidance related to accounting for cash receipts and cash payments and classification on the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of ASU 2016-15 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will be effective for us for fiscal years beginning on or after January 1, 2020, including interim periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of our adoption of ASU 2016-13 in our condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(
“
ASU 2016-09”). The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities and classification on the statement of cash flows. ASU 2016-09 will be effective for us on January 1, 2017. We are currently evaluating the potential impact that this standard may have on our financial position, results of operations and statement of cash flows.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). This statement requires entities to recognize on its balance sheet assets and liabilities associated with the rights and obligations created by leases with terms greater than twelve months. This statement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods and early adoption is permitted. We are currently evaluating the impact of ASU 2016-02 in our condensed consolidated financial statements and we currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for us on January 1, 2018. We are currently evaluating the impact of our pending adoption of ASU 2016-01 in our condensed consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory
(Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”). The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of ASU 2015-11 is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 will be effective for us on January 1, 2017. The adoption of ASU 2015-11 is not expected to have a material impact on our results of operations, cash flows or financial position.
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15,
Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
(“ASU 2015-15”), which allows presentation of debt issuance costs related to line-of-credit arrangements as either in accordance with the amendments in ASU 2015-03, or as an asset with subsequent amortization of the debt issuance costs ratably over the term of the arrangement. We adopted ASU 2015-03 retrospectively in the first quarter of 2016. As a result, we presented unamortized debt issuance costs as direct deductions from the carrying amounts of the related debt liabilities. We previously included the
$11.2 million
of unamortized debt issuance costs in “other long-term assets” in our condensed consolidated balance sheet as of December 31, 2015.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“
ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures, if required. ASU 2014-15 will be effective for annual reporting periods ending after December 15, 2016, which will be our fiscal year ending December 31, 2016, and to annual and interim periods thereafter. We are in the process of evaluating the impact of adoption of ASU 2014-15 in our condensed consolidated financial statements and related disclosures and do not expect it to have a material impact on our results of operations, cash flows or financial position.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification Topic 606
(“ASU 2014-09”). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customer
Topic 606s, Principal versus Agent Considerations
, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers Topic 606, Identifying Performance Obligations and Licensing
, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers Topic 606, Narrow-Scope Improvements and Practical Expedients
,
related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected from customers. We are currently evaluating the method of adoption and the potential impact that Topic 606 may have on our financial position and results of operations. These ASUs are effective for entities for interim and annual reporting periods beginning after December 15, 2017, including interim periods within that year,
which for us is the period beginning January 1, 2018. Early adoption is permitted any time after the original effective date, which for us is January 1, 2017. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. We have not yet selected a transition method and are currently evaluating the impact of this standard in our condensed consolidated financial statements.