hznp-10q_20160331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-35238

 

HORIZON PHARMA PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

 

Ireland

 

Not Applicable

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

Connaught House, 1st Floor

1 Burlington Road, Dublin 4, D04 C5Y6, Ireland

 

Not Applicable

(Address of principal executive offices)

 

(Zip Code)

011 353 1 772 2100

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

x

Accelerated filer

o

 

 

 

 

Non-accelerated filer

o  (Do not check if a smaller reporting company)

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

Number of registrant’s ordinary shares, nominal value $0.0001, outstanding as of April 29, 2016: 160,356,705. 

 

 

 


 

HORIZON PHARMA PLC

INDEX

 

 

 

 

Page

 

 

 

No.

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

1

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and as of December 31, 2015 (Unaudited)

 

1

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

 

2

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited)

 

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 4.

Controls and Procedures

 

45

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

46

Item 1A.

Risk Factors

 

46

Item 6.

Exhibits

 

90

Signatures

 

91

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

HORIZON PHARMA PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share data)

 

 

 

As of

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

385,853

 

 

$

859,616

 

Restricted cash

 

 

2,778

 

 

 

1,860

 

Accounts receivable, net

 

 

290,289

 

 

 

210,437

 

Inventories, net

 

 

180,202

 

 

 

18,376

 

Prepaid expenses and other current assets

 

 

17,482

 

 

 

15,858

 

Total current assets

 

 

876,604

 

 

 

1,106,147

 

Property and equipment, net

 

 

18,581

 

 

 

14,020

 

Developed technology, net

 

 

1,976,902

 

 

 

1,609,049

 

In-process research and development

 

 

66,000

 

 

 

66,000

 

Other intangible assets, net

 

 

6,858

 

 

 

7,061

 

Goodwill

 

 

255,602

 

 

 

253,811

 

Deferred tax assets, net

 

 

4,347

 

 

 

2,278

 

Other assets

 

 

600

 

 

 

222

 

TOTAL ASSETS

 

$

3,205,494

 

 

$

3,058,588

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt—current portion

 

$

4,000

 

 

$

4,000

 

Accounts payable

 

 

69,671

 

 

 

16,590

 

Accrued expenses

 

 

89,140

 

 

 

100,046

 

Accrued trade discounts and rebates

 

 

224,370

 

 

 

183,769

 

Accrued royalties—current portion

 

 

54,588

 

 

 

51,700

 

Deferred revenues—current portion

 

 

1,155

 

 

 

1,447

 

Total current liabilities

 

 

442,924

 

 

 

357,552

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

 

Exchangeable notes, net

 

$

286,558

 

 

$

282,889

 

Long-term debt, net, net of current

 

 

849,622

 

 

 

849,867

 

Accrued royalties, net of current

 

 

172,445

 

 

 

123,519

 

Deferred revenues, net of current

 

 

8,579

 

 

 

8,785

 

Deferred tax liabilities, net

 

 

133,648

 

 

 

113,400

 

Other long-term liabilities

 

 

19,749

 

 

 

9,431

 

Total long-term liabilities

 

 

1,470,601

 

 

 

1,387,891

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Ordinary shares, $0.0001 nominal value; 300,000,000 shares authorized;

   160,634,955 and 160,069,067 shares issued at March 31, 2016 and December 31,

   2015, respectively, and 160,250,589 and 159,684,701 shares outstanding at

   March 31, 2016 and December 31, 2015, respectively

 

$

16

 

 

$

16

 

Treasury stock, 384,366 ordinary shares at March 31, 2016 and December 31, 2015

 

 

(4,585

)

 

 

(4,585

)

Additional paid-in capital

 

 

2,026,029

 

 

 

2,001,552

 

Accumulated other comprehensive loss

 

 

(2,898

)

 

 

(2,651

)

Accumulated deficit

 

 

(726,593

)

 

 

(681,187

)

Total shareholders’ equity

 

 

1,291,969

 

 

 

1,313,145

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

3,205,494

 

 

$

3,058,588

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1


 

HORIZON PHARMA PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands, except share and per share data)

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Net sales

 

$

204,690

 

 

$

113,141

 

Cost of goods sold

 

 

77,233

 

 

 

28,853

 

Gross profit

 

 

127,457

 

 

 

84,288

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Research and development

 

 

12,722

 

 

 

6,181

 

Sales and marketing

 

 

75,544

 

 

 

47,063

 

General and administrative

 

 

66,395

 

 

 

26,280

 

Total operating expenses

 

 

154,661

 

 

 

79,524

 

Operating (loss) income

 

 

(27,204

)

 

 

4,764

 

OTHER EXPENSE, NET:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(19,458

)

 

 

(10,032

)

Foreign exchange loss

 

 

(173

)

 

 

(837

)

Loss on induced conversion of debt and debt extinguishment

 

 

 

 

 

(10,544

)

Other expense, net

 

 

(14

)

 

 

(991

)

Total other expense, net

 

 

(19,645

)

 

 

(22,404

)

Loss before (benefit) expense for income taxes

 

 

(46,849

)

 

 

(17,640

)

(BENEFIT) EXPENSE FOR INCOME TAXES

 

 

(1,443

)

 

 

1,913

 

NET LOSS

 

$

(45,406

)

 

$

(19,553

)

NET LOSS PER ORDINARY SHARE—Basic and diluted

 

$

(0.28

)

 

$

(0.16

)

WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING—Basic and

   diluted

 

 

159,904,416

 

 

 

125,650,593

 

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(247

)

 

 

1,864

 

Other comprehensive (loss) income

 

 

(247

)

 

 

1,864

 

COMPREHENSIVE LOSS

 

$

(45,653

)

 

$

(17,689

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

2


 

HORIZON PHARMA PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands) 

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(45,406

)

 

$

(19,553

)

Adjustments to reconcile net loss to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

50,642

 

 

 

18,335

 

Share-based compensation

 

 

27,745

 

 

 

6,674

 

Royalty accretion

 

 

9,359

 

 

 

3,044

 

Loss on induced conversions of debt and debt extinguishment

 

 

 

 

 

4,848

 

Amortization of debt discount and deferred financing costs

 

 

4,425

 

 

 

2,206

 

Foreign exchange loss

 

 

173

 

 

 

837

 

Other

 

 

 

 

 

102

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(69,838

)

 

 

(53,443

)

Inventories

 

 

7,317

 

 

 

3,088

 

Prepaid expenses and other current assets

 

 

(242

)

 

 

(34,307

)

Accounts payable

 

 

52,856

 

 

 

(18

)

Accrued trade discounts and rebates

 

 

40,601

 

 

 

2,188

 

Accrued expenses and accrued royalties

 

 

(23,521

)

 

 

(6,022

)

Deferred revenues

 

 

(498

)

 

 

(26

)

Deferred income taxes

 

 

(2,657

)

 

 

1,356

 

Other non-current assets and liabilities

 

 

3,225

 

 

 

(48

)

Net cash provided by (used in) operating activities

 

 

54,181

 

 

 

(70,739

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

 

(514,814

)

 

 

 

Purchases of property and equipment

 

 

(7,525

)

 

 

(1,577

)

Change in restricted cash

 

 

(918

)

 

 

138

 

Net cash used in investing activities

 

 

(523,257

)

 

 

(1,439

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net proceeds from issuance of Exchangeable Senior Notes

 

 

 

 

 

388,000

 

Repayment of the 2015 Term Loan Facility

 

 

(1,000

)

 

 

 

Proceeds from the issuance of ordinary shares in connection with warrant exercises

 

 

 

 

 

9,924

 

Proceeds from the issuance of ordinary shares in connection with stock option

   exercises

 

 

919

 

 

 

1,789

 

Payment of employee withholding taxes relating to share-based awards

 

 

(4,185

)

 

 

(1,215

)

Net cash (used in) provided by financing activities

 

 

(4,266

)

 

 

398,498

 

Effect of foreign exchange rate changes on cash

 

 

(421

)

 

 

(916

)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(473,763

)

 

 

325,404

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

 

859,616

 

 

 

218,807

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

385,853

 

 

$

544,211

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

9,534

 

 

$

7,311

 

Cash paid for income taxes

 

 

2,368

 

 

 

1,239

 

Cash paid for induced conversions and debt extinguishment

 

 

 

 

 

5,370

 

Supplemental non-cash flow information:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable and accrued

   expenses

 

$

2,851

 

 

$

1,033

 

Conversion of Convertible Senior Notes to ordinary shares

 

 

 

 

 

32,546

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

HORIZON PHARMA PLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 – BASIS OF PRESENTATION AND BUSINESS OVERVIEW

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The December 31, 2015 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.

On September 19, 2014, the businesses of Horizon Pharma, Inc. (“HPI”) and Vidara Therapeutics International Public Limited Company (“Vidara”) were combined in a merger transaction (the “Vidara Merger”), accounted for as a reverse acquisition under the acquisition method of accounting for business combinations, with HPI treated as the acquiring company in the Vidara Merger for accounting purposes. As part of the Vidara Merger, a wholly-owned subsidiary of Vidara merged with and into HPI, with HPI surviving the Vidara Merger as a wholly-owned subsidiary of Vidara. Prior to the Vidara Merger, Vidara changed its name to Horizon Pharma plc (the “Company”). Upon the consummation of the Vidara Merger, the historical financial statements of HPI became the Company’s historical financial statements.

On May 7, 2015, the Company completed its acquisition of Hyperion Therapeutics Inc. (“Hyperion”) in which the Company acquired all of the issued and outstanding shares of Hyperion’s common stock for $46.00 per share in cash or approximately $1.1 billion on a fully-diluted basis. Following the completion of the acquisition, Hyperion became a wholly-owned subsidiary of the Company and was renamed as Horizon Therapeutics, Inc.

On January 13, 2016, the Company completed its acquisition of Crealta Holdings LLC (“Crealta”) for approximately $539.7 million, including cash acquired of $24.9 million. Following the completion of the acquisition, Crealta became a wholly-owned subsidiary of the Company and was renamed as Horizon Pharma Rheumatology LLC.

The unaudited condensed consolidated financial statements presented herein include the results of operations of the acquired businesses from the date of acquisition. See Note 3 for further details of business acquisitions.

Unless otherwise indicated or the context otherwise requires, references to the “Company”, “we”, “us” and “our” refer to Horizon Pharma plc and its consolidated subsidiaries, including its predecessor, HPI. All references to “Vidara” are references to Horizon Pharma plc (formerly known as Vidara Therapeutics International Public Limited Company) and its consolidated subsidiaries prior to the effective time of the Vidara Merger on September 19, 2014.

The unaudited condensed consolidated financial statements presented herein include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated.

Business Overview

The Company is a biopharmaceutical company focused on improving patients’ lives by identifying, developing, acquiring and commercializing differentiated and accessible medicines that address unmet medical needs. The Company markets nine medicines through its orphan, primary care and rheumatology business units. The Company’s marketed medicines are ACTIMMUNE® (interferon gamma-1b), BUPHENYL® (sodium phenylbutyrate) Tablets and Powder, DUEXIS® (ibuprofen/famotidine), KRYSTEXXA® (pegloticase), MIGERGOT® (ergotamine tartrate and caffeine suppositories), PENNSAID® (diclofenac sodium topical solution) 2% w/w (“PENNSAID 2%”), RAVICTI® (glycerol phenylbutyrate) Oral Liquid, RAYOS® (prednisone) delayed-release tablets and VIMOVO® (naproxen/esomeprazole magnesium).

The Company developed DUEXIS and RAYOS, known as LODOTRA® outside the United States, acquired the U.S. rights to VIMOVO from AstraZeneca AB (“AstraZeneca”) in November 2013, acquired certain rights to ACTIMMUNE as a result of the Vidara Merger in September 2014, acquired the U.S. rights to PENNSAID 2% from Nuvo Research Inc. (“Nuvo”) in October 2014, acquired RAVICTI and BUPHENYL, known as AMMONAPS® in Europe, as a result of the acquisition of Hyperion in May 2015, and acquired KRYSTEXXA and the U.S. rights to MIGERGOT as a result of the acquisition of Crealta in January 2016.

4


 

The Company’s medicines are distributed by retail and specialty pharmacies. Part of the Company’s commercial strategy for its primary care and rheumatology business units is to offer physicians the opportunity to have their patients fill prescriptions through pharmacies participating in the Company’s HorizonCares patient access program. This program does not involve the Company in the prescribing of medicines. The purpose of this program is solely to assist in ensuring that, when physicians determine that one of the Company’s medicines offers a potential clinical benefit to their patients and prescribe the medicine for an eligible patient, financial assistance may be available to reduce the commercial patient’s out-of-pocket costs. In the first three months of 2016, this resulted in approximately 96 percent of commercial patients having co-pay amounts of $10 or less when filling prescriptions for the Company’s medicines utilizing its patient access program. For commercial patients who are prescribed the Company’s primary care or rheumatology medicines, the HorizonCares program offers co-pay assistance when a third-party payor covers a prescription but requires an eligible patient to pay a co-pay or deductible, and offers full subsidization when a third-party payor rejects coverage for an eligible patient. For patients who are prescribed the Company’s orphan medicines, the Company’s patient access programs provide reimbursement support, a clinical nurse program, co-pay and other patient assistance. The aggregate commercial value of the Company’s patient access programs for the three months ended March 31, 2016 was $388.6 million. All pharmacies that fill prescriptions for the Company’s medicines are fully independent, including those that participate in HorizonCares. The Company does not own or possess any option to purchase an ownership stake in any pharmacy that distributes its medicines, and the Company’s relationship with each pharmacy is non-exclusive and arm’s length. All of the Company’s sales are processed through pharmacies independent of its business.

The Company has a compliance program in place to address adherence with various laws and regulations relating to its sales, marketing and manufacturing of its medicines, as well as certain third-party relationships, including pharmacies.  Specifically with respect to pharmacies, the compliance program utilizes a variety of methods and tools to monitor and audit pharmacies, including those that participate in the HorizonCares program, to confirm their activities, adjudication and practices are consistent with the Company’s compliance policies and guidance.

The Company is a public limited company formed under the laws of Ireland. The Company operates through a number of international and U.S. subsidiaries with principal business purposes to either hold intellectual property assets, perform research and development or manufacturing operations, serve as distributors of the Company’s medicines or provide services and financial support to the Company.

Revision of Prior Period Financial Statements

In the course of preparing the Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016, the Company determined that there had been an error in the presentation of the line titled “Foreign currency translation adjustments” for the previously reported three months ended March 31, 2015 (the “Affected Financial Statement”). The Affected Financial Statement presented foreign currency translation adjustment of $1,864,000 as a loss rather than income. In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated, the Company considered the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1, Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The Company concluded that this misstatement was not material, individually or in the aggregate, to any of the prior reporting periods, and therefore, amendment of the previously filed reports was not required. As such, the revision for this correction is reflected in the financial information for the three months ended March 31, 2015 presented in this Form 10-Q and will be reflected in any future filings containing such financial information. The following are selected line items from the Company’s unaudited condensed consolidated statement of comprehensive loss illustrating the effect of the revision (in thousands):

 

 

 

For the Three Months Ended March 31, 2015

 

 

 

As reported

 

 

As adjusted

 

Net loss

 

$

(19,553

)

 

$

(19,553

)

Foreign currency translation adjustments

 

 

(1,864

)

 

$

1,864

 

Other comprehensive (loss) income

 

 

(1,864

)

 

 

1,864

 

Comprehensive loss

 

$

(21,417

)

 

$

(17,689

)

 

Recent Accounting Pronouncements

From time to time, the Company adopts, as of the specified effective date, new accounting pronouncements issued by the FASB or other standard setting bodies. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

5


 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Subtopic 606). The new standard aims to achieve a consistent application of revenue recognition within the United States, resulting in a single revenue model to be applied by reporting companies under GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. In March 2016 and April 2016, the FASB issued ASU No. 2016-08 and ASU No. 2016-10, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. These standards will be effective for the Company beginning in the first quarter of 2018. Early adoption is permitted, but not before the original effective date of the standard. The Company has not yet selected a transition method nor has it determined the impact of the new standard on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU No. 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU No. 2014-15 provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations in the financial statement footnotes. ASU No. 2014-15 is effective for annual reporting periods ending after December 15, 2016 and to annual and interim periods thereafter. Early adoption is permitted. The Company is evaluating the effect of adopting ASU No. 2014-15, but does not expect adoption will have a material impact on the consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15, which further clarifies the implementation guidance of ASU No. 2015-03. The amendments in these ASUs are effective for the financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted ASU No. 2015-03 on January 1, 2016. The following table summarizes the adjustments made to conform prior period classifications as a result of the new guidance (in thousands):

 

 

 

As of December 31, 2015

 

 

 

As filed

 

 

Reclassification

 

 

As adjusted

 

Other non-current assets

 

$

8,581

 

 

$

(8,359

)

 

$

222

 

Exchangeable notes, net

 

 

(283,675

)

 

786

 

 

 

(282,889

)

Long-term debt, net, net of current

 

 

(857,440

)

 

 

7,573

 

 

 

(849,867

)

 

In April 2015, the FASB issued ASU No. 2015-05: Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement which provides guidance on a customer’s accounting for fees paid in a cloud computing arrangement. Under the new standard, customers will apply the same criteria as vendors to determine whether a cloud computing arrangement contains a software license or is solely a service contract. The amendments in this ASU, which may be applied prospectively or retrospectively, are effective for annual and interim periods beginning after December 15, 2015. The Company adopted ASU No. 2015-05 on January 1, 2016 and the adoption did not have a material impact on the consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this new guidance, entities that measure inventory using any method other than last-in, first-out or the retail inventory method will be required to measure inventory at the lower of cost and net realizable value. The amendments in this ASU, which should be applied prospectively, are effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the effect of adopting ASU No. 2015-11, but does not expect adoption will have a material impact on the consolidated financial statements and related disclosures.

6


 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASC 805”). Under this guidance, an acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this ASU, which should be applied prospectively, are effective for annual and interim periods beginning after December 15, 2015. The Company adopted ASU No. 2015-16 on January 1, 2016, and the adoption did not have a material impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under ASU No. 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently in the process of evaluating the impact of adoption of ASU No. 2016-02 on its consolidated financial statements and related disclosures.

In March 2016, the FASB Issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled. The guidance on accounting for an employee’s use of shares to satisfy the statutory income tax withholding obligation and for forfeitures is changing, and the update requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The amendments in this update will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU No. 2016-09 on its consolidated financial statements and related disclosures.

 

 

NOTE 2 – NET LOSS PER SHARE

The following table presents basic and diluted net loss per share for the three months ended March 31, 2016 and 2015 (in thousands, except share and per share data):

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Basic and diluted loss per share calculation:

 

 

 

 

 

 

 

 

Net loss

 

$

(45,406

)

 

$

(19,553

)

Weighted average ordinary shares outstanding

 

 

159,904,416

 

 

 

125,650,593

 

Basic and diluted net loss per share

 

$

(0.28

)

 

$

(0.16

)

 

 

Basic net loss per share is computed by dividing net loss by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings per share (“EPS”) reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue ordinary shares were exercised, converted into ordinary shares, or resulted in the issuance of ordinary shares that would have shared in the Company’s earnings.

The potentially dilutive impact of the Horizon Pharma Investment Limited (“Horizon Investment”), a wholly-owned subsidiary of the Company, March 2015 private placement of $400.0 million aggregate principal amount of 2.50% Exchangeable Senior Notes due 2022 (the “Exchangeable Senior Notes”) is determined using a method similar to the treasury stock method. Under this method, no numerator or denominator adjustments arise from the principal and interest components of the Exchangeable Senior Notes because the Company has the intent and ability to settle the Exchangeable Senior Notes’ principal and interest in cash. Instead, the Company is required to increase the diluted EPS denominator by the variable number of shares that would be issued upon conversion if it settled the conversion spread obligation with shares. For diluted EPS purposes, the conversion spread obligation is calculated based on whether the average market price of the Company's ordinary shares over the reporting period is in excess of the exchange price of the Exchangeable Senior Notes. There was no calculated spread added to the denominator for the three months ended March 31, 2016 or 2015. 

 

 

7


 

NOTE 3 – BUSINESS ACQUISITIONS

Crealta Acquisition

On January 13, 2016, the Company completed its acquisition of all the membership interests of Crealta. The acquisition added two medicines, KRYSTEXXA and MIGERGOT, to the Company’s medicine portfolio. The Crealta acquisition further diversified the Company’s portfolio of medicines and aligned with its focus of acquiring value-enhancing, clinically differentiated, long-life medicines that treat orphan diseases. The total consideration for the acquisition was approximately $539.7 million, including cash acquired of $24.9 million, and was composed of the following (in thousands):

 

Cash

 

$

536,181

 

Net settlements on the exercise of stock options and

   unrestricted units

 

 

3,526

 

Total consideration

 

$

539,707

 

 

During the three months ended March 31, 2016, the Company incurred $10.1 million in Crealta acquisition-related costs including advisory, legal, accounting, valuation, severance, retention bonuses and other professional and consulting fees and $10.0 million and $0.1 million were accounted for as “general and administrative” and “costs of goods sold”, respectively, in the condensed consolidated statement of comprehensive loss.

Pursuant to ASC 805, the Company accounted for the Crealta acquisition as a business combination using the acquisition method of accounting. Identifiable assets and liabilities of Crealta, including identifiable intangible assets, were recorded based on their estimated fair values as of the date of the closing of the acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. Significant judgment was required in determining the estimated fair values of developed technology intangible assets, inventories and certain other assets and liabilities. Such preliminary valuation required estimates and assumptions including, but not limited to, estimating future cash flows and direct costs in addition to developing the appropriate discount rates and current market profit margins. The Company’s management believes the fair values recognized for the assets acquired and the liabilities assumed are based on reasonable estimates and assumptions. Accordingly, the unaudited purchase price adjustments are preliminary and are subject to further adjustments as additional information becomes available and as additional analyses are performed, and such further adjustments may be material.

The following table summarizes the preliminary fair values assigned to the assets acquired and the liabilities assumed by the Company (in thousands): 

 

(Liabilities assumed) and assets acquired:

 

Allocation

 

Accounts payable and accrued expenses

 

$

(4,543

)

Accrued trade discounts and rebates

 

 

(1,424

)

Deferred tax liability

 

 

(20,835

)

Other non-current liability

 

 

(6,900

)

Contingent royalty liabilities

 

 

(51,300

)

Cash and cash equivalents

 

 

24,893

 

Accounts receivable

 

 

10,014

 

Inventories

 

 

169,054

 

Prepaid expenses and other current assets

 

 

1,382

 

Developed technology

 

 

417,300

 

Other non-current assets

 

 

275

 

Goodwill

 

 

1,791

 

Fair value of consideration paid

 

$

539,707

 

 

Inventories acquired included raw materials, work in process and finished goods. Inventories were recorded at their preliminary estimated fair values. The fair value of finished goods has been determined based on the estimated selling price, net of selling costs and a margin on the selling costs. The fair value of work in process has been determined based on estimated selling price, net of selling costs and costs to complete the manufacturing, and a margin on the selling and manufacturing costs. The fair value of raw materials was estimated to equal the replacement cost. A step up in the value of inventory of $163.6 million was recorded in connection with the acquisition. During the three months ended March 31, 2016, the Company amortized $7.4 million of KRYSTEXXA and MIGERGOT inventory step-up.

Other tangible assets and liabilities were valued at their respective carrying amounts as management believes that these amounts approximated their acquisition date fair values.

Other non-current liability represents an assumed $6.9 million probable contingent liability. See Note 12 for further details.

8


 

Identifiable intangible assets and liabilities acquired include developed technology and contingent royalties. The preliminary estimated fair values of the developed technology and contingent royalties represent preliminary valuations performed with the assistance of an independent appraisal firm based on management’s estimates, forecasted financial information and reasonable and supportable assumptions.

Developed technology intangible assets reflect the estimated fair value of Crealta’s rights to its currently marketed medicines, KRYSTEXXA and MIGERGOT. The preliminary fair value of developed technology was determined using an income approach. The income approach explicitly recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs for Crealta’s medicines. Indications of value were developed by discounting these benefits to their acquisition-date worth at a discount rate of 27% for KRYSTEXXA and 23% for MIGERGOT. The fair value of the KRYSTEXXA and MIGERGOT developed technologies were capitalized as of the Crealta acquisition date and are subsequently being amortized over approximately 12 and 10 years, respectively, which are the periods in which over 90% of the estimated cash flows are expected to be realized.

 

The Company has assigned a preliminary fair value to a contingent liability for royalties potentially payable under previously existing agreements related to KRYSTEXXA and MIGERGOT. The royalties for KRYSTEXXA are payable under the terms of a license agreement with Duke University (“Duke”) and Mountain View Pharmaceuticals (“MVP”). See Note 12 for details of the percentages of royalties payable under such agreements. The initial fair value of this liability was $51.3 million and was determined using a discounted cash flow analysis incorporating the estimated future cash flows of royalty payments resulting from future sales. The discount rate used was the same as for the fair value of the developed technology.

The preliminary deferred tax liability recorded represents deferred tax liabilities assumed as part of the acquisition, net of deferred tax assets, related to net operating tax loss carryforwards of Crealta.

Goodwill represents the excess of the preliminary acquisition consideration over the estimated fair value of net assets acquired and was recorded in the condensed consolidated balance sheet as of the acquisition date. The Company does not expect any portion of this goodwill to be deductible for tax purposes.

Hyperion Acquisition

On May 7, 2015, the Company completed the acquisition of Hyperion in which it acquired all of the issued and outstanding shares of Hyperion’s common stock for $46.00 per share. The acquisition added two important medicines, RAVICTI and BUPHENYL, to the Company’s medicine portfolio. Through the acquisition, the Company leveraged as well as expanded the existing infrastructure of its orphan disease business. The total consideration for the acquisition was approximately $1.1 billion and was composed of the following (in thousands, except share and per share data):

 

Fully diluted equity value (21,425,909 shares at $46.00 per

   share)

 

$

985,592

 

Net settlements on the exercise of stock options, restricted

   stock and performance stock units

 

 

89,806

 

Total consideration

 

$

1,075,398

 

 

During the three months ended March 31, 2016 and 2015, the Company incurred $0.7 million and $1.9 million, respectively, in Hyperion acquisition-related costs. The costs during the three months ended March 31, 2016 included consulting costs, lease termination charges and other consulting fees, and were accounted for as “general and administrative” expenses in the condensed consolidated statement of comprehensive loss.

Pursuant to ASC 805, the Company accounted for the Hyperion acquisition as a business combination using the acquisition method of accounting. Identifiable assets and liabilities of Hyperion, including identifiable intangible assets, were recorded based on their estimated fair values as of the date of the closing of the acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. Significant judgment was required in determining the estimated fair values of developed technology intangible assets and certain other assets and liabilities. Such a preliminary valuation required estimates and assumptions including, but not limited to, estimating future cash flows and direct costs in addition to developing the appropriate discount rates and current market profit margins. The Company’s management believes the fair values recognized for the assets acquired and the liabilities assumed are based on reasonable estimates and assumptions. Accordingly, the purchase price adjustments are preliminary and are subject to further adjustments as additional information becomes available and as additional analyses are performed, and such further adjustments may be material. 

9


 

The following table summarizes the preliminary fair values assigned to the assets acquired and the liabilities assumed by the Company (in thousands): 

 

(Liabilities assumed) and assets acquired:

 

Allocation

 

Deferred tax liability, net

 

$

(262,732

)

Accounts payable

 

 

(2,439

)

Accrued trade discounts and rebates

 

 

(9,792

)

Accrued expenses

 

 

(7,566

)

Contingent royalties

 

 

(86,800

)

Cash and cash equivalents

 

 

53,037

 

Short-term investments

 

 

39,049

 

Long-term investments

 

 

25,574

 

Accounts receivable, net

 

 

11,858

 

Inventory

 

 

13,498

 

Prepaid expenses and other current assets

 

 

2,533

 

Property and equipment

 

 

1,044

 

Other non-current assets

 

 

123

 

Developed technology

 

 

1,044,200

 

Goodwill

 

 

253,811

 

Fair value of consideration paid

 

$

1,075,398

 

 

Inventories acquired included raw materials and finished goods. Inventories were recorded at their current fair values. The fair value of finished goods has been determined based on the estimated selling price, net of selling costs and a margin on the selling costs. The fair value of raw materials was estimated to equal the replacement cost. A step up in the value of inventory of $8.7 million was recorded in connection with the acquisition and has subsequently been fully recognized in the condensed consolidated statement of comprehensive loss.  

Other tangible assets and liabilities were valued at their respective carrying amounts as management believes that these amounts approximated their acquisition date fair values.

Identifiable intangible assets and liabilities acquired include developed technology and contingent royalties. The preliminary fair values of the developed technology and contingent royalties represent preliminary valuations performed with the assistance of an independent appraisal firm based on management’s estimates, forecasted financial information and reasonable and supportable assumptions.

Developed technology intangible assets reflect the estimated value of Hyperion’s rights to its currently marketed medicines, RAVICTI and BUPHENYL. The fair value of developed technology was determined using an income approach. The income approach explicitly recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs for Hyperion’s medicines. Indications of value were developed by discounting these benefits to their acquisition-date worth at a discount rate of 8.5% that reflected the then-current return requirements of the market. The fair value of the RAVICTI and BUPHENYL developed technologies were capitalized as of the Hyperion acquisition date and are subsequently being amortized over 11 and 7 years, respectively, which are the periods in which over 90% of the estimated cash flows are expected to be realized.

The Company has assigned a preliminary fair value to a contingent liability for royalties potentially payable under previously existing agreements related to RAVICTI and BUPHENYL. The royalties are payable under the terms of an asset purchase agreement and an amended and restated collaboration agreement with Ucyclyd Pharma, Inc. (“Ucyclyd”) and a license agreement with Saul W. Brusilow, M.D. and Brusilow Enterprises Inc. (together “Brusilow”). See Note 12 for details of the percentages payable under such agreements. The initial fair value of this liability was $86.8 million and was determined using a discounted cash flow analysis incorporating the estimated future cash flows of royalty payments resulting from future sales. The discount rate used was the same as for the fair value of the developed technology.

10


 

Deferred tax assets and liabilities arise from acquisition accounting adjustments where book values of certain assets and liabilities differ from their tax bases. Deferred tax assets and liabilities are recorded at the currently enacted rates which will be in effect at the time when the temporary differences are expected to reverse in the country where the underlying assets and liabilities are located. Hyperion’s developed technology as of the acquisition date was located primarily in the United States where a U.S. tax rate of 39% is being utilized and a significant deferred tax liability is recorded. Upon consummation of the Hyperion acquisition, Hyperion became a member of the Company’s U.S. tax consolidation group. As such, its tax assets and liabilities were considered in determining the appropriate amount (if any) of valuation allowances that should be recognized in assessing the realizability of the group’s deferred tax assets. The Hyperion acquisition adjustments resulted in the recognition of significant net deferred tax liabilities. Per ASC Topic 740, Accounting for Uncertainty in Income Taxes, future reversals of existing taxable temporary differences provide objectively verifiable evidence that should be considered as a source of taxable income to realize a tax benefit for deductible temporary differences and carryforwards. Generally, the existence of sufficient taxable temporary differences will enable the use of the tax benefit of existing deferred tax assets. As of the first quarter of 2015, the Company had significant U.S. federal and state valuation allowances. These valuation allowances were released in the second quarter of 2015 to reflect the recognition of Hyperion’s deferred tax liabilities that will provide taxable temporary differences that will be realized within the carryforward period of the Company’s U.S. tax consolidation group’s available net operating losses and other deferred tax assets. Accordingly, the Company recorded an income tax benefit of $105.1 million in the second quarter of 2015 relating to the release of existing U.S. federal and state valuation allowances.

Short-term and long-term investments included in the table above represent available-for-sale securities that were reported in short-term investments or long-term investments based on maturity dates and whether such assets are reasonably expected to be realized in cash or sold or consumed during the normal cycle of business. Available-for-sale investments were recorded at fair value and were liquidated shortly after the acquisition.

Goodwill represents the excess of the preliminary acquisition consideration over the estimated fair value of net assets acquired and was recorded in the condensed consolidated balance sheet as of the acquisition date. The Company does not expect any portion of this goodwill to be deductible for tax purposes.

Pro Forma Information

The following table represents the condensed consolidated financial information for the Company for the three months ended March 31, 2015 on a pro forma basis, assuming that the Crealta and Hyperion acquisitions occurred as of January 1, 2015. The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the Crealta and Hyperion acquisitions, and are expected to have a continuing impact on the consolidated results. These items include, among others, adjustments to record the amortization of definite-lived intangible assets, interest expense, debt discount and deferred financing costs associated with the debt in connection with the acquisitions.

The Company does not believe that the pre-acquisition operating results for Crealta during January 2016 are material to the combined entity and as such the Company did not prepare an unaudited pro forma combined statement of operations for the three months ended March 31, 2016.

Additionally, the following table sets forth unaudited financial information and has been compiled from historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transactions occurred on the dates indicated or that may be achieved in the future (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2015

 

 

 

As reported

 

 

Pro forma

adjustments

 

 

Pro forma

 

Net sales

 

$

113,141

 

 

$

40,613

 

 

$

153,754

 

Net loss

 

$

(19,553

)

 

$

(21,013

)

 

$

(40,566

)

 

The Company’s unaudited condensed consolidated statements of comprehensive loss for the three months ended March 31, 2016 include KRYSTEXXA and MIGERGOT net sales as a result of the acquisition of Crealta of $16.2 million and $0.9 million, respectively, and RAVICTI and BUPHENYL net sales as a result of the acquisition of Hyperion of $37.1 million and $3.7 million, respectively. Hyperion and Crealta have been fully integrated into the Company’s business and as a result of these integration efforts, the Company cannot distinguish between these operations and those of the Company’s legacy business.      

 

 

NOTE 4 – INVENTORIES

Inventories are stated at the lower of cost or market value. Inventories consist of raw materials, work-in-process and finished goods. The Company has entered into manufacturing and supply agreements for the manufacture or purchase of raw materials and production supplies. The Company’s inventories include the direct purchase cost of materials and supplies and manufacturing overhead costs.

11


 

The components of inventories as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Raw materials

 

$

1,719

 

 

$

6,232

 

Work-in-process

 

 

143,245

 

 

 

631

 

Finished goods

 

 

35,238

 

 

 

11,513

 

Inventories, net

 

$

180,202

 

 

$

18,376

 

 

Work-in-progress and finished goods at March 31, 2016 included $135.5 million and $20.7 million, respectively, of stepped-up KRYSTEXXA and MIGERGOT inventory. During the three months ended March 31, 2016, the Company amortized $7.4 million of KRYSTEXXA and MIGERGOT inventory step-up.

 

 

NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Medicine samples inventory

 

$

5,154

 

 

$

4,697

 

Prepaid co-pay expenses

 

 

1,949

 

 

 

1,881

 

Prepaid software license fees

 

 

1,217

 

 

 

1,638

 

Other prepaid expenses

 

 

9,162

 

 

 

7,642

 

Prepaid expenses and other current assets

 

$

17,482

 

 

$

15,858

 

 

 

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Machinery and equipment

 

$

2,834

 

 

$

2,946

 

Computer equipment

 

 

2,797

 

 

 

2,514

 

Software

 

 

7,978

 

 

 

1,360

 

Leasehold improvements

 

 

6,788

 

 

 

1,966

 

Other

 

 

1,634

 

 

 

276

 

 

 

 

22,031

 

 

 

9,062

 

Less accumulated depreciation

 

 

(4,693

)

 

 

(3,791

)

Construction in process

 

 

160

 

 

 

3,492

 

Software implementation in process

 

 

1,083

 

 

 

5,257

 

Property and equipment, net

 

$

18,581

 

 

$

14,020

 

 

The Company capitalizes development costs associated with internal use software, including external direct costs of materials and services and payroll costs for employees devoting time to a software project. Costs incurred during the preliminary project stage, as well as costs for maintenance and training, are expensed as incurred.

Software implementation in process as of March 31, 2016 and December 31, 2015 is related to new enterprise resource planning software being implemented by the Company. The software is being implemented on a phased basis starting January 2016 and depreciation is not recorded on capitalized costs relating to a phase which has not yet entered service. Once a particular phase of the project enters service, associated capitalized costs are moved from “software implementation in process” to “software” in the table above, and depreciation commences.

Depreciation expense was $1.0 million and $0.7 million for the three months ended March 31, 2016 and 2015, respectively.

 

 

12


 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The gross carrying amount of goodwill as of March 31, 2016 was as follows (in thousands):

 

Balance at December 31, 2015

 

$

253,811

 

Acquired during the period

 

 

1,791

 

Balance at March 31, 2016

 

$

255,602

 

 

 

In May 2015, the Company recognized goodwill with a preliminary value of $253.8 million in connection with the Hyperion acquisition, which represented the excess of the purchase price over the fair value of the net assets acquired.   

In January 2016, the Company recognized goodwill with a preliminary value of $1.8 million in connection with the Crealta acquisition, which represented the excess of the purchase price over the fair value of the net assets acquired.   

As of March 31, 2016, there were no accumulated goodwill impairment losses.

Intangible Assets

The Company’s intangible assets consist of developed technology related to ACTIMMUNE, PENNSAID 2%, RAYOS, VIMOVO, RAVICTI, BUPHENYL, KRYSTEXXA and MIGERGOT in the United States, and LODOTRA and AMMONAPS in Europe, as well as in-process research and development (“IPR&D”) and customer relationships for ACTIMMUNE.    

In May 2015, in connection with the acquisition of Hyperion, the Company capitalized $1,021.6 million of developed technology related to RAVICTI and $22.6 million of developed technology related to BUPHENYL.

In January 2016, in connection with the acquisition of Crealta, the Company capitalized $392.7 million of developed technology related to KRYSTEXXA and $24.6 million of developed technology related to MIGERGOT.

See Note 3 for further details of intangible assets acquired in business acquisitions.

The Company tests its intangible assets for impairment when events or circumstances may indicate that the carrying value of these assets exceeds their fair value. The Company does not believe there have been any circumstances or events that would indicate that the carrying value of any of its intangible assets was impaired at March 31, 2016 or December 31, 2015.

As of March 31, 2016 and December 31, 2015, amortizable intangible assets consisted of the following (in thousands):

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

Cost Basis

 

 

Accumulated Amortization

 

 

Net Book

Value

 

 

Cost Basis

 

 

Accumulated

Amortization

 

 

Net Book

Value

 

Developed technology

 

$

2,209,795

 

 

$

(232,893

)

 

$

1,976,902

 

 

$

1,792,495

 

 

$

(183,446

)

 

$

1,609,049

 

Customer relationships

 

 

8,100

 

 

 

(1,242

)

 

 

6,858

 

 

 

8,100

 

 

 

(1,039

)

 

 

7,061

 

Total amortizable intangible assets

 

$

2,217,895

 

 

$

(234,135

)

 

$

1,983,760

 

 

$

1,800,595

 

 

$

(184,485

)

 

$

1,616,110

 

 

IPR&D is not amortized until successful completion of the project. IPR&D assets represent capitalized incomplete research projects related to ACTIMMUNE that the Company acquired through a business combination.

 

Amortization expense for the three months ended March 31, 2016 and 2015 was $49.7 million and $17.7 million, respectively. As of March 31, 2016, estimated future amortization expense was as follows (in thousands):

 

2016 (April to December)

 

$

152,134

 

2017

 

 

202,946

 

2018

 

 

202,946

 

2019

 

 

189,953

 

2020

 

 

189,735

 

Thereafter

 

 

1,046,046

 

Total

 

$

1,983,760

 

 

 

13


 

NOTE 8 – ACCRUED TRADE DISCOUNTS AND REBATES

Accrued trade discounts and rebates as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Accrued wholesaler fees and commercial rebates

 

$

24,482

 

 

$

21,112

 

Accrued co-pay and other patient assistance

 

 

126,255

 

 

 

114,201

 

Accrued government rebates and chargebacks

 

 

73,633

 

 

 

48,456

 

Accrued trade discounts and rebates

 

$

224,370

 

 

$

183,769

 

Invoiced wholesaler fees and commercial rebates, co-pay

   and other patient assistance, and government rebates and

   chargebacks in accounts payable

 

 

45,263

 

 

 

 

Total customer-related accruals and allowances

 

$

269,633

 

 

$

183,769

 

 

The following table summarizes changes in the Company’s customer-related accruals and allowances from December 31, 2015 to March 31, 2016 (in thousands):

 

 

 

Wholesaler Fees

 

 

Co-Pay and

 

 

Government

 

 

 

 

 

 

 

and Commercial

 

 

Other Patient

 

 

Rebates and

 

 

 

 

 

 

 

Rebates

 

 

Assistance

 

 

Chargebacks

 

 

Total

 

Balance at December 31, 2015

 

$

21,112

 

 

$

114,201

 

 

$

48,456

 

 

$

183,769

 

Current provisions relating to sales in the three months ended

   March 31, 2016

 

 

25,480

 

 

 

388,552

 

 

 

60,286

 

 

 

474,318

 

Adjustments relating to prior year sales

 

 

2,956

 

 

 

 

 

 

(2,282

)

 

 

674

 

Payments relating to sales in the three months ended

   March 31, 2016

 

 

(7,194

)

 

 

(224,243

)

 

 

(17,037

)

 

 

(248,474

)

Payments relating to sales in prior years

 

 

(18,334

)

 

 

(114,189

)

 

 

(9,555

)

 

 

(142,078

)

Crealta acquisition on January 13, 2016

 

 

492

 

 

 

 

 

 

932

 

 

 

1,424

 

Balance at March 31, 2016

 

$

24,512

 

 

$

164,321

 

 

$

80,800

 

 

$

269,633

 

 

 

NOTE 9 – ACCRUED EXPENSES

Accrued expenses as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Payroll-related expenses

 

$

33,790

 

 

$

47,205

 

Consulting and professional services

 

 

12,483

 

 

 

17,160

 

Accrued interest

 

 

16,187

 

 

 

10,637

 

Accrued other

 

 

26,680

 

 

 

25,044

 

Accrued expenses

 

$

89,140

 

 

$

100,046

 

 

Accrued payroll-related expenses at March 31, 2016 include $5.4 million and $3.2 million relating to severance and related employee costs as a result of the Hyperion and Crealta acquisitions, respectively. The Company anticipates that a significant amount of Hyperion and Crealta acquisition-related accrued expenses will be paid by the end of the second quarter of 2016 and the first quarter of 2017, respectively.

 

 

14


 

NOTE 10 – ACCRUED ROYALTIES

Changes in the liability for royalties during the three months ended March 31, 2016 consisted of the following (in thousands):

 

Balance as of December 31, 2015

 

$

175,219

 

Assumed KRYSTEXXA and MIGERGOT accrued royalties

 

 

99

 

Assumed KRYSTEXXA and MIGERGOT contingent royalty

   liabilities

 

 

51,300

 

Royalty payments

 

 

(8,944

)

Accretion expense

 

 

9,359

 

Balance as of March 31, 2016

 

 

227,033

 

Less: Current portion

 

 

(54,588

)

Accrued royalties, net of current

 

$

172,445

 

 

The Company did not record any remeasurements of contingent royalty liabilities during the three months ended March 31, 2016, as there were no triggering events during the period.

 

 

NOTE 11 – FAIR VALUE MEASUREMENTS

The following tables and paragraphs set forth the Company’s financial instruments that are measured at fair value on a recurring basis within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The following describes three levels of inputs that may be used to measure fair value:

Level 1—Observable inputs such as quoted prices 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, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its money market funds. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

As of March 31, 2016, the Company’s restricted cash included bank time deposits which were measured at fair value using Level 2 inputs and their carrying values were approximately equal to their fair values. Level 2 inputs, obtained from various third-party data providers, represent quoted prices for similar assets in active markets, or these inputs were derived from observable market data, or if not directly observable, were derived from or corroborated by other observable market data. There were no transfers between the different levels of the fair value hierarchy in 2016 or 2015.

Assets and liabilities measured at fair value on a recurring basis

The following table sets forth the Company’s financial assets and liabilities at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

March 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank time deposits

 

$

 

 

$

1,500

 

 

$

 

 

$

1,500

 

Money market funds

 

 

210,280

 

 

 

 

 

 

 

 

 

210,280

 

Total assets at fair value

 

$

210,280

 

 

$

1,500

 

 

$

 

 

$

211,780

 

 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank time deposits

 

$

 

 

$

1,000

 

 

$

 

 

$

1,000

 

Money market funds

 

 

280,053

 

 

 

 

 

 

 

 

 

280,053

 

Total assets at fair value

 

$

280,053

 

 

$

1,000

 

 

$

 

 

$

281,053

 

 

  

 

15


 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company has the following lease agreements in place for real properties:

 

Location

 

Approximate Square Footage

 

 

Lease Expiry Date

Dublin, Ireland