0001551152 false Common Stock, $0.01 Par Value ABBV 0001551152 2019-09-15 2019-09-16 0001551152 us-gaap:CommonStockMember exch:XCHI 2019-09-15 2019-09-16 0001551152 us-gaap:CommonStockMember exch:XNYS 2019-09-15 2019-09-16 iso4217:USD xbrli:shares iso4217:USD xbrli:shares

 

Common Stock, $0.01 Par Value ABBV

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): September 16, 2019

 

ABBVIE INC.

 

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   001-35565   32-0375147
(State or other Jurisdiction
of Incorporation)
  (Commission File Number)   (IRS Employer
Identification No.)

 

 

 

1 North Waukegan Road

North Chicago, Illinois 60064-6400

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (847) 932-7900

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which
registered
Common Stock, $0.01 Par Value   ABBV   New York Stock Exchange
Chicago Stock Exchange

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

 

 

 

 

 

Item 8.01. Other Events.

 

Financial Information Related to Allergan Acquisition

 

AbbVie Inc. (“AbbVie”) is filing this Current Report on Form 8-K to provide certain financial information with respect to Allergan plc (“Allergan”) and AbbVie’s proposed acquisition of Allergan (the “Acquisition”). As previously disclosed in its Current Report on Form 8-K filed on June 25, 2019, AbbVie and Venice Subsidiary LLC (“Acquirer Sub”), a direct wholly-owned subsidiary of AbbVie, entered into a Transaction Agreement (the “Transaction Agreement”) with Allergan. The Transaction Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, Acquirer Sub will acquire all of the outstanding ordinary shares of Allergan. As a result, Allergan will become a wholly-owned subsidiary of AbbVie.

 

Included in this Current Report on Form 8-K are (a) Allergan’s audited consolidated financial statements and related notes as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018 and the related report of PricewaterhouseCoopers LLP, Allergan’s independent registered public accounting firm, which are included as Exhibit 99.1, (b) Allergan’s unaudited consolidated financial statements and related notes for the three and six months ended June 30, 2019 and June 30, 2018, which are included as Exhibit 99.2, and (c) AbbVie’s unaudited pro forma condensed combined financial information giving effect to the Acquisition (the “pro forma financial information”), which includes the unaudited pro forma condensed combined balance sheet as of June 30, 2019, the unaudited pro forma condensed combined statements of earnings for the year ended December 31, 2018 and for the six months ended June 30, 2019 and the related notes, which are included as Exhibit 99.3.

 

Also included in this Current Report on Form 8-K is the consent of PricewaterhouseCoopers LLP consenting to the incorporation by reference in certain of AbbVie’s Registration Statements of its report included in Exhibit 99.1, which is included as Exhibit 23.1.

 

The pro forma financial information included in this Current Report on Form 8-K has been presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the Acquisition occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that AbbVie will experience after the Acquisition.

 

Item 9.01. Financial Statements and Exhibits.

 

(a) Financial statements of Allergan.

 

Allergan’s audited consolidated financial statements and related notes as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018 and the related report of PricewaterhouseCoopers LLP, Allergan’s independent registered public accounting firm, are filed herewith as Exhibit 99.1 and included herein.

 

(b) Quarterly financial statements and certain supplemental information of Allergan.

 

Allergan’s unaudited consolidated financial statements and related notes for the three and six months ended June 30, 2019 and June 30, 2018, are filed herewith as Exhibit 99.2 and included herein.

 

(c) Pro forma financial information of AbbVie.

 

AbbVie’s unaudited pro forma condensed combined financial information, giving effect to the Acquisition, which includes the unaudited pro forma condensed combined balance sheet as of June 30, 2019, the unaudited pro forma condensed combined statements of earnings for the year ended December 31, 2018 and for the six months ended June 30, 2019 and the related notes, is filed herewith as Exhibit 99.3 and included herein.

 

 2 

 

 

(d) Exhibits

 

Exhibit
No.
  Exhibit  
     
23.1   Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm of Allergan.
     
99.1   Allergan’s audited consolidated financial statements and related notes as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018 and the related report of PricewaterhouseCoopers LLP, Allergan’s independent registered public accounting firm.
     
99.2   Allergan’s unaudited consolidated financial statements and related notes for the three and six months ended June 30, 2019 and June 30, 2018.
     
99.3   AbbVie’s unaudited pro forma condensed combined financial information, giving effect to the Acquisition, which includes the unaudited pro forma condensed combined balance sheet as of June 30, 2019, the unaudited pro forma condensed combined statements of earnings for the year ended December 31, 2018 and for the six months ended June 30, 2019 and the related notes.
     
104   The cover page from this Current Report on Form 8-K formatted in Inline XBRL (included as Exhibit 101).

 

NO OFFER OR SOLICITATION

 

This communication is not intended to and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy or an invitation to purchase or subscribe for any securities or the solicitation of any vote or approval in any jurisdiction pursuant to the Acquisition or otherwise, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. In particular, this communication is not an offer of securities for sale into the United States. No offer of securities shall be made in the United States absent registration under the U.S. Securities Act of 1933, as amended, or pursuant to an exemption from, or in a transaction not subject to, such registration requirements. Any securities issued in the Acquisition are anticipated to be issued in reliance upon available exemptions from such registration requirements pursuant to Section 3(a)(10) of the U.S. Securities Act of 1933, as amended.

 

 3 

 

 

FORWARD-LOOKING STATEMENTS

 

This communication contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including forward-looking statements with respect to the Acquisition and AbbVie’s, Allergan’s and/or the combined group’s estimated or anticipated future business, performance and results of operations and financial condition, including estimates, forecasts, targets and plans for AbbVie and, following the acquisition, if completed, the combined group. The words “believe,” “expect,” “anticipate,” “project” and similar expressions, among others, generally identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the possibility that a possible acquisition will not be pursued, failure to obtain necessary regulatory approvals or required financing or to satisfy any of the other conditions to the possible acquisition, adverse effects on the market price of AbbVie’s shares of common stock or Allergan’s ordinary shares and on AbbVie’s or Allergan’s operating results because of a failure to complete the possible acquisition, failure to realize the expected benefits of the possible acquisition, failure to promptly and effectively integrate Allergan’s businesses, negative effects relating to the announcement of the possible acquisition or any further announcements relating to the possible acquisition or the consummation of the possible acquisition on the market price of AbbVie’s shares of common stock or Allergan’s ordinary shares, significant transaction costs and/or unknown or inestimable liabilities, potential litigation associated with the possible acquisition, general economic and business conditions that affect the combined companies following the consummation of the possible acquisition, the combined company’s capital structure post-Acquisition and the nature of any debt issued to fund the Acquisition, changes in global, political, economic, business, competitive, market and regulatory forces, future exchange and interest rates, changes in tax laws, regulations, rates and policies, future business acquisitions or disposals and competitive developments. These forward-looking statements are based on numerous assumptions and assessments made in light of AbbVie’s experience and perception of historical trends, current conditions, business strategies, operating environment, future developments and other factors it believes appropriate. By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. The factors described in the context of such forward-looking statements in this communication could cause AbbVie’s plans with respect to Allergan or AbbVie’s actual results, performance or achievements, industry results and developments to differ materially from those expressed in or implied by such forward-looking statements. Although it is believed that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct and persons reading this communication are therefore cautioned not to place undue reliance on these forward-looking statements which speak only as at the date of this communication. Additional information about economic, competitive, governmental, technological and other factors that may affect AbbVie can be found in AbbVie’s filings with the SEC, including the risk factors discussed in AbbVie’s most recent Annual Report on Form 10-K, as updated by its Quarterly Reports on Form 10-Q and future filings with the SEC.

 

Any forward-looking statements in this communication are based upon information available to AbbVie and/or its board of directors as of the date of this communication and, while believed to be true when made, may ultimately prove to be incorrect. Subject to any obligations under applicable law, neither AbbVie or any member of its board of directors undertakes any obligation to update any forward-looking statement whether as a result of new information, future developments or otherwise, or to conform any forward-looking statement to actual results, future events, or to changes in expectations. All subsequent written and oral forward-looking statements attributable to AbbVie or its board of directors or any person acting on behalf of any of them are expressly qualified in their entirety by this paragraph.

 

 4 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  ABBVIE INC.
     
Date: September 16, 2019 By: /s/ Robert A. Michael
    Robert A. Michael
    Executive Vice President, Chief Financial Officer

 

 5 

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-227316) and Form S-8 (Nos. 333-222107, 333-222105, 333-212067, 333-204466, 333-185564, 333-185563, 333-185562, 333-185561) of AbbVie Inc. of our report dated February 15, 2019 relating to the financial statements of Allergan plc, which appears in this Current Report on Form 8-K.

 

/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 16, 2019

 

 

Exhibit 99.1

  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   Page 
     
Reports of Independent Registered Public Accounting Firm    2 
      
Consolidated Balance Sheets of Allergan plc as of December 31, 2018 and 2017    3 
      
Consolidated Statements of Operations of Allergan plc for the years ended December 31, 2018, 2017 and 2016    4 
      
Consolidated Statements of Comprehensive (Loss) / Income of Allergan plc for the years ended December 31, 2018, 2017 and 2016    5 
      
Consolidated Statements of Cash Flows of Allergan plc for the years ended December 31, 2018, 2017 and 2016    6 
      
Consolidated Statements of Equity of Allergan plc for the years ended December 31, 2018, 2017 and 2016    7 
      
Notes to the Consolidated Financial Statements    8 

  

 1 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of Allergan plc

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Allergan plc and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive (loss)/income, equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.

 

Change in Accounting Principles

 

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for income taxes and the manner in which it accounts for goodwill in 2018.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

February 15, 2019

 

We have served as the Company's auditor since at least 1994. We have not been able to determine the specific year we began serving as auditor of the Company.

 

 2 

 

  

ALLERGAN PLC

CONSOLIDATED BALANCE SHEETS

(In millions, except par value and share data)

 

   December 31,   December 31, 
   2018   2017 
ASSETS          
Current assets:          
Cash and cash equivalents  $880.4   $1,817.2 
Marketable securities   1,026.9    4,632.1 
Accounts receivable, net   2,868.1    2,899.0 
Inventories   846.9    904.5 
Current assets held for sale   34.0    - 
Prepaid expenses and other current assets   819.1    1,123.9 
Total current assets   6,475.4    11,376.7 
Property, plant and equipment, net   1,787.0    1,785.4 
Investments and other assets   1,970.6    267.9 
Non current assets held for sale   882.2    81.6 
Deferred tax assets   1,063.7    319.1 
Product rights and other intangibles   43,695.4    54,648.3 
Goodwill   45,913.3    49,862.9 
Total assets  $101,787.6   $118,341.9 
LIABILITIES AND EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $4,787.2   $5,541.4 
Income taxes payable   72.4    74.9 
Current portion of long-term debt and capital leases   868.3    4,231.8 
Total current liabilities   5,727.9    9,848.1 
Long-term debt and capital leases   22,929.4    25,843.5 
Other long-term liabilities   882.0    886.9 
Other taxes payable   1,615.5    1,573.9 
Deferred tax liabilities   5,501.8    6,352.4 
Total liabilities   36,656.6    44,504.8 
Commitments and contingencies (Refer to Note 24)          
Equity:          
Preferred shares, $0.0001 par value per share, zero and 5.1 million shares authorized, issued and outstanding, respectively   -    4,929.7 
Ordinary shares; $0.0001 par value per share; 1,000.0 million shares authorized, 332.6 million and 330.2 million shares issued and outstanding, respectively   -    - 
Additional paid-in capital   56,510.0    54,013.5 
Retained earnings   7,258.9    12,957.2 
Accumulated other comprehensive income   1,345.2    1,920.7 
Total shareholders’ equity   65,114.1    73,821.1 
Noncontrolling interest   16.9    16.0 
Total equity   65,131.0    73,837.1 
Total liabilities and equity  $101,787.6   $118,341.9 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 3 

 

 

ALLERGAN PLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

 

   Years Ended December 31, 
   2018   2017   2016 
Net revenues  $15,787.4   $15,940.7   $14,570.6 
Operating expenses:               
Cost of sales (excludes amortization and impairment of acquired intangibles including product rights)   2,191.4    2,168.0    1,860.8 
Research and development   2,266.2    2,100.1    2,575.7 
Selling and marketing   3,250.6    3,514.8    3,266.4 
General and administrative   1,271.2    1,501.9    1,473.9 
Amortization   6,552.3    7,197.1    6,470.4 
Goodwill impairments   2,841.1    -    - 
In-process research and development impairments   804.6    1,452.3    743.9 
Asset sales and impairments, net   2,857.6    3,927.7    5.0 
Total operating expenses   22,035.0    21,861.9    16,396.1 
Operating (loss)   (6,247.6)   (5,921.2)   (1,825.5)
                
Interest income   45.2    67.7    69.9 
Interest (expense)   (911.2)   (1,095.6)   (1,295.6)
Other income / (expense), net   256.7    (3,437.3)   219.2 
Total other (expense), net   (609.3)   (4,465.2)   (1,006.5)
(Loss) before income taxes and noncontrolling interest   (6,856.9)   (10,386.4)   (2,832.0)
(Benefit) for income taxes   (1,770.7)   (6,670.4)   (1,897.0)
Net (loss) from continuing operations, net of tax   (5,086.2)   (3,716.0)   (935.0)
(Loss) / income from discontinued operations, net of tax   -    (402.9)   15,914.5 
Net (loss) / income   (5,086.2)   (4,118.9)   14,979.5 
(Income) attributable to noncontrolling interest   (10.2)   (6.6)   (6.1)
Net (loss) / income attributable to shareholders   (5,096.4)   (4,125.5)   14,973.4 
Dividends on preferred shares   46.4    278.4    278.4 
Net (loss) / income attributable to ordinary shareholders  $(5,142.8)  $(4,403.9)  $14,695.0 
                
(Loss) / income per share attributable to ordinary shareholders - basic:               
Continuing operations  $(15.26)  $(11.99)  $(3.17)
Discontinued operations   -    (1.20)   41.35 
Net (loss) / income per share - basic  $(15.26)  $(13.19)  $38.18 
(Loss) / income per share attributable to ordinary shareholders - diluted:               
Continuing operations  $(15.26)  $(11.99)  $(3.17)
Discontinued operations   -    (1.20)   41.35 
Net (loss) / income per share - diluted  $(15.26)  $(13.19)  $38.18 
                
Dividends per ordinary share  $2.88   $2.80   $- 
                
Weighted average ordinary shares outstanding:               
Basic   337.0    333.8    384.9 
Diluted   337.0    333.8    384.9 

 

See accompanying Notes to the Consolidated Financial Statements.

  

 4 

 

 

ALLERGAN PLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) / INCOME

(In millions)

 

   Years Ended December 31, 
   2018   2017   2016 
Net (loss) / income  $(5,086.2)  $(4,118.9)  $14,979.5 
Other comprehensive (loss) / income               
Foreign currency translation (losses) / gains   (474.4)   1,248.0    (441.6)
Net impact of other-than-temporary loss on investment in Teva securities   -    1,599.4    - 
Impact of Teva Transaction   -    -    1,544.8 
Unrealized (losses) / gains, net of tax   (38.1)   111.7    (1,647.5)
Total other comprehensive (loss) / income, net of tax   (512.5)   2,959.1    (544.3)
Comprehensive (loss) / income   (5,598.7)   (1,159.8)   14,435.2 
Comprehensive (income) attributable to noncontrolling interest   (10.2)   (6.6)   (6.1)
Comprehensive (loss) / income attributable to ordinary shareholders  $(5,608.9)  $(1,166.4)  $14,429.1 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 5 

 

 

ALLERGAN PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

   Years Ended December 31, 
   2018   2017   2016 
Cash Flows From Operating Activities:               
Net (loss) / income  $(5,086.2)  $(4,118.9)  $14,979.5 
Reconciliation to net cash provided by operating activities:               
Depreciation   196.3    171.5    155.8 
Amortization   6,552.3    7,197.1    6,475.2 
Provision for inventory reserve   96.4    102.2    181.4 
Share-based compensation   239.8    293.3    334.5 
Deferred income tax benefit   (1,255.7)   (7,783.1)   (1,443.9)
Pre-tax gain on sale of businesses to Teva   -    -    (24,511.1)
Non-cash tax effect of gain on sale of businesses to Teva   -    -    5,285.2 
Goodwill impairments   2,841.1    -    - 
In-process research and development impairments   804.6    1,452.3    743.9 
Loss on asset sales and impairments, net   2,857.6    3,927.7    5.0 
Net income impact of other-than-temporary loss on investment in Teva securities   -    3,273.5    - 
Charge to settle Teva related matters   -    387.4    - 
Loss on forward sale of Teva shares   -    62.9    - 
Gain on sale of Teva securities, net   (60.9)   -    - 
Amortization of inventory step-up   -    131.7    42.4 
Gain on sale of businesses   (182.6)   -    - 
Non-cash extinguishment of debt   30.0    (15.7)   - 
Cash (discount) / charge related to extinguishment of debt   (45.6)   205.6    - 
Amortization of deferred financing costs   22.6    27.8    51.0 
Contingent consideration adjustments, including accretion   (106.5)   (133.2)   (66.8)
Other, net   29.0    (37.0)   (59.9)
Changes in assets and liabilities (net of effects of acquisitions):               
Decrease / (increase) in accounts receivable, net   (37.0)   (188.3)   (191.0)
Decrease / (increase) in inventories   (145.7)   (144.8)   (268.4)
Decrease / (increase) in prepaid expenses and other current assets   4.3    27.9    29.9 
Increase / (decrease) in accounts payable and accrued expenses   151.6    95.9    313.5 
Increase / (decrease) in income and other taxes payable   (1,191.6)   1,114.1    (326.6)
Increase / (decrease) in other assets and liabilities   (73.7)   29.1    (283.9)
Net cash provided by operating activities   5,640.1    6,079.0    1,445.7 
Cash Flows From Investing Activities:               
Additions to property, plant and equipment   (253.5)   (349.9)   (331.4)
Additions to product rights and other intangibles   -    (614.3)   (2.0)
Sale of businesses to Teva   -    -    33,804.2 
Additions to investments   (2,471.7)   (9,783.8)   (15,743.5)
Proceeds from sale of investments and other assets   6,259.3    15,153.3    7,771.6 
Payments to settle Teva related matters   (466.0)   -    - 
Proceeds from sales of property, plant and equipment   30.4    7.1    33.3 
Acquisitions of businesses, net of cash acquired   -    (5,290.4)   (1,198.9)
Net cash provided by / (used in) investing activities   3,098.5    (878.0)   24,333.3 
Cash Flows From Financing Activities:               
Proceeds from borrowings of long-term indebtedness, including credit facility   2,657.0    3,550.0    1,050.0 
Payments on debt, including capital lease obligations and credit facility   (8,804.5)   (6,413.6)   (10,848.7)
Debt issuance and other financing costs   (10.4)   (20.6)   - 
Cash charge related to extinguishment of debt   -    (205.6)   - 
Payments of contingent consideration and other financing   (30.9)   (511.6)   (161.1)
Proceeds from stock plans   102.4    183.4    172.1 
Proceeds from forward sale of Teva securities   465.5    -    - 
Payments to settle Teva related matters   (234.0)   -    - 
Repurchase of ordinary shares   (2,775.4)   (493.0)   (15,076.4)
Dividends paid   (1,049.8)   (1,218.2)   (278.4)
Net cash (used in) financing activities   (9,680.1)   (5,129.2)   (25,142.5)
Effect of currency exchange rate changes on cash and cash equivalents   4.7    21.4    (8.5)
Net (decrease) / increase in cash and cash equivalents   (936.8)   93.2    628.0 
Cash and cash equivalents at beginning of period   1,817.2    1,724.0    1,096.0 
Cash and cash equivalents at end of period  $880.4   $1,817.2   $1,724.0 
Supplemental Disclosures of Cash Flow Information:               
Cash paid during the year for:               
Income taxes other, net of refunds  $717.4   $(5.1)  $3,692.7 
Interest  $965.7   $1,144.4   $1,277.9 
Schedule of Non-Cash Investing and Financing Activities:               
Conversion of mandatory convertible preferred shares  $4,929.7   $-   $- 
Settlement of Teva Shares  $465.5   $-   $- 
Settlement of secured financing  $(465.5)  $-   $- 
Receipt of Teva Pharmaceuticals Industries Ltd. ordinary shares in connection with the sale of the generics business  $-   $-   $5,038.6 
Non-cash equity issuance for the acquisition of Zeltiq net assets  $-   $8.5   $- 
Dividends accrued  $1.4   $24.6   $23.2 

 

See accompanying Notes to the Consolidated Financial Statements.

  

 6 

 

 

ALLERGAN PLC

CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

 

                      Retained     Accumulated              
                            Additional     Earnings/     Other              
    Ordinary Shares     Preferred Shares     Paid-in-     (Accumulated     Comprehensive     Noncontrolling        
    Shares     Amount     Shares     Amount     Capital     Deficit)     Income / (Loss)     Interest     Total  
BALANCE, January 1, 2016     394.5     $ -       5.1     $ 4,929.7     $ 68,508.3     $ 3,647.5     $ (494.1 )   $ (2.1 )   $ 76,589.3  
 Comprehensive income:                                                                        
Net income attributable to shareholders     -       -       -       -       -       14,973.4       -       -       14,973.4  
Other comprehensive (loss), net of tax     -       -       -       -       -       -       (2,089.1 )     -       (2,089.1 )
Other comprehensive income resulting from the Teva Transaction     -       -       -       -       -       -       1,544.8       -       1,544.8  
Share-based compensation     -       -       -       -       334.5       -       -       -       334.5  
Ordinary shares issued under employee stock plans     2.3       -       -       -       172.1       -       -       -       172.1  
Tax benefits from exercise of options     -       -       -       -       20.4       -       -       -       20.4  
Dividends declared     -       -       -       -       -       (278.4 )     -       -       (278.4 )
Repurchase of ordinary shares under the share repurchase programs     (61.6 )     -       -       -       (15,000.0 )     -       -       -       (15,000.0 )
Repurchase of ordinary shares     (0.3 )     -       -       -       (76.4 )     -       -       -       (76.4 )
Movement in noncontrolling interest     -       -       -       -       -       -       -       9.9       9.9  
BALANCE, December 31, 2016     334.9     $ -       5.1     $ 4,929.7     $ 53,958.9     $ 18,342.5     $ (1,038.4 )   $ 7.8     $ 76,200.5  
Comprehensive (loss):                                                                        
Net (loss) attributable to shareholders     -       -       -       -       -       (4,125.5 )     -       -       (4,125.5 )
Other comprehensive income, net of tax     -       -       -       -       -       -       1,359.7       -       1,359.7  
Net impact of other-than-temporary loss on investment in Teva securities     -       -       -       -       -       -       1,599.4       -       1,599.4  
Share-based compensation     -       -       -       -       293.3       -       -       -       293.3  
Issuance for the Zeltiq acquisition     -       -       -       -       8.5       -       -       -       8.5  
Ordinary shares issued under employee stock plans     2.2       -       -       -       183.4       -       -       -       183.4  
Impact of change in accounting for share-based compensation plans     -       -       -       -       62.4       (41.6 )     -       -       20.8  
Dividends declared     -       -       -       -       -       (1,218.2 )     -       -       (1,218.2 )
Repurchase of ordinary shares under the share repurchase programs,including non-cash settlement of ASR program     (6.8 )     -       -       -       (450.0 )     -       -       -       (450.0 )
Repurchase of ordinary shares     (0.1 )     -       -       -       (43.0 )     -       -       -       (43.0 )
Movement in noncontrolling interest     -       -       -       -       -       -       -       8.2       8.2  
BALANCE, December 31, 2017     330.2     $ -       5.1     $ 4,929.7     $ 54,013.5     $ 12,957.2     $ 1,920.7     $ 16.0     $ 73,837.1  
Comprehensive (loss):                                                                        
Net (loss) attributable to shareholders     -       -       -       -       -       (5,096.4 )     -       -       (5,096.4 )
Other comprehensive (loss), net of tax     -       -       -       -       -       -       (512.5 )     -       (512.5 )
Share-based compensation     -       -       -       -       239.8       -       -       -       239.8  
Ordinary shares issued under employee stock plans     1.6       -       -       -       102.4       -       -       -       102.4  
Dividends declared     -       -       -       -       -       (1,026.6 )     -       -       (1,026.6 )
Conversion of Mandatory Preferred Shares     17.8       -       (5.1 )     (4,929.7 )     4,929.7       -       -       -       -  
Implementation of new accounting pronouncements     -       -       -       -       -       424.7       (63.0 )     -       361.7  
Repurchase of ordinary shares under the share repurchase programs, including non-cash settlement of ASR program   (16.8 )     -       -       -       (2,740.4 )     -       -       -       (2,740.4 )
Repurchase of ordinary shares     (0.2 )     -               -       (35.0 )     -       -       -       (35.0 )
Movement in noncontrolling interest     -       -       -       -       -       -       -       0.9       0.9  
BALANCE, December 31, 2018     332.6     $ -       -     $ -     $ 56,510.0     $ 7,258.9     $ 1,345.2     $ 16.9     $ 65,131.0  

  

See accompanying Notes to the Consolidated Financial Statements.

 

 7 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — Description of Business

 

Allergan plc is a global pharmaceutical leader. Allergan is focused on developing, manufacturing and commercializing branded pharmaceutical, device, biologic, surgical and regenerative medicine products for patients around the world. Allergan markets a portfolio of leading brands and best-in-class products primarily focused on four key therapeutic areas including medical aesthetics, eye care, central nervous system and gastroenterology. Allergan is an industry leader in Open Science, a model of research and development, which defines our approach to identifying and developing game-changing ideas and innovation for better patient care. The Company has operations in more than 100 countries.

 

On August 2, 2016 we completed the divestiture of our global generics business and certain other assets to Teva Pharmaceutical Industries Ltd. (“Teva”) (the “Teva Transaction”) for $33.3 billion in cash, net of cash acquired by Teva, which included estimated working capital and other contractual adjustments, and 100.3 million unregistered Teva ordinary shares (or American Depository Shares with respect thereto) (“Teva Shares”).  As part of the Teva Transaction, Teva acquired our global generics business, including the United States (“U.S.”) and international generic commercial units, our third-party supplier Medis, our global generic manufacturing operations, our global generic research and development (“R&D”) unit, our international over-the-counter (“OTC”) commercial unit (excluding OTC eye care products) and certain established international brands.

 

On October 3, 2016, the Company completed the divestiture of the Anda Distribution business to Teva for $500.0 million. The Anda Distribution business distributed generic, branded, specialty and OTC pharmaceutical products from more than 300 manufacturers to retail independent and chain pharmacies, nursing homes, mail order pharmacies, hospitals, clinics and physician offices across the U.S. 

 

The Company recognized a combined gain on the sale of the Anda Distribution business and the Teva Transaction of $15,932.2 million in the year ended December 31, 2016.

 

As a result of the Teva Transaction and the divestiture of the Company’s Anda Distribution business, and in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” the financial results of the businesses held for sale were reclassified to discontinued operations for all periods presented in our consolidated financial statements. The results of our discontinued operations include the results of our generic product development, manufacturing and distribution of off-patent pharmaceutical products, certain established international brands marketed similarly to generic products and out-licensed generic pharmaceutical products primarily in Europe through our Medis third-party business through August 2, 2016, as well as our Anda Distribution business through October 3, 2016.

  

NOTE 2 — Formation of the Company

 

Allergan plc was incorporated in Ireland on May 16, 2013 as a private limited company and re-registered effective September 20, 2013 as a public limited company. It was established for the purpose of facilitating the business combination between Allergan Finance, LLC (formerly known as Actavis, Inc.) and Warner Chilcott plc (“Warner Chilcott”). Following the consummation of the acquisition of Warner Chilcott on October 1, 2013 (the “Warner Chilcott Acquisition”), Allergan Finance, LLC and Warner Chilcott became wholly-owned subsidiaries of Allergan plc. Each of Allergan Finance, LLC’s common shares was converted into one Company ordinary share. Effective October 1, 2013, through a series of related-party transactions, Allergan plc contributed its indirect subsidiaries, including Allergan Finance, LLC, to its subsidiary Warner Chilcott Limited.

 

Pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Allergan plc “AGN” ordinary shares are deemed to be registered under Section 12(b) of the Exchange Act, are subject to the informational requirements of the Exchange Act, and the rules and regulations promulgated thereunder.

 

References throughout to “we,” “our,” “us,” the “Company” or “Allergan” refer to financial information and transactions of Allergan plc.

 

References throughout to “Ordinary Shares” refer to Allergan plc’s ordinary shares, par value $0.0001 per share.

 

 8 

 

 

NOTE 3 — Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) (“GAAP”). The consolidated financial statements include the accounts of wholly owned subsidiaries, after elimination of intercompany accounts and transactions. The consolidated financial information presented herein reflects all financial information that, in the opinion of management, is necessary for a fair statement of financial position, results of operations and cash flows for the periods presented.

 

The Company’s consolidated financial statements include the financial results of all acquired companies subsequent to the acquisition date.

 

Implementation of New Guidance

 

On January 1, 2018, we adopted ASU No. 2014-09, "Revenue from Contracts with Customers" (“Topic 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting practices. The impact to revenues for the year ended December 31, 2018 was not significant as a result of the adoption. The adoption of this guidance does not have a material impact on the Company’s financial position or results of operations as the Company’s sales primarily are governed by standard ship and bill terms of pharmaceutical products to customers.

 

The Company applies the “practical expedient” as defined in Topic 606 to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs which are included in selling, general, and administrative expenses are consistent with the accounting prior to the adoption of Topic 606. The Company also elected to use the practical expedient to not adjust the promised amount of consideration for the effects of the time value of money for contracts in which the anticipated period between when the Company transfers the goods or services to the customer and when the customer pays is equal to one year or less.

 

On January 1, 2018, the Company adopted ASU No. 2016-01, which now requires equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. Under the previous guidance, changes in the fair value of equity securities were recognized through other comprehensive income.

 

On January 1, 2018, the Company adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Previously, GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition was an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The amendment to the guidance eliminated the exception for an intra-entity transfer of an asset other than inventory and required an entity to recognize the income tax consequences when the transfer occurs.

 

The following represents the impact on the Company's Consolidated Balance Sheet as a result of the adoption on January 1, 2018 of these accounting pronouncements ($ in millions):

  

    Increase / (decrease)  
Pronouncement  

Accounts

receivable,

net

   

Prepaid

expenses

and other

current

assets

   

Accounts

payable

and

accrued

expenses

   

Deferred

tax

liabilities

   

Retained

earnings

   

Accumulated

other

comprehensive

income / (loss)

 

Accounting Standards Update No. 2014-09

  $ 1.9     $ -     $ (3.6 )   $ -     $ 5.5     $ -  

Accounting Standards Update No. 2016-01

  $ -     $ -     $ -     $ -     $ 63.0     $ (63.0 )*

Accounting Standards Update No. 2016-16

  $ -     $ (44.8 )   $ -     $ (401.0 )   $ 356.2     $ -  
                                                 
* The Company adopted ASU 2016-01, Financial Instruments on January 1, 2018. The new standard required modified retrospective adoption through 2018 beginning Retained Earnings and Accumulated Other Comprehensive Income. This was incorrectly recorded as a loss through Other Comprehensive Income of $63.0 million during the quarter ended March 31, 2018. This was corrected for during 2018 and therefore, has no impact on the annual consolidated financial statements. The Company has determined that the adjustment was not material to any previously reported interim periods.

 

 9 

 

 

On January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows. As a result of the guidance, the Company retrospectively applied the standard which resulted in a reclassification of debt extinguishment costs from cash flows from operating activities to cash flows from financing activities. As a result of the application of the guidance, cash flows from operating activities increased by $205.6 million and cash flows from financing activities decreased by $205.6 million in the year ended December 31, 2017.

 

On January 1, 2018, the Company adopted ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost.  Upon adoption, the Company recorded other components of the net periodic benefit cost with “other income / (expense), net.”

 

On July 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815) — Targeted Improvements to Accounting for Hedging Activities, which now better aligns the Company’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness on a prospective basis. After the adoption, the Company presents the entire change in fair value of a hedging instrument in the same income statement line item(s) as the earnings effect of the hedged item when that hedged item affects earnings.

 

Use of Estimates

 

Management is required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with GAAP. Such estimates and assumptions affect the reported financial statements. The Company’s most significant estimates relate to the determination of SRAs (defined below) included within either accounts receivable or accrued liabilities, the valuation of inventory balances, the determination of useful lives for intangible assets, pension and other post-retirement benefit plan assumptions, the assessment of expected cash flows used in evaluating goodwill and other long-lived assets for impairment and recognition and measurement of assets acquired and liabilities assumed in business combinations at fair value. The estimation process required to prepare the Company’s consolidated financial statements requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. The Company’s actual results could differ materially from those estimates.

 

Foreign Currency Translation

 

For most of the Company’s international operations, the local currency has been determined to be the functional currency. The results of its non-U.S. dollar based operations are translated to U.S. dollars at the average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transaction. Translation adjustments are reflected in shareholders’ equity and are included as a component of other comprehensive (loss) / income. The translational effects of revaluing non-functional currency assets and liabilities into the functional currency are recorded as general and administrative expenses in the consolidated statements of operations.

 

The Company realizes foreign currency gains / (losses) in the normal course of business based on movement in the applicable exchange rates. These transactional gains / (losses) are included as a component of general and administrative expenses.

 

Cash and Cash Equivalents

 

The Company considers cash and cash equivalents to include cash in banks, commercial paper and deposits with financial institutions that can be liquidated without prior notice or penalty. The Company considers all highly liquid investments with an original maturity from the date acquired of three months or less to be cash equivalents.

 

Fair Value of Other Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts and other receivables, investments, trade accounts payable, and long-term debt, including the current portion. The carrying amounts of cash and cash equivalents, marketable securities, accounts and other receivables and trade accounts payable are representative of their respective fair values due to their relatively short maturities. The fair values of investments in companies that are publicly traded are based on quoted market prices. The Company estimates the fair value of its fixed rate long-term obligations based on quoted market rates.

 

 10 

 

 

Inventories

 

Inventories consist of finished goods held for sale and distribution, raw materials and work in process. Inventory includes brand and aesthetic products which represent Food and Drug Administration (“FDA”) approved or likely to be approved indications. Inventory valuation reserves are established based on a number of factors/situations including, but not limited to, raw materials, work in process or finished goods not meeting product specifications, product obsolescence, or application of the lower of cost (first-in, first-out method) or net realizable value concepts. The determination of events requiring the establishment of inventory valuation reserves, together with the calculation of the amount of such reserves may require judgment. Assumptions utilized in our quantification of inventory reserves include, but are not limited to, estimates of future product demand, consideration of current and future market conditions, product net selling price, anticipated product launch dates, competition and potential product obsolescence and other events relating to special circumstances surrounding certain products. No material adjustments have been required to our inventory reserve estimates for the periods presented. Adverse changes in assumptions utilized in our inventory reserve calculations could result in an increase to our inventory valuation reserves and higher cost of sales.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation. Major renewals and improvements are capitalized if they add functionality or extend the life of the asset, while routine maintenance and repairs are expensed as incurred. The Company capitalizes interest on qualified construction projects. At the time property, plant and equipment are retired from service, the cost and accumulated depreciation are removed from the respective accounts.

 

Depreciation expense is computed principally on the straight-line method, over the estimated useful lives of the related assets. The following table provides the range of estimated useful lives used for each asset type:

 

Computer software/hardware (including internally developed)   3-10 years
Machinery and equipment   3-15 years
Research and laboratory equipment   3-10 years
Furniture and fixtures   3-10 years
Buildings, improvements, leasehold improvements and other   4-50 years
Transportation equipment   3-20 years

 

The Company assesses property, plant and equipment for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable.

 

Investments

 

The Company’s equity investments are accounted for under the equity method of accounting when the Company can exert significant influence and the Company’s ownership interest does not exceed 50%. The Company records equity method investments at cost and adjusts for the appropriate share of investee net earnings or losses. Investments in which the Company owns less than a 20% interest and cannot exert significant influence are recorded at fair value and the Company recognizes any changes in fair value in net income. For equity investments without readily determinable fair values, the Company may make a separate election for each eligible investment to use a measurement alternative until the investment’s fair value becomes readily determinable. Under the alternative method, the equity investments are accounted for at cost, less any impairment, plus or minus changes resulting from observable price changes in an orderly transaction for an identical or similar investment of the same issuer.

 

Marketable Securities

 

The Company’s marketable securities consist of U.S. treasury and agency securities and debt and equity securities of publicly-held companies. The Company’s marketable securities are recorded at fair value, based upon quoted market prices with an offset to interest income.

 

Product Rights and Other Definite Lived Intangible Assets

 

Our product rights and other definite lived intangible assets are stated at cost, less accumulated amortization, and are amortized using the economic benefit model or the straight-line method, if results are materially aligned, over their estimated useful lives. We determine amortization periods for product rights and other definite lived intangible assets based on our assessment of various factors impacting estimated cash flows. Such factors include the product’s position in its life cycle, the existence or absence of like products in the market, various other competitive and regulatory issues, and contractual terms. Significant changes to any of these factors may result in an impairment, a reduction in the intangibles useful life or an acceleration of related amortization expense, which could cause our net results to decline.

 

 11 

 

 

Product rights and other definite lived intangible assets are tested periodically for impairment when events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted pre-tax future cash flows over its useful life, including any salvage value. In the event the carrying value of the asset exceeds the undiscounted future cash flows, the carrying value is considered not recoverable and an impairment exists. An impairment loss is measured as the excess of the asset’s carrying value over its fair value, calculated using discounted future cash flows. The computed impairment loss is recognized in net (loss) / income in the period that the impairment occurs. Assets which are not impaired may require an adjustment to the remaining useful lives for which to amortize the asset. Our projections of discounted cash flows use a discount rate determined by our management to be commensurate with the risk inherent in our business model. Our estimates of future cash flows attributable to our other definite lived intangible assets require significant judgment based on our historical and anticipated results and are subject to many factors. Different assumptions and judgments could materially affect the calculation of the undiscounted cash flows of the other definite lived intangible assets which could trigger impairment.

 

Goodwill and Intangible Assets with Indefinite Lives

 

The Company tests goodwill and intangible assets with indefinite lives for impairment annually in the second quarter. Additionally, the Company may perform interim tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit or an indefinite lived intangible asset below its carrying amount such as those fourth quarter 2018 triggering events relating to the Company’s General Medicine Reporting Unit as discussed in “NOTE 15 — Goodwill, Product Rights and Other Intangible Assets”. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units.

 

The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors, including Reporting Unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a Reporting Unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative assessment for some or all of its Reporting Units and perform a quantitative test as of the measurement date of the test.

 

Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Impairment, if any, would be recorded in operating income / (loss) and this could result in a material impact to net income / (loss) and income / (loss) per share.

 

Prior to Allergan’s 2018 annual impairment test, the Company adopted the new guidance under Accounting Standard Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment which eliminated step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment loss as of January 1, 2018. A goodwill impairment loss under the new guidance is instead measured using a single step test based on the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill.

 

Acquired in-process research and development (“IPR&D”) intangible assets represent the value assigned to research and development projects acquired in a business combination that, as of the date acquired, represent the right to develop, use, sell and/or offer for sale a product or other intellectual property that has not been completed or approved. The IPR&D intangible assets are subject to impairment testing until completion or abandonment of each project. Upon abandonment, the assets are impaired if there is no future alternative use or ability to sell the asset. Impairment testing requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and other costs which may be allocated), determination of the appropriate discount rate in order to measure the risk inherent in each future cash flow stream, assessment of each asset’s life cycle, potential regulatory and commercial success risks, and competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of IPR&D projects include legal risk, market risk and regulatory risk. Changes in our assumptions could result in future impairment charges. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change or the timely completion of each project and commercial success will occur. For these and other reasons, actual results may vary significantly from estimated results.

 

Upon successful completion of each project and approval of a product, we will make a separate determination of the useful life of the intangible asset, transfer the amount to currently marketed products (“CMP”) and amortization expense will be recorded over the estimated useful life.

 

 12 

 

 

Contingent Consideration

 

We determine the acquisition date fair value of contingent consideration obligations for business acquisitions based on a probability-weighted income approach derived from revenue estimates, post-tax gross profit levels and a probability assessment with respect to the likelihood of achieving contingent obligations including contingent payments such as milestone obligations, royalty obligations and contract earn-out criteria, where applicable. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined using the fair value concepts defined in ASC Topic 820 “Fair Value Measurement,” (“ASC 820”). The resultant probability-weighted cash flows are discounted using an appropriate effective annual interest rate. At each reporting date, the contingent consideration obligation will be revalued to estimated fair value and changes in fair value will be reflected as income or expense in our consolidated statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of future revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations. Changes in assumptions utilized in our contingent consideration fair value estimates could result in an increase or decrease in our contingent consideration obligation and a corresponding charge or reduction to operating results. Refer to “NOTE 23 — Fair Value Measurement” for additional details regarding the fair value of contingent consideration.

 

Revenue Recognition

 

General

 

Topic 606 provides that revenues are recognized when control of the promised goods under a contract is transferred to a customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods as specified in the underlying terms with the customer. The Company warrants products against defects and for specific quality standards, permitting the return of products under certain circumstances. Product sales are recorded net of all sales-related deductions including, but not limited to: chargebacks, trade discounts, commercial and government rebates, customer loyalty programs, fee-for-service arrangements with certain distributors, returns, and other allowances which we refer to in the aggregate as sales returns and allowances (“SRA”).

 

The Company’s performance obligations are primarily achieved when control of the products is transferred to the customer. Transfer of control is based on contractual performance obligations, but typically occurs upon receipt of the goods by the customer as that is when the customer has obtained control of significantly all of the economic benefits.

 

Prior to the achievement of performance obligations, shipping and handling costs associated with outbound freight for a product to be transferred to a customer are accounted for as a fulfillment cost and are included in selling and marketing expenses. When the Company sells a business and future royalties are considered as part of the consideration, the Company recognizes the royalties as a component of “other income / (expense), net”.

 

Other revenues earned are mainly comprised of royalty income from licensing of intellectual property. Royalty income is recognized when the licensee’s subsequent sale occurs.

 

Refer to “NOTE 20 – Segments” for our revenues disaggregated by product and segment and our revenues disaggregated by geography for our international segment. We believe this level of disaggregation best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

 

Significant Payment Terms

 

A contract with a customer states the final terms of the sale, including the description, quantity, and price of each product purchased. The Company’s payment terms vary by the type and location of the customer and the products offered. A customer agrees to a stated rate and price in the contract and given that most of the products sold contain variable consideration, the amount of revenue recognized incorporates adjustments for SRAs as appropriate.

  

Determining the Transaction Price

 

The Company offers discounts and rebates to certain customers who participate in various programs that are referred to as SRA allowances as described further below in the section “Provisions for SRAs”. Such discounting and rebating activity is included as part of the Company’s estimate of the transaction price and is accounted for as a reduction to gross sales. At time of sale, the Company records the related SRA adjustments. The Company performs validation activities each period to assess the adequacy of the liability or contra receivable estimates recorded to reflect actual activity and will adjust the reserve balances accordingly.

 

Provisions for SRAs

 

As is customary in the pharmaceutical industry, certain customers may receive cash-based incentives or credits, which are variable consideration accounted for as SRAs. The Company estimates SRA amounts based on the expected amount to be provided to customers, which reduces the revenues recognized. The Company believes that there will not be significant changes to our estimates of variable consideration. The Company uses a variety of methods to assess the adequacy of the SRA reserves to ensure that our financial statements are fairly stated. These provisions are estimated based on historical payment experience, the historical relationship of the deductions to gross product revenues, government regulations, estimated utilization or redemption rates, estimated customer inventory levels and current contract sales terms. The estimation process used to determine our SRA provisions has been applied on a consistent basis and no material revenue adjustments to total reported revenues have been necessary to increase or decrease our reserves for SRA as a result of a significant change in underlying estimates.

 

 13 

 

 

Chargebacks — A chargeback represents an amount payable in the future to a wholesaler for the difference between the invoice price paid by such wholesaler customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product. The chargeback provision and related reserve varies with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks also takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at certain contract prices. The Company validates the chargeback accrual quarterly through a review of the inventory reports obtained from our largest wholesale customers. This customer inventory information is used to verify the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent the vast majority of the recipients of the Company’s chargeback credits. We continually monitor current pricing trends and wholesaler inventory levels to ensure the contra-receivable for future chargebacks is fairly stated.

 

Rebates — Rebates include volume related incentives to direct and indirect customers, third-party managed care and Medicare Part D rebates, Medicaid rebates and other government rebates. Rebates are accrued based on an estimate of claims to be paid for product sold into trade by the Company. Volume rebates are generally contractually offered to customers as an incentive to use the Company’s products and to encourage greater product sales. These rebate programs include contracted rebates based on customers’ purchases made during an applicable monthly, quarterly or annual period. The provision for third-party rebates is estimated based on our customers’ contracted rebate programs and the Company’s historical experience of rebates paid. Any significant changes to our customer rebate programs are considered in establishing the provision for rebates. The provisions for government rebates are based, in part, upon historical experience of claims submitted by the various states and authorities, contractual terms and government regulations. We monitor legislative changes to determine what impact such legislation may have on our provision.

 

Cash Discounts — Cash discounts are provided to customers that pay within a specific time period. The provision for cash discounts is estimated based upon invoice billings and historical customer payment experience. The Company’s experience of payment history is fairly consistent and most customer payments qualify for a cash discount.

 

Returns and Other Allowances — The Company’s provision for returns and other allowances include returns, promotional allowances and loyalty cards.

 

Consistent with industry practice, the Company maintains a returns policy that allows customers to return product for a credit. In accordance with the Company’s policy, credits for customer returns of products are applied against outstanding account activity or are settled in cash. Product exchanges are generally not permitted. Customer returns of product are generally not resalable. The Company’s estimate of the provision for returns is based upon historical experience and current trends of actual customer returns. Additionally, we consider other factors when estimating the current period returns provision, including levels of inventory in the distribution channel, as well as significant market changes which may impact future expected returns.

 

Promotional allowances are credits with no discernable benefit offered to Allergan that are issued in connection with a product launch or as an incentive for customers to carry our product. The Company establishes a reserve for promotional allowances based upon contractual terms.

 

Loyalty cards allow end-user patients a discount per prescription and are accrued based on historical experience, contract terms and the volume of product and cards in the distribution channel.

  

 14 

 

 

The following table summarizes the activity from continuing operations in the Company’s major categories of SRA ($ in millions):

 

   Chargebacks   Rebates  

Returns

and

Other

Allowances

  

Cash

Discounts

   Total 
Balance at December 31, 2015  $78.2   $1,344.4   $367.5   $25.1   $1,815.2 
Provision related to sales in 2016   1,003.2    4,338.7    1,390.1    306.5    7,038.5 
Credits and payments   (967.2)   (4,069.1)   (1,341.7)   (296.9)   (6,674.9)
Balance at December 31, 2016  $114.2   $1,614.0   $415.9   $34.7   $2,178.8 
Provision related to sales in 2017   1,098.7    4,891.4    1,799.3    330.6    8,120.0 
Credits and payments   (1,135.7)   (4,710.4)   (1,734.7)   (328.8)   (7,909.6)
Add: LifeCell and Zeltiq Acquisitions   -    4.2    37.1    -    41.3 
Balance at December 31, 2017  $77.2   $1,799.2   $517.6   $36.5   $2,430.5 
Provision related to sales in 2018   1,117.7    5,464.7    1,725.3    322.2    8,629.9 
Credits and payments   (1,133.1)   (5,355.4)   (1,676.3)   (328.0)   (8,492.8)
Balance at December 31, 2018  $61.8   $1,908.5   $566.6   $30.7   $2,567.6 
Contra accounts receivable at December 31, 2018  $61.8   $76.4   $38.8   $30.7   $207.7 
Accounts payable and accrued expenses at December 31, 2018  $-   $1,832.1   $527.8   $-   $2,359.9 

 

 

The following table summarizes the balance sheet classification of our SRA reserves ($ in millions):

 

   December 31, 2018   December 31, 2017 
Contra accounts receivable  $207.7   $250.6 
Accounts payable and accrued expenses   2,359.9    2,179.9 
Total  $2,567.6   $2,430.5 

  

The SRA provisions recorded to reduce gross product sales to net product sales, excluding discontinued operations, were as follows ($ in millions):

 

   Years Ended December 31, 
   2018   2017   2016 
Gross product sales  $24,056.9   $23,688.4   $21,398.6 
Provisions to reduce gross product sales to net products sales   (8,629.9)   (8,120.0)   (7,038.5)
Net product sales  $15,427.0   $15,568.4   $14,360.1 
Percentage of SRA provisions to gross sales   35.9%   34.3%   32.9%

  

Collectability Assessment

 

At the time of contract inception or customer account set-up, the Company performs a collectability assessment on the creditworthiness of such customer. The Company assesses the probability that the Company will collect the consideration to which it will be entitled in exchange for the goods sold. In evaluating collectability, the Company considers the customer’s ability and intention to pay consideration when it is due. On a recurring basis, the Company estimates the amount of receivables considered uncollectible after sale to the customer to reflect allowances for doubtful accounts. Provision for bad debts, included in general and administrative expenses, were $18.5 million, $11.6 million and $3.5 million in the years ended December 31, 2018, 2017 and 2016, respectively.

 

Practical Expedients and Exemptions

 

The Company generally expenses sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling and marketing expenses.

  

 15 

 

 

The Company does not adjust the promised amount of consideration for the effects of the time value of money for contracts in which the anticipated period between when the Company transfers the goods or services to the customer and when the customer pays is equal to one year or less.

 

The Company has chosen not to elect the remaining practical expedients.

 

Litigation and Contingencies

 

The Company is involved in various legal proceedings in the normal course of its business, including product liability litigation, intellectual property litigation, employment litigation and other litigation. Additionally, the Company, in consultation with its counsel, assesses the need to record a liability for contingencies on a case-by-case basis in accordance with FASB Accounting Standards Codification (“ASC”) Topic 450 “Contingencies” (“ASC 450”). Accruals are recorded when the Company determines that a loss related to a matter is both probable and reasonably estimable. These accruals are adjusted periodically as assessment efforts progress or as additional information becomes available. Refer to “NOTE 24 — Commitments and Contingencies” for more information.

 

R&D Activities

 

R&D activities are expensed as incurred and consist of self-funded R&D costs, the costs associated with work performed under collaborative R&D agreements, regulatory fees, and acquisition and license related milestone payments, if any.

 

As of December 31, 2018, we are developing a number of products, some of which utilize novel drug delivery systems, through a combination of internal and collaborative programs including but not limited to the following:

 

Product   Therapeutic Area   Indication  

Expected

Launch

Year

  Phase
Cariprazine   Central Nervous System   Bipolar Depression   2019   Review
Abicipar   Eye Care   Age Related Macular Degeneration   2020   III
Bimatoprost SR   Eye Care   Glaucoma   2020   III
Ubrogepant   Central Nervous System   Acute Migraine   2020   III
Atogepant   Central Nervous System   Prophylaxis Migraine   2021   III
Presbysol   Eye Care   Presbyopia   2021   III
Rapastinel   Central Nervous System   Depression   2021   III
Cenicriviroc   Gastrointestinal   NASH   2022   III
Relamorelin   Gastrointestinal   Gastroparesis   2023   III
Abicipar   Eye Care   Diabetic Macular Edema   2023   II
Brimonidine DDS   Eye Care   Geographic Atrophy   2023   II
Brazikumab   Gastrointestinal   Crohn's Disease   2024   II
Botox   Medical Aesthetics   Platysma/Masseter   2025/2023   II
Brazikumab   Gastrointestinal   Ulcerative Colitis   2025   II

 

We also have a number of products in development as part of our life-cycle management strategy for our existing product portfolio.

 

Allocation of Acquisition Fair Values to Assets Acquired and Liabilities Assumed

 

We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition. The fair value of the consideration paid, including contingent consideration, is assigned to the underlying net assets of the acquired business based on their respective fair values as determined using a market participant concept. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

 

 16 

 

 

The most material line items impacted by the allocation of acquisition fair values are:

 

·Intangible assets (including IPR&D assets upon successful completion of the project and approval of the product) which are amortized to amortization expense over the expected life of the asset. Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to present value expected future net cash flow streams, the timing of approvals and the probability of success for IPR&D projects and the timing of related product launch dates, the assessment of each asset’s life cycle, the impact of competitive trends on each asset’s life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the future useful lives. For these and other reasons, actual results may vary significantly from estimated results.
   
·Inventory is recorded at fair market value factoring in selling price and costs to dispose. Inventory acquired is typically valued higher than replacement cost.

 

Income Taxes

 

Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

 

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as income tax expense.

 

The TCJA introduced 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”). Under this provision, the amount of GILTI included by a U.S. shareholder will be taxed at a rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. After consideration of the relevant guidance and completing the accounting for the tax effects of the TCJA, the Company has elected to treat GILTI as a period cost.

 

Comprehensive Income / (Loss)

 

Comprehensive income / (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income / (loss) refers to revenues, expenses, gains and losses that are included in comprehensive income / (loss), but excluded from net income / (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity. The Company’s other comprehensive income / (loss) is primarily comprised of actuarial gains / (losses), the impact of hedging transactions, pension liabilities and foreign currency translation adjustments.

 

Earnings Per Share (“EPS”)

 

The Company computes EPS in accordance with ASC Topic 260, “Earnings Per Share” (“ASC 260”) and related guidance, which requires two calculations of EPS to be disclosed: basic and diluted. Basic EPS is computed by dividing net (loss) / income by the weighted average ordinary shares outstanding during a period. Diluted EPS is based on the treasury stock method and includes the effect from potential issuance of ordinary shares, such as shares issuable pursuant to the exercise of stock options and restricted stock units. Diluted EPS also includes the impact of ordinary share equivalents issued (or issuable in 2017) upon the mandatory conversion of the Company’s preferred shares which occurred on March 1, 2018. Ordinary share equivalents have been excluded where their inclusion would be anti-dilutive to continuing operations.

 

 17 

 

 

A reconciliation of the numerators and denominators of basic and diluted EPS follows ($ in millions, except per share amounts):

 

   Years Ended December 31, 
   2018   2017   2016 
Net (loss) / income:               
  Net (loss) attributable to ordinary shareholders excluding (loss) / income from discontinued operations, net of tax  $(5,142.8)  $(4,001.0)  $(1,219.5)
(Loss) / income from discontinued operations, net of tax   -    (402.9)   15,914.5 
Net (loss) / income attributable to ordinary shareholders  $(5,142.8)  $(4,403.9)  $14,695.0 
                
Basic weighted average ordinary shares outstanding   337.0    333.8    384.9 
                
Basic EPS:               
Continuing operations  $(15.26)  $(11.99)  $(3.17)
Discontinued operations  $-   $(1.20)  $41.35 
Net (loss) / income per share  $(15.26)  $(13.19)  $38.18 
                
Dividends per ordinary share  $2.88   $2.80   $- 
                
Diluted weighted average ordinary shares outstanding   337.0    333.8    384.9 
                
Diluted EPS:               
Continuing operations  $(15.26)  $(11.99)  $(3.17)
Discontinued operations  $-   $(1.20)  $41.35 
Net (loss) / income per share  $(15.26)  $(13.19)  $38.18 

 

Stock awards to purchase 2.3 million, 3.8 million, and 4.7 million ordinary shares for the years ended December 31, 2018, 2017 and 2016, respectively, were outstanding, but not included in the computation of diluted EPS, because the awards were anti-dilutive for continuing operations and as such the treatment for discontinued operations was also anti-dilutive.

 

The Company’s preferred shares were converted to ordinary shares on March 1, 2018. The weighted average impact of ordinary share equivalents of 2.9 million for the year ended December 31, 2018, which would result from the mandatory conversion of the Company’s preferred shares at the beginning of the period, were not included in the calculation of diluted EPS as their impact would be anti-dilutive. Similarly, the anti-diluted weighted average impact of ordinary share equivalents upon mandatory conversion of the preferred shares of 17.8 million and 17.6 million for years ended December 31, 2017, and 2016, respectively, were excluded from in the calculation of diluted EPS.

 

Refer to “NOTE 19 –Shareholders’ Equity” for further discussion on the Company’s share repurchase programs.

 

Employee Benefits

 

Defined Contribution Plans

 

The Company has defined contribution plans that are post-employment benefit plans under which the Company pays fixed contributions to a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to the defined contribution plans are recognized as an employee benefit expense in the consolidated statement of operations in the periods during which the related services were rendered.

 

Defined Benefit Plans

 

The Company recognizes the overfunded or underfunded status of each of its defined benefit plans as an asset or liability on its consolidated balance sheets. The obligations are generally measured at the actuarial present value of all benefits attributable to employee service rendered, as provided by the applicable benefit formula. The estimates of the obligation and related expense of these plans recorded in the financial statements are based on certain assumptions. The most significant assumptions relate to discount rate and expected return on plan assets. Other assumptions used may include employee demographic factors such as compensation rate increases, retirement patterns, expected employee turnover and participant mortality rates. The difference between these assumptions and actual experience results in the recognition of an asset or liability based upon a net actuarial (gain) / loss. If the total net actuarial (gain) / loss included in accumulated other comprehensive income / (loss) exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic pension cost over the average remaining service lives of the employees participating in the pension plan. Net periodic benefit costs are recognized in the consolidated statement of operations.

 

 18 

 

 

Share-Based Compensation

 

The Company has adopted several equity award plans which authorize the granting of options, restricted shares, restricted stock units and other forms of equity awards of the Company’s ordinary shares, subject to certain conditions.

 

The Company grants awards with the following features:

 

·Time-based restricted stock and restricted stock unit awards (including, in certain foreign jurisdictions, cash-settled restricted stock unit awards, which are recorded as a liability);
   
·Performance-based restricted stock unit awards measured against performance-based targets defined by the Company, including, but not limited to, total shareholder return metrics and R&D milestones, as defined by the Company; and
   
·Non-qualified options to purchase outstanding shares.

 

The Company recognizes share-based compensation expense for granted awards over the applicable vesting period.

 

Cash-settled performance-based awards are recorded as a liability. These cash-settled performance-based awards were measured against pre-established total shareholder returns metrics.

 

Restructuring Costs

 

The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee severance costs are accrued when the restructuring actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. The Company also incurs costs with contract terminations and costs of transferring products as part of restructuring activities. Refer to “NOTE 21 — Business Restructuring Charges” for more information.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, which states that a lessee should recognize the assets and liabilities that arise from leases. This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As of the January 1, 2019 transition date, the right of use (“ROU”) asset and liability were less than 1.0% and less than 2.0% of total Company assets and liabilities, respectively.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company evaluated the impact of this pronouncement and concluded that the guidance is not expected to have a material impact on our financial position and results of operations.

 

 19 

 

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date, but does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The entity is required to provide disclosures about a change in accounting principle in the period of adoption. The Company evaluated the impact of these amendments and the guidance is not expected to have a material impact on our financial position and results of operations.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (i.e., a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license.  The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted.  The Company can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is evaluating the impact, if any, that this pronouncement will have on our financial position and results of operations.  

 

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) – Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The revisions to the disclosure requirements affect only the year-end financial statements of plan sponsors, as there are no changes related to interim financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted.  The ASU provisions will be applied on a retrospective basis to all periods presented.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. The Company will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the valuation processes of Level 3 fair value measurements. However, the Company will be required to additionally disclose the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  The amendments relating to additional disclosure requirements will be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. The Company is permitted to early adopt either the entire ASU or only the provisions that eliminate or modify the requirements.

 

NOTE 4 — Business Developments

 

2018 Significant Business Developments

 

The following are the significant transactions that were completed or announced in the year ended December 31, 2018.

 

Licenses and Asset Acquisitions

 

Bonti, Inc.

 

On October 24, 2018, the Company acquired Bonti, Inc. (“Bonti”), a privately held clinical-stage biotechnology company focused on the development and commercialization of novel, fast-acting neurotoxin programs for aesthetic and therapeutic applications, for $195.0 million upfront plus contingent consideration of up to $90.0 million which may be recorded if the corresponding events become probable. The transaction was accounted for as an asset acquisition as the purchase primarily related to one asset. The aggregate upfront expense of $196.6 million was recorded as a component of R&D expense in the year ended December 31, 2018.

 

Elastagen Pty Ltd

 

On April 6, 2018, the Company completed the acquisition of Elastagen Pty Ltd, a clinical stage medical company developing medical and cosmetic treatments including recombinant human tropoelastin, the precursor of elastin, which will be combined with Allergan's existing fillers product lines. The transaction was accounted for as an asset acquisition as the purchase primarily related to one asset. The aggregate upfront expense of $96.1 million was recorded as a component of R&D expense during the year ended December 31, 2018. Under the terms of the agreement, Elastagen Pty Ltd is eligible to receive additional contingent consideration of up to $165.0 million which may be recorded if the corresponding events become probable.

 

 20 

 

 

Repros Therapeutics, Inc.

 

On January 31, 2018, the Company completed the acquisition of Repros Therapeutics, Inc., which was accounted for as an asset acquisition as the purchase primarily related to one asset. The aggregate upfront expense of $33.2 million was recorded as a component of R&D expense during the year ended December 31, 2018.

 

Divestitures

 

Aclaris Therapeutics, Inc.

 

On November 30, 2018, the Company divested Rhofade® to Aclaris Therapeutics, Inc. Under the terms of the agreement, the purchase price included an upfront cash payment, a potential development milestone payment for an additional dermatology product, and tiered payments based on annual net sales of Rhofade®, which have a fair value estimated to be $50.3 million. As a result of this transaction, the Company recorded a net loss of $266.2 million which is included as a component of “Asset sales and impairments, net”.

 

Almirall, S.A.

 

On September 20, 2018, the Company completed the sale of five medical dermatology products (Aczone®, Tazorac®, Azelex®, Cordran® Tape and Seysara) in the U.S. to Almirall, S.A. Allergan concluded that these assets constituted a business. As part of the sale, the Company received cash consideration of $550.0 million and is eligible to receive a contingent payment of up to an additional $100.0 million in the event that net sales of the divested products in a specified calendar year exceed a sales target, to which no fair value has been ascribed. As a result of this transaction, the Company recorded the following ($ in millions):

 

Purchase Price  $550.0 
      
Assets sold     
Intangible assets  $205.4 
Goodwill   184.0 
Other assets   31.0 
Net assets sold  $420.4 
      
Net gain included as a component of Other income / (expense), net  $129.6 

 

2017 Significant Business Developments

 

The following are the significant transactions that were completed or announced in the year ended December 31, 2017.

 

Acquisitions

 

Keller Medical, Inc.

 

On June 23, 2017, the Company acquired Keller Medical, Inc. (“Keller”), a privately held medical device company and developer of the Keller Funnel® (the “Keller Acquisition”).  The Keller Acquisition combined the Keller Funnel®, a surgical device used in conjunction with breast implants, with the Company’s leading breast implants business.

 

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Zeltiq® Aesthetics, Inc.

 

On April 28, 2017, the Company acquired Zeltiq® Aesthetics, Inc. (“Zeltiq”) for an acquisition accounting purchase price of $2,405.4 million (the “Zeltiq Acquisition”). Zeltiq was focused on developing and commercializing products utilizing its proprietary controlled-cooling technology platform (Coolsculpting®). The Zeltiq Acquisition combined Zeltiq’s body contouring business with the Company’s leading portfolio of medical aesthetics.

 

Assets Acquired and Liabilities Assumed at Fair Value

 

The Zeltiq Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date and reflects purchase accounting adjustments subsequent to the acquisition date ($ in millions):

 

  

Final

Valuation

as of

December 31,

2018

 
Cash and cash equivalents  $36.7 
Accounts receivable   47.0 
Inventories   59.3 
Property, plant and equipment   12.4 
Intangible assets   1,185.0 
Goodwill   1,211.6 
Other assets   17.1 
Accounts payable and accrued expenses   (104.6)
Deferred revenue   (10.6)
Deferred taxes, net   (47.2)
Other liabilities   (1.3)
Net assets acquired  $2,405.4 

 

IPR&D and Intangible Assets

 

The estimated fair value of the intangible assets, including customer relationships, was determined using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, R&D costs, selling and marketing costs, other allocated costs, and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream. This technique is referred to herein as the “IPR&D and Intangible Asset Valuation Technique.”

 

The fair value of the intangible assets acquired in the Zeltiq Acquisition was determined using the IPR&D and Intangible Asset Valuation Technique. The discount rate used to arrive at the present value for these acquired intangible assets ranged from 10.0% to 11.0% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. The discount rate of the Zeltiq Acquisition was driven by the life-cycle stage of the products and the therapeutic indication. For these and other reasons, actual results may vary significantly from estimated results.

 

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The following table identifies the summarized amounts recognized and the weighted average useful lives using the economic benefit of intangible assets ($ in millions):

 

  

Amount recognized

as of the

acquisition date

  

Weighted average

useful lives

(years)

 
Definite Lived Assets          
Consumables  $985.0    6.7 
System   43.0    3.7 
Total CMP   1,028.0      
Customer Relationships   157.0    6.6 
Total Definite Lived Assets  $1,185.0      

 

Goodwill

 

Among the reasons the Company acquired Zeltiq and the factors that contributed to the recognition of goodwill was the expansion of the Company’s leading medical aesthetics portfolio.  Goodwill from the Zeltiq Acquisition of $954.7 million was assigned to the US Specialized Therapeutic segment and goodwill of $256.9 million was assigned to the International segment and is non-deductible for tax purposes.

 

Inventories

 

The fair value of inventories acquired included an acquisition accounting fair market value step-up of $22.9 million which was recognized as a component of cost of sales as the inventory acquired was sold to the Company’s customers in the year ended December 31, 2017.

 

Deferred Tax Liabilities

 

Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.

 

LifeCell Corporation

 

On February 1, 2017, the Company acquired LifeCell Corporation (“LifeCell”), a regenerative medicine company, for an acquisition accounting price of $2,883.1 million (the “LifeCell Acquisition”). The LifeCell Acquisition combined LifeCell's novel, regenerative medicines business, including its high-quality and durable portfolio of dermal matrix products with the Company's leading portfolio of medical aesthetic products, breast implants and tissue expanders. The LifeCell Acquisition expanded the Company’s medical aesthetics portfolio by adding Alloderm® and Strattice®.

 

Assets Acquired and Liabilities Assumed at Fair Value

 

The LifeCell Acquisition has been accounted for using the acquisition method of accounting.

 

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date and reflects purchase accounting adjustments subsequent to the acquisition date ($ in millions):

 

  

Final

Valuation

 
Cash and cash equivalents  $8.7 
Accounts receivable   50.8 
Inventories   175.4 
Property, plant and equipment, net   53.7 
Currently marketed products ("CMP") intangible assets   2,010.0 
In-process research and development ("IPR&D") intangible assets   10.0 
Goodwill   1,449.1 
Accounts payable and accrued expenses   (149.6)
Deferred tax liabilities, net   (746.2)
Other   21.2 
Net assets acquired  $2,883.1 

 

IPR&D and Intangible Assets

 

The fair value of the acquired intangible assets was determined using the IPR&D and Intangible Asset Valuation Technique. The discount rate used to arrive at the present value for these acquired intangible assets was 7.5% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections in the LifeCell Acquisition. The discount rate of the LifeCell Acquisition was driven by the life-cycle stage of the products including, the advanced nature of IPR&D projects and the therapeutic indication. For these and other reasons, actual results may vary significantly from estimated results.  

 

The following table identifies the summarized amounts recognized and the weighted average useful lives using the economic benefit of intangible assets ($ in millions):

 

  

Amount recognized

as of the

acquisition date

  

Weighted average

useful lives

(years)

 
Definite lived assets          
Alloderm®  $1,385.0    6.9 
Revolve®   80.0    7.1 
Strattice®   320.0    5.1 
Artia®   115.0    8.8 
Other   10.0    2.8 
Total CMP   1,910.0      
Customer Relationships   100.0    6.3 
Total definite lived assets   2,010.0      
In-process research and development          
Other   10.0      
Total IPR&D   10.0      
Total intangible assets  $2,020.0      

 

Goodwill

 

Among the reasons the Company acquired LifeCell and the factors that contributed to the recognition of goodwill was the expansion of the Company’s leading medical aesthetic portfolio.  Goodwill from the LifeCell Acquisition of $1,449.1 million was assigned to the US Specialized Therapeutic segment and is non-deductible for tax purposes.

 

Inventories

 

The fair value of inventories acquired included an acquisition accounting fair market value step-up of $108.4 million which was recognized as a component of cost of sales as the inventory acquired was sold to the Company’s customers in the year ended December 31, 2017, excluding currency impact.

  

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Deferred Tax Liabilities

 

Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.

  

Licenses and Other Transactions Accounted for as Asset Acquisitions

 

Lyndra, Inc.

 

On July 31, 2017, the Company entered into a collaboration, option and license agreement with Lyndra, Inc. (“Lyndra”) to develop orally administered ultra-long-acting (once-weekly) products for the treatment of Alzheimer’s disease and an additional, unspecified indication. The total upfront payment of $15.0 million was included as a component of R&D expense in the year ended December 31, 2017. The Company concluded based on the stage of development of the assets, the lack of acquired employees and manufacturing, as well as the lack of certain other inputs and processes, that the transaction did not qualify as a business. The future option exercise payments, if any, and any future success based milestones relating to the licensed products of up to $85.0 million will be recorded if the corresponding events become probable.

 

Editas Medicine, Inc.

 

On March 14, 2017, the Company entered into a strategic alliance and option agreement with Editas Medicine, Inc. (“Editas”) for access to early stage, first-in-class eye care programs. Pursuant to the agreement, Allergan made an upfront payment of $90.0 million for the right to license up to five of Editas’ gene-editing programs in eye care, including its lead program for Leber Congenital Amaurosis (“LCA”). Under the terms of the agreement, if an option is exercised, Editas is eligible to receive contingent research and development and commercial milestones plus royalties based on net sales. The Company concluded based on the stage of development of the assets, the lack of acquired employees and manufacturing, as well as the lack of certain other inputs and processes, that the transaction did not qualify as a business. The total upfront payment of $90.0 million was included as a component of R&D expense in the year ended December 31, 2017. The future option exercise payments, if any, and any future success based milestones relating to the licensed products will be recorded if the corresponding events become probable.

 

In the year ended December 31, 2018, the Company exercised a $15.0 million option to develop and commercialize EDIT-101 globally for the treatment of LCA10 which was included as a component of R&D expense. Additionally, Editas has exercised its option to co-develop and share equally in the profits and losses from EDIT-101 in the United States. Editas received an additional $25.0 million milestone, which was included as a component as R&D expense in the year ended December 31, 2018, as the FDA accepted the investigational new drug application for EDIT-101.

 

Assembly Biosciences, Inc.

 

On January 9, 2017, the Company entered into a licensing agreement with Assembly Biosciences, Inc. (“Assembly”) for the worldwide rights to Assembly’s microbiome gastrointestinal development programs. Under the terms of the agreement, the Company made an upfront payment to Assembly of $50.0 million for the exclusive, worldwide rights to develop and commercialize certain development compounds. Additionally, Assembly will be eligible to receive success-based development and commercial milestone payments plus royalties based on net sales. The Company and Assembly will generally share development costs through proof-of-concept (“POC”) studies, and Allergan will assume all post-POC development costs. The Company concluded based on the stage of development of the assets, the lack of acquired employees and manufacturing as well as the lack of certain other inputs and processes that the transaction did not qualify as a business. The total upfront payment of $50.0 million was included as a component of R&D expense in the year ended December 31, 2017 and the future success based milestone payments of up to $2,771.0 million, including amounts for additional development programs not committed to as of December 31, 2017, will be recorded if the corresponding events become probable.

 

Lysosomal Therapeutics, Inc.

 

On January 9, 2017, the Company entered into a definitive agreement for the option to acquire Lysosomal Therapeutics, Inc. (“LTI”). LTI is focused on innovative small-molecule research and development in the field of neurodegeneration, yielding new treatment options for patients with severe neurological diseases. Under the agreement, Allergan acquired an option right directly from LTI shareholders to acquire LTI for $150.0 million plus future milestone payments following completion of a Phase Ib trial for LTI-291 as well as an upfront research and development payment. The Company concluded based on the stage of development of the assets, the lack of acquired employees and manufacturing, as well as the lack of certain other inputs and processes, that the transaction did not qualify as a business. The aggregate upfront payment of $145.0 million was recorded as a component of R&D expense in the year ended December 31, 2017. The Company did not exercise its option and on January 2, 2019, the option agreement with LTI was terminated.

 

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Other Transactions

 

Saint Regis Mohawk Tribe

 

On September 8, 2017, the Company entered into an agreement with the Saint Regis Mohawk Tribe, under which the Saint Regis Mohawk Tribe obtained the rights to Orange Book-listed patents covering Restasis® (Cyclosporine Ophthalmic Emulsion) 0.05%, and the Company was granted exclusive licenses under the patents related to the product. Pursuant to the agreement, the Company paid the Saint Regis Mohawk Tribe an upfront payment of $13.8 million, which was recorded as a component of cost of sales in the year ended December 31, 2017. Additionally, the Saint Regis Mohawk Tribe will be eligible to receive up to $15.0 million in annual royalties starting in 2018, during the period that certain patent claims remain in effect.

 

2016 Significant Business Developments

 

The following are the significant transactions that were completed in the year ended December 31, 2016. Refer to “NOTE 7 — Discontinued Operations” for material divestitures that were completed into during the year ended December 31, 2016.

 

Acquisitions

 

Tobira Therapeutics, Inc.

 

On November 1, 2016, the Company acquired Tobira Therapeutics, Inc. (“Tobira”), a clinical-stage biopharmaceutical company focused on developing and commercializing therapies for non-alcoholic steatohepatitis (“NASH”) and other liver diseases for an acquisition accounting purchase price of $570.1 million, plus contingent consideration of up to $49.84 per share in contingent value rights (“CVR”), or up to $1,101.3 million, that may be payable based on the successful completion of certain development, regulatory and commercial milestones (the “Tobira Acquisition”), of which $303.1 million was paid in the year ended December 31, 2017 for the initiation of Phase III clinical trials. The CVR had an acquisition date fair value of $479.0 million. The Tobira Acquisition added Cenicriviroc, a differentiated, complementary development program for the treatment of the multi-factorial elements of NASH, including inflammation, metabolic syndromes and fibrosis, to Allergan's global gastroenterology R&D pipeline.

 

Assets Acquired and Liabilities Assumed at Fair Value

 

The transaction has been accounted for using the acquisition method of accounting.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date ($ in millions):

 

  

Final

Valuation

 
Cash and cash equivalents  $21.3 
IPR&D intangible assets   1,357.0 
Goodwill   98.6 
Indebtedness   (15.9)
Contingent consideration   (479.0)
Deferred tax liabilities, net   (381.8)
Other assets and liabilities   (30.1)
Net assets acquired  $570.1 

 

IPR&D and Intangible Assets

 

The fair value of the IPR&D intangible assets was determined using the IPR&D and Intangible Asset Valuation Technique. The discount rate used to arrive at the present value for IPR&D intangible assets was 11.5% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. The discount rate of the acquisition was driven by the stage of the product and the therapeutic indication. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.  

 

Goodwill

 

Among the reasons the Company acquired Tobira and the factors that contributed to the recognition of goodwill was the expansion of the Company’s pipeline of NASH products.  Goodwill from the Tobira Acquisition of $98.6 million was assigned to the US General Medicine segment and is non-deductible for tax purposes.

  

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Contingent Consideration

 

As part of the acquisition, the Company is required to pay the former shareholders of Tobira up to $1,101.3 million, of which $303.1 million was paid in the year ended December 31, 2017, based on the timing of the certain development, regulatory and commercial milestones, if any. At the time of the acquisition, the Company estimated the fair value of the contingent consideration to be $479.0 million using a probability weighted average approach that considered the possible outcomes of scenarios related to the specified product.

 

Deferred Tax Liabilities

 

Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.

 

Vitae Pharmaceuticals, Inc.

 

On October 25, 2016, the Company acquired Vitae Pharmaceuticals, Inc. (“Vitae”), a clinical-stage biotechnology company, for an acquisition accounting purchase price of $621.4 million (the “Vitae Acquisition”). At the time of the transaction, the Vitae Acquisition was anticipated to expand Allergan’s dermatology product pipeline with the addition of a Phase II orally active RORyt (retinoic acid receptor-related orphan receptor gamma) inhibitor for the potential treatment of psoriasis and other autoimmune disorders, and a Phase II atopic dermatitis drug candidate. 

 

Assets Acquired and Liabilities Assumed at Fair Value

 

The transaction has been accounted for using the acquisition method of accounting.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date ($ in millions):

 

  

Final

Valuation

 
Cash and cash equivalents  $44.7 
Marketable securities   20.2 
Property, plant and equipment, net   5.0 
IPR&D intangible assets   686.0 
Assets held for sale   22.5 
Goodwill   30.6 
Other assets and liabilities   (20.7)
Deferred tax liabilities, net   (166.9)
Net assets acquired  $621.4 

 

IPR&D and Intangible Assets

 

The fair value of the IPR&D intangible assets was determined using the IPR&D and Intangible Asset Valuation Technique. The discount rate used to arrive at the present value for IPR&D intangible assets was 9.5% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. The discount rate of the acquisition was driven by the stage of the product and the therapeutic indication. Refer to “NOTE 15 – Goodwill, Product Rights and Other Intangible Assets” for impairments of the acquired assets.  

 

Goodwill

 

Among the reasons the Company acquired Vitae and the factors that contributed to the recognition of goodwill was the expansion of the Company’s pipeline of dermatology products.  Goodwill from the Vitae Acquisition of $30.6 million was assigned to the US Specialized Therapeutic segment and is non-deductible for tax purposes.

 

Deferred Tax Liabilities

 

Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.

 

 27 

 

 

Assets Held for Sale

 

The Company held for sale certain intangible assets acquired as part of the Vitae Acquisition.  These assets had an acquisition accounting value of $22.5 million. In the year ended December 31, 2017, the Company sold these assets for $22.5 million.

 

ForSight VISION5, Inc.

 

On September 23, 2016, the Company acquired ForSight VISION5, Inc. (“ForSight”), a privately held, clinical-stage biotechnology company focused on eye care, in an all cash transaction of approximately $95.0 million (the “ForSight Acquisition”). Under the terms of the ForSight Acquisition, the Company acquired ForSight for an acquisition accounting purchase price of $74.5 million plus the payment of outstanding indebtedness of $14.8 million and other miscellaneous charges. ForSight shareholders are eligible to receive contingent consideration of up to $125.0 million, which had an initial estimated fair value of $79.8 million, relating to commercialization milestones. The Company acquired ForSight for its lead development program, a peri-ocular ring designed for extended drug delivery and reducing elevated intraocular pressure (“IOP”) in glaucoma patients.

 

Assets Acquired and Liabilities Assumed at Fair Value

 

The transaction has been accounted for using the acquisition method of accounting.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date ($ in millions):

 

  

Final

Valuation

 
Cash and cash equivalents  $1.0 
IPR&D intangible assets   158.0 
Goodwill   50.5 
Current liabilities   (14.8)
Contingent consideration   (79.8)
Deferred tax liabilities, net   (37.2)
Other assets and liabilities   (3.2)
Net assets acquired  $74.5 

 

IPR&D and Intangible Assets

 

The fair value of the IPR&D intangible assets was determined using the IPR&D and Intangible Asset Valuation Technique. The discount rate used to arrive at the present value for IPR&D intangible assets was 13.0% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. The discount rate of the acquisition was driven by the early stage of the product and the therapeutic indication. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.  

 

Goodwill

 

Among the reasons the Company acquired ForSight and the factors that contributed to the recognition of goodwill was the expansion of the Company’s pipeline of eye care products. Goodwill from the ForSight Acquisition of $50.5 million was assigned to the US Specialized Therapeutics segment and is non-deductible for tax purposes.

 

Contingent Consideration

 

As part of the acquisition, the Company is required to pay the former shareholders of ForSight up to $125.0 million based on the timing of the first commercial sale, if any. The Company estimated the fair value of the contingent consideration to be $79.8 million using a probability weighted average approach that considered the possible outcomes of scenarios related to the specified product. In the year ended December 31, 2016, the Company recognized approximately $33.0 million in impairments of the acquired ForSight IPR&D asset as the Company anticipated a delay in potential launch timing, if any.  Offsetting this impairment was a corresponding reduction of acquired contingent consideration of $15.0 million, which reduced overall R&D expenses.

 

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Deferred Tax Liabilities

 

Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.

 

Licenses and Asset Acquisitions

 

Motus Therapeutics, Inc.

 

On December 15, 2016, the Company acquired Motus Therapeutics, Inc. (“Motus”) for an upfront payment of approximately $200.0 million (the “Motus Transaction”).  Motus has the worldwide rights to RM-131 (relamorelin), a peptide ghrelin agonist being developed for the treatment of diabetic gastroparesis.  Under the terms of the Motus Transaction, Motus shareholders are eligible to receive contingent consideration in connection with the commercial launch of the product. The Company concluded based on the stage of development of the assets, the lack of acquired employees as well as certain other inputs and processes that the transaction did not qualify as a business. The total upfront net payment of $199.5 million was included as a component of R&D expense in the year ended December 31, 2016 and the future milestone will be recorded if the corresponding event becomes probable.

 

Chase Pharmaceuticals Corporation

 

On November 22, 2016, the Company acquired Chase Pharmaceuticals Corporation (“Chase”), a clinical-stage biopharmaceutical company focused on the development of improved treatments for neurodegenerative disorders including Alzheimer's disease, for an upfront payment of approximately $125.0 million plus potential regulatory and commercial milestones of up to $875.0 million related to Chase's lead compound, CPC-201, and certain backup compounds (the “Chase Transaction”). The Company concluded based on the stage of development of the assets, the lack of acquired employees as well as certain other inputs and processes that the Chase Transaction did not qualify as a business. The total upfront net payment of $122.9 million was expensed as a component of R&D expense in the year ended December 31, 2016 and the future milestones will be recorded if the corresponding events become probable. In the year ended December 31, 2018, milestone payments of $75.0 million were included as a component of R&D expense.

 

AstraZeneca plc License

 

On October 2, 2016, the Company entered into a licensing agreement with MedImmune, AstraZeneca plc's (“AstraZeneca”) global biologics research and development arm, for the global rights to brazikumab (the “AstraZeneca Transaction”). Brazikumab is an anti-IL-23 monoclonal antibody for the treatment of patients with moderate-to-severe Crohn's disease and was Phase II ready for ulcerative colitis and other conditions treated with anti-IL-23 monoclonal antibodies.  Under the terms of the AstraZeneca Transaction, AstraZeneca received $250.0 million for the exclusive, worldwide license to develop and commercialize brazikumab and can receive contingent consideration of up to $1.27 billion (as of the time of the transaction), as well as tiered royalties on sales of the product. The Company concluded based on the stage of development of the assets, the lack of acquired employees and manufacturing as well as certain other inputs and processes that the transaction did not qualify as a business. The total upfront payment of $250.0 million was included as a component of R&D expense in the year ended December 31, 2016 and the future milestones will be recorded if the corresponding events become probable. In the year ended December 31, 2018, milestones of $90.0 million, related to the probable initiation of clinical studies, were expensed as a component of R&D expense.

 

RetroSense Therapeutics, LLC

 

On September 6, 2016, the Company acquired certain assets of RetroSense Therapeutics LLC (“RetroSense”), a private, clinical-stage biotechnology company focused on novel gene therapy approaches to restore vision in patients suffering from blindness (the “RetroSense Transaction”). Under the terms of the RetroSense Transaction, RetroSense received approximately $60.0 million upfront, and is eligible to receive up to $495.0 million in contingent regulatory and commercialization milestone payments related to its lead development program, RST-001, a novel gene therapy for the treatment of retinitis pigmentosa. The Company concluded based on the stage of development of the assets, the lack of acquired employees as well as certain other inputs and processes that the RetroSense Transaction did not qualify as a business.  The total upfront net payment of $59.7 million was included as a component of R&D expense in the year ended December 31, 2016 and the future milestones will be recorded if the corresponding events become probable.

 

Akarna Therapeutics, Ltd.

 

On August 26, 2016, the Company acquired Akarna Therapeutics, Ltd. (“Akarna”), a biopharmaceutical company developing novel small molecule therapeutics that target inflammatory and fibrotic diseases (the “Akarna Transaction”). Under the terms of the Akarna Transaction, Akarna shareholders received approximately $50.0 million upfront and were eligible to receive contingent development and commercialization milestones of up to $1,015.0 million. The Company concluded based on the stage of development of the assets as well as a lack of certain other inputs and processes that the Akarna Transaction did not qualify as a business.  The total upfront net payment of $48.2 million was included as a component of R&D expense in the year ended December 31, 2016 and the future milestones will be recorded if the corresponding events become probable. In the year ended December 31, 2017, a milestone of $39.6 million, related to the initiation of a clinical study, was included as a component of R&D expense.

 

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Topokine Therapeutics, Inc.

 

On April 21, 2016, the Company acquired Topokine Therapeutics, Inc. (“Topokine”), a privately held, clinical-stage biotechnology company focused on development stage topical medicines for fat reduction (the “Topokine Transaction”). Under the terms of the Topokine Transaction, Topokine shareholders received an upfront payment of $85.8 million and are eligible to receive contingent development and commercialization milestones of up to $260.0 million for XAF5, a first-in-class topical agent in development for the treatment of steatoblepharon, also known as undereye bags. The Company concluded based on the stage of development of the assets, the lack of acquired employees as well as certain other inputs and processes that the Topokine Transaction did not qualify as a business. The total upfront net payment of approximately $85.0 million was included as a component of R&D expense in the year ended December 31, 2016 and the future milestones will be recorded if the corresponding events become probable.

 

Heptares Therapeutics, Ltd.

 

On April 6, 2016, the Company entered into an agreement with Heptares Therapeutics, Ltd. (“Heptares”), under which the Company licensed exclusive global rights to a portfolio of novel subtype-selective muscarinic receptor agonists in development for the treatment of major neurological disorders, including Alzheimer's disease (the “Heptares Transaction”). Under the terms of the Heptares Transaction, Heptares received an upfront payment of $125.0 million and is eligible to receive contingent milestone payments of up to approximately $665.0 million upon successful Phase I, II and III clinical development and launch of the first three licensed compounds for multiple indications and up to approximately $2.575 billion associated with achieving certain annual sales thresholds during the several years following launch. In addition, Heptares was eligible to receive contingent tiered royalties on net sales of all products resulting from the partnership. The Company concluded based on the stage of development of the assets, the lack of acquired employees as well as certain other inputs and processes that the Heptares Transaction did not qualify as a business. The total upfront payment of $125.0 million was included as a component of R&D expense in the year ended December 31, 2016 and the future milestones will be recorded if the events become probable. In the year ended December 31, 2017, a milestone of $15.0 million, related to the initiation of a clinical study, was included as a component of R&D expense.

 

Anterios, Inc.

 

On January 6, 2016, the Company acquired Anterios, Inc. (“Anterios”), a clinical stage biopharmaceutical company developing a next generation delivery system and botulinum toxin-based prescription products (“the Anterios Transaction”). Under the terms of the Anterios Transaction, Anterios shareholders received an upfront net payment of approximately $90.0 million and are eligible to receive contingent development and commercialization milestone payments up to $387.5 million related to an investigational topical formulation of botulinum toxin type A in development for the potential treatment of hyperhidrosis, acne, and crow’s feet lines and the related NDS™, Anterios' proprietary platform delivery technology that enables local, targeted delivery of neurotoxins through the skin without the need for injections.  The Company concluded based on the stage of development of the assets, the lack of acquired employees as well as certain other inputs and processes that the Anterios Transaction did not qualify as a business.  The total upfront net payment of $89.2 million was included as a component of R&D expense in the year ended December 31, 2016 and the future milestones will be recorded if the corresponding events become probable.

 

NOTE 5 — Assets Held for Sale

 

The following represents the assets held for sale ($ in millions):

 

   December 31,   December 31, 
   2018   2017 
Assets held for sale:          
Inventories  $34.0   $- 
Property, plant and equipment, net   32.8    53.0 
Product rights and other intangibles   849.4    15.8 
Goodwill   -    12.8 
Total assets held for sale  $916.2   $81.6 

 

As of December 31, 2018, Allergan concluded that its Anti-Infectives business met the criteria for held for sale based on management’s intent and ability to divest the business within the next twelve months.  As a result of this decision, Allergan impaired the business assets by $771.7 million, including goodwill of $622.0 million, based on the expected aggregate fair value to be received of approximately $885.0 million. Upon the sale of the business, Allergan would only recognize the upfront proceeds received in exchange for the assets disposed, which may result in further potential write downs as of the date of sale. If contingent consideration is part of the aggregate fair value received, the Company would recognize any future benefits in “other income / (expense)” as the contingent portion of the divestiture is earned.

 

 30 

 

 

As of December 31, 2017, assets held for sale principally consisted of facilities no longer in use and certain product rights and other intangibles and goodwill.

 

NOTE 6 — Collaborations

 

The Company has ongoing transactions with other entities through collaboration agreements. The following represent the material collaboration agreements impacting the years ended December 31, 2018, 2017 and 2016.

 

Ironwood Collaboration

 

In September 2007, Forest entered into a collaboration agreement with Ironwood Pharmaceuticals (“Ironwood”) to jointly develop and commercialize Linzess® (linaclotide) for the treatment of irritable bowel syndrome with constipation (IBS-C) and chronic idiopathic constipation (CIC). Under the terms of the agreement, the Company shares equally with Ironwood all profits and losses (as defined) from the development and commercialization of Linzess in the U.S. In addition, the Company expanded this agreement to cover the acquired Constella rights internationally.

 

The agreement included contingent milestone payments as well as a contingent equity investment based on the achievement of specific clinical and commercial milestones. The Company may be obligated to pay up to an additional $100.0 million if certain sales milestones are achieved.

 

Based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable guidance, the Company records receipts from and payments to Ironwood in two pools: the “Development pool” which consists of R&D expenses, and the “Commercialization pool,” which consists of revenue, cost of sales and other operating expenses. The net payment to or receipt from Ironwood for the Development pool is recorded in R&D expense and the net payment to or receipt from Ironwood for the Commercialization pool is recorded in cost of goods sold. In the year ended December 31, 2018, the Company recorded a $29.9 million Linzess® profit share true-up in cost of sales.

 

Amgen Collaboration

 

In December 2011, we entered into a collaboration agreement with Amgen Inc. (“Amgen”) to develop and commercialize, on a worldwide basis, biosimilar versions of Herceptin®, Avastin®, Rituxan/Mab Thera®, and Erbitux® (the “Amgen Collaboration Agreement”). Amgen has assumed primary responsibility for developing, manufacturing and initially commercializing the oncology antibody products.

 

In addition, we will contribute our significant expertise in the commercialization and marketing of products in highly competitive specialty markets, including helping effectively manage the lifecycle of the biosimilar products. The collaboration products are expected to be sold under a joint Amgen/Allergan label. We will initially receive royalties and sales milestones from product revenues. The collaboration will not pursue biosimilars of Amgen’s proprietary products.  In the year ended December 31, 2017, the FDA approved MVASI ™, a biosimilar of Avastin, for the treatment of five types of cancer.  As a result of the approval, the Company can achieve certain commercial and sales based milestones and receive royalties based on the net sales of the product.  In the year ended December 31, 2018, the Company recorded $25.0 million in milestone revenue as a result of the anticipated product launch of MVASI during the 2019 fiscal year. Additionally, in the year ended December 31, 2018, the European Commission granted marketing authorization for MVASI and KANJINTI, both biosimilars of Herceptin.

 

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NOTE 7 — Discontinued Operations

 

Global Generics Business

 

On July 27, 2015, the Company announced that it entered into the Teva Transaction, which closed on August 2, 2016. On October 3, 2016, the Company completed the divestiture of the Anda Distribution business to Teva for $500.0 million. The Company recognized a combined gain on the sale of the Anda Distribution business and the sale of the global generics business of $15,932.2 million in the twelve months ended December 31, 2016.

 

In October 2016, pursuant to our agreement with Teva, Teva provided the Company with its proposed estimated adjustment to the closing date working capital balance.  The Company disagreed with Teva’s proposed adjustment, and, pursuant to our agreement with Teva, each of the Company’s and Teva’s proposed adjustments were submitted to arbitration (“Working Capital Arbitration”) to determine the working capital amount in accordance with GAAP as applied by the Company consistent with past practice. On January 31, 2018, Allergan plc and Teva entered into a Settlement Agreement and Mutual Releases (the “Agreement”). The Agreement provides that the Company will make a one-time payment of $700.0 million to Teva which was paid in the year ended December 31, 2018; the Company and Teva will jointly dismiss their working capital dispute arbitration, and the Company and Teva will release all actual or potential claims under the Master Purchase Agreement, dated July 26, 2015, by and between the Company and Teva, for breach of any representation, warranty, or covenant (other than any breach of a post-closing covenant not known as of the date of the Agreement). The Company recorded a pre-tax charge of $466.0 million as a component of other (expense) / income, net from discontinued operations relating to the settlement in the year ended December 31, 2017.

 

The Company notes the following reconciliation of the proceeds received in the combined transaction to the gain recognized in income from discontinued operations in 2016 ($ in millions):

 

Net cash proceeds received  $33,804.2 
August 2, 2016 fair value of Teva shares   5,038.6 
Total Proceeds  $38,842.8 
Net assets sold to Teva, excluding cash   (12,487.7)
Other comprehensive income disposed   (1,544.8)
Deferral of proceeds relating to additional elements of agreements with Teva   (299.2)
Pre-tax gain on sale of generics business and Anda Distribution business  $24,511.1 
Income taxes   (8,578.9)
Net gain on sale of generics business and Anda Distribution business  $15,932.2 

 

The fair value of Teva Shares owned were recorded within “Marketable securities” on the Company’s Consolidated Balance Sheet. The closing August 2, 2016 Teva stock price discounted at a rate of 5.9 percent due to the lack of marketability was used to initially value the shares.

 

Teva Share Activity

 

During the year ended December 31, 2018, the Company recorded the following movements in its investment in Teva securities ("Teva Share Activity") ($ in millions except per share information):

 

 32 

 

 

    Shares     Carrying
Value

per Share
    Market
Price
    Proceeds
Received
    Value of
Marketable

Securities
    Unrealized
Gain / (Loss) as

a Component
of Other
Comprehensive
Income
    Gain / (Loss)
Recognized

in Other
Income/
(Expense),
Net
    Derivative
Instrument

(Liability)/
Asset
    Retained
Earnings
 
Teva securities as of December 31, 2017     95.9     $ 17.60     $ 18.95     n.a.     $ 1,817.7     $ 129.3     $ -     $ (62.9 )   $ -  
Impact of ASU No. 2016-01 during the three months ended March 31, 2018     -       -       -       -       -       (129.3 )     -       -       129.3  
Settlement of initial accelerated share repurchase ("ASR"), net during the three months ended March 31, 2018(1)     (25.0 )     18.95       16.53 (2)   413.3       (473.8 )     -       2.5       62.9       -  
Settlement of forward sale entered into during the three months ended March 31, 2018, net(3)     (25.0 )     17.09       18.61 (4)   465.5       (427.3 )     -       38.2       -       -  
Open market sales during the twelve months ended December 31, 2018     (45.9 )   n.a. (5)   20.41       936.7       (916.6 )     -       20.2       -       -  
Teva securities as of and for the twelve months ended December 31, 2018     -     $ -     $ -     $ 1,815.5     $ -     $ -     $ 60.9     $ -     $ 129.3  

 

 

(1) In the year ended December 31, 2017, the Company recorded a $62.9 million loss on the fair value of the derivative for the forward sale of 25.0 million of Teva securities.  The ASR was settled on January 12, 2018 for $413.3 million.  

(2) Market price represents average price over the life of the contract.  On the January 17, 2018 settlement date, the closing stock price of Teva securities was $21.48.  

(3) On February 13, 2018, the Company entered into additional forward sale transactions under which we sold approximately 25.0 million Teva shares.  The value of the shares were based on the volume weighted average price of Teva shares plus a premium and settled during the year ended December 31, 2018. As a result of the transaction, the Company received 80% of the proceeds, or approximately $372.0 million on February 13, 2018.  The forward sale was settled on May 7, 2018 for total proceeds of $465.5 million.  

(4) Market price represents average price over the life of the contract.  On the May 7, 2018 settlement date, the closing stock price of Teva securities was $18.62.

(5) Average carrying value per share was $19.97.  

 

 33 

 

 

During the year ended December 31, 2017, the Company recorded the following movements in its investment in Teva securities ($ in millions except per share information):

 

    Shares     Carrying
Value
per Share
    Market
Price
    Discount     Movement
in the
Value of
Marketable
Securities
    Unrealized
Gain / (Loss) as
a Component
of Other
Comprehensive
Income
    (Loss) /
Gain
Recognized
in Other
Income /
(Expense),
Net
 
Teva securities as of December 31, 2016     100.3     $ 53.39     $ 36.25       5.4 %   $ 3,439.2     $ (1,599.4 )   $ -  
Other-than-temporary impairment recognized at March 31, 2017     100.3       32.09       32.09       4.9 %     (378.6 )     1,599.4       (1,978.0 )
Other-than-temporary impairment recognized at September 30, 2017     100.3       17.60       17.60       0.0 %     (1,295.5 )     -       (1,295.5 )
Sales during the twelve months ended December 31, 2017     (4.4 )   n.a.     n.a.       0.0 %     (76.7 )     -       4.2  
Other fair value movements in the twelve months ended December 31, 2017     95.9       17.60       18.95       0.0 %     129.3       129.3       -  
Teva securities as of and for the twelve months ended December 31, 2017     95.9     $ 17.60     $ 18.95       0.0 %   $ 1,817.7     $ 129.3     $ (3,269.3 )

 

The Teva stock price was discounted due to the lack of marketability.  

 

Financial results of the global generics business and the Anda Distribution business are presented as “(Loss) / income from discontinued operations, net of tax” on the Consolidated Statements of Operations for the years ended December 31, 2017 and 2016.

 

The following table presents key financial results of the global generics business and the Anda Distribution business included in “(Loss) / income from discontinued operations, net of tax” for the years ended December 31, 2017 and 2016 ($ in millions):

 

   Years Ended December 31, 
   2017   2016 
Net revenues  $-   $4,504.3 
Operating expenses:          
Cost of sales (excludes amortization and impairment of acquired intangibles including product rights)   -    2,798.3 
Research and development   -    269.4 
Selling and marketing   -    352.9 
General and administrative   18.8    425.8 
Amortization   -    4.8 
Asset sales and impairments, net   1.2    - 
Total operating expenses   20.0    3,851.2 
Operating (loss) / income   (20.0)   653.1 
Other (expense) / income, net   (470.4)   15,932.2 
(Benefit) / provision for income taxes   (87.5)   670.8 
(Loss) / income from discontinued operations, net of tax  $(402.9)  $15,914.5 

 

The operating income reflects approximately seven months of operating activity of the Company’s former generics business and approximately nine months of operating activity of the Anda Distribution business in the year ended December 31, 2016. “Other (expense) / income, net” includes the gain on sale of the businesses to Teva. 

 

 34 

 

 

Depreciation and amortization was ceased upon the determination that the held for sale criteria were met, which were the announcement dates of the Teva Transaction and the divestiture of the Anda Distribution business. The depreciation, amortization and significant operating and investing non-cash items of the discontinued operations were as follows ($ in millions):

 

  

Year Ended

December 31, 2016

 
Depreciation from discontinued operations  $2.1 
Amortization from discontinued operations   4.8 
Capital expenditures   85.3 
Deferred income tax expense   6,038.5 

 

NOTE 8 — Share-Based Compensation

 

The Company recognizes compensation expense for all share-based compensation awards made to employees and directors based on the fair value of the awards on the date of grant. A summary of the Company’s share-based compensation plans is presented below.

 

Option award plans require options to be granted at the fair market value of the shares underlying the options at the date of the grant and generally become exercisable over periods ranging from three to five years. Each option granted expires ten years from the date of the grant. Restricted stock awards are grants that entitle the holder to ordinary shares, subject to certain terms. Restricted stock unit awards are grants that entitle the holder the right to receive an ordinary share, subject to certain terms. Restricted stock and restricted stock unit awards (both time-based vesting and performance-based vesting) generally have restrictions that lapse over a one to four year vesting period. Restrictions generally lapse for non-employee directors after one year. Certain restricted stock units are performance-based awards issued at a target number with the actual number of ordinary shares issued ranging based on achievement of the performance criteria. All restricted stock and restricted stock units which remain active under the Company’s equity award plans are eligible to receive cash dividend equivalent payments upon vesting.

 

Fair Value Assumptions

 

All restricted stock and restricted stock units (whether time-based or performance-based) are granted and expensed using the fair value per share on the applicable grant date, over the applicable vesting period. Non-qualified options to purchase ordinary shares are granted to employees at exercise prices per share equal to the closing market price per share on the date of grant. The fair value of non-qualified options is determined on the applicable grant dates using the Black-Scholes method of valuation and that amount is recognized as an expense over the vesting period. Using the Black-Scholes valuation model, the fair value of options is based on the following assumptions:

 

  

2018

Grants

  

2017

Grants

  

2016

Grants

 
Dividend yield   1.5%   1.2%   0.0%
Expected volatility   27.0%   27.0%   27.0%
Risk-free interest rate   2.2-2.9%    2.0-2.3%    1.3 - 2.4% 
Expected term (years)   7.0    7.0    7.0 - 7.5 

 

Share-Based Compensation Expense

 

Share-based compensation expense recognized in the Company’s results of operations, including discontinued operations, for the years ended December 31, 2018, 2017 and 2016 was as follows ($ in millions):

 

   Years Ended December 31, 
   2018   2017   2016 
Equity-based compensation awards  $239.8   $293.3   $334.5 
Cash-settled awards in connection with the Zeltiq Acquisition   -    31.5    - 
Cash-settled awards in connection with the Tobira Acquisition   -    -    27.0 
Cash-settled awards in connection with the Vitae Acquisition   -    -    18.6 
Cash-settled awards in connection with the ForSight Acquisition   -    -    3.1 
Non-equity settled awards other   -    (16.8)   - 
Total share-based compensation expense  $239.8   $308.0   $383.2 

 

 35 

 

 

In the year ended December 31, 2016, share-based compensation expense included in discontinued operations was $12.9 million.

 

In the years ended December 31, 2018, 2017 and 2016, the related tax benefits were $53.5 million, $105.0 million and $131.8 million, respectively, relating to share-based compensation.

 

In the year ended December 31, 2017, the income in non-equity settled awards other was due to an actuarial reversal of $16.8 million based on the decline of the total shareholder return metrics. These awards are cash-settled and fair valued based on a pre-determined total shareholder return metric.

 

Included in the share-based compensation awards for the years ended December 31, 2018, 2017 and 2016 is the impact of accelerations and step-ups relating to the acquisition accounting treatment of outstanding awards acquired in the Zeltiq Acquisition, the acquisition of Allergan, Inc. (the “Allergan Acquisition”), and the acquisition of Forest Laboratories, Inc. (the “Forest Acquisition”) ($ in millions):

 

   Years Ended December 31, 
   2018   2017   2016 
Zeltiq Acquisition  $10.1   $47.8   $- 
Allergan Acquisition   8.3    47.1    108.9 
Forest Acquisition   -    10.1    45.2 
Total  $18.4   $105.0   $154.1 

 

Unrecognized future share-based compensation expense was $312.4 million as of December 31, 2018. This amount will be recognized as an expense over a remaining weighted average period of 1.3 years. Share-based compensation is being amortized and charged to operations over the same period as the restrictions are eliminated for the participants, which is generally on a straight-line basis.

 

Share Activity

 

The following is a summary of equity award activity for unvested restricted stock and stock units in the period from December 31, 2017 through December 31, 2018 (in millions, except per share data):

 

   Shares  

Weighted

Average

Grant Date

Fair Value

  

Weighted

Average

Remaining

Contractual

Term

(Years)

  

Aggregate

Grant Date

Fair Value

 
Restricted shares / units outstanding at December 31, 2017   2.0   $237.72    1.8   $484.1 
Granted   1.4    147.10         204.0 
Vested   (0.6)   242.16         (152.5)
Forfeited   (0.3)   203.72         (62.7)
Restricted shares / units outstanding at December 31, 2018   2.5   $190.27    1.6   $472.9 

 

 36 

 

 

The following is a summary of equity award activity for non-qualified options to purchase ordinary shares in the period from December 31, 2017 through December 31, 2018 (in millions, except per share data):

 

   Options  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Term

(Years)

  

Aggregate

Intrinsic

Value

 
Outstanding, December 31, 2017   7.3   $120.94    5.2   $312.7 
Granted   0.2    151.27           
Exercised   (1.0)   100.85           
Cancelled   (0.2)   244.13           
Outstanding, vested and expected to vest at December 31, 2018   6.3   $122.74    4.4   $69.0 

 

The decrease in the aggregate intrinsic value of the options is primarily related to the decline in the Company’s stock from $163.58 as of December 31, 2017 to $133.66 as of December 31, 2018.

 

NOTE 9 — Pension and Other Postretirement Benefit Plans

 

Defined Benefit Plan Obligations

 

The Company has numerous defined benefit plans offered to employees around the world. For these plans, retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. As of December 31, 2018, all of the Company’s plans were frozen for future enrollment.

 

The service and settlement costs captured as part of the net periodic (benefit) are recorded within general & administrative expenses and the interest costs and expected return on plan assets are recorded within “other income / (expense), net”. The net periodic (benefit) of the defined benefit plans for continuing operations for the years ended December 31, 2018, 2017 and 2016 was as follows ($ in millions):

 

   Years Ended December 31, 
   2018   2017   2016 
Service cost  $2.8   $5.5   $5.0 
Interest cost   38.1    40.7    44.5 
Expected return on plan assets   (63.8)   (54.5)   (53.0)
Settlement   (0.6)   (0.1)   (1.8)
Net periodic (benefit)  $(23.5)  $(8.4)  $(5.3)

 

Obligations and Funded Status

 

Benefit obligation and asset data for the defined benefit plans for continuing operations, was as follows ($ in millions):

 

   Years Ended December 31, 
   2018   2017 
Change in Plan Assets          
Fair value of plan assets at beginning of year  $1,235.2   $1,093.9 
Employer contribution   14.8    15.2 
(Loss) / gain on plan assets   (53.6)   117.2 
Benefits paid   (41.1)   (36.0)
Settlements   (2.9)   (5.3)
Effects of exchange rate changes and other   (22.8)   50.2 
Fair value of plan assets at end of year  $1,129.6   $1,235.2 

 

 37 

 

 

   Years Ended December 31, 
   2018   2017 
Change in Benefit Obligation          
Benefit obligation at beginning of the year  $1,330.0   $1,234.1 
Service cost   2.8    5.5 
Interest cost   38.1    40.7 
Actuarial (gain) / loss   (74.5)   36.9 
Curtailments   -    (8.1)
Settlements and other   (2.9)   (5.3)
Benefits paid   (41.1)   (36.0)
Effects of exchange rate changes and other   (25.2)   62.2 
Benefit obligation at end of year  $1,227.2   $1,330.0 
Funded status at end of year  $(97.6)  $(94.8)

 

The following table outlines the funded actuarial amounts ($ in millions):

 

   Years Ended December 31, 
   2018   2017 
Noncurrent assets  $27.6   $21.9 
Current liabilities   (0.9)   (0.8)
Noncurrent liabilities   (124.3)   (115.9)
   $(97.6)  $(94.8)

 

The underfunding of pension benefits is primarily a function of the different funding incentives that exist outside of the United States. In certain countries, there are no legal requirements or financial incentives provided to companies to pre-fund pension obligations. In these instances, benefit payments are typically paid directly by the Company as they become due.

 

Plan Assets

 

Companies are required to use a fair value hierarchy as defined in ASC 820 which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value (“Fair Value Leveling”). There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:

 

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation.

 

If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

 38 

 

 

The fair values of the Company’s pension plan assets at December 31, 2018 by asset category are as follows ($ in millions):

 

  

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable Inputs

(Level 3)

   Total 
Assets                    
Investment funds                    
U.S. equities  $20.6   $-   $      -   $20.6 
International equities   205.3    -    -    205.3 
Other equity securities   49.8    -    -    49.8 
Equity securities  $275.7   $-   $-   $275.7 
                     
U.S. Treasury bonds  $-   $63.0   $-   $63.0 
Bonds and bond funds   -    787.2    -    787.2 
Other debt securities   -    -    -    - 
Debt securities  $-   $850.2   $-   $850.2 
Other investments                    
Other   -    3.7    -    3.7 
Total assets  $275.7   $853.9   $-   $1,129.6 

 

The fair values of the Company’s pension plan assets at December 31, 2017 by asset category are as follows ($ in millions):

 

  

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable Inputs

(Level 3)

   Total 
Assets                    
Investment funds                    
U.S. equities  $33.5   $-   $      -   $33.5 
International equities   265.5    -    -    265.5 
Other equity securities   70.5    -    -    70.5 
Equity securities  $369.5   $-   $-   $369.5 
                     
U.S. Treasury bonds  $-   $96.9   $-   $96.9 
Bonds and bond funds   -    745.7    -    745.7 
Other debt securities   -    21.2    -    21.2 
Debt securities  $-   $863.8   $-   $863.8 
Other investments                    
Other   -    1.9    -    1.9 
Total assets  $369.5   $865.7   $-   $1,235.2 

 

The assets of the pension plan are held in separately administered trusts. The investment guidelines for the Company’s pension plans is to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of the plan, given an acceptable level of risk. The target investment portfolio of the Company’s continuing operations pension plans is allocated as follows:

 

  

Target Allocation as of

December 31,

 
   2018   2017 
Bonds   70.6%   68.8%
Equity securities   26.0%   31.2%
Other investments   3.4%   0.0%

 

Expected Contributions

 

Employer contributions to the pension plan during the year ending December 31, 2019 are expected to be $8.9 million for continuing operations.

 

 39 

 

 

Expected Benefit Payments

 

Total expected benefit payments for the Company’s pension plans are as follows ($ in millions):

 

   

Expected Benefit

Payments

 
2019   $ 36.3  
2020     38.7  
2021     40.9  
2022     43.2  
2023     45.6  
Thereafter     1,022.5  
Total liability   $ 1,227.2  

 

 

Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service. The majority of the payments will be paid from plan assets and not Company assets.

 

Information for defined benefit plans with an accumulated benefit obligation in excess of plan assets is presented below ($ in millions):

 

  

Defined Benefit as of

December 31,

 
   2018   2017 
Projected benefit obligations  $1,227.2   $1,330.0 
Accumulated benefit obligations  $1,223.5   $1,324.7 
Plan assets  $1,129.6   $1,235.2 

 

Amounts Recognized in Other Comprehensive Income / (Loss)

 

Net (loss) / gain amounts reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net loss amounts in excess of certain thresholds are amortized into net pension cost over the average remaining service life of employees. Balances recognized within accumulated other comprehensive income/(loss) excluding the impact of taxes that have not been recognized as components of net periodic benefit costs are as follows ($ in millions):

 

    Defined Benefit  
Balance as of December 31, 2016   $ 24.4  
Net actuarial gain     33.8  
Balance as of December 31, 2017   $ 58.2  
Net actuarial (loss)     (44.6 )
Balance as of December 31, 2018   $ 13.6  

 

 

Actuarial Assumptions

 

The weighted average assumptions used to calculate the projected benefit obligations of the Company’s defined benefit plans, including assets and liabilities held for sale, are as follows:

 

   As of December 31, 
   2018   2017 
Discount rate   3.3%   2.9%
Salary growth rate   3.0%   3.0%

 

 40 

 

 

The weighted average assumptions used to calculate the net periodic benefit cost of the Company’s defined benefit plans are as follows:

 

   As of December 31, 
   2018   2017 
Discount rate   2.9%   3.3%
Expected rate of return on plan assets   5.2%   5.0%
Salary growth rate   3.0%   3.0%

 

In order to select a discount rate for purposes of valuing the plan obligations the Company uses market returns and adjusts them as needed to fit the estimated duration of the plan liabilities.

 

The expected rate of return represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, long-term historical returns data are considered as well as actual returns on the plan assets and other capital markets experience. Using this reference information, the long-term return expectations for each asset category and a weighted average expected return was developed, according to the allocation among those investment categories.

 

Other Post-Employment Benefit Plans

 

The Company has post-employment benefit plans. Accumulated benefit obligation for the defined benefit plans, were as follows ($ in millions):

 

    Accumulated Benefit
Obligation
 
Accumulated benefit obligation as of December 31, 2016   $ 52.7  
Interest cost     2.0  
Actuarial charge     (5.0 )
Benefits paid     (2.9 )
Accumulated benefit obligation as of December 31, 2017   $ 46.8  
Interest cost     1.6  
Actuarial charge     (2.6 )
Benefits paid     (3.6 )
Accumulated benefit obligation as of December 31, 2018   $ 42.2  

 

Savings Plans

 

The Company also maintains certain defined contribution savings plans covering substantially all U.S.-based employees. The Company contributes to the plans based upon the employee contributions. The Company’s expense for contributions to these retirement plans for amounts included in continuing operations was $128.9 million, $89.1 million and $75.6 million in the years ended December 31, 2018, 2017 and 2016, respectively.

 

 41 

 

 

NOTE 10 — Other Income / (Expense), Net

 

Other income / (expense), net consisted of the following ($ in millions):

 

   Years Ended December 31, 
   2018   2017   2016 
Teva Share Activity  $60.9   $(3,269.3)  $- 
Sale of businesses   182.6    -    - 
Debt extinguishment costs as part of the debt tender offer   -    (161.6)   - 
Debt extinguishment other   15.6    (27.6)   - 
Other-than-temporary impairments   -    (26.1)   - 
Dividend income   -    85.2    68.2 
Naurex recovery   -    20.0    - 
Forward sale of Teva shares   -    (62.9)   - 
Pfizer termination fee (Allergan plc only)   -    -    150.0 
Other (expense) / income, net   (2.4)   5.0    1.0 
Other income / (expense), net  $256.7   $(3,437.3)  $219.2 

 

Teva Share Activity

 

Refer to “NOTE 7 — Discontinued Operations” for the movements that the Company recorded during the years ended December 31, 2018 and 2017 in its investment in Teva securities.

 

Sale of Business

 

During the year ended December 31, 2018, the Company recorded a net gain of $129.6 million as a result of the sale of five medical dermatology products to Almirall, S.A.

 

During the year ended December 31, 2018, the Company completed the sale of a non-strategic asset group held for sale as of December 31, 2017, which was deemed a business based on the applicable guidance at the time, for $55.0 million in cash plus deferred consideration of $20.0 million. As a result of this transaction, the Company recognized a gain of $53.0 million.

 

Debt Extinguishment Costs as Part of the Debt Tender Offer

 

On May 30, 2017, the Company completed the repurchase of certain debt securities issued for cash under a previously announced tender offer. In the year ended December 31, 2017, as a result of the debt extinguishment, the Company repaid $2,843.3 million of senior notes and recognized a loss of $161.6 million, within “other (expense) / income, net” for the early tender payment and non-cash write-off of premiums and debt fees related to the repurchased notes, including $170.5 million of a make-whole premium.

 

Debt Extinguishment Other

 

During the year ended December 31, 2018, the Company repurchased $3,939.1 million of senior notes in the open market. As a result of the debt extinguishment, the Company recognized a net gain of $15.6 million within “other income / (expense), net” for the discount received upon repurchase of $45.6 million, offset by the non-cash write-off of premiums and debt fees related to the repaid notes of $30.0 million.

 

 42 

 

 

During the year ended December 31, 2018, the Company redeemed and retired the following senior notes ($ in millions):

 

    Year Ended December 31, 2018     
Tranche  

Face Value

Retired

  

Cash Paid

for Retirement

  

Remaining Value at

December 31, 2018

 
2.450% due 2019   $500.0   $500.0   $- 
3.000% due 2020    793.2    791.3    2,706.7 
3.450% due 2022    59.5    58.6    2,940.5 
3.850% due 2024    163.3    160.9    1,036.7 
3.800% due 2025    972.5    963.8    3,027.5 
4.550% due 2035    711.0    696.9    1,789.0 
4.850% due 2044    420.6    413.5    1,079.4 
4.750% due 2045    319.0    308.5    881.0 
Total   $3,939.1   $3,893.5   $13,460.8 

 

In the year ended December 31, 2017, the Company repaid $750.0 million of senior notes due in the year ending December 31, 2019. As a result of the extinguishment, the Company recognized a loss of $27.6 million, within “Other (expense) / income” for the early payment and non-cash write-off of premiums and debt fees related to the repaid notes, including $35.1 million of a make-whole premium.

 

Other-than-temporary Impairments

 

The Company recorded other-than-temporary impairment charges on other equity investments and cost method investments of $26.1 million in the year ended December 31, 2017.

 

Dividend Income

 

During the years ended December 31, 2017 and 2016, the Company received dividend income of $85.2 million and $68.2 million, respectively, on the 100.3 million Teva ordinary shares acquired as a result of the Teva Transaction. On February 8, 2018, Teva suspended all dividends on ordinary shares.

 

Naurex Recovery

 

On August 28, 2015, the Company acquired certain products in early stage development of Naurex, Inc. (“Naurex”) in an all-cash transaction, which was accounted for as an asset acquisition. The Company received a purchase price reduction of $20.0 million in the year ended December 31, 2017 based on the settlement of an open contract dispute.

 

Forward Sale of Teva Shares

 

Refer to “NOTE 7 — Discontinued Operations” for the movements in the Company’s investment in Teva securities.

 

Pfizer Termination Fee

 

On November 23, 2015, the Company announced that it entered into a definitive merger agreement (the “Pfizer Agreement”) under which Pfizer Inc. (“Pfizer”), a global innovative biopharmaceutical company, and Allergan plc would merge in a stock and cash transaction. On April 6, 2016, the Company announced that its merger agreement with Pfizer was terminated by mutual agreement. In connection with the termination of the merger agreement, Pfizer paid Allergan plc $150.0 million for expenses associated with the transaction which was included as a component of other income / (expense), net during the year ended December 31, 2016.

 

 43 

 

 

NOTE 11 — Inventories

 

Inventories consist of finished goods held for sale and distribution, raw materials and work-in-process. Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company writes down inventories to net realizable value based on forecasted demand, market conditions or other factors, which may differ from actual results.

 

Inventories consisted of the following ($ in millions):

 

   December 31,   December 31, 
   2018   2017 
Raw materials  $303.2   $326.9 
Work-in-process   145.7    158.1 
Finished goods   520.2    527.8 
    969.1    1,012.8 
Less: inventory reserves   122.2    108.3 
Total Inventories  $846.9   $904.5 

 

NOTE 12 — Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following ($ in millions):

 

   December 31,   December 31, 
   2018   2017 
Accrued expenses:          
Accrued third-party rebates  $1,832.1   $1,713.7 
Accrued payroll and related benefits   694.3    635.6 
Accrued returns and other allowances   527.8    466.2 
Accrued R&D expenditures   215.5    165.9 
Interest payable   191.4    245.9 
Royalties payable   155.1    189.2 
Accrued pharmaceutical fees   145.3    186.4 
Litigation-related reserves and legal fees   92.0    78.3 
Accrued severance, retention and other shutdown costs   71.6    132.8 
Accrued non-provision taxes   68.5    76.5 
Accrued selling and marketing expenditures   61.1    53.0 
Current portion of contingent consideration obligations   8.3    56.2 
Contractual commitments (including amounts due to Teva)   4.3    705.4 
Dividends payable   1.4    24.6 
Other accrued expenses   368.7    487.2 
Total accrued expenses  $4,437.4   $5,216.9 
Accounts payable   349.8    324.5 
Total accounts payable and accrued expenses  $4,787.2   $5,541.4 

 

 44 

 

 

NOTE 13 — Property, Plant and Equipment, Net

 

Property, plant and equipment, net consisted of the following as of December 31, 2018 and 2017 ($ in millions):

 

    Machinery
and
Equipment
    Research and
Laboratory
Equipment
    Transportation/
Other
    Land, Buildings
and Leasehold
Improvements
    Construction
in Progress
    Total  
At December 31, 2017   $ 545.3     $ 59.0     $ 475.3     $ 814.9     $ 507.0     $ 2,401.5  
Additions     9.9       5.0       35.8       60.4       142.4       253.5  
Disposals/transfers/other     44.9       6.4       25.8       45.2       (180.0 )     (57.7 )
Currency translation     (9.7 )     (3.0 )     (7.3 )     (9.4 )     (2.7 )     (32.1 )
At December 31, 2018   $ 590.4     $ 67.4     $ 529.6     $ 911.1     $ 466.7     $ 2,565.2  
Accumulated depreciation                                                
At December 31, 2017   $ 219.3     $ 38.5     $ 232.4     $ 125.9     $ -     $ 616.1  
Additions     70.9       9.2       71.1       45.1       -       196.3  
Disposals/transfers/impairments/other     (1.5 )     -       (6.7 )     (13.5 )     -       (21.7 )
Currency translation     (4.5 )     (1.4 )     (5.4 )     (1.2 )     -       (12.5 )
At December 31, 2018   $ 284.2     $ 46.3     $ 291.4     $ 156.3     $ -     $ 778.2  
                                                 
Property, plant and equipment, net At December 31, 2018   $ 306.2     $ 21.1     $ 238.2     $ 754.8     $ 466.7     $ 1,787.0  

 

 

Depreciation expense for continuing operations was $196.3 million, $171.5 million and $153.7 million in the years ended December 31, 2018, 2017 and 2016, respectively.

 

NOTE 14 — Prepaid Expenses, Investments and Other Assets

 

Prepaid expenses and other current assets consisted of the following ($ in millions):

 

   December 31,   December 31, 
   2018   2017 
Prepaid taxes  $403.8   $690.9 
Prepaid insurance   16.7    20.9 
Royalty receivables   67.7    80.1 
Sales and marketing   41.8    31.9 
Other   289.1    300.1 
Total prepaid expenses and other current assets  $819.1   $1,123.9 

 

Investments in marketable securities, including those classified in cash and cash equivalents due to the maturity term of the instrument, other investments and other assets consisted of the following ($ in millions):

 

   December 31,   December 31, 
   2018   2017 
Marketable securities:          
Short-term investments  $1,026.9   $2,814.4 
Teva shares   -    1,817.7 
Total marketable securities  $1,026.9   $4,632.1 
Investments and other assets:          
Deferred executive compensation investments  $90.8   $112.4 
Equity method investments   8.4    11.5 
Other long-term investments   37.6    60.8 
Taxes receivable   1,674.8    32.1 
Contingent income   75.3    - 
Other assets   83.7    51.1 
Total investments and other assets  $1,970.6   $267.9 

 

 45 

 

 

The Company’s marketable securities and other long-term investments are recorded at fair value based on quoted market prices using the specific identification method. These investments are classified as either current or non current, as appropriate, in the Company’s consolidated balance sheets.

 

The $1.7 billion of taxes receivable primarily relates to a current tax benefit and reclassification of certain deferred tax assets to non-current taxes receivable for U.S. capital losses.

 

Other assets include security and equipment deposits and long-term receivables.

 

NOTE 15 — Goodwill, Product Rights and Other Intangible Assets

 

Goodwill

 

Goodwill for the Company’s reporting segments consisted of the following ($ in millions):

 

  

US Specialized

Therapeutics

  

US General

Medicine

   International   Total 
Balance as of December 31, 2017  $20,859.6   $21,399.7   $7,603.6   $49,862.9 
Divested   (184.0)   -    -    (184.0)
Impairments   -    (2,841.1)   -    (2,841.1)
Held for sale        (622.0)        (622.0)
Foreign exchange and other adjustments   -    -    (302.5)   (302.5)
Balance as of December 31, 2018  $20,675.6   $17,936.6   $7,301.1   $45,913.3 

 

Annual Testing

 

The Company performed its annual goodwill impairment test during the second quarter of 2018 by evaluating its five Reporting Units. In performing this test, the Company utilized long-term growth rates for its Reporting Units ranging from 1.0% to 2.0% in its estimation of fair value and discount rates ranging from 8.5% to 10.0%, which increased versus the prior year annual testing discount rates of 7.5% to 8.5% to reflect changes in market conditions. The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical performance by management.

 

Of the Reporting Units tested in the second quarter, the Company’s US Eye Care Reporting Unit, which is a component of its US Specialized Therapeutics Segment and has an allocated goodwill balance of $9,824.8 million, and its General Medicine Reporting Unit, were the most sensitive to a change in future valuation assumptions. These Reporting Units had the lowest level of headroom between the carrying value of the Reporting Unit and the fair value of the Reporting Unit. While management believes the assumptions used were reasonable and commensurate with the views of a market participant, changes in key assumptions for these Reporting Units, including increasing the discount rate, lowering revenue forecasts, lowering the operating margin or lowering the long-term growth rate, could result in a future impairment.

 

Fourth Quarter 2018 Testing

 

In the three months ended December 31, 2018 and subsequent to the Company’s annual impairment test, the Company identified several impairment indicators which led to the fourth quarter assessment of its General Medicine Reporting Unit for impairment.  The Company noted the following:

 

·At December 31, 2018, the Company determined that the Anti-Infectives business met the held for sale criteria.  Based on this determination, the Company compared the anticipated sales price of the business with internal estimates of discounted future cash flows, noting a decline in the fair value of the group of assets.

 

·Other commercial factors which included a decline in projected cash flows of its Women’s Health business, in part, due to the failure to receive FDA approval for a late stage product candidate.

 

·An increase in the cost of the capital since the Company’s second quarter annual impairment test.  The Company’s weighted average cost of capital for the General Medicine Reporting Unit increased to 9.5% due to increased interest rates and other market dynamics. 

 

As a result of the evaluation, the Company tested General Medicine’s goodwill for impairment and recorded a $2,841.1 million goodwill impairment charge to its General Medicine Reporting Unit. 

 

 46 

 

 

No impairment indicators were noted for the Company’s other Reporting Units subsequent to the annual impairment test. The fair value of its General Medicine, US Eye Care and the Company’s other Reporting Units are, in part, comprised of anticipated product launches in the next three years. Negative events regarding these pipeline assets including, but not limited to, Abicipar, Atogepant, Bimataprost SR, Cariprazine, Rapastinel, and Ubrogepant, as well as other next generation aesthetic products could lead to further goodwill impairment charges. Allergan’s General Medicine Reporting Unit’s asset value equals fair value as of December 31, 2018, while its US Eye Care Reporting Unit has headroom of less than 10%.

 

As of December 31, 2018 and 2017, the gross balance of goodwill, prior to the consideration of impairments, was $48,771.7 million and $49,880.2 million, respectively.

 

Product Rights and Other Intangible Assets

 

Product rights and other intangible assets consisted of the following for the years ended December 31, 2018 and 2017 ($ in millions):

 

Cost Basis   Balance as of
December 31,
2017
    Additions     Impairments     Divested /
Held for
Sale
    Foreign
Currency
Translation
    Balance as of
December 31,
2018
 
Intangibles with definite lives:                                                
Product rights and other intangibles   $ 73,892.5     $ 49.0     $ -     $ (3,391.0 )   $ (315.4 )   $ 70,235.1  
Trade name     690.0       -       -       -       -       690.0  
Total definite lived intangible assets   $ 74,582.5     $ 49.0     $ -     $ (3,391.0 )   $ (315.4 )   $ 70,925.1  
Intangibles with indefinite lives:                                                
IPR&D   $ 5,874.1     $ -     $ (798.0 )   $ (28.0 )   $ -     $ 5,048.1  
Total indefinite lived intangible assets   $ 5,874.1     $ -     $ (798.0 )   $ (28.0 )   $ -     $ 5,048.1  
Total product rights and other intangibles   $ 80,456.6     $ 49.0     $ (798.0 )   $ (3,419.0 )   $ (315.4 )   $ 75,973.2  

 

Accumulated Amortization   Balance as of
December 31,
2017
    Amortization     Impairments     Divested /
Held for
Sale
    Foreign
Currency
Translation
    Balance as of
December 31,
2018
 
Intangibles with definite lives:                                                
Product rights and other intangibles   $ (25,593.6 )   $ (6,474.2 )   $ (2,239.9 )   $ 2,233.4     $ 89.3     $ (31,985.0 )
Trade name     (214.7 )     (78.1 )     -       -       -       (292.8 )
Total definite lived intangible assets   $ (25,808.3 )   $ (6,552.3 )   $ (2,239.9 )   $ 2,233.4     $ 89.3     $ (32,277.8 )
Total product rights and other intangibles   $ (25,808.3 )   $ (6,552.3 )   $ (2,239.9 )   $ 2,233.4     $ 89.3     $ (32,277.8 )
Net Product Rights and Other Intangibles   $ 54,648.3                                     $ 43,695.4  

 

In the year ended December 31, 2018, the Company determined that the Anti-Infectives business was deemed held for sale. Based on the anticipated future cash flows, the Company impaired certain Anti-Infective CMP by $149.7 million. The remaining amount of net product rights and other intangibles which met the held for sale criteria is $849.4 million.

 

 47 

 

 

Non-Annual Testing

 

In addition to the Company’s annual impairment test performed in the second quarter, the Company noted the following impairments based on triggering events during the year ended December 31, 2018:

 

·In the fourth quarter of 2018, the Company impaired the intangible assets associated with Kybella by $1,643.8 million in “Asset sales and impairments, net” as a result of a decrease in the future sales forecasts based on current performance, in part due to risks relating to supply of the product and the corresponding impact on demand;

 

·In the fourth quarter of 2018, the Company impaired the intangible assets associated with True Tear® by $187.6 million in “Asset sales and impairments, net” as a result of lower sales forecasts based on the Company’s current marketing plans and initial results of product launch;

 

·In the year ended December 31, 2018, the Company divested net product rights and other intangibles of $205.4 million in “Asset sales and impairments, net” and $130.5 million (after intangible asset impairment of $252.0 million) as part of the divestitures of the Medical Dermatology business to Almirall, S.A. and the divestiture of Rhofade® to Aclaris Therapeutics, Inc, respectively; and

 

·In the first quarter of 2018, the Company recorded a $522.0 million impairment as a result of negative clinical data related to the oral psoriasis indication received in March 2018 for its RORyt IPR&D project obtained as part of the acquisition of Vitae Pharmaceuticals, Inc.

 

Annual Testing

 

During the second quarter of 2018, the Company performed its annual IPR&D impairment test and based on events occurring or decisions made within the quarter ended June 30, 2018, the Company recorded the following impairments:

 

·a $164.0 million impairment as a result of changes in launch plans based on clinical results of an eye care project obtained as part of the Allergan Acquisition;

 

·a $40.0 million impairment due to a delay in clinical studies and anticipated approval date of a project obtained as part of the acquisition of Vitae Pharmaceuticals, Inc.;

 

·a $27.0 million impairment due to a delay in clinical studies and anticipated approval date of a medical dermatology project obtained as part of the Allergan Acquisition;

 

·a $20.0 million impairment as a result of a strategic decision to no longer pursue approval internationally of an eye care project obtained as part of the Allergan Acquisition;

 

·a $19.0 million impairment due to a delay in clinical studies and anticipated approval date for a CNS project obtained as part of the Allergan Acquisition; and

 

·a $6.0 million impairment due to a delay in clinical studies and anticipated approval date of an eye care project obtained as part of the Allergan Acquisition.

 

 48 

 

 

Product rights and other intangible assets consisted of the following for the years ended December 31, 2017 and 2016 ($ in millions):

 

Cost Basis   Balance as of
December 31,
2016
    Additions     Impairments     IPR&D to
CMP
Transfers
    Divested /
Held for
Sale /
Other
    Foreign
Currency
Translation
    Balance as of
December 31,
2017
 
Intangibles with definite lives:                                                        
Product rights and other intangibles   $ 67,801.4     $ 3,876.9     $ -     $ 1,444.0     $ (34.0 )   $ 804.2     $ 73,892.5  
Trade name     690       -       -       -