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General and Administrative Expense 2016 Compared to 2015 General and administrative expense decreased $12.8 million • Decreases in professional fees of $7.9 million, largely associated with the completion in 2016 of our internal control remediation efforts and Project Bluecore, a company-wide infrastructure initiative to improve the reliability and efficiency of our systems, processes, and reporting • Reduced legal costs of $6.9 million, largely due to legal settlements incurred in the prior year and a commercial legal settlement in 2016 whereby we received $3.0 million • The moratorium on the medical device tax in 2016, which decreased expense by $1.3 million • Reduction in other controllable expenses • Overall decrease was partially offset by increased share-based compensation expense of $8.1 million, including $5.7 million associated with the determination in 2016 that achieving the performance criteria related to certain of our performance-based vesting restricted stock awards is probable 2015 Compared to 2014 General and administrative expense increased $8.1 million • Legal settlements totaling $5.3 million in 2015 • Increased spending of $1.6 million associated with the strengthening of our infrastructure as part of Project Bluecore • Increased share-based compensation expense of $1.5 million • Increased professional fees and personnel costs as part of our internal controls remediation efforts • Overall decrease partially offset by the impact of changes in foreign exchange rates Research and Development Expense 2016 Compared to 2015 Research and development expense increased $2.4 million • Increased costs associated with clinical trials of $1.5 million, primarily due to invested resources to identify potential new clinical indications for our PEMF technology and to develop our next generation of bone growth stimulators, which were recently approved by the FDA and European Commission • A $1.3 million investment made in the first quarter of 2016 to expand the processing and storage capabilities of MTF, the supplier of our Trinity Evolution and Trinity ELITE tissue forms 2015 Compared to 2014 Research and development expense increased $1.4 million due primarily to increased consulting fees and clinical trial costs as we invested resources to identify potential new clinical indications for our PEMF technology and for new product developments in Spine Fixation and Extremity Fixation. |
The primary factors affecting our effective tax rate for 2016 are as follows: • Expenses categorized as “Charges related to U.S. Government resolutions”, which represent settlement payments with substantially no tax benefit • A change in estimate relating to the deductible amount of certain compensation expenses • Increases in unrecognized tax benefits • Expiration of certain foreign net operating loss carryforwards and current period losses in jurisdictions where we do not currently receive a tax benefit 2015 Effective Tax Rate The primary factors affecting our effective tax rate for 2015 were as follows: • Expiration of certain foreign net operating loss carryforwards and current period losses in jurisdictions where we do not currently receive a tax benefit • The mix of earnings among tax jurisdictions • Recording a valuation allowance on the net deferred tax assets in Puerto Rico Liquidity and Capital Resources Cash and cash equivalents at December 31, 2016 were $39.6 million compared to $63.7 million at December 31, 2015. |
The following table identifies our principal products by trade name and describes their primary applications: Product Primary Application BioStim Solutions Cervical-Stim® Pulsed electromagnetic field (“PEMF”) non-invasive cervical spine regenerative stimulator used to enhance bone growth Spinal-Stim® PEMF non-invasive lumbar spine regenerative stimulator used to enhance bone growth Physio-Stim® PEMF non-invasive long bone regenerative stimulator used to enhance bone growth in non-union factures Biologic Solutions AlloQuent® Structural Allografts Interbody devices made of cortical bone that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc Trinity ELITE® A fully moldable allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Trinity Evolution® An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure VersaShield® A thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands Collage® Synthetic Osteoconductive Scaffold A synthetic bone void filler Extremity Fixation Solutions Fixator External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus™, XCaliber® and Gotfried P.C.C.P® Eight-Plate Guided Growth System® Treatment for bowed legs or knock knees of children LRS Advanced Limb Reconstruction System® External fixation for limb lengthening and corrections of deformity TrueLok™ Ring fixation system for limb lengthening and deformity correction TL-HEX TrueLok Hexapod System®(“TL-HEX™”) Hexapod external fixation system for trauma and deformity correction with associated software Galaxy Fixation® System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps PREFIX™ and PREFIX 2™ External fixation range for temporary fixation of fractures in trauma VeroNail® Trochanteric Nailing System Trochanteric titanium nailing system for hip fractures Centronail® Titanium Nailing System Complete range of intramedullary nails including the Humeral Nail Cemex® Bone cement OSCAR® Ultrasonic bone cement removal Product Primary Application Centronail® Ankle Compression Nailing System (“ACN”) An extension of the Centronail® range of intermedullary nails Ankle Hindfoot Nail (“AHN”) A differentiated solution for hindfoot fusions Contours™ Lapidus Plating System™ (“LPS”) A plate design contoured specifically for a tarsometatarsal (“TMT”) fusion Contours PHP Proximal Humeral Plate™ (“PHP”) An innovative plating solution for fraction fixation of the proximal humerus Contours VPS® Volar Plating System™ III The 3rd generation of plates to treat distal radius fractures Spine Fixation Solutions 3°™ /Reliant™ Anterior Cervical Plating Systems Plating systems implanted during anterior cervical spine fusion procedures Hallmark® Anterior Cervical Plate System A cervical plating system implanted during anterior cervical spine fusion procedures Ascent® LE Posterior Occipital Cervico-Thoracic (“POCT”) System A system of pedicle screws and rods implanted during a posterior spinal fusion procedure involving the stabilization of several degenerated or deformed cervical vertebrae NewBridge® Laminoplasty Fixation System A device implanted during a posterior surgical procedure designed to expand the cervical vertebrae and relieve pressure on the spinal canal ATHLET™ Vertebral Body Replacement (“VBR”) System A lordotic, modular vertebral body replacement system intended for use in the thoracolumbar spine Construx® Mini PEEK Spacer System Smaller, unibody versions of the Construx PEEK VBR System, implanted as a cervical interbody or partial vertebrectomy solution CONSTRUX® Mini PEEK/ Titanium Composite™ (“PTC”) Spacer System™ A cervical interbody with porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics Construx® PEEK VBR System A modular device implanted during the replacement of degenerated or deformed spinal vertebrae to provide additional anterior support NGage® Surgical Mesh System A modular metallic interbody implant placed between two vertebrae designed to restore disc space and increase stability that has been lost due to degeneration or deformity PILLAR® PL & TL PEEK VBR System Interbody devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Transforaminal Lumbar Interbody Fusion (“TLIF”) procedures FORZA® Spacer System Interbody devices for PLIF and TLIF procedures PILLAR® AL PEEK Partial VBR System An intervertebral body fusion device for Anterior Lumbar Interbody Fusion (“ALIF”) procedures PILLAR® SA PEEK Spacer System An intervertebral body fusion device that incorporates screw fixation to optimize implant stability Firebird® Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure Firebird® Deformity Correction System An extension to the Firebird® Spinal Fixation System that provides additional instrument and implant options for complex thoracolumbar spine procedures Phoenix® Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird® Spinal Fixation System designed to be implanted during a posterior thoracolumbar spine fusion procedure Product Primary Application Phoenix® Compression Destraction Extension (“CDX™”) An extension to the Phoenix® Minimally Invasive Spinal Fixation System that provides additional implant and instrument options for complex deformity spinal fixation JANUS™ Midline Fixation Screw An addition to the Firebird® Spinal Fixation System designed to achieve more cortical bone purchase in the medial to lateral trajectory when compared to traditional pedicle screws and provides surgeons with the option of a midline approach SFS™ Spinal Fixation System A system of screws, hooks, rods, spacers, staples, washers, dominos, lateral offsets, cross-connectors that provides simple, reliable and comprehensive stabilization solution for spinal non-cervical fixation Samba-Screw® System A minimally invasive screw system that is intended for fixation of sacroiliac joint disruptions in skeletally mature patients ProView® Minimal Access Portal (“MAP”) System An instrument system for minimally invasive posterior lumbar spinal fusion, including tubular and expandable retractors, a percutaneous screw delivery system and the ONYX ™ System for Disc removal and interbody space preparation Unity® Lumbosacral Fixation System A plating system implanted during anterior lumbar spine fusion procedures LONESTAR® Cervical Stand Alone (“CSA”) A stand-alone spacer system designed to provide the biomechanical strength to a tradition or minimal invasive ACDF procedure with less disruption of patient anatomy and preserve the anatomical profile SKYHAWK® Lateral Interbody Fusion System & Lateral Plate System Provides a complete solution for the surgeon to perform a Lateral Lumbar Interbody Fusion, an approach to spinal fusion in which the surgeon access the intervertebral disc space using a surgical approach from the patient’s side that disturbs fewer structures and tissues QUADRx™ Lateral Retractor A retractor with a straightforward 4 blade design that requires no sequential dilation prior to retractor placement over the guide wire and creates a rectangular aperture that provides adaptability to both patient anatomy and surgeon technique CENTURION® Posterior Occipital Cervico-Thoracic (“POCT”) System A multiple component system comprised of a variety of non-sterile, single use components made of titanium alloy or cobalt chrome that allow the surgeon to build a spinal implant construct We have proprietary rights in all of the above products with the exception of Cemex®, Eight-Plate Guided Growth System® and Contour VPS®. |
The following table identifies our principal products by trade name and describes their primary applications: Product Primary Application BioStim Solutions Cervical-Stim® Pulsed electromagnetic field (“PEMF”) non-invasive cervical spine regenerative stimulator used to enhance bone growth Spinal-Stim® PEMF non-invasive lumbar spine regenerative stimulator used to enhance bone growth Physio-Stim® PEMF long bone non-invasive regenerative stimulator used to enhance bone growth in non-union factures Biologic Solutions AlloQuent® Structural Allografts Interbody devices made of cortical bone that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc Trinity ELITE® A fully moldable allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Trinity Evolution® An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure VersaShield® A thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands Collage® Synthetic Osteoconductive Scaffold A bone void filler Extremity Fixation Solutions Fixator External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus™, XCaliber® and Gotfried P.C.C.P® Eight-Plate Guided Growth System® Treatment for bowed legs or knock knees of children LRS Advanced Limb Reconstruction System® External fixation for limb lengthening and corrections of deformity TrueLok™ Ring fixation system for limb lengthening and deformity correction TL-HEX TrueLok Hexapod System®(“TL-HEX™”) Hexapod external fixation system for trauma and deformity correction with associated software Galaxy Fixation™ System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps. |
Spine Fixation Solutions 3°™ /Reliant® Anterior Cervical Plating Systems Plating systems implanted during anterior cervical spine fusion procedures Hallmark® Anterior Cervical Plate System A cervical plating system implanted during anterior cervical spine fusion procedures Ascent® LE Posterior Occipital Cervico-Thoracic (“POCT”) System A system of pedicle screws and rods implanted during a posterior spinal fusion procedure involving the stabilization of several degenerated or deformed cervical vertebrae NewBridge® Laminoplasty Fixation System A device implanted during a posterior surgical procedure designed to expand the cervical vertebrae and relieve pressure on the spinal canal Construx® Mini PEEK Spacer System Smaller, unibody versions of the Construx PEEK VBR System, implanted as a cervical interbody or partial vertebrectomy solution CONSTRUX®Mini PTC™ PEEKTI Composite Spacer System™ A cervical interbody with porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics. |
Construx® PEEK VBR System A modular device implanted during the replacement of degenerated or deformed spinal vertebrae to provide additional anterior support NGage® Surgical Mesh System A modular metallic interbody implant placed between two vertebrae designed to restore disc space and increase stability that has been lost due to degeneration or deformity PILLAR® PL & TL PEEK VBR System Interbody devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Transforaminal Lumbar Interbody Fusion (“TLIF”) procedures FORZA® Spacer System PLIF and TLIF procedures PILLAR® AL PEEK Partial VBR System An intervertebral body fusion device for Anterior Lumbar Interbody Fusion (“ALIF”) procedures PILLAR® SA PEEK Spacer System An intervertebral body fusion device that incorporates screw fixation to optimize implant stability Firebird® Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure Firebird® Deformity Correction System An extension to the Firebird TM Spinal Fixation System that provides additional instrument and implant options for complex thoracolumbar spine procedures Phoenix® Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird Spinal Fixation System designed to be implanted during a posterior thoracolumbar spine fusion procedure SFS™ Spinal Fixation System A system of screws, hooks, rods, spacers, staples, washers, dominos, lateral offsets, cross-connectors that provides simple, reliable and comprehensive stabilization solution for spinal non-cervical fixation SambaScrew® A minimally invasive screw system that is intended for fixation of sacroiliac joint disruptions in skeletally mature patients Product Primary Application ProView™ Minimal Access Portal (“MAP”) System An instrument system for minimally invasive posterior lumbar spinal fusion, including tubular and expandable retractors, a percutaneous screw delivery system and the ONYX ™ System for Disc removal and interbody space preparation Unity® Lumbosacral Fixation System A plating system implanted during anterior lumbar spine fusion procedures LONESTAR® Cervical Stand Alone A stand-alone spacer system designed to provide the biomechanical strength to a tradition or minimal invasive ACDF procedure with less disruption of patient anatomy and preserve the anatomical profile. |
In addition, we have designed and are implementing the specific remediation initiatives described below: Management’s remediation plan with respect to controls over revenue recognition practices relating to the Company’s distributors: ● We have enhanced our revenue recognition training materials for all sales personnel; ● We have conducted training of sales personnel (including senior-level management) pursuant to our updated revenue recognition training materials; ● We have created and implemented an improved sales certification process to identify any sales with deviations from written sales contracts; ● We have added key personnel within our finance department, which we believe will bring additional revenue recognition expertise to address our more complex revenue transactions to help ensure that our revenue recognition policies are correctly applied; and ● We are working to improve procedures with respect to the proper communication, approval, documentation and accounting review of deviations from written sales contracts. |
Management’s remediation plan with respect to controls over foreign subsidiary oversight: ● We have changed our structure so that all of our foreign subsidiaries’ accounting functions now report to the VP of International Accounting, who then, along with our domestic subsidiaries’ accounting functions, report to the VP, Controller within the corporate accounting function, which enhances the review of, and provides additional corporate-level oversight of, their activities; ● We have established and hired a Director of Controls and Process Improvement position, whose primary duties are the design and implementation of processes and procedures to strengthen internal control over financial reporting; ● We have engaged a professional firm to perform testing and evaluation of the Company’s internal controls, and to assist the Company in designing and implementing additional financial reporting controls and financial reporting control enhancements; and ● We are evaluating our accounting systems to determine appropriate enhancements, and a plan is being executed that includes upgrading accounting systems at foreign locations. |
The following table identifies our principal products by trade name and describes their primary applications: Product Primary Application BioStim Solutions Cervical-Stim ® Pulsed electromagnetic field (“PEMF”) non-invasive cervical spine regenerative stimulator used to enhance bone growth Spinal-Stim ® PEMF non-invasive lumbar spine regenerative stimulator used to enhance bone growth Physio-Stim ® PEMF long bone non-invasive regenerative stimulator used to enhance bone growth in non-union factures Biologic Solutions Alloquent ® Allografts Interbody devices made of cortical bone that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc Trinity Elite ® A fully moldable allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Trinity Evolution ® An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Versashield ® VersaShield™ is a thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands Product Primary Application Collage ™ Synthetic Osteoconductive Scaffold A bone void filler Extremity Fixation Solutions Fixation External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus ®, XCaliber ™ and Gotfried PC.C.P ® Eight-Plate Guided Growth System ® Treatment for bowed legs or knock knees of children Limb Reconstruction System (“LRS”) and LRS ADVanced External fixation for lengthenings and corrections of deformity TrueLok ™ Ring fixation system for limb lengthening and deformity correction TL-HEX™ TrueLok™ Hexapod System(TL-HEX) Hexapod external fixation system for trauma and deformity correction with associated software Galaxy Fixation ™ System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps. |
Spine Fixation Solutions 3 Degree ™ /Reliant ® Anterior Cervical Plating Systems Plating systems implanted during anterior cervical spine fusion procedures Hallmark ® Anterior Cervical Plate System A cervical plating system implanted during anterior cervical spine fusion procedures Ascent ® LE Posterior Occipital Cervico-Thoracic (“POCT”) System A system of pedicle screws and rods implanted during a posterior spinal fusion procedure involving the stabilization of several degenerated or deformed cervical vertebrae Tempus Cervical Plate A cervical plating system implanted during anterior cervical spine fusion procedures Product Primary Application NewBridge ® Laminoplasty Fixation System A device implanted during a posterior surgical procedure designed to expand the cervical vertebrae and relieve pressure on the spinal canal Construx ® Mini PEEK Spacer System Smaller, unibody versions of the Construx PEEK VBR System, implanted as a cervical interbody or partial vertebrectomy solution CONSTRUX®Mini PTC(TM) PEEK Titanium Composite Spacer System™ A cervical interbody with porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics. |
Construx ® PEEK VBR System A modular device implanted during the replacement of degenerated or deformed spinal vertebrae to provide additional anterior support NGage ® Surgical Mesh System A modular metallic interbody implant placed between two vertebrae designed to restore disc space and increase stability that has been lost due to degeneration or deformity PILLAR ® PL & TL PEEK VBR System Interbody devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Transforaminal Lumbar Interbody Fusion (“TLIF”) procedures FORZA™ Spacer System PLIF and TLIF procedures PILLAR ® AL PEEK Partial VBR System An intervertebral body fusion device for Anterior Lumbar Interbody Fusion (“ALIF”) procedures PILLAR ® SA PEEK Spacer System An intervertebral body fusion device that incorporates screw fixation to optimize implant stability Firebird ® Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure Firebird ® Deformity Correction System An extension to the Firebird TM Spinal Fixation System which provides additional instrument and implant options for complex thoraco-lumbar spine procedures Phoenix ™ Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird Spinal Fixation System designed to be implanted during a posterior thoraco-lumbar spine fusion procedure SFS ™ Spinal Fixation System A system of screws, hooks, rods, spacers, staples, washers, dominos, lateral offsets, cross-connectors which provides simple, reliable and comprehensive stabilization solution for spinal non-cervical fixation ICON ™ Spinal Fixation System Multi axial pedicle screws, mono axial pedicle screws, reduction screws, set screws, multi-axial bodies, offset bodies, cross connectors and rods that allow the surgeon to build a spinal implant construct. |
Those regulatory requirements include: product listing and establishment registration; Quality System Regulation (“QSR”) which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses or indications; clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; approval of product modifications that affect the safety or effectiveness of one of our PMA approved devices; Medical Device Reporting regulations, which require that manufacturers report to FDA if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; post-approval restrictions or conditions, including post-approval study commitments; post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations; regulations pertaining to voluntary recalls; and notices of corrections or removals. |
In addition, we have designed and plan to implement, and in some cases have already implemented, the specific remediation initiatives described below: Management’s remediation plan with respect to controls over revenue recognition practices relating to the Company’s distributors: • We have enhanced our revenue recognition training materials for all sales personnel; • We are in the process of training sales management personnel (including senior-level management) pursuant to our updated revenue recognition training materials; • We have created and implemented an improved sales certification process to identify any sales with deviations from written sales contracts; • We have established and hired a new Senior Manager of Revenue position in our finance department, which we believe will bring additional revenue recognition expertise to address our more complex revenue transactions to help ensure that our revenue recognition policies are correctly applied; and • We are working to improve procedures with respect to the proper communication, approval, documentation and accounting review of deviations from written sales contracts. |
The following table identifies our principal products by trade name and describes their primary applications: Product Primary Application Spinal Regenerative Solutions Cervical-Stim ® Pulsed electromagnetic field (“PEMF”) non-invasive cervical spine regenerative stimulator used to enhance bone growth Spinal-Stim ® PEMF non-invasive lumbar spine regenerative stimulator used to enhance bone growth Alloquent ® Allografts Interbody devices made of cortical bone that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc Trinity Evolution ® An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion procedure Collage ™ Synthetic Osteoconductive Scaffold A bone void filler Spinal Repair Solutions 3 Degree ™ /Reliant ™ Anterior Cervical Plating Systems Plating systems implanted during anterior cervical spine fusion procedures Hallmark ® Anterior Cervical Plate System A cervical plating system implanted during anterior cervical spine fusion procedures Ascent ® LE Posterior Occipital Cervico-Thoracic (“POCT”) System A system of pedicle screws and rods implanted during a posterior spinal fusion procedure involving the stabilization of several degenerated or deformed cervical vertebrae NewBridge ® Laminoplasty Fixation System A device implanted during a posterior surgical procedure designed to expand the cervical vertebrae and relieve pressure on the spinal canal Construx ® Mini PEEK Spacer System Smaller, unibody versions of the Construx PEEK VBR System, implanted as a cervical interbody or partial vertebrectomy solution CONSTRUX®Mini PTC(TM) PEEK Titanium Composite Spacer System™ A cervical interbody with porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics. |
Construx ® PEEK VBR System A modular device implanted during the replacement of degenerated or deformed spinal vertebrae to provide additional anterior support NGage ® Surgical Mesh System A modular metallic interbody implant placed between two vertebrae designed to restore disc space and increase stability that has been lost due to degeneration or deformity PILLAR ™ PL & TL PEEK VBR System Interbody devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Trans-laminar Lumbar Interbody Fusion (“TLIF”) procedures FORZA™ Spacer System Interbody devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Trans-laminar Lumbar Interbody Fusion (“TLIF”) procedures PILLAR ™ AL PEEK Partial VBR System An intervertebral body fusion device for Anterior Lumbar Interbody Fusion (“ALIF”) procedures PILLAR ™ SA PEEK Spacer System An intervertebral body fusion device that incorporates screw fixation to optimize implant stability Firebird ™ Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure Firebird ™ Deformity Correction System An extension to the Firebird TM Spinal Fixation System which provides additional instrument and implant options for complex thoraco-lumbar spine procedures Phoenix ™ Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird TM Spinal Fixation System designed to be implanted during a posterior thoraco-lumbar spine fusion procedure SFS ™ Spinal Fixation System A system of screws, hooks, rods, spacers, staples, washers, dominos, lateral offsets, cross-connectors which provides simple, reliable and comprehensive stabilization solution for spinal non-cervical fixation ICON ™ Spinal Fixation System Multi axial pedical screws, mono axial pedicle screws, reduction screws, set screws, multi-axial bodies, offset bodies, cross connectors and rods that allow the surgeon to build a spinal implant construct. |
The ICON ™ Module Spinal Fixation System is intended for posterior, non cervical pedicle fixation ProView ™ Minimal Access Portal (“MAP”) System An instrument system for minimally invasive posterior lumbar spinal fusion, including tubular and expandable retractors, a percutaneous screw delivery system and the ONYX ™ System for Disc removal and interbody space preparation Unity ® Lumbosacral Fixation System A plating system implanted during anterior lumbar spine fusion procedures TDX ™ Posterior Dynamic Stabilization A posterior dynamic rod allowing natural movements in the treated segments of the lumbar spine (Currently only available for sale outside the U.S.) In Swing ™ Interspinous Process Spacer An implant placed between the spinous processes of the lumbar spine, designed to widen the canal and decompress the symptomatic level (Currently only available for sale outside the U.S.) Product Primary Application Orthopedic Repair Solutions Fixation External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus ®, XCaliber ™ and Gotfried PC.C.P ® Eight-Plate Guided Growth System ® Treatment for bowed legs or knock knees of children Limb Reconstruction System (“LRS”) and LRS ADVanced External fixation for lengthenings and corrections of deformity TrueLok ™ Ring fixation system for limb lengthening and deformity correction TL-HEX™ TrueLok™ Hexapod System(TL-HEX) Hexapod external fixation system for trauma and deformity correction with associated software Galaxy Fixation ™ System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps. |
Key elements of the Integrity Advantage ™ Program include: • Organizational oversight by senior-level personnel responsible for the compliance function within our Company; • Written standards and procedures, including a Corporate Code of Business Conduct; • Methods for communicating compliance concerns, including anonymous reporting mechanisms; • Investigation and remediation measures to ensure prompt response to reported matters and timely corrective action; • Compliance education and training for employees and contracted business associates; • Auditing and monitoring controls to promote compliance with applicable laws and assess program effectiveness; • Disciplinary guidelines to enforce compliance and address violations; • Exclusion lists screening of employees, and contracted business associates; and • Risk assessments to identify areas of regulatory compliance risk Government Regulation Our research, development and clinical programs, as well as our manufacturing and marketing operations, are subject to extensive regulation in the U.S. and other countries. |
Key elements of the Integrity Advantage ™ Program include: · Organizational oversight by senior-level personnel responsible for the compliance function within our Company; · Written standards and procedures, including a Corporate Code of Business Conduct; · Methods for communicating compliance concerns, including anonymous reporting mechanisms; · Investigation and remediation measures to ensure prompt response to reported matters and timely corrective action; · Compliance education and training for employees and agents; · Auditing and monitoring controls to promote compliance with applicable laws and assess program effectiveness; · Disciplinary guidelines to enforce compliance and address violations; · Exclusion lists screening of employees, agents and distributors; and · Risk assessment to identify areas of regulatory compliance risk Government Regulation Our research, development and clinical programs, as well as our manufacturing and marketing operations, are subject to extensive regulation in the U.S. and other countries. |
Name Title Date /s/ ROBERT S. VATERS President and Chief Executive Officer, February 29, 2012 Robert S. Vaters Director (Principal Executive Officer) /s/ BRIAN MCCOLLUM Senior Vice President of Finance and Chief February 29, 2012 Brian McCollum Financial Officer (Principal Financial and Accounting Officer) /s/ JAMES F. GERO Chairman of the Board of Directors February 29, 2012 James F. Gero /s/ WALTER VON WARTBURG Director February 29, 2012 Walter von Wartburg /s/ GUY JORDAN Director February 29, 2012 Guy Jordan /s/ KENNETH R. WEISSHAAR Director February 29, 2012 Kenneth R. Weisshaar /s/ MICHAEL MAINELLI Director February 29, 2012 Michael Mainelli /s/ ALAN W. MILINAZZO Director February 29, 2012 Alan W. Milinazzo /s/ DAVEY S. SCOON Director February 29, 2012 Davey S. Scoon ORTHOFIX INTERNATIONAL N.V. Index to Consolidated Financial Statements Page Index to Consolidated Financial Statements Statement of Management’s Responsibility for Financial Statements Management’s Report on Internal Control over Financial Reporting Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2011 and 2010 Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009 Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 Notes to the Consolidated Financial Statements Schedule 1-Condensed Financial Information of Registrant Orthofix International N.V. S-1 Schedule 2-Valuation and Qualifying Accounts S-5 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. |
The following table identifies our principal products by trade name and describes their primary applications: Product Primary Application Spine Products Cervical-Stim® Pulsed electromagnetic field (“PEMF”) non-invasive cervical spine bone growth stimulator Spinal-Stim® PEMF non-invasive lumbar spine bone growth stimulator Alloquent® Allografts Interbody devices made of cortical bone that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc Trinity® Evolution™ An adult stem cell-based bone growth matrix used during surgery that is designed to enhance the success of a spinal fusion procedure 3 Degree™/Reliant™ Anterior Cervical Plating Systems Plating systems implanted during anterior cervical spine fusion procedures Hallmark® Anterior Cervical Plate System A cervical plating system implanted during anterior cervical spine fusion procedures Ascent® LE Posterior Occipital Cervico-Thoracic (“POCT”) System A system of pedicle screws and rods implanted during a posterior spinal fusion procedure involving the stabilization of several degenerated or deformed cervical vertebrae NewBridge® Laminoplasty Fixation System A device implanted during a posterior surgical procedure designed to expand the cervical vertebrae and relieve pressure on the spinal canal Construx® Mini Polyetheretherketones (“PEEK”) Vertebral Body Replacement (“VBR”) System Smaller, unibody versions of the Construx PEEK VBR System, implanted during the replacement of degenerated or deformed spinal vertebrae Construx® PEEK VBR System A modular device implanted during the replacement of degenerated or deformed spinal vertebrae to provide additional anterior support NGage® Surgical Mesh System A modular metallic interbody implant placed between two vertebrae designed to restore disc space and increase stability that has been lost due to degeneration or deformity PILLAR™ PL & TL PEEK VBR System Interbody devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Trans-laminar Lumbar Interbody Fusion (“TLIF”) procedures PILLAR™ AL PEEK Partial VBR System An intervertebral body fusion device for Anterior Lumbar Interbody Fusion (“ALIF”) procedures PILLAR™ SA PEEK Spacer System An intervertebral body fusion device that incorporates screw fixation to optimize implant stability Firebird™ Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure ProView™ Minimal Access Portal (“MAP”) System An instrument system for minimally invasive posterior lumbar spinal fusion, including tubular and expandable retractors, a percutaneous screw delivery system and the ONYX™ System for Disc removal and interbody space preparation Unity® Lumbosacral Fixation System A plating system implanted during anterior lumbar spine fusion procedures Product Primary Application Orthopedic Products Fixation External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus®, XCaliber™, Contours VPS®, VeroNail® and Gotfried PC.C.P® Physio-Stim® PEMF long bone non-invasive bone growth stimulator Trinity® Evolution™ An adult stem cell-based bone growth matrix used during surgery to facilitate bone fusion Origen™ DBM with Bioactive Glass A bone void filler Eight-Plate Guided Growth System® Treatment for bowed legs or knock knees of children ISKD® Internal limb-lengthening device Limb Reconstruction System (“LRS”) and LRS ADVanced External fixation for lengthenings and corrections of deformity TrueLok™ Ring fixation system for limb lengthening and deformity correction PREFIX™ and PREFIX™ 2 External fixation range for temporary fixation of fractures in trauma Centronail® Titanium Nailing System Complete range of intramedullary nails including the Humeral Nail Cemex® Bone cement OSCAR Ultrasonic bone cement removal Sports Medicine Products Breg® Bracing Bracing products which are designed to provide support and protection of limbs, extremities and back during healing and rehabilitation Polar Care® and KODIAK® Cold therapy products that are designed to reduce swelling, pain and accelerate the rehabilitation process OrthoSelect™ services and Vision™ Inventory Management System Consulting services which provide guidance and tools to improve overall practice efficiency and a web based inventory system customized to enable efficient management of orthopedic devices We have proprietary rights in all of the above products with the exception of Cemex®, ISKD®, Eight-Plate Guided Growth System® and Contour VPS®. |
Square Feet Ownership Manufacturing, warehousing, distribution and research and development facility for Spine and Orthopedics Products and administrative facility for Corporate, Domestic and Spinal Implants and Biologics segments Lewisville, TX 140,000 Leased Tooling and model shop for Spinal Implants and Biologics Springfield, MA 19,000 Leased Research and development office for Spinal Implants and Biologics Fairfield, NJ 3,946 Leased Research and development, component manufacturing, quality control and training facility for fixation products and sales management, distribution and administrative facility for Italy Verona, Italy 38,000 Owned International Distribution Center for Orthofix products Verona, Italy 18,000 Leased Sales management, distribution and administrative offices Florham Park, NJ 2,700 Leased Sales management, distribution and administrative offices for fixation products Andover, England 9,001 Leased Sales management, distribution and administrative facility for United Kingdom Maidenhead, England 9,000 Leased Sales management, distribution and administrative facility for Brazil Alphaville, Brazil 4,690 Leased Sales management, distribution and administrative facility for Brazil São Paulo, Brazil 1,184 Leased Sales management, distribution and administrative facility for France Gentilly, France 3,854 Leased Sales management, distribution and administrative facility for Germany Ottobrunn, Germany 16,145 Leased Sales management, distribution and administrative facility for Switzerland Steinhausen, Switzerland 1,180 Leased Administrative, manufacturing, warehousing, distribution and research and development facility for Breg Vista, California 104,832 Leased Manufacturing facility for Breg products Mexicali, Mexico 63,000 Leased Sales management, distribution and administrative facility for Puerto Rico Guaynabo, Puerto Rico 4,400 Leased Item 3. |
Further, in addition to scheduled debt payments, the credit agreement, as amended, requires us to make mandatory prepayments with (a) the excess cash flow (as defined in the credit agreement) of Orthofix and its subsidiaries, in an amount equal to 50% of the excess annual cash flow beginning with the year ending December 31, 2007, provided, however, if the leverage ratio (as defined in the credit agreement) is less than or equal to 1.75 to 1.00, as of the end of any fiscal year, there will be no mandatory excess cash flow prepayments, with respect to such fiscal year, (b) 100% of the net cash proceeds of any debt issuances by Orthofix or any of its subsidiaries or 50% of the net cash proceeds of equity issuances by any such party, excluding the exercise of stock options, provided, however, if the leverage ratio is less than or equal to 1.75 to 1.00 at the end of the preceding fiscal year, Orthofix Holdings shall not be required to prepay the loans with the proceeds of any such debt or equity issuance, (c) the net cash proceeds of asset dispositions over a minimum threshold, or (d) unless reinvested, insurance proceeds or condemnation awards. |
Name Title Date /s/ Alan w. Milinazzo Chief Executive Officer, March 1, 2010 Alan W. Milinazzo President and Director /s/ Robert S. vaters Executive Vice President and March 1, 2010 Robert S. Vaters Chief Financial Officer /s/ james f. gero Chairman of the Board of Directors March 1, 2010 James F. Gero /s/ jerry c. benjamin Vice Chairman of the Board of March 1, 2010 Jerry C. Benjamin Directors /s/ walter von wartburg Director March 1, 2010 Walter von Wartburg /s/ thomas j. kester Director March 1, 2010 Thomas J. Kester /s/ Charles w. federico Director March 1, 2010 Charles W. Federico /s/ guy jordan Director March 1, 2010 Guy Jordan /s/ kenneth r. weisshaar Director March 1, 2010 Kenneth R. Weisshaar /s/ maria sainz Director March 1, 2010 Maria Sainz /s/ michael mainelli Director March 1, 2010 Michael Mainelli ORTHOFIX INTERNATIONAL N.V. Index to Consolidated Financial Statements All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. |
The senior secured bank credit facility requires mandatory prepayments that may have an adverse effect on our operations and limit our ability to grow our business Further, in addition to scheduled debt payments, the credit agreement, as amended, requires us to make mandatory prepayments with (a) the excess cash flow (as defined in the credit agreement) of Orthofix and its subsidiaries, in an amount equal to 50% of the excess annual cash flow beginning with the year ending December 31, 2007, provided, however, if the leverage ratio (as defined in the credit agreement) is less than or equal to 1.75 to 1.00, as of the end of any fiscal year, there will be no mandatory excess cash flow prepayments, with respect to such fiscal year (b) 100% of the net cash proceeds of any debt issuances by Orthofix or any of its subsidiaries or 50% of the net cash proceeds of equity issuances by any such party, excluding the exercise of stock options, provided, however, if the leverage ratio is less than or equal to 1.75 to 1.00 at the end of the preceding fiscal year, Orthofix Holdings shall not be required to prepay the loans with the proceeds of any such debt or equity issuance, (c) the net cash proceeds of asset dispositions over a minimum threshold, or (d) unless reinvested, insurance proceeds or condemnation awards. |
Name Title Date /s/ Alan w. Milinazzo Chief Executive Officer, March 12, 2009 Alan W. Milinazzo President and Director /s/ Robert S. vaters Executive Vice President and March 12, 2009 Robert S. Vaters Chief Financial Officer /s/ james f. gero Chairman of the Board of Directors March 12, 2009 James F. Gero /s/ peter j. hewett Deputy Chairman of the Board of March 12, 2009 Peter J. Hewett Directors /s/ Charles w. federico Director March 12, 2009 Charles W. Federico /s/ jerry c. benjamin Director March 12, 2009 Jerry C. Benjamin /s/ walter von wartburg Director March 12, 2009 Walter von Wartburg /s/ thomas j. kester Director March 12, 2009 Thomas J. Kester /s/ kenneth r. weisshaar Director March 12, 2009 Kenneth R. Weisshaar /s/ guy jordan Director March 12, 2009 Guy Jordan /s/ Maria Sainz Director March 12, 2009 Maria Sainz Index to Consolidated Financial Statements All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. |
Further, in addition to scheduled debt payments, the credit agreement requires us to make mandatory prepayments with (a) the excess cash flow (as defined in the credit agreement) of Orthofix and its subsidiaries, in an amount equal to 50% of the excess annual cash flow beginning with the year ending December 31, 2007, provided, however, if the leverage ratio (as defined in the credit agreement) is less than or equal to 1.75 to 1.00, as of the end of any fiscal year, there will be no mandatory excess cash flow prepayments with respect to such fiscal year, (b) 100% of the net cash proceeds of any debt issuances by Orthofix or any of its subsidiaries or 50% of the net cash proceeds of equity issuances by any such party, excluding the exercise of stock options, provided, however, if the leverage ratio is less than or equal to 1.75 to 1.00 at the end of the preceding fiscal year, Orthofix Holdings shall not be required to prepay the loans with the proceeds of any such debt or equity issuance in the immediately succeeding fiscal year, (c) the net cash proceeds of asset dispositions over a minimum threshold, or (d) unless reinvested, insurance proceeds or condemnation awards. |
Name Title Date /s/ Alan w. Milinazzo Chief Executive Officer, February 29, 2008 Alan W. Milinazzo President and Director /s/ timothy m. adams Chief Financial Officer February 29, 2008 Timothy M. Adams (Principal Accounting Officer) /s/ james f. gero Chairman of the Board of Directors February 29, 2008 James F. Gero /s/ peter j. hewett Deputy Chairman of the Board ofDirectors February 29, 2008 Peter J. Hewett /s/ Charles w. federico Director February 29, 2008 Charles W. Federico /s/ jerry c. benjamin Director February 29, 2008 Jerry C. Benjamin /s/ walter von wartburg Director February 29, 2008 Walter von Wartburg /s/ thomas j. kester Director February 29, 2008 Thomas J. Kester /s/ kenneth r. weisshaar Director February 29, 2008 Kenneth R. Weisshaar /s/ guy jordan Director February 29, 2008 Guy Jordan Index to Consolidated Financial Statements All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. |
Further, in addition to scheduled debt payments, the credit agreement requires us to make mandatory prepayments with (a) the excess cash flow (as defined in the credit agreement) of Orthofix and its subsidiaries, in an amount equal to 50% of the excess annual cash flow beginning with the year ending December 31, 2007, provided, however, if the leverage ratio (as defined in the credit agreement) is less than or equal to 1.75 to 1.00, as of the end of any fiscal year, there will be no mandatory excess cash flow prepayments, with respect to such fiscal year (b) 100% of the net cash proceeds of any debt issuances by Orthofix or any of its subsidiaries or 50% of the net cash proceeds of equity issuances by any such party, excluding the exercise of stock options, provided, however, if the leverage ratio is less than or equal to 1.75 to 1.00 at the end of the preceding fiscal year, Orthofix Holdings shall not be required to prepay the loans with the proceeds of any such debt or equity issuance, (c) the net cash proceeds of asset dispositions over a minimum threshold, or (d) unless reinvested, insurance proceeds or condemnation awards. |
Name Title Date /s/ ALAN W. MILINAZZO Chief Executive Officer, March 16, 2007 Alan W. Milinazzo President and Director /s/ THOMAS HEIN Chief Financial Officer March 16, 2007 Thomas Hein (Principal Accounting Officer) /s/ JAMES F. GERO Chairman of the Board of Directors March 16, 2007 James F. Gero /s/ PETER J. HEWETT Deputy Chairman of the Board of Directors March 16, 2007 Peter J. Hewett /s/ CHARLES W. FEDERICO Director March 16, 2007 Charles w. Federico /s/ JERRY C. BENJAMIN Director March 16, 2007 Jerry C. Benjamin /s/ WALTER VON WARTBURG Director March 16, 2007 Walter von Wartburg /s/ THOMAS J. KESTER Director March 16, 2007 Thomas J. Kester /s/ KENNETH R. WEISSHAAR Director March 16, 2007 Kenneth R. Weisshaar /s/ GUY JORDAN Director March 16, 2007 Guy Jordan /s/ STEFAN WIDENSOHLER Director March 16, 2007 Stefan Widensohler Index to Consolidated Financial Statements All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. |
Income from continuing operations before provision for income taxes consisted of: Year ended December 31, ---------------------------------- (In thousands) 2005 2004 2003 ---- ---- ---- U.S. $36,511 $32,254 $26,624 Non-U.S. 59,004 18,105 12,691 ------- ------- ------- $95,515 $50,359 $39,315 ======= ======= ======= The tax effects of the significant temporary differences, which comprise the deferred tax liabilities and assets, are as follows: (In thousands) 2005 2004 --------- -------- Deferred tax liabilities Goodwill $(5) $(110) Patents and other intangible assets (22,306) (24,239) Property, Plant and Equipment (925) (477) Other (2,416) (2,598) -------- -------- (25,652) (27,424) Deferred tax assets Other current $111 $171 Inventories and related reserves 1,781 1,619 Allowance for doubtful accounts 2,619 2,410 Net operating loss carryforwards 396 573 Deferred royalties - 916 Other long-term 1,993 1,111 -------- -------- 6,900 6,800 Valuation allowance (376) (138) -------- -------- 6,524 6,662 -------- -------- Net deferred tax liability $(19,128) $(20,762) ======== ======== The valuation allowance as of December 31, 2005 and 2004 was $0.4 million and $0.1 million, respectively. |
The following table identifies our principal products by trade name and describes their primary applications: Product Primary Application ------- ------------------- Orthopedic Products ------------------- Spine Spinal-Stim PEMF non-invasive lumbar spinal bone growth stimulation Cervical-Stim PEMF non-invasive cervical spine bone growth stimulation Orthotrac Pneumatic vest used to reduce pressure on the spine EZ Brace Rigid external brace for spine stabilization Reconstruction ExFix External fixation, including the Sheffield Ring, OASIS and limb-lengthening systems A-V Impulse System Enhancement of venous circulation, principally used after orthopedic procedures to prevent deep vein thrombosis Cemex Bone cement ISKD Internal limb-lengthening device OSCAR Ultrasonic bone cement removal Breg Bracing Bracing products which provide support and protection of limbs and extremities Polar Care Cold therapy products to reduce swelling and accelerate the rehabilitation process Pain Care Pain therapy products that provide continuous post-surgery infusion of local anesthetic into surgical site Trauma ExFix External and internal fixation, including DAF, ProCallus, Xcaliber and nailing systems Physio-Stim PEMF long bone non-invasive bone growth stimulation PC.C.P Percutaneous compression plating system for hip fracture Non-Orthopedic Products ----------------------- Laryngeal Mask Maintenance of airway during anesthesia Other Several non-orthopedic products for which various Orthofix subsidiaries hold distribution rights We have proprietary rights over all of the above products with the exception of the Laryngeal Mask, Cemex, and ISKD. |
Analysis of long-lived assets by geographic area: (In thousands) 2004 2003 ----------- ----------- U.S. $199,808 $200,626 Italy 12,957 12,122 U.K. 24,521 24,866 Cyprus 10,533 10,619 Others 14,545 10,834 ----------- ----------- $262,364 $259,067 =========== =========== Sales by Market Sector for the year ended December 31, 2004 ------------------------------------------------------------ Americas Americas International (In thousands) Orthofix Breg Orthofix Total -------------- ----------- --------------- --------------- Orthopedic Spine $81,190 $ - $ 185 $81,375 Reconstruction 7,318 68,083 45,534 120,935 Trauma 36,058 211 26,623 62,892 -------------- ----------- --------------- --------------- Total Orthopedic 124,566 68,294 72,342 265,202 Non-Orthopedic 1,406 - 20,030 21,436 -------------- ----------- --------------- --------------- Total $125,972 $68,294 $92,372 $286,638 ============== =========== =============== =============== Sales by Market Sector for the year ended December 31, 2003 ------------------------------------------------------------ Americas Americas International (In thousands) Orthofix Breg Orthofix Total -------------- ----------- --------------- --------------- Orthopedic Spine $79,453 $ - $99 $79,552 Reconstruction 6,775 - 44,408 51,183 Trauma 29,242 - 24,464 53,706 -------------- ----------- --------------- --------------- Total Orthopedic 115,470 - 68,971 184,441 Non-Orthopedic 1,378 - 17,888 19,266 -------------- ----------- --------------- --------------- Total $116,848 $ - $86,859 $203,707 ============== =========== =============== =============== Orthofix International N.V. Notes to the consolidated financial statements (cont.) |
The components of the provision for income tax expense (benefit) are as follows: Year ended December 31, ------------------------------------------- (In thousands) 2004 2003 2002 ------------- ----------- ----------- Italy - Current $2,727 $1,948 $2,097 - Deferred (241) (371) (51) Cyprus - Current 251 224 516 - Deferred -- 16 28 U.K. - Current 985 2,670 1,518 - Deferred (34) 37 17 U.S. - Current 15,928 9,471 7,651 - Deferred (3,711) 333 1,319 Netherlands Antilles - Current 25 12 5 - Deferred 134 -- -- Other - Current 168 (212) (4) - Deferred (22) 457 (221) ------------- ----------- ----------- Total tax expense $16,210 $14,585 $12,875 ============= =========== =========== Income from continuing operations before provision for income taxes consisted of: Year ended December 31, ------------------------------------------- (In thousands) 2004 2003 2002 ------------- ----------- ----------- U.S. $32,254 $26,624 $24,781 Non U.S. 18,105 12,691 15,749 ------------- ------------ ----------- $50,359 $39,315 $40,530 ============= =========== =========== Orthofix International N.V. Notes to the consolidated financial statements (cont.) |
The following table identifies our principal products by trade name and describes their primary applications: Product Primary Application ------- ------------------- Orthopedic Products Spine Spinal-Stim PEMF non-invasive spinal bone growth stimulation Orthotrac Pneumatic vest used to reduce pressure on the spine EZ Brace Rigid external brace for spine stabilization Reconstruction ExFix External fixation, including the Sheffield Ring, OASIS and limb-lengthening systems A-V Impulse System Enhancement of venous circulation, principally used after orthopedic procedures Cemex Bone cement ISKD Internal limb-lengthening device OSCAR Ultrasonic bone cement removal BoneSource Bone substitute material Breg Bracing (1) Bracing products which provide support and protection of limbs and extremities Polar Care (1) Cold therapy products to reduce swelling and accelerate the rehabilitation process Pain Care (1) Pain therapy products that provide continuous infusion of local anesthetic into surgical site post-surgery Trauma ExFix External and internal fixation, including DAF, ProCallus, Xcaliber and nailing systems Physio-Stim PEMF non-invasive bone growth stimulation PC.C.P Percutaneous compression plating system for hip fracture Non-Orthopedic Products ----------------------- Laryngeal Mask Maintenance of airway during anesthesia Other Several non-orthopedic products for which various Orthofix subsidiaries hold distribution rights (1) Acquired through the acquisition of Breg on December 30, 2003. |
Name Title Date ---- ----- ---- /s/ CHARLES W. FEDERICO Chief Executive Officer, March 12, 2004 - ------------------------- President and Director Charles W. Federico /s/ THOMAS HEIN Chief Financial Officer March 12, 2004 - ------------------------- (Principal Accounting Officer) Thomas Hein /s/ ROBERT GAINES-COOPER Chairman of the Board of March 12, 2004 - ------------------------- Directors Robert Gaines-Cooper /s/ EDGAR WALLNER Deputy Chairman and Director March 12, 2004 - ------------------------- Edgar Wallner /s/ PETER CLARKE Executive Vice President and March 12, 2004 - ------------------------- Director Peter Clarke /s/ JERRY C. BENJAMIN Director March 12, 2004 - ------------------------- Jerry C. Benjamim /s/ ALBERTO C D'ABREU DE PAULO Director March 12, 2004 - ------------------------------ Alberto C d'Abreu de Paulo /s/ JAMES F. GERO Director March 12, 2004 - ------------------------- James F. Gero /s/ FREDERIK K. J. HARTSUIKER Director March 12, 2004 - ------------------------------ Frederik K. J. Hartsuiker /s/ PETER J. HEWETT Director March 12, 2004 - ------------------------- Peter J. Hewett /s/ JOHN W. LITTLECHILD Director March 12, 2004 - ------------------------- John W. Littlechild Orthofix International N.V. Index to Consolidated Financial Statements Page Index to Consolidated Financial Statements..................................F-1 Statement of Management's Responsibility for Financial Statements...........F-2 Report of Independent Auditors..............................................F-3 Report of Independent Accountants...........................................F-4 Report of Independent Auditors..............................................F-5 Report of Independent Auditors..............................................F-6 Consolidated Balance Sheets as of December 31, 2003 and 2002................F-7 Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001.......................................................F-8 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001......................................F-9 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001......................................................F-10 Notes to the Consolidated Financial Statements.............................F-11 Schedule 2-- Valuation and Qualifying Accounts..............................S-1 Report of Independent Accountants on Financial Statement Schedule...........S-2 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. |
The components of the provision for income tax expense (benefit) are as follows: Year ended December 31, ------------------------------------ (In thousands) 2003 2002 2001 -------- -------- -------- Italy - Current $1,948 $2,097 $1,085 - Deferred (371) (51) (211) Cyprus - Current 224 516 (133) - Deferred 16 28 56 U.K. - Current 2,670 1,518 1,342 - Deferred 37 17 404 U.S. - Current 9,471 7,651 5,097 - Deferred 333 1,319 165 Netherlands Antilles - Current 12 5 145 Other - Current (212) (4) (83) - Deferred 457 (221) - -------- -------- -------- Total tax expense $14,585 $12,875 $7,867 ======== ======== ======== Income from continuing operations before provision for income taxes consisted of: Year ended December 31, ---------------------------------- (In thousands) 2003 2002 2001 -------- -------- -------- U.S. $26,624 $24,781 $11,689 Non U.S. 12,691 15,749 18,978 -------- -------- -------- $39,315 $40,530 $30,667 -------- -------- -------- Orthofix International N.V. Notes to the consolidated financial statements (cont.) |
The following table identifies our products by trade names within product groups and describes their primary applications: Product Primary Application Orthopedic Devices Orthofix external and internal fixation, including DAF, ProCallus, XCaliber and nailing systems Osteogenics BoneSource bone substitute material OSCAR ultrasonic bone cement removal Orthotrac pneumatic vest used to reduce pressure on the spine EZ Brace rigid external brace for spine stabilization STORM and VacoSplint advanced bracing fitted for fracture and tendon repair ISKD internal limb-lengthening device PC.CP percutaneous compression plating system for hip fracture Cemex bone cement SEM Prosthetic Devices prostheses Stimulation Products Spinal-Stim PEMF non-invasive spinal fusion bone growth stimulation Physio-Stim PEMF non-invasive bone growth stimulation Vascular Therapy Products A-V Impulse System enhancement of venous circulation Non-Orthopedic Products Laryngeal Mask maintenance of airway during anesthesia Other several non-orthopedic products for which various Orthofix subsidiaries hold distribution rights We have proprietary rights over all of the above products with the exception of the Laryngeal Mask, Cemex, SEM prosthetic devices, STORM/VacoSplint, ISKD and PC.CP. |
The components of the provision for income tax expense (benefit) are as follows: Year ended December 31, --------------------------------- (In thousands) 2002 2001 2000 ------ ------ ------ Italy - Current $2,097 $1,085 $2,725 - Deferred (51) (211) 152 Cyprus - Current 516 (133) 5,210 - Deferred 28 56 (230) U.K. - Current 1,518 1,342 1,203 - Deferred 17 404 (68) U.S. - Current 7,651 5,097 6,045 - Deferred 1,319 165 1,027 Netherlands Antilles - Current 5 145 85 Other - Current (4) (83) 85 - Deferred (221) - - ------- ------ ------- Total tax expense $12,875 $7,867 $16,234 ======= ====== ======= Income from continuing operations before provision for income taxes consisted of: Year ended December 31, (In thousands) 2002 2001 2000 ------ ------ ------ U.S. $24,781 $11,689 $14,866 Non U.S. 15,749 18,978 47,709 ------- ------- ------ $40,530 $30,667 $62,575 ------- ------- ------ The tax effects of the significant temporary differences, which comprise the deferred tax liabilities and assets, are as follows: (In thousands) 2002 2001 ------ ------ Deferred tax liabilities Goodwill $(570) $(590) Patents (375) (317) Inventories (1) 9 Property, Plant and Equipment (95) (130) Other (1,161) (1,013) ------ ------ (2,202) (2,041) (In thousands) 2002 2001 ------ ------ Deferred tax assets Accrued compensation $128 412 Inventories and related reserves 1,146 1,440 Allowance for doubtful accounts 1,997 2,108 Net operating loss carry forwards 80 79 Deferred royalties 939 934 Other (162) 134 ------ ------ 4,128 5,107 ------ ------ Net deferred tax asset $1,926 $3,066 ====== ====== The deferred tax provision relates to tax effects of the amortization of goodwill which is deductible for income tax purposes over a period of five years and, prior to January 1, 2002, was charged against operating results over a period of twenty years. |
Some of the risks we face include: •the effect of the COVID-19 pandemic on our business, financial condition, cash flows, and results of operations; •the impact on our business from the separation of our eye-health business into an independent publicly traded entity; •the ongoing legal proceedings, investigations, and inquiries respecting certain of our historical distribution, marketing, pricing, disclosure and accounting practices; •the impact of changes to our pricing practices, whether imposed, legislated or voluntary; •the potential adverse impact of legal proceedings, litigation, and government investigations; •our dependence on third parties to meet their contractual, legal, regulatory, and other obligations; •the impact of product recalls and related product liability claims; •our ability to comply with extensive regulation concerning marketing, promotional and business practices; •our ability to comply with restrictive covenants in our debt agreements; •our ability to generate cash in order to service our debt; •the impact on our business of restrictions imposed by our significant indebtedness; •the effect of interest rate changes, including the potential discontinuation of LIBOR; •our ability to recruit and retain executives and key personnel; •the potential increase of our effective tax rates; •our ability to compete with generic competitors in products that represent a significant amount of our revenue; •our ability to obtain, maintain, enforce or defend the intellectual property rights required to conduct our business; •our ability to develop or acquire more effective or less costly pharmaceutical or OTC products or medical devices than our competitors; •the effect of our commitment to the cessation of or limitation on pricing increases for certain of our products; •the impact of divestitures of certain of our assets and business; •the potential adverse effect of acquisitions of assets, products and businesses; •our ability to maintain and provide appropriate training in our products to our health care providers; •our ability to achieve or maintain expected levels of market acceptance for our new products; •our dependence on reimbursements from governmental and other third-party payors; •the impact of a failure to be included in formularies developed by managed care organizations and third-party payors; •the failure of our fulfillment arrangements with Walgreens and our dermatology cash-pay prescription program; •risks associated with the international scope of our operations; •foreign currency exposure on the translation into U.S. dollars of the financial results of our international operations; •our ability to successfully commercialize our pipeline products; •our ability to comply with ongoing regulatory review of our marketed drugs; •the effect that the United Kingdom’s exit from the European Union may have on the development, regulatory approval and review of our products; •the impact on our business of interruptions in our manufacturing processes; •our dependence on a limited number of sources for certain of our finished products and raw materials; •the effect of changes in inventory levels or fluctuations in buying patterns by our large distributor and retail customers; •our ability to comply with applicable laws and regulations and prevail in any litigation related to noncompliance; •the impact that reforms of the health care system may have on our ability to sell our products profitably; •our ability to comply with environmental laws and regulations and environmental remediation obligations; •the potential adverse effect of shareholder activism; •the impact on our profitability from the potential impairment of goodwill and other intangible assets; •the breakdown, interruption, breach or other compromise of our information technology systems; •our ability to effectively monitor and respond to expectations regarding environmental, social and governance matters; •the restatement of our previously issued financial statements and potential exposure to additional risks therefrom; •the decline in pricing and/or volume of our products in our distribution agreements with other companies; •the illegal distribution and sale of counterfeit versions of our products; •the reduction of profits due to imports from countries where our products are available at lower prices; •the reduction of revenues in future fiscal periods due to our policies regarding returns, allowances, and chargebacks; •the decline in sales volumes or prices of our products as the result of the concentration of sales to wholesalers; •our potential obligations under our indemnity agreements and arrangements; and •the fluctuation of our operating results and financial condition from quarter to quarter. |
For example, we may experience: •material closures or disruptions to our manufacturing sites (for example, we experienced closures at our Milan, Bothell, Washington USA sites and our two sites in China in 2020); •lack of availability of active pharmaceutical ingredients ("API"), and intermediates, or other supply chain disruptions, including for some of our key products; •alternative working arrangements, including personnel working remotely and additional cleaning or sterilization protocols at our production facilities, which could negatively impact our business should such arrangements remain for an extended period of time; •interruption or delays in the operations of the FDA, the EMA and other regulatory authorities, which may impact review and approval timelines for our planned trials and launches; •delays or difficulties in enrolling patients in our clinical trials; •delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff; •diversion of health care resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials; •interruption or postponement of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints; •limitations on employee resources that would otherwise be focused on our business and operations, such as the conduct of our preclinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people; •delays in or postponements of our clinical trial programs as a result of “stay at home” orders affecting our research facilities or the closure of such research facilities, which may impact the timing, approval and launch of the affected clinical trial programs; •deferral of elective medical procedures and of doctor and dentist visits, and reduced usage of contact lens, which may reduce demand for certain of the Company’s products, including our contact lens products and certain branded pharmaceutical products in our eye-care, dermatology, GI and dentistry businesses; and •adverse effects on the regional economies in which we operate which could reduce demand for certain of the Company’s products. |
While we have successfully settled or otherwise resolved a number of legacy legal proceedings, investigations and inquiries relating to, among other things, our disclosure and accounting practices and our former relationship with Philidor, including the securities class action litigation matters in both the U.S. and Canada, the investigation by the SEC and the investigation order from the Autorité des marches financiers (the “AMF”) (our principal securities regulator in Canada), we are currently still the subject of a number of other ongoing legal proceedings and investigations and inquiries by governmental agencies, including, but not limited to, the following: (i) a number of pending securities litigations, including certain opt-out actions in the U.S. (related to the U.S. Securities class action which has been settled, but remains subject to an objector's appeal of the final court approval), and in Canada (related to the securities class action litigation in Canada which has been settled), have been instituted, the allegations of which relate to, among other things, allegedly false and misleading statements by the Company and/or failures to disclose information about our business and prospects, including relating to drug pricing, our policies and accounting practices, our use of specialty pharmacies, and our former relationship with Philidor and (ii) purported class actions under the federal RICO statute on behalf of third-party payors arising out of our pricing and use of specialty pharmacies, and our former relationship with Philidor. |
Levels of market acceptance for our new products could be impacted by several factors, some of which are not within our control, including but not limited to the following: ▪safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors; ▪scope of approved uses and marketing approval; ▪availability of patent or regulatory exclusivity; ▪timing of market approvals and market entry; ▪ongoing regulatory obligations following approval, such as the requirement to conduct a Risk Evaluation and Mitigation Strategy ("REMS") programs; ▪any restrictions or “black box” warnings required on the labeling of such products; ▪availability of alternative products from our competitors; ▪acceptance of the price of our products; ▪effectiveness of our sales forces and promotional efforts; ▪the level of reimbursement of our products; ▪acceptance of our products on government and private formularies; ▪ability to market our products effectively at the retail level or in the appropriate setting of care; and ▪the reputation of our products. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: ▪difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export and sanctions laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), the Canadian Corruption of Foreign Public Officials Act, and other applicable worldwide anti-bribery laws; ▪price and currency exchange controls; ▪restrictions on the repatriation of funds; ▪scarcity of hard currency, including the U.S. dollar, which may require a transfer or loan of funds to the operations in such countries, which they may not be able to repay on a timely basis; ▪political and economic instability; ▪compliance with multiple regulatory regimes; ▪compliance with economic sanctions laws and other laws that apply to our activities in the countries where we operate; ▪less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; ▪differing degrees of protection for intellectual property; ▪unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; ▪new export license requirements; ▪adverse changes in tariff and trade protection measures; ▪differing labor regulations; ▪potentially negative consequences from changes in or interpretations of tax laws; ▪restrictive governmental actions; ▪possible nationalization or expropriation; ▪credit market uncertainty; ▪differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. laws and regulations; ▪difficulties with licensees, contract counterparties, or other commercial partners; and ▪differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance and/or stock price from period to period: •development and launch of new competitive products; •the timing and receipt of FDA and other regulatory approvals or lack of approvals; •costs related to business development transactions; •changes in the amount we spend to promote our products; •delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; •changes in treatment practices of physicians that currently prescribe certain of our products; •increases in the cost of raw materials used to manufacture our products; •FDA or other regulatory actions relating to our manufacturers or suppliers; •manufacturing and supply interruptions; •our responses to price competition; •new legislation that would control or regulate the prices of drugs; •a protracted and wide-ranging trade conflict between the United States and China; •expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; •market acceptance of our products; •the timing of wholesaler and distributor purchases and success of our wholesaler and distributor arrangements; •general economic and industry conditions, including potential fluctuations in interest rates; •changes in seasonality of demand for certain of our products; •foreign currency exchange rate fluctuations; •changes to, or the confidence in, our business strategy; •changes to, or the confidence in, our management; and •expectations for future growth. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless: (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and (b) more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Canadian Tax Act), (iii) “timber resource property” (as such term is defined in the Canadian Tax Act) or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists or the common shares are otherwise deemed to be taxable Canadian property. |
To date we received approximately $3,500 million in net proceeds from these divestitures; •made strategic investments in our core businesses in order to support recent revenue growth and prepare for additional growth opportunities we plan to capitalize on for our core businesses; •made measurable progress in improving our capital structure as we have repaid over $8,600 million in debt obligations (net of additional borrowings, amounts refinanced and excluding the $1,210 million financing of the U.S. Securities Litigation settlement discussed below) during the period January 1, 2016 through the date of this filing using the proceeds from the divestiture of non-core assets, cash generated from our operations and improved working capital management; and •resolved many of the Company's legacy litigation matters originating back to 2015 and prior, including the most significant legacy legal matter, the U.S. Securities Litigation settlement discussed below, significantly reducing related possible disruptions and other uncertainties to our operations. |
The increase was primarily driven by: (i) higher gross selling prices, (ii) higher volumes, (iii) the incremental contribution of the sales of our Trulance® product, which we added to our portfolio in March 2019 as part of the acquisition of certain assets of Synergy and (iv) better inventory management, partially offset by: (i) the unfavorable effect of foreign currencies, (ii) the impact of divestitures and discontinuations, (iii) higher sales deductions and (iv) the amortization of the inventory fair value step-up recorded in acquisition accounting related to the inventories we acquired as part of the acquisition of certain assets of Synergy; •an increase in SG&A expenses of $81 million, primarily attributable to: (i) higher selling, advertising and promotion expenses, (ii) the impact of the acquisition of certain assets of Synergy, (iii) costs in 2019 attributable to our IT infrastructure improvement projects and (iv) the charge associated with the termination of a co-promotional agreement with US WorldMeds, LLC. |
The increase was partially offset by: (i) the favorable effect of foreign currencies, (ii) lower costs related to professional services and (iii) the impact of divestitures and discontinuations; •an increase in R&D of $58 million primarily attributable to a number of projects within our Bausch + Lomb and GI businesses; •a decrease in Amortization of intangible assets of $747 million, primarily due to: (i) the impact of the change in the estimated useful life of the Xifaxan® related intangible assets made in September 2018 to reflect management's changes in assumptions, (ii) fully amortized intangible assets no longer being amortized in 2019 and (iii) lower amortization as a result of impairments to intangible assets in prior periods; •a decrease in Goodwill impairments of $2,322 million, as a result of impairments in 2018 to the goodwill of our: (i) Salix reporting unit upon adopting the new guidance for goodwill impairment accounting at January 1, 2018, (ii) Ortho Dermatologics reporting unit due to unforeseen changes in business dynamics during the three months ended March 31, 2018 and (iii) Dentistry reporting unit as a result of revised forecasts due to changing market conditions during the three months ended December 31, 2018; •a decrease in Asset impairments, including loss on assets held for sale of $493 million, primarily related to specific impairments in 2018 as a result of: (i) decreases in forecasted sales for the Uceris® Tablet product due to generic competition and (ii) decreases in forecasted sales for the Arestin® product due to changing market conditions; and •an increase in Other expense (income), net of $1,434 million, primarily attributable to: (i) an increase in net charges to Litigation and other matters primarily related to the settlement of a legacy U.S. securities class action matter (which is subject to an objector's appeal of the final court approval) in 2019, to which the Company and the other settling defendants admitted no liability as to the claims against it and deny all allegations of wrongdoing and (ii) Acquired in-process research and development costs incurred during 2019 associated with the upfront payments to enter into certain exclusive licensing agreements. |
See Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our audited Consolidated Financial Statements regarding further details related to product sales provisions; •rebates as a percentage of gross product sales was higher primarily due the impact of: (i) increases in gross product sales for products that carry higher contractual rebates and co-pay assistance programs, including the impact of incremental rebates from contractual price increase limitations for promoted products, such as Xifaxan® and Jublia® and (ii) sales of our Trulance® product, which we added to our portfolio in March 2019 as part of the acquisition of certain assets of Synergy, partially offset by decreases in gross product sales for products which carry higher rebate rates, such as Apriso® as a result of its generic release, Lotemax® Suspension and Lotemax® Gel; •chargebacks as a percentage of gross product sales was higher primarily due to the impact of: (i) higher chargeback rates and gross product sales for Glumetza® SLX, Xifaxan® and Nifedical® and (ii) the release of the generic Apriso® AG (December 2019). |
Further, in the ordinary course of business, we may borrow and repay amounts under our 2023 Revolving Credit Facility to meet business needs; •IT Infrastructure Investment-We expect to make payments of approximately $60 million for licensing, maintenance and capitalizable costs associated with our IT infrastructure improvement projects during 2021; •Capital expenditures-We expect to make payments of approximately $275 million for property, plant and equipment during 2021; •Contingent consideration payments-We expect to make contingent consideration and other development/approval/sales-based milestone payments of $164 million during 2021; •Restructuring and integration payments-We expect to make payments of $7 million during 2021 for employee separation costs and lease termination obligations associated with restructuring and integration actions we have taken through December 31, 2020; •Benefit obligations-We expect to make aggregate payments under our pension and postretirement obligations of $14 million during 2021. |
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects and forecasts and changes thereto; product pipeline, prospective products and product approvals, product development and future performance and results of current and anticipated products; anticipated revenues for our products; anticipated growth in our Ortho Dermatologics business; expected R&D and marketing spend; our expected primary cash and working capital requirements for 2021 and beyond; our plans for continued improvement in operational efficiency and the anticipated impact of such plans; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; our ability to meet the financial and other covenants contained in our Fourth Amended and Restated Credit and Guaranty Agreement (the "Restated Credit Agreement") and senior notes indentures; the impact of our distribution, fulfillment and other third-party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; the anticipated impact of the adoption of new accounting standards; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our impairment assessments, including the assumptions used therein and the results thereof; the anticipated impact of the evolving COVID-19 pandemic and related responses from governments and private sector participants on the Company, its supply chain, third-party suppliers, project development timelines, costs, revenue, margins, liquidity and financial condition, the anticipated timing, speed and magnitude of recovery from these COVID-19 pandemic related impacts and the Company’s planned actions and responses to this pandemic; and the Company’s plan to separate its eye-health business, including the structure and timing of completing such separation transaction. |
Important factors, risks and uncertainties that could cause actual results to differ materially from these expectations include, among other things, the following: •the risks and uncertainties caused by or relating to the evolving COVID-19 pandemic, the fear of that pandemic, the availability and effectiveness of vaccines for COVID-19, the rapidly evolving reaction of governments, private sector participants and the public to that pandemic, and the potential effects and economic impact of the pandemic and the reaction to it, the severity, duration and future impact of which are highly uncertain and cannot be predicted, and which may have a significant adverse impact on the Company, including but not limited to its supply chain, third-party suppliers, project development timelines, employee base, liquidity, stock price, financial condition and costs (which may increase) and revenue and margins (both of which may decrease); •with respect to the proposed separation of the Company’s eye-health business, the risks and uncertainties include, but are not limited to, the expected benefits and costs of the separation transaction, the expected timing of completion of the separation transaction and its terms, the Company’s ability to complete the separation transaction considering the various conditions to the completion of the separation transaction (some of which are outside the Company’s control, including conditions related to regulatory matters and a possible shareholder vote, if applicable), that market or other conditions are no longer favorable to completing the transaction, that any shareholder, stock exchange, regulatory or other approval (if required) is not obtained on the terms or timelines anticipated or at all, business disruption during the pendency of or following the separation transaction, diversion of management time on separation transaction-related issues, retention of existing management team members, the reaction of customers and other parties to the separation transaction, the qualification of the separation transaction as a tax-free transaction for Canadian and/or U.S. federal income tax purposes (including whether or not an advance ruling from either or both of the Canada Revenue Agency and the Internal Revenue Service will be sought or obtained), potential dyssynergy costs resulting from the separation transaction, the impact of the separation transaction on relationships with customers, suppliers, employees and other business counterparties, general economic conditions, conditions in the markets the Company is engaged in, behavior of customers, suppliers and competitors, technological developments, as well as legal and regulatory rules affecting the Company’s business; •the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our past distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor Rx Services, LLC ("Philidor")), including a number of pending non-class securities litigations (including certain pending opt-out actions in the U.S. related to the previously settled securities class action (which is subject to an objector's appeal of the final court approval) and certain opt-out actions in Canada relating to the recently settled class action in Canada) and purported class actions under the federal RICO statute and other claims, investigations or proceedings that may be initiated or that may be asserted; •potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the past and ongoing public scrutiny of our past distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor; •the past and ongoing scrutiny of our legacy business practices, including with respect to pricing, and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof; •pricing decisions that we have implemented, or may in the future elect to implement, such as the Patient Access and Pricing Committee’s commitment that the average annual price increase for our branded prescription pharmaceutical products will be set at no greater than single digits, or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs); •legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions); •ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the FDA and equivalent agencies outside of the U.S. and the results thereof; •actions by the FDA or other regulatory authorities with respect to our products or facilities; •our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on our financial condition, cash flows and results of operations; •our ability to meet the financial and other covenants contained in our Restated Credit Agreement, senior notes indentures, 2023 Revolving Credit Facility and other current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, including prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional obligations we are able to incur pursuant to other covenants, our ability to draw under our 2023 Revolving Credit Facility and restrictions on our ability to make certain investments and other restricted payments; •any default under the terms of our senior notes indentures or Restated Credit Agreement and our ability, if any, to cure or obtain waivers of such default; •any downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances; •any reductions in, or changes in the assumptions used in, our forecasts for fiscal year 2021 or beyond, including as a result of the impacts of the COVID-19 pandemic on our business and operations, which could lead to, among other things: (i) a failure to meet the financial and/or other covenants contained in our Restated Credit Agreement and/or senior notes indentures and/or (ii) impairment in the goodwill associated with certain of our reporting units or impairment charges related to certain of our products or other intangible assets, which impairments could be material; •changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products or other intangible assets; •the uncertainties associated with the acquisition and launch of new products, including, but not limited to, our ability to provide the time, resources, expertise and funds required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges; •our ability or inability to extend the profitable life of our products, including through line extensions and other life-cycle programs; •our ability to retain, motivate and recruit executives and other key employees; •our ability to implement effective succession planning for our executives and key employees; •factors impacting our ability to achieve anticipated growth in our Ortho Dermatologics business, including the success of recently launched products (such as Arazlo®), expected geographic expansion in our Solta business (including with respect to Next Generation Thermage FLX®), the ability to successfully implement and operate our cash-pay prescription program for certain of our Ortho Dermatologics branded products, and the ability of such program to achieve the anticipated goals respecting patient access and fulfillment, the approval of pending and pipeline products (and the timing of such approvals), changes in estimates on market potential for dermatology products and continued investment in and success of our sales force; •factors impacting our ability to achieve anticipated revenues for our products, including changes in anticipated marketing spend on such products and launch of competing products; •the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly; •our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; •our ability to effectively operate and grow our businesses in light of the challenges that the Company has faced and market conditions, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our past pricing and other practices, limitations on the way we conduct business imposed by the covenants contained in our Restated Credit Agreement, senior notes indentures and the agreements governing our other indebtedness, and the impacts of the COVID-19 pandemic; •the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third-party payors; the impact our distribution, pricing and other practices may have on the decisions of such government authorities, PBMs and other third-party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products; •the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith; •the consolidation of wholesalers, retail drug chains and other customer groups and the impact of such industry consolidation on our business; •our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries; •the actions of our third-party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor; •the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations); •adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in certain of the countries in which we do business; •the impact of the United States-Mexico-Canada Agreement (“USMCA”) and any potential changes to other trade agreements; •the final outcome and impact of Brexit negotiations; •the trade conflict between the United States and China; •our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property (such as in connection with the filing by Norwich Pharmaceuticals Inc. (“Norwich”) of its Abbreviated New Drug Application (“ANDA”) for Xifaxan® (rifaximin) 550 mg tablets and the Company’s related lawsuit filed against Norwich in connection therewith); •the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights; •our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis and the difficulties, challenges, time and resources associated with the integration of acquired companies, businesses and products; •any divestitures of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant impairments of goodwill or other assets, or any adverse tax consequences suffered as a result of any such divestitures; •the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, examinations, reviews and regulatory proceedings against us or relating to us and settlements thereof; •our ability to negotiate the terms of or obtain court approval for the settlement of certain legal and regulatory proceedings; •our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays; •the disruption of delivery of our products and the routine flow of manufactured goods; •economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; •interest rate risks associated with our floating rate debt borrowings; •our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our arrangements with Walgreens; •our ability to effectively promote our own products and those of our co-promotion partners; •the success of our fulfillment arrangements with Walgreens, including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, PBMs, third-party payors and governmental agencies), and the continued compliance of such arrangements with applicable laws; •our ability to secure and maintain third-party research, development, manufacturing, licensing, marketing or distribution arrangements; •the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market; •the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith; •the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third-party insurance or self-insurance; •the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; •the results of continuing safety and efficacy studies by industry and government agencies; •the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges; •the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges; •the seasonality of sales of certain of our products; •declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control; •compliance by the Company or our third-party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations; •the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential amendment thereof and other legislative and regulatory health care reforms in the countries in which we operate, including with respect to recent government inquiries on pricing; •the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its businesses and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products; •the impact of changes in federal laws and policy that may be undertaken following the change in the U.S. administration; •illegal distribution or sale of counterfeit versions of our products; •interruptions, breakdowns or breaches in our information technology systems; and •risks in Item 1A. |
These procedures also included, among others (i) developing an independent estimate of Medicaid rebates by utilizing third-party information on inventory levels in the distribution channel, the terms of the specific Medicaid rebate programs, and the historical trends of actual Medicaid rebate claims paid adjusted for price and projected market conditions (ii) comparing the independent estimate for these Medicaid rebates to management’s estimates, (iii) evaluating the reasonableness of management’s assumptions related to the allowances for sales returns, including existing return policies, comparing to historical trends and considering whether these assumptions were consistent with evidence obtained in other areas of the audit, (iv) evaluating the appropriateness of the sales return model and testing the completeness and accuracy of underlying data used in the model, and (v) testing Medicaid rebate and sales return claims processed by the Company, including evaluating those claims for consistency with the contractual terms of the Company’s arrangements and policies. |
We have been or are currently the subject of a number of ongoing legal proceedings and investigations and inquiries by governmental agencies, including, but not limited to, the following: (i) investigations by the U.S. Attorney’s Offices for the District of Massachusetts and the Southern District of New York relating to certain matters, including our patient assistance programs (including financial support provided to patients), our former relationship with Philidor and other pharmacies, our accounting treatment for sales by specialty pharmacies, information provided to the Centers for Medicare and Medicaid Services, our pricing (including discounts and rebates), marketing and distribution of our products, our compliance program, and employee compensation; (ii) the investigation by the SEC of the Company relating to certain matters, including our former relationship with Philidor, our accounting practices and policies and our public disclosures; (iii) an investigation order from the Autorité des marches financiers (the “AMF”) (our principal securities regulator in Canada) relating to certain matters, including with respect to our former relationship with Philidor and our accounting practices and policies; (iv) a number of pending securities litigations, including certain opt-out actions in the U.S. (related to the U.S. Securities class action which is settled, subject to final court approval), and the pending securities class action litigation in Canada and related opt-out actions, have been instituted, the allegations of which relate to, among other things, allegedly false and misleading statements by the Company and/or failures to disclose information about our business and prospects, including relating to drug pricing, our policies and accounting practices, our use of specialty pharmacies, and our former relationship with Philidor and (v) purported class actions under the federal RICO statute on behalf of third-party payors arising out of our pricing and use of specialty pharmacies, and our former relationship with Philidor. |
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) significantly revised U.S. federal corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate to 21%, limiting the tax deduction for interest expense to 30% of adjusted earnings, allowing immediate expensing for certain new investments, implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, imposing an additional U.S. tax on certain non-U.S. subsidiaries’ earnings which are considered to be Global Intangible Low Taxed Income (referred to as “GILTI”) and imposing an alternative “base erosion and anti-abuse tax” (“BEAT”) on domestic corporations that make deductible payments to foreign related persons in excess of specified amounts, and, effective for net operating losses (“NOLs”) arising in taxable years beginning after December 31, 2017, eliminating net operating loss carrybacks, permitting indefinite net operating loss carryforwards, and limiting the use of net operating loss carryforwards to 80% of current year taxable income. |
Levels of market acceptance for our new products could be impacted by several factors, some of which are not within our control, including but not limited to the following: • safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors; • scope of approved uses and marketing approval; • availability of patent or regulatory exclusivity; • timing of market approvals and market entry; • ongoing regulatory obligations following approval, such as the requirement to conduct a Risk Evaluation and Mitigation Strategy ("REMS") programs; • any restrictions or “black box” warnings required on the labeling of such products; • availability of alternative products from our competitors; • acceptance of the price of our products; • effectiveness of our sales forces and promotional efforts; • the level of reimbursement of our products; • acceptance of our products on government and private formularies; • ability to market our products effectively at the retail level or in the appropriate setting of care; and • the reputation of our products. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export and sanctions laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), the Canadian Corruption of Foreign Public Officials Act, and other applicable worldwide anti-bribery laws; • price and currency exchange controls; • restrictions on the repatriation of funds; • scarcity of hard currency, including the U.S. dollar, which may require a transfer or loan of funds to the operations in such countries, which they may not be able to repay on a timely basis; • political and economic instability; • compliance with multiple regulatory regimes; • compliance with economic sanctions laws and other laws that apply to our activities in the countries where we operate; • less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • credit market uncertainty; • differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. laws and regulations; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance and/or stock price from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • FDA regulatory actions relating to our manufacturers; • manufacturing and supply interruptions; • our responses to price competition; • new legislation that would control or regulate the prices of drugs; • a protracted and wide-ranging trade conflict between the United States and China; • expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases and success of our wholesaler and distributor arrangements; • general economic and industry conditions, including potential fluctuations in interest rates; • changes in seasonality of demand for certain of our products; • foreign currency exchange rate fluctuations; • changes to, or the confidence in, our business strategy; • changes to, or the confidence in, our management; and • expectations for future growth. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless: (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and (b) more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Canadian Tax Act), (iii) “timber resource property” (as such term is defined in the Canadian Tax Act) or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists or the common shares are otherwise deemed to be taxable Canadian property. |
The increase was primarily driven by: (i) higher gross selling prices, (ii) higher volumes, (iii) the incremental contribution of the sales of our Trulance® product, which we added to our portfolio in March 2019 as part of the acquisition of certain assets of Synergy and (iv) better inventory management, partially offset by: (i) the unfavorable effect of foreign currencies, (ii) the impact of divestitures and discontinuations, (iii) higher sales deductions and (iv) the amortization of the inventory fair value step-up recorded in acquisition accounting related to the inventories we acquired as part of the acquisition of certain assets of Synergy; • an increase in Selling, general, and administrative expenses (“SG&A”) of $81 million, primarily attributable to: (i) higher selling, advertising and promotion expenses, (ii) the impact of the acquisition of certain assets of Synergy, (iii) costs in 2019 attributable to our IT infrastructure improvement projects and (iv) the charge associated with the termination of a co-promotional agreement with US WorldMeds, LLC. |
The increase was partially offset by: (i) the favorable effect of foreign currencies, (ii) lower costs related to professional services and (iii) the impact of divestitures and discontinuations; • an increase in R&D of $58 million primarily attributable to a number of projects within our Bausch + Lomb and GI businesses; • a decrease in Amortization of intangible assets of $747 million, primarily due to: (i) the impact of the change in the estimated useful life of the Xifaxan® related intangible assets made in September 2018 to reflect management's changes in assumptions, (ii) fully amortized intangible assets no longer being amortized in 2019 and (iii) lower amortization as a result of impairments to intangible assets in prior periods; • a decrease in Goodwill impairments of $2,322 million, as a result of impairments in 2018 to the goodwill of our: (i) Salix reporting unit upon adopting the new guidance for goodwill impairment accounting at January 1, 2018, (ii) Ortho Dermatologics reporting unit due to unforeseen changes in business dynamics during the three months ended March 31, 2018 and (iii) Dentistry reporting unit as a result of revised forecasts due to changing market conditions during the three months ended December 31, 2018; • a decrease in Asset impairments of $493 million, primarily related to specific impairments in 2018 as a result of: (i) decreases in forecasted sales for the Uceris® Tablet product due to generic competition and (ii) decreases in forecasted sales for the Arestin® product due to changing market conditions; • an increase in Other expense (income), net of $1,434 million, primarily attributable to: (i) an increase in net charges to Litigation and other matters primarily related to the settlement of a legacy U.S. securities class action matter (which is subject to final court approval) in 2019, to which the Company and the other settling defendants admitted no liability as to the claims against it and deny all allegations of wrongdoing and (ii) Acquired in-process research and development costs (“IPR&D”) incurred during 2019 associated with the upfront payments to enter into certain exclusive licensing agreements. |
Further, in the ordinary course of business, we may borrow and repay amounts under our 2023 Revolving Credit Facility to meet business needs; • IT Infrastructure Investment-We expect to make payments of approximately $80 million, net of the amounts included in Purchase obligations in the table above, for licensing, maintenance and capitalizable costs associated with our IT infrastructure improvement projects during 2020; • Capital expenditures-We expect to make payments of approximately $300 million for property, plant and equipment during 2020, of which there were $115 million in committed amounts as of December 31, 2019; • Contingent consideration payments-We expect to make contingent consideration and other development/approval/sales-based milestone payments of $64 million during 2020; • Restructuring and integration payments-We expect to make payments of $5 million during 2020 for employee separation costs and lease termination obligations associated with restructuring and integration actions we have taken through December 31, 2019; • Benefit obligations-We expect to make payments under our pension and postretirement obligations of $3 million, $9 million and $5 million to the U.S. pension benefit plan, the non-U.S. pension benefit plans and the U.S. postretirement benefit plan, respectively during 2020. |
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects and forecasts and changes thereto; product pipeline, prospective products and product approvals, product development and future performance and results of current and anticipated products; anticipated revenues for our products; anticipated growth in our Ortho Dermatologics business; expected R&D and marketing spend; our expected primary cash and working capital requirements for 2020 and beyond; our plans for continued improvement in operational efficiency and the anticipated impact of such plans; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; our ability to meet the financial and other covenants contained in our Fourth Amended and Restated Credit and Guaranty Agreement (the "Restated Credit Agreement") and senior notes indentures; the impact of our distribution, fulfillment and other third-party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; the anticipated impact of the adoption of new accounting standards; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; and our impairment assessments, including the assumptions used therein and the results thereof. |
Important factors, risks and uncertainties that could cause actual results to differ materially from these expectations include, among other things, the following: • the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our past distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor Rx Services, LLC ("Philidor")), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts and the U.S. Attorney's Office for the Southern District of New York, the pending investigations by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, the investigation order issued by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), a number of pending securities litigations (including certain pending opt-out actions in the U.S. (related to the recently settled securities class action, (which is subject to final court approval, and remains subject to the risk and uncertainty that the U.S. District Court for the District of New Jersey may not approve the $1,210 million settlement agreement)) and the pending class action litigation in Canada and related opt-out actions) and purported class actions under the federal RICO statute and other claims, investigations or proceedings that may be initiated or that may be asserted; • potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the past and ongoing public scrutiny of our past distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor; • the past and ongoing scrutiny of our legacy business practices, including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York), and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof; • pricing decisions that we have implemented, or may in the future elect to implement, such as the Patient Access and Pricing Committee’s commitment that the average annual price increase for our branded prescription pharmaceutical products will be set at no greater than single digits, or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs); • legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions); • ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the “FDA”) and the results thereof; • actions by the FDA or other regulatory authorities with respect to our products or facilities; • our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on our financial condition, cash flows and results of operations; • our ability to meet the financial and other covenants contained in our Restated Credit Agreement, senior notes indentures and other current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, including prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional obligations we are able to incur pursuant to other covenants, and restrictions on our ability to make certain investments and other restricted payments; • any default under the terms of our senior notes indentures or Restated Credit Agreement and our ability, if any, to cure or obtain waivers of such default; • any delay in the filing of any future financial statements or other filings and any default under the terms of our senior notes indentures or Restated Credit Agreement as a result of such delays; • any downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances; • any reductions in, or changes in the assumptions used in, our forecasts for fiscal year 2020 or beyond, which could lead to, among other things: (i) a failure to meet the financial and/or other covenants contained in our Restated Credit Agreement and/or senior notes indentures and/or (ii) impairment in the goodwill associated with certain of our reporting units or impairment charges related to certain of our products or other intangible assets, which impairments could be material; • changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products or other intangible assets; • the uncertainties associated with the acquisition and launch of new products (such as our recently launched Bryhali®, Duobrii® and Ocuvite® Eye Performance products), including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges; • our ability or inability to extend the profitable life of our products, including through line extensions and other life-cycle programs; • our ability to retain, motivate and recruit executives and other key employees; • our ability to implement effective succession planning for our executives and key employees; • factors impacting our ability to achieve anticipated growth in our Ortho Dermatologics business, including the success of recently launched products (such as Bryhali® and Duobrii®), the ability to successfully implement and operate Dermatology.com, our new cash-pay prescription program for certain of our Ortho Dermatologics branded products, and the ability of such program to achieve the anticipated goals respecting patient access and fulfillment, the approval of pending and pipeline products (and the timing of such approvals), expected geographic expansion, changes in estimates on market potential for dermatology products and continued investment in and success of our sales force; • factors impacting our ability to achieve anticipated revenues for our products, including changes in anticipated marketing spend on such products and launch of competing products; • the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly; • our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; • our ability to effectively operate and grow our businesses in light of the challenges that the Company has faced and market conditions, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our past pricing and other practices, and limitations on the way we conduct business imposed by the covenants contained in our Restated Credit Agreement, senior notes indentures and the agreements governing our other indebtedness; • the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third-party payors; the impact our distribution, pricing and other practices (including as it relates to our current relationship with Walgreen Co. ("Walgreens")) may have on the decisions of such government authorities, PBMs and other third-party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products; • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith; • the consolidation of wholesalers, retail drug chains and other customer groups and the impact of such industry consolidation on our business; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries; • the actions of our third-party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor; • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations); • adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in certain of the countries in which we do business; • the impact of the United States-Mexico-Canada Agreement (“USMCA”) and any potential changes to other trade agreements; • the final outcome and impact of Brexit negotiations; • the trade conflict between the United States and China; • the extent and impact of the coronavirus reported to have surfaced in China; • our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property (such as in connection with the recent filing by Sandoz Inc. (“Sandoz”) and Norwich Pharmaceuticals Inc. (“Norwich”) of their respective Abbreviated New Drug Application (“ANDA”) for Xifaxan® (rifaximin) 550 mg tablets and the Company’s related lawsuit filed against Sandoz in connection therewith. |
The Company intends to file suit against Norwich within the regulated timeframe); • the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights; • our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis and the difficulties, challenges, time and resources associated with the integration of acquired companies, businesses and products; • any additional divestitures of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant impairments of goodwill or other assets, or any adverse tax consequences suffered as a result of any such divestitures; • the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, examinations, reviews and regulatory proceedings against us or relating to us and settlements thereof; • our ability to negotiate the terms of or obtain court approval for the settlement of certain legal and regulatory proceedings; • our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays; • the disruption of delivery of our products and the routine flow of manufactured goods; • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • interest rate risks associated with our floating rate debt borrowings; • our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our arrangements with Walgreens; • our ability to effectively promote our own products and those of our co-promotion partners; • the success of our fulfillment arrangements with Walgreens, including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, PBMs, third-party payors and governmental agencies), and the continued compliance of such arrangements with applicable laws; • our ability to secure and maintain third-party research, development, manufacturing, licensing, marketing or distribution arrangements; • the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market; • the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith; • the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third-party insurance or self-insurance; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges; • the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • the seasonality of sales of certain of our products; • declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control; • compliance by the Company or our third-party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations; • the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential amendment thereof and other legislative and regulatory health care reforms in the countries in which we operate, including with respect to recent government inquiries on pricing; • the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its business and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products; • the impact of changes in federal laws and policy under consideration by the Trump administration and Congress, including the effect that such changes will have on fiscal and tax policies, the potential revision of all or portions of the Health Care Reform Act, international trade agreements and policies and policy efforts designed to reduce patient out-of-pocket costs for medicines (which could result in new mandatory rebates and discounts or other pricing restrictions); • illegal distribution or sale of counterfeit versions of our products; and • interruptions, breakdowns or breaches in our information technology systems. |
These procedures also included, among others, (i) developing an independent estimate of Medicaid rebates by utilizing third-party information on price and projected market conditions, the terms of the specific Medicaid rebate programs, and the historical trends of actual Medicaid rebate claims paid, (ii) comparing the independent estimate for these Medicaid rebates to management’s estimates, (iii) evaluating the reasonableness of management’s assumptions related to the allowances for sales returns, including existing return policies with customers, projected sales mix and forecasted prescription demand, by comparing to historical trends and considering whether these assumptions were consistent with evidence obtained in other areas of the audit, (iv) evaluating the appropriateness of the sales return model and testing the completeness, accuracy, and relevance of underlying data used in the model, and (v) testing Medicaid rebate and sales return claims processed by the Company, including evaluating those claims for consistency with the contractual terms of the Company’s arrangements and policies. |
We have been or are currently the subject of a number of ongoing legal proceedings and investigations and inquiries by governmental agencies, including, but not limited to, the following: (i) investigations by the U.S. Attorney’s Offices for the District of Massachusetts and the Southern District of New York relating to certain matters, including our patient assistance programs (including financial support provided to patients), our former relationship with Philidor and other pharmacies, our accounting treatment for sales by specialty pharmacies, information provided to the Centers for Medicare and Medicaid Services, our pricing (including discounts and rebates), marketing and distribution of our products, our compliance program, and employee compensation; (ii) the investigation by the SEC of the Company relating to certain matters, including our former relationship with Philidor, our accounting practices and policies and our public disclosures; (iii) an investigation by the State of North Carolina Department of Justice relating to certain matters, including the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, our Nitropress®, Isuprel® and Cuprimine® products and our pricing decisions for certain of our other products; (iv) an investigation order from the Autorité des marches financiers (the “AMF”) (our principal securities regulator in Canada) relating to certain matters, including with respect to our former relationship with Philidor and our accounting practices and policies; (v) an investigation by the State of Texas concerning various price reporting matters relating to the State's Medicaid program for certain B&L products; (vi) a number of pending putative class action securities litigations in the U.S. (including related opt-out actions) and Canada (including related opt-out actions) have been instituted, the allegations of which relate to, among other things, allegedly false and misleading statements by the Company and/or failures to disclose information about our business and prospects, including relating to drug pricing, our policies and accounting practices, our use of specialty pharmacies, and our former relationship with Philidor and (vii) purported class actions under the federal RICO statute on behalf of third-party payors arising out of our pricing and use of specialty pharmacies, and our former relationship with Philidor. |
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) significantly revised U.S. federal corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate to 21%, limiting the tax deduction for interest expense to 30% of adjusted earnings, allowing immediate expensing for certain new investments, implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, imposing an additional U.S. tax on certain non-U.S. subsidiaries’ earnings which are considered to be Global Intangible Low Taxed Income (referred to as “GILTI”) and imposing an alternative “base erosion and anti-abuse tax” (“BEAT”) on domestic corporations that make deductible payments to foreign related persons in excess of specified amounts, and, effective for net operating losses (”NOLs”) arising in taxable years beginning after December 31, 2017, eliminating net operating loss carrybacks, permitting indefinite net operating loss carryforwards, and limiting the use of net operating loss carryforwards to 80% of current year taxable income. |
Levels of market acceptance for our new products could be impacted by several factors, some of which are not within our control, including but not limited to the following: • safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors; • scope of approved uses and marketing approval; • availability of patent or regulatory exclusivity; • timing of market approvals and market entry; • ongoing regulatory obligations following approval, such as the requirement to conduct a Risk Evaluation and Mitigation Strategy ("REMS") programs; • any restrictions or “black box” warnings required on the labeling of such products; • availability of alternative products from our competitors; • acceptance of the price of our products; • effectiveness of our sales forces and promotional efforts; • the level of reimbursement of our products; • acceptance of our products on government and private formularies; • ability to market our products effectively at the retail level or in the appropriate setting of care; and • the reputation of our products. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export and sanctions laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), the Canadian Corruption of Foreign Public Officials Act, and other applicable worldwide anti-bribery laws; • price and currency exchange controls; • restrictions on the repatriation of funds; • scarcity of hard currency, including the U.S. dollar, which may require a transfer or loan of funds to the operations in such countries, which they may not be able to repay on a timely basis; • political and economic instability; • compliance with multiple regulatory regimes; • compliance with economic sanctions laws and other laws that apply to our activities in the countries where we operate; • less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • credit market uncertainty; • differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. laws and regulations; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance and/or stock price from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • FDA regulatory actions relating to our manufacturers; • manufacturing and supply interruptions; • our responses to price competition; • new legislation that would control or regulate the prices of drugs; • a protracted and wide-ranging trade conflict between the United States and China; • expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases and success of our wholesaler and distributor arrangements; • general economic and industry conditions, including potential fluctuations in interest rates; • changes in seasonality of demand for certain of our products; • foreign currency exchange rate fluctuations; • changes to, or the confidence in, our business strategy; • changes to, or the confidence in, our management; and • expectations for future growth. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless: (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Canadian Tax Act), (iii) “timber resource property” (as such term is defined in the Canadian Tax Act) or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists or the common shares are otherwise deemed to be taxable Canadian property. |
Provisions recorded to reduce gross product sales to net product sales and revenues for the years ended December 31, 2018 and 2017 were as follows: Cash discounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales were 42% and 42% in 2018 and 2017, respectively, primarily driven by: • discounts and allowances as a percentage of gross product sales were unchanged as higher sales and discount and allowance rates associated with Migranal® AG, Tobramycin CD and Xenazine® AG and the launch of Diastat® AG were offset by lower sales and discount and allowance rates for Zegerid® AG, Metrogel® AG and Isuprel®; • returns as a percentage of gross product sales was lower primarily due to lower sales and lower return rates associated with certain products, primarily Nitropress® which was impacted by multiple generics in 2017, Glumetza® SLX, Mephyton® and Relistor® SLX partially offset by higher return rates for Edecrin® and Solodyn®; • rebates as a percentage of gross product sales were higher primarily due to increased sales of products that carry higher contractual rebates and co-pay assistance programs, including the impact of incremental rebates from contractual price increase limitations. |
Cash Discounts and Allowances, Chargebacks and Distribution Fees Cash discounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales were 42% and 41% in 2017 and 2016, respectively, an increase of 1% primarily driven by: • an increase in discounts and allowances as a percentage of product sales primarily associated with the generic release of Glumetza® AG partially offset by lower sales of Zegerid® AG due to generic competition; • returns as a percentage of gross product sales was unchanged as higher return rates for products with generic launches in 2017, such as Nitropress® and Glumetza®, were substantially offset by decreases from lower year over year sales and return rates associated with certain products, primarily Zegerid® AG which was launched in 2016, and Retin® AG which was impacted by multiple generics in 2016; • rebates as a percentage of product sales was higher as increased sales of products that carry higher contractual rebates and co-pay assistance programs, including the impact of gross price increases where customers receive incremental rebates based on contractual price increase limitations. |
Further, in the ordinary course of business, we may borrow and repay amounts under our Revolving Credit Facility to meet business needs; • Capital expenditures-We expect to make payments of approximately $275 million for property, plant and equipment during 2019, of which there were $44 million in committed amounts as of December 31, 2018; • Contingent consideration payments-We expect to make contingent consideration and other approval/sales-based milestone payments of $44 million during 2019; • Restructuring and integration payments-We expect to make payments of $19 million during 2019 for employee separation costs and lease termination obligations associated with restructuring and integration actions we have taken through December 31, 2018; and • Benefit obligations-We expect to make payments under our pension and postretirement obligations of $2 million, $7 million and $5 million to the U.S. pension benefit plan, the non-U.S. pension benefit plans and the U.S. postretirement benefit plan, respectively during 2019. |
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects and forecasts and changes thereto; product pipeline, prospective products and product approvals, product development and future performance and results of current and anticipated products; anticipated revenues for our products, including the Significant Seven; anticipated growth in our Ortho Dermatologics business; expected R&D and marketing spend, including in connection with the promotion of the Significant Seven; our expected primary cash and working capital requirements for 2019 and beyond; the Company's plans for continued improvement in operational efficiency and the anticipated impact of such plans; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; the impact of our distribution, fulfillment and other third-party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; the anticipated impact of the adoption of new accounting standards; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our ability to meet the financial and other covenants contained in our Fourth Amended and Restated Credit and Guaranty Agreement (the "Restated Credit Agreement"), and indentures; and our impairment assessments, including the assumptions used therein and the results thereof. |
Important factors, risks and uncertainties that could cause actual results to differ materially from these expectations include, among other things, the following: • the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our past distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor Rx Services, LLC ("Philidor")), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts and the U.S. Attorney's Office for the Southern District of New York, the pending investigations by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, the investigation order issued by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), a number of pending putative securities class action litigations in the U.S. (including related opt-out actions) and Canada (including related opt-out actions) and purported class actions under the federal RICO statute and other claims, investigations or proceedings that may be initiated or that may be asserted; • potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the past and ongoing public scrutiny of our past distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor; • the past and ongoing scrutiny of our legacy business practices, including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York), and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof; • pricing decisions that we have implemented, or may in the future elect to implement, whether as a result of recent scrutiny or otherwise, such as the Patient Access and Pricing Committee’s commitment that the average annual price increase for our branded prescription pharmaceutical products will be set at no greater than single digits, or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs); • legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions); • ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the “FDA”) and the results thereof; • actions by the FDA or other regulatory authorities with respect to our products or facilities; • our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on our financial condition, cash flows and results of operations; • our ability to meet the financial and other covenants contained in our Restated Credit Agreement, indentures and other current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, including prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional debt we are able to incur where not prohibited, and restrictions on our ability to make certain investments and other restricted payments; • any default under the terms of our senior notes indentures or Restated Credit Agreement and our ability, if any, to cure or obtain waivers of such default; • any delay in the filing of any future financial statements or other filings and any default under the terms of our senior notes indentures or Restated Credit Agreement as a result of such delays; • any downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances; • any reductions in, or changes in the assumptions used in, our forecasts for 2019 or beyond, which could lead to, among other things: (i) a failure to meet the financial and/or other covenants contained in our Restated Credit Agreement and/or indentures and/or (ii) impairment in the goodwill associated with certain of our reporting units or impairment charges related to certain of our products or other intangible assets, which impairments could be material; • changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products or other intangible assets; • any additional divestitures of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant write-downs of goodwill, or any adverse tax consequences suffered as a result of any such divestitures; • the uncertainties associated with the acquisition and launch of new products, including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges; • our ability to retain, motivate and recruit executives and other key employees; • our ability to implement effective succession planning for our executives and key employees; • factors impacting our ability to achieve anticipated growth in our Ortho Dermatologics business, including the approval of pending and pipeline products (and the timing of such approvals), expected geographic expansion, changes in estimates on market potential for dermatology products and continued investment in and success of our sales force; • factors impacting our ability to achieve anticipated revenues for our Significant Seven products, including the approval of pending products in the Significant Seven (and the timing of such approvals), changes in anticipated marketing spend on such products and launch of competing products; • the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly; • our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; • our ability to effectively operate, stabilize and grow our businesses in light of the challenges that the Company currently faces, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our past pricing, distribution and other practices, reputational harm and limitations on the way we conduct business imposed by the covenants in our Restated Credit Agreement, indentures and the agreements governing our other indebtedness; • the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third-party payors; the impact our distribution, pricing and other practices (including as it relates to our current relationship with Walgreen Co. ("Walgreens")) may have on the decisions of such government authorities, PBMs and other third-party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products; • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries; • the actions of our third-party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor; • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations); • adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in certain of the countries in which we do business; • the impact of the recently signed United States-Mexico-Canada Agreement (“USMCA”) and any potential changes to other trade agreements; • the final outcome and impact of Brexit negotiations; • the potentially escalating trade conflict between the United States and China; • our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property; • the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights; • our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis and the difficulties, challenges, time and resources associated with the integration of acquired companies, businesses and products; • the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof; • our ability to negotiate the terms of or obtain court approval for the settlement of certain legal and regulatory proceedings; • our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays; • the disruption of delivery of our products and the routine flow of manufactured goods; • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • interest rate risks associated with our floating rate debt borrowings; • our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our arrangements with Walgreens; • our ability to effectively promote our own products and those of our co-promotion partners, such as Doptelet® (Dova Pharmaceuticals, Inc.) and LucemyraTM (US WorldMeds, LLC); • the success of our fulfillment arrangements with Walgreens, including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, PBMs, third-party payors and governmental agencies), the continued compliance of such arrangements with applicable laws, and our ability to successfully negotiate any improvements to our arrangements with Walgreens; • our ability to secure and maintain third-party research, development, manufacturing, licensing, marketing or distribution arrangements; • the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market; • the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith; • the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third-party insurance or self-insurance; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges; • the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • the seasonality of sales of certain of our products; • declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control; • compliance by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations; • the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential amendment thereof and other legislative and regulatory health care reforms in the countries in which we operate, including with respect to recent government inquiries on pricing; • the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its business and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products; • the impact of changes in federal laws and policy under consideration by the Trump administration and Congress, including the effect that such changes will have on fiscal and tax policies, the potential revision of all or portions of the Health Care Reform Act, international trade agreements and policies and policy efforts designed to reduce patient out-of-pocket costs for medicines (which could result in new mandatory rebates and discounts or other pricing restrictions); • illegal distribution or sale of counterfeit versions of our products; and • interruptions, breakdowns or breaches in our information technology systems. |
We have been or are currently the subject of a number of ongoing legal proceedings and investigations and inquiries by governmental agencies, including the following: (i) investigations by the U.S. Attorney’s Offices for the District of Massachusetts and the Southern District of New York relating to certain matters, including our patient assistance programs (including financial support provided to patients), our former relationship with Philidor and other pharmacies, our accounting treatment for sales by specialty pharmacies, information provided to the Centers for Medicare and Medicaid Services, our pricing (including discounts and rebates), marketing and distribution of our products, our compliance program, and employee compensation; (ii) the investigation by the SEC of the Company relating to certain matters, including our former relationship with Philidor, our accounting practices and policies and our public disclosures; (iii) an investigation by the State of North Carolina Department of Justice relating to certain matters, including the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, our Nitropress®, Isuprel® and Cuprimine® products and our pricing decisions for certain of our other products; (iv) a request for documents and other information received by the Company from the Autorité des marches financiers (the “AMF”) (our principal securities regulator in Canada) relating to certain matters, including with respect to our former relationship with Philidor and our accounting practices and policies; (v) the pending investigation by the California Department of Insurance relating to our former relationship with Philidor and certain California-based pharmacies, the marketing and distribution of our products in California, the billing of insurers for our products being used by California residents, and other matters; (vi) a number of purported class action securities litigations in the U.S. (including related opt-out actions) and Canada have been instituted, the allegations of which relate to, among other things, allegedly false and misleading statements by the Company and/or failures to disclose information about our business and prospects, including relating to drug pricing, our policies and accounting practices, our use of specialty pharmacies, and our former relationship with Philidor and (vii) purported class actions under the federal RICO statute on behalf of third-party payors arising out of our pricing and use of specialty pharmacies, and our former relationship with Philidor. |
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) significantly revised U.S. federal corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate to 21%, limiting the tax deduction for interest expense to 30% of adjusted earnings, allowing immediate expensing for certain new investments, implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, an additional U.S. tax on certain non-U.S. subsidiaries’ earnings which are considered to be Global Intangible Low Taxed Income (referred to as “GILTI”) and imposing an alternative “base erosion and anti-abuse tax” (“BEAT”) on domestic corporations that make deductible payments to foreign related persons in excess of specified amounts, and, effective for net operating losses arising in taxable years beginning after December 31, 2017, eliminating net operating loss carrybacks, permitting indefinite net operating loss carryforwards, and limiting the use of net operating loss carryforwards to 80% of current year taxable income. |
Levels of market acceptance for our new products (such as our Siliq™ product) could be impacted by several factors, some of which are not within our control, including but not limited to the following: • safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors; • scope of approved uses and marketing approval; • availability of patent or regulatory exclusivity; • timing of market approvals and market entry; • ongoing regulatory obligations following approval, such as the requirement to conduct a Risk Evaluation and Mitigation Strategy ("REMS") programs; • any restrictions or “black box” warnings required on the labeling of such products; • availability of alternative products from our competitors; • acceptance of the price of our products; • effectiveness of our sales forces and promotional efforts; • the level of reimbursement of our products; • acceptance of our products on government and private formularies; • ability to market our products effectively at the retail level or in the appropriate setting of care; and • the reputation of our products. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), the Canadian Corruption of Foreign Public Officials Act, and other applicable worldwide anti-bribery laws; • price and currency exchange controls; • restrictions on the repatriation of funds; • scarcity of hard currency, including the U.S. dollar, which may require a transfer or loan of funds to the operations in such countries, which they may not be able to repay on a timely basis; • political and economic instability; • compliance with multiple regulatory regimes; • compliance with economic sanctions laws and other laws that apply to our activities in the countries where we operate; • less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • credit market uncertainty; • differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. laws and regulations; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance and/or stock price from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • FDA regulatory actions relating to our manufacturers; • manufacturing and supply interruptions; • our responses to price competition; • expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases and success of our wholesaler and distributor arrangements; • general economic and industry conditions, including potential fluctuations in interest rates; • changes in seasonality of demand for certain of our products; • foreign currency exchange rate fluctuations; • changes to, or the confidence in, our business strategy; • changes to, or the confidence in, our management; and • expectations for future growth. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless: (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Canadian Tax Act), (iii) “timber resource property” (as such term is defined in the Canadian Tax Act) or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists or the common shares are otherwise deemed to be taxable Canadian property. |
Based on current patent expiration dates, settlement agreements and/or competitive information, we believe that our key products facing a potential loss of exclusivity and/or generic competition in the five year period from 2018 to and including 2022 include, among others (this is not an exhaustive list of products), the following key products in the U.S.: in 2018, Cuprimine®, Elidel®, Locoid® Lotion, Lotemax® Gel, Lotemax® Suspension, Mephyton®, and certain products subject to settlement agreements, which in aggregate represented 8% and 8% of our U.S. and Puerto Rico revenues for 2017 and 2016; in 2019, Zovirax® cream and certain products subject to settlement agreements, which in aggregate represented 2% and 2% of our U.S. and Puerto Rico revenues for 2017 and 2016; in 2020, Clindagel® and Migranal® which represented 0% and 1% of our U.S. and Puerto Rico revenues for 2017 and 2016; in 2021, Luzu®, PreserVision® and certain products subject to settlement agreements, which represented 4% and 3% of our U.S. and Puerto Rico revenue for 2017 and 2016, respectively. |
("Amoun") (the "Amoun Acquisition") and other acquisitions; • an increase in SG&A of $110 million primarily attributable to: (i) the incremental SG&A from the Salix Acquisition and other acquisitions, (ii) severance and other benefits associated with exiting executives, (iii) professional fees in connection with legal and governmental proceedings, investigations and information requests and (iv) on-boarding our new executive team and other key employees; • an increase in R&D of $87 million primarily within the Branded Rx and Bausch + Lomb/International segments to enhance our core assets and support of our new growth strategy; • an increase in Amortization of intangible assets of $416 million, as we amortized intangible assets acquired in 2015 for the full year 2016; • an increase in Goodwill impairments of $1,077 million primarily in connection with the realignment of our segment structure that took place during the three months ended September 30, 2016; • an increase in Asset impairments of $159 million primarily in connection with Ruconest® which was divested on December 7, 2016; • a decrease in Restructuring and integration costs of $230 million as the integration of acquisitions in 2015 and prior is substantially complete; • a decrease in in-process R&D costs of $72 million which was primarily related to a $100 million upfront payment to acquire certain multi-year licensing rights to brodalumab, marketed as Siliq™, expensed in 2015; and • Other expense, net in 2015 includes post-combination compensation expenses of $183 million associated with two acquisitions in 2015 that did not occur in 2016. |
Provisions recorded to reduce gross product sales to net product sales and revenues for the years ended December 31, 2017 and 2016 were as follows: Cash discounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales were 42% and 41% in 2017 and 2016, respectively, an increase of 1% primarily driven by: • an increase in discounts and allowances as a percentage of product sales primarily associated with the generic release of Glumetza® AG partially offset by lower sales of Zegerid® AG due to generic competition; • returns as a percentage of gross product sales was unchanged as higher return rates for products with generic launches in 2017, such as Nitropress® and Glumetza®, were substantially offset by decreases from lower year over year sales and return rates associated with certain products, primarily Zegerid® AG which was launched in 2016,and Retin® AG which was impacted by multiple generics in 2016; • rebates as a percentage of product sales was higher as increased sales of products that carry higher contractual rebates and co-pay assistance programs, including the impact of gross price increases where customers receive incremental rebates based on contractual price increase limitations. |
The increase was primarily driven by: (i) incremental SG&A related to the Salix Acquisition, the Amoun Acquisition and other acquisitions of $193 million, (ii) termination benefits associated with our former Chief Executive Officer ("CEO") of $38 million recognized in the first quarter consisting of: (a) the pro-rata vesting of performance-based restricted stock units ("RSUs") (no shares were issued on vesting of these performance-based RSUs because the associated market-based performance condition was not attained), (b) a cash severance payment and (c) a pro-rata annual cash bonus, (iii) professional fees in connection with recent legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices of $65 million, (iv) severance and other benefits paid to our exiting executives (excluding benefits paid to the former CEO) and costs associated with recruiting and on-boarding new executive team members and (v) an increase in legal and professional fees in connection with ongoing corporate and business matters. |
Further, in the ordinary course of business, we may borrow and repay amounts under our Revolving Credit Facility to meet business needs; • Capital expenditures-We expect to make payments of approximately $250 million for property, plant and equipment during 2018, of which there were $35 million in committed amounts as of December 31, 2017; • Contingent consideration payments-We expect to make contingent consideration and other approval/sales-based milestone payments of $112 million during 2018; • Restructuring and integration payments-We expect to make payments of $27 million during 2018 for employee separation costs and lease termination obligations associated with restructuring and integration actions we have taken through December 31, 2017; • Benefit obligations-We expect to make payments under our pension and postretirement obligations of $5 million, $7 million and $6 million to the U.S. pension benefit plan, the non-U.S. pension benefit plans and the U.S. postretirement benefit plan, respectively during 2018. |
These forward-looking statements relate to, among other things: our business strategy, business plans and prospects, forecasts and changes thereto, product pipeline, prospective products or product approvals, product development and distribution plans, future performance or results of current and anticipated products; anticipated revenues for our products, including the Significant Seven; anticipated compounding growth in our Ortho Dermatologics business; expected R&D and marketing spend; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; the impact of our distribution, fulfillment and other third party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our ability to meet the financial and other covenants contained in our Third Amended and Restated Credit and Guaranty Agreement, as amended (the "Credit Agreement") and indentures; and our impairment assessments, including the assumptions used therein and the results thereof. |
Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: • the expense, timing and outcome of legal and governmental proceedings, investigations and information requests relating to, among other matters, our distribution, marketing, pricing, disclosure and accounting practices (including with respect to our former relationship with Philidor Rx Services, LLC ("Philidor")), including pending investigations by the U.S. Attorney's Office for the District of Massachusetts, the U.S. Attorney's Office for the Southern District of New York and the State of North Carolina Department of Justice, the pending investigations by the U.S. Securities and Exchange Commission (the “SEC”) of the Company, the request for documents and information received by the Company from the Autorité des marchés financiers (the “AMF”) (the Company’s principal securities regulator in Canada), the pending investigation by the California Department of Insurance, a number of pending putative securities class action litigations in the U.S. (including related opt-out actions) and Canada and purported class actions under the federal RICO statute and other claims, investigations or proceedings that may be initiated or that may be asserted; • potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative publicity and reputational harm on our Company, products and business that may result from the ongoing public scrutiny of our distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigations and liabilities we may face as a result of any alleged wrongdoing by Philidor and/or its management and/or employees; • the current scrutiny of our business practices including with respect to pricing (including the investigations by the U.S. Attorney's Offices for the District of Massachusetts and the Southern District of New York, and the State of North Carolina Department of Justice) and any pricing controls or price adjustments that may be sought or imposed on our products as a result thereof; • pricing decisions that we have implemented, or may in the future elect to implement, whether as a result of recent scrutiny or otherwise, such as the decision of the Company to take no further price increases on our Nitropress® and Isuprel® products and to implement an enhanced rebate program for such products, our decision on the price of our Siliq™ product, the Patient Access and Pricing Committee’s commitment that the average annual price increase for our branded prescription pharmaceutical products will be set at no greater than single digits and below the 5-year weighted average of the increases within the branded biopharmaceutical industry or any future pricing actions we may take following review by our Patient Access and Pricing Committee (which is responsible for the pricing of our drugs); • legislative or policy efforts, including those that may be introduced and passed by the U.S. Congress, designed to reduce patient out-of-pocket costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions); • ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by the U.S. Food and Drug Administration (the "FDA") and the results thereof; • actions by the FDA or other regulatory authorities with respect to our products or facilities; • our substantial debt (and potential additional future indebtedness) and current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on our financial condition, cash flows and results of operations; • our ability to meet the financial and other covenants contained in our Credit Agreement, indentures and other current or future debt agreements and the limitations, restrictions and prohibitions such covenants impose or may impose on the way we conduct our business, prohibitions on incurring additional debt if certain financial covenants are not met, limitations on the amount of additional debt we are able to incur where not prohibited, and restrictions on our ability to make certain investments and other restricted payments; • any default under the terms of our senior notes indentures or Credit Agreement and our ability, if any, to cure or obtain waivers of such default; • any delay in the filing of any future financial statements or other filings and any default under the terms of our senior notes indentures or Credit Agreement as a result of such delays; • any further downgrade by rating agencies in our credit ratings, which may impact, among other things, our ability to raise debt and the cost of capital for additional debt issuances; • any reductions in, or changes in the assumptions used in, our forecasts for fiscal year 2018 or beyond, which could lead to, among other things: (i) a failure to meet the financial and/or other covenants contained in our Credit Agreement and/or indentures and/or (ii) impairment in the goodwill associated with certain of our reporting units or impairment charges related to certain of our products or other intangible assets, which impairments could be material; • changes in the assumptions used in connection with our impairment analyses or assessments, which would lead to a change in such impairment analyses and assessments and which could result in an impairment in the goodwill associated with any of our reporting units or impairment charges related to certain of our products or other intangible assets; • any additional divestitures of our assets or businesses and our ability to successfully complete any such divestitures on commercially reasonable terms and on a timely basis, or at all, and the impact of any such divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant write-downs of goodwill, or any adverse tax consequences suffered as a result of any such divestitures; • our shift in focus to much lower business development activity through acquisitions for the foreseeable future as we focus on reducing our outstanding debt levels and as a result of the restrictions imposed by our Credit Agreement that restrict us from, among other things, making acquisitions over an aggregate threshold (subject to certain exceptions) and from incurring debt to finance such acquisitions, until we achieve a specified leverage ratio; • the uncertainties associated with the acquisition and launch of new products, including, but not limited to, our ability to provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges; • our ability to retain, motivate and recruit executives and other key employees, including subsequent to retention payments being paid out and as a result of the reputational challenges we face and may continue to face; • our ability to implement effective succession planning for our executives and key employees; • factors impacting our ability to achieve anticipated compounding growth in our Ortho Dermatologics business, including approval of pending and pipeline products (and the timing of such approvals), expected geographic expansion, changes in estimates on market potential for dermatology products and continued investment in and success of our sales force; • factors impacting our ability to achieve anticipated revenues for our Significant Seven products, including the approval of pending products in the Significant Seven (and the timing of such approvals), changes in anticipated marketing spend on such products and launch of competing products; • the challenges and difficulties associated with managing a large complex business, which has, in the past, grown rapidly; • our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors; • our ability to effectively operate, stabilize and grow our businesses in light of the challenges that the Company currently faces, including with respect to its substantial debt, pending investigations and legal proceedings, scrutiny of our pricing, distribution and other practices, reputational harm and limitations on the way we conduct business imposed by the covenants in our Credit Agreement, indentures and the agreements governing our other indebtedness; • the extent to which our products are reimbursed by government authorities, pharmacy benefit managers ("PBMs") and other third party payors; the impact our distribution, pricing and other practices (including as it relates to our current relationship with Walgreens) may have on the decisions of such government authorities, PBMs and other third party payors to reimburse our products; and the impact of obtaining or maintaining such reimbursement on the price and sales of our products; • the inclusion of our products on formularies or our ability to achieve favorable formulary status, as well as the impact on the price and sales of our products in connection therewith; • our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries; • the actions of our third party partners or service providers of research, development, manufacturing, marketing, distribution or other services, including their compliance with applicable laws and contracts, which actions may be beyond our control or influence, and the impact of such actions on our Company, including the impact to the Company of our former relationship with Philidor and any alleged legal or contractual non-compliance by Philidor; • the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering and operating in new and different geographic markets (including the challenges created by new and different regulatory regimes in such countries and the need to comply with applicable anti-bribery and economic sanctions laws and regulations); • adverse global economic conditions and credit markets and foreign currency exchange uncertainty and volatility in the countries in which we do business (such as the current or recent instability in Brazil, Russia, Ukraine, Argentina, Egypt, certain other countries in Africa and the Middle East, the devaluation of the Egyptian pound, and the adverse economic impact and related uncertainty caused by the United Kingdom's decision to leave the European Union (Brexit)); • our ability to obtain, maintain and license sufficient intellectual property rights over our products and enforce and defend against challenges to such intellectual property; • the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of products that compete against our products that do not have patent or data exclusivity rights; • if permitted under our Credit Agreement, and to the extent we elect to resume business development activities through acquisitions, our ability to identify, finance, acquire, close and integrate acquisition targets successfully and on a timely basis; • factors relating to the acquisition and integration of the companies, businesses and products that have been acquired by the Company and that may in the future be acquired by the Company (if permitted under our Credit Agreement and to the extent we elect to resume business development activities through acquisitions), such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations (including potential disruptions in sales activities and potential challenges with information technology systems integrations), the difficulties and challenges associated with entering into new business areas and new geographic markets, the difficulties, challenges and costs associated with managing and integrating new facilities, equipment and other assets, the risks associated with the acquired companies, businesses and products and our ability to achieve the anticipated benefits and synergies from such acquisitions and integrations, including as a result of cost-rationalization and integration initiatives. |
Factors impacting the achievement of anticipated benefits and synergies may include greater than expected operating costs, the difficulty in eliminating certain duplicative costs, facilities and functions, and the outcome of many operational and strategic decisions; • the expense, timing and outcome of pending or future legal and governmental proceedings, arbitrations, investigations, subpoenas, tax and other regulatory audits, reviews and regulatory proceedings against us or relating to us and settlements thereof; • our ability to obtain components, raw materials or finished products supplied by third parties (some of which may be single-sourced) and other manufacturing and related supply difficulties, interruptions and delays; • the disruption of delivery of our products and the routine flow of manufactured goods; • economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins; • interest rate risks associated with our floating rate debt borrowings; • our ability to effectively distribute our products and the effectiveness and success of our distribution arrangements, including the impact of our arrangements with Walgreens; • the success of our fulfillment arrangements with Walgreens, including market acceptance of, or market reaction to, such arrangements (including by customers, doctors, patients, PBMs, third party payors and governmental agencies), the continued compliance of such arrangements with applicable laws, and our ability to successfully negotiate any improvements to our arrangements with Walgreens; • our ability to secure and maintain third party research, development, manufacturing, marketing or distribution arrangements; • the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to potential lawsuits, product liability claims and damages and/or recalls or withdrawals of products from the market; • the mandatory or voluntary recall or withdrawal of our products from the market and the costs associated therewith; • the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third party insurance or self-insurance; • the difficulty in predicting the expense, timing and outcome within our legal and regulatory environment, including with respect to approvals by the FDA, Health Canada and similar agencies in other countries, legal and regulatory proceedings and settlements thereof, the protection afforded by our patents and other intellectual and proprietary property, successful generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies; • the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges; • the results of management reviews of our research and development portfolio (including following the receipt of clinical results or feedback from the FDA or other regulatory authorities), which could result in terminations of specific projects which, in turn, could lead to material impairment charges; • the seasonality of sales of certain of our products; • declines in the pricing and sales volume of certain of our products that are distributed or marketed by third parties, over which we have no or limited control; • compliance by the Company or our third party partners and service providers (over whom we may have limited influence), or the failure of our Company or these third parties to comply, with health care “fraud and abuse” laws and other extensive regulation of our marketing, promotional and business practices (including with respect to pricing), worldwide anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations; • the impacts of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Act”) and potential amendment thereof and other legislative and regulatory health care reforms in the countries in which we operate, including with respect to recent government inquiries on pricing; • the impact of any changes in or reforms to the legislation, laws, rules, regulation and guidance that apply to the Company and its business and products or the enactment of any new or proposed legislation, laws, rules, regulations or guidance that will impact or apply to the Company or its businesses or products; • the impact of changes in federal laws and policy under consideration by the Trump administration and Congress, including the effect that such changes will have on fiscal and tax policies, the potential revision of all or portions of the Health Care Reform Act, international trade agreements and policies and policy efforts designed to reduce patient out-of-pocket costs for medicines (which could result in new mandatory rebates and discounts or other pricing restrictions); • illegal distribution or sale of counterfeit versions of our products; and • interruptions, breakdowns or breaches in our information technology systems. |
The terms of the April 2016 amendment imposed a number of restrictions on the Company and its subsidiaries until the time that: (i) the Company delivered the 2015 Form 10-K (which was filed on April 29, 2016) and the March 31, 2016 Form 10-Q (which was filed on June 7, 2016) (such requirements, the "Financial Reporting Requirements") and (ii) the leverage ratio of the Company and its subsidiaries (being the ratio, as of the last day of any fiscal quarter, of Consolidated Total Debt (as defined in the Credit Agreement) as of such day to Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the four fiscal quarter period ending on such date) is less than 4.50 to 1.00, including imposing: (i) a $250 million aggregate cap (the "Transaction Cap") on acquisitions (although the Transaction Cap does not apply to any portion of acquisition consideration paid for by either the issuance of the Company’s equity or the proceeds of any such equity issuance), (ii) a restriction on the incurrence of debt to finance such acquisitions and (iii) a requirement that the net proceeds from certain asset sales be used to repay the term loans under the Credit Agreement, instead of investing such net proceeds in real estate, equipment, other tangible assets or intellectual property useful in the business. |
Segment Revenues and Profit Segment revenues and profits for the years ended December 31, 2017, 2016 and 2015 were as follows: Segment Assets Total assets by segment as of December 31, 2017 and 2016 were as follows: Capital Expenditures, Depreciation and Amortization of intangible assets, and Asset Impairments Capital expenditures, depreciation and amortization of intangible assets, and asset impairments by segment for the years ended December 31, 2017, 2016 and 2015 were as follows: Revenues by Product Category Revenues by product category for the years ended December 31, 2017, 2016 and 2015 were as follows: Geographic Information Revenues are attributed to a geographic region based on the location of the customer for the years ended December 31, 2017, 2016 and 2015 were as follows: Long-lived assets consisting of property, plant and equipment, net of accumulated depreciation, are attributed to geographic regions based on their physical location as of December 31, 2017 and 2016 were as follows: Major Customers Customers that accounted for 10% or more of total revenues for the years ended December 31, 2017, 2016 and 2015 were as follows: SUPPLEMENTARY DATA (UNAUDITED) Selected unaudited quarterly consolidated financial data are shown below: |
We have been or are currently the subject of a number of recent legal proceedings and investigations and inquiries by governmental agencies, including the following: (i) investigations by the U.S. Attorney’s Offices for the District of Massachusetts and the Southern District of New York relating to certain matters, including our patient assistance programs (including financial support provided to patients), our former relationship with Philidor and other pharmacies, our accounting treatment for sales by specialty pharmacies, information provided to the Centers for Medicare and Medicaid Services, our pricing (including discounts and rebates), marketing and distribution of our products, our compliance program, and employee compensation; (ii) the investigation by the SEC of the Company relating to certain matters, including our former relationship with Philidor, our accounting practices and policies and our public disclosures; (iii) investigations by the U.S. Senate Special Committee on Aging and the U.S. House Committee on Oversight and Government Reform relating to certain matters, including our pricing decisions on particular drugs, as well as financial support provided by the Company for patients and matters relating to our research and development program, Medicare, and Medicaid; (iv) an investigation by the State of North Carolina Department of Justice relating to certain matters, including the production, marketing, distribution, sale and pricing of, and patient assistance programs covering, our Nitropress®, Isuprel® and Cuprimine® products and our pricing decisions for certain of our other products; (v) a request for documents and other information received by the Company from the AMF relating to certain matters, including with respect to our former relationship with Philidor and our accounting practices and policies; (vi) a document subpoena from the New Jersey State Bureau of Securities relating to our former relationship with Philidor, our accounting treatment for sales to Philidor, our financial reporting and public disclosures and other matters; (vii) the pending investigation by the California Department of Insurance relating to our former relationship with Philidor and certain California-based pharmacies, the marketing and distribution of our products in California, the billing of insurers for our products being used by California residents, and other matters; (viii) a number of purported class action securities litigations in the U.S. and Canada have been instituted, the allegations of which relate to, among other things, allegedly false and misleading statements by the Company and/or failures to disclose information about our business and prospects, including relating to drug pricing, our policies and accounting practices, our use of specialty pharmacies, and our former relationship with Philidor and (ix) purported class actions under the federal RICO statute on behalf of third-party payors arising out of our pricing and use of specialty pharmacies, and our former relationship with Philidor. |
Such restrictions, prohibitions and limitations could impact our ability to implement elements of our strategy in the following ways: • our ability to obtain additional debt financing on favorable terms or at all could be limited; • there may be instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required payments on our debt, which circumstances may result in the acceleration of the maturity of some or all of our outstanding indebtedness (which we may not have the ability to pay); • there may be instances in which we are unable to meet the financial covenants contained in our debt agreements, at which time we may be prohibited from incurring any additional debt until such covenants are met; • in 2017, a substantial portion of our cash flow from operations will be allocated (and, in future years, may be allocated) to service our debt, thus reducing the amount of our cash flow available for other purposes, including operating costs and capital expenditures that could improve our competitive position and results of operations; • we may issue debt or equity securities or sell some of our assets (subject to certain restrictions under our existing indebtedness) to meet payment obligations or to reduce our financial leverage, and we cannot assure you whether such transactions will be on favorable terms; • our flexibility to plan for, or react to, competitive challenges in our business and the pharmaceutical and medical device industries may be compromised; • we may be put at a competitive disadvantage relative to competitors that do not have as much debt as we have, and competitors that may be in a more favorable position to access additional capital resources; • our ability to make acquisitions and execute business development activities through acquisitions will be limited and may, in future years, continue to be limited; and • our ability to resolve regulatory and litigation matters may be limited. |
Levels of market acceptance for our new products (such as our Addyi® or our recently approved Siliq™ product (brodalumab)) could be impacted by several factors, some of which are not within our control, including but not limited to the: • safety, efficacy, convenience and cost-effectiveness of our products compared to products of our competitors; • scope of approved uses and marketing approval; • availability of patent or regulatory exclusivity; • timing of market approvals and market entry; • ongoing regulatory obligations following approval, such as the requirement to conduct a Risk Evaluation and Mitigation Strategy ("REMS") programs; • any restrictions or “black box” warnings required on the labeling of such products; • availability of alternative products from our competitors; • acceptance of the price of our products; • effectiveness of our sales forces and promotional efforts; • the level of reimbursement of our products; • acceptance of our products on government and private formularies; • ability to market our products effectively at the retail level or in the appropriate setting of care; and • the reputation of our products. |
All of our foreign operations are subject to risks inherent in conducting business abroad, including, among other things: • difficulties in coordinating and managing foreign operations, including ensuring that foreign operations comply with foreign laws as well as Canadian and U.S. laws applicable to Canadian companies with U.S. and foreign operations, such as export laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), and other applicable worldwide anti-bribery laws; • price and currency exchange controls; • restrictions on the repatriation of funds; • scarcity of hard currency, including the U.S. dollar, such as is the case currently in Egypt, which may require a transfer or loan of funds to the operations in such countries, which they may not be able to repay on a timely basis; • political and economic instability; • compliance with multiple regulatory regimes; • compliance with economic sanctions laws and other laws that apply to our activities in the countries where we operate, such as in Russia and Crimea; • less established legal and regulatory regimes in certain jurisdictions, including as relates to enforcement of anti-bribery and anti-corruption laws and the reliability of the judicial systems; • differing degrees of protection for intellectual property; • unexpected changes in foreign regulatory requirements, including quality standards and other certification requirements; • new export license requirements; • adverse changes in tariff and trade protection measures; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • restrictive governmental actions; • possible nationalization or expropriation; • credit market uncertainty; • differing local practices, customs and cultures, some of which may not align or comply with our Company practices and policies or U.S. laws and regulations; • difficulties with licensees, contract counterparties, or other commercial partners; and • differing local product preferences and product requirements. |
The following events or occurrences, among others, could cause fluctuations in our financial performance and/or stock price from period to period: • development and launch of new competitive products; • the timing and receipt of FDA approvals or lack of approvals; • costs related to business development transactions; • changes in the amount we spend to promote our products; • delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses; • changes in treatment practices of physicians that currently prescribe certain of our products; • increases in the cost of raw materials used to manufacture our products; • manufacturing and supply interruptions; • our responses to price competition; • expenditures as a result of legal actions (and settlements thereof), including the defense of our patents and other intellectual property; • market acceptance of our products; • the timing of wholesaler and distributor purchases; • general economic and industry conditions, including potential fluctuations in interest rates; • changes in seasonality of demand for certain of our products; • foreign currency exchange rate fluctuations; • changes to, or the confidence in, our business strategy; • changes to, or the confidence in, our management; and • expectations for future growth. |
As long as the common shares are then listed on a “designated stock exchange”, which currently includes the NYSE and TSX, the common shares generally will not constitute taxable Canadian property of a U.S. Holder, unless (a) at any time during the 60-month period preceding the disposition, the U.S. Holder, persons not dealing at arm’s length with such U.S. Holder or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of the capital stock of the Company and more than 50% of the fair market value of the common shares was derived, directly or indirectly, from any combination of (i) real or immoveable property situated in Canada, (ii) “Canadian resource property” (as such term is defined in the Canadian Tax Act), (iii) “timber resource property” (as such terms are defined in the Canadian Tax Act), or (iv) options in respect of, or interests in, or for civil law rights in, any such properties whether or not the property exists, or (b) the common shares are otherwise deemed to be taxable Canadian property. |
The decreases in contribution were partially offset by the incremental contributions from the Salix Acquisition, the Amoun Acquisition and other acquisitions of $507 million; • an increase in selling, general, and administrative expenses (“SG&A”) of $110 million primarily attributable to the costs associated with (i) the incremental SG&A from the Salix Acquisition and other acquisitions, (ii) severance and other benefits associated with exiting executives, (iii) professional fees in connection with recent legal and governmental proceedings, investigations and information requests and (iv) on-boarding our new executive team and other key employees; • an increase in R&D of $87 million primarily within the Branded Rx and Bausch + Lomb/International segments to enhance our core assets and support of our new growth strategy; • an increase in amortization of intangible assets of $416 million as we amortized intangible assets acquired in 2015 for the full year 2016; • goodwill impairments of $1,077 million in 2016; • a decrease in restructuring and integration costs of $230 million as the Company completed the integration of its recent acquisitions; • a decrease in in-process R&D costs of $72 million which was primarily related to a $100 million upfront payment to acquire certain multi-year licensing rights to brodalumab (to be marketed as Siliq™ in the U.S.) expensed in 2015; and • post-combination compensation expenses in 2015 of approximately $183 million associated with two acquisitions in 2015 included in other (income) expense and not occurring in 2016. |
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