hznp-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

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

For the quarterly period ended June 30, 2018

OR

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      No  

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      No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

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

Number of registrant’s ordinary shares, nominal value $0.0001, outstanding as of July 27, 2018: 166,629,738. 

 

 

 

 


HORIZON PHARMA PLC

INDEX

 

 

 

 

 

Page

 

 

 

No.

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

1

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and as of December 31, 2017 (Unaudited)

 

1

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)

 

2

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)

 

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

5

Item 2.

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

 

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

51

Item 4.

Controls and Procedures

 

51

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

52

Item 1A.

Risk Factors

 

52

Item 6.

Exhibits

 

96

 

Signatures

 

98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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

 

 

June 30,

 

December 31,

 

 

2018

 

2017

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

$

710,211

 

$

751,368

 

Restricted cash

 

6,394

 

 

6,529

 

Accounts receivable, net

 

403,671

 

 

405,214

 

Inventories, net

 

50,105

 

 

61,655

 

Prepaid expenses and other current assets

 

64,231

 

 

43,402

 

Total current assets

 

1,234,612

 

 

1,268,168

 

Property and equipment, net

 

18,070

 

 

20,405

 

Developed technology, net

 

2,272,154

 

 

2,443,949

 

Other intangible assets, net

 

5,039

 

 

5,441

 

Goodwill

 

426,441

 

 

426,441

 

Deferred tax assets, net

 

4,185

 

 

3,470

 

Other assets

 

29,224

 

 

36,081

 

Total assets

$

3,989,725

 

$

4,203,955

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Long-term debt—current portion

$

 

$

10,625

 

Accounts payable

 

31,110

 

 

34,681

 

Accrued expenses

 

173,619

 

 

175,697

 

Accrued trade discounts and rebates

 

449,683

 

 

501,753

 

Accrued royalties—current portion

 

65,604

 

 

65,328

 

Deferred revenues—current portion

 

5,629

 

 

6,885

 

Total current liabilities

 

725,645

 

 

794,969

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

Exchangeable notes, net

 

323,105

 

 

314,384

 

Long-term debt, net of current

 

1,562,013

 

 

1,576,646

 

Accrued royalties, net of current

 

293,626

 

 

291,185

 

Deferred revenues, net of current

 

 

 

9,713

 

Deferred tax liabilities, net

 

157,404

 

 

157,945

 

Other long-term liabilities

 

67,782

 

 

68,015

 

Total long-term liabilities

 

2,403,930

 

 

2,417,888

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

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

   166,974,870 and 164,785,083 shares issued at June 30, 2018 and December

   31, 2017, respectively, and 166,590,504 and 164,400,717 shares outstanding at

   June 30, 2018 and December 31, 2017, respectively

 

17

 

 

16

 

Treasury stock, 384,366 ordinary shares at June 30, 2018 and December 31, 2017

 

(4,585

)

 

(4,585

)

Additional paid-in capital

 

2,306,754

 

 

2,248,979

 

Accumulated other comprehensive loss

 

(1,128

)

 

(983

)

Accumulated deficit

 

(1,440,908

)

 

(1,252,329

)

Total shareholders’ equity

 

860,150

 

 

991,098

 

Total liabilities and shareholders' equity

$

3,989,725

 

$

4,203,955

 

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 June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Net sales

$

302,835

 

 

$

289,507

 

 

$

526,716

 

 

$

510,366

 

 

Cost of goods sold

 

100,082

 

 

 

130,150

 

 

 

216,174

 

 

 

269,266

 

 

Gross profit

 

202,753

 

 

 

159,357

 

 

 

310,542

 

 

 

241,100

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

24,265

 

 

 

163,101

 

 

 

41,910

 

 

 

176,162

 

 

Selling, general and administrative

 

176,674

 

 

 

159,653

 

 

 

356,273

 

 

 

333,718

 

 

Impairment of long-lived assets

 

 

 

 

22,270

 

 

 

37,853

 

 

 

22,270

 

 

Total operating expenses

 

200,939

 

 

 

345,024

 

 

 

436,036

 

 

 

532,150

 

 

Operating income (loss)

 

1,814

 

 

 

(185,667

)

 

 

(125,494

)

 

 

(291,050

)

 

OTHER EXPENSE, NET:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(31,030

)

 

 

(31,608

)

 

 

(61,484

)

 

 

(63,591

)

 

Foreign exchange (loss) gain

 

(5

)

 

 

151

 

 

 

(115

)

 

 

(108

)

 

Gain on divestiture

 

 

 

 

5,856

 

 

 

 

 

 

5,856

 

 

Loss on debt extinguishment

 

 

 

 

 

 

 

 

 

 

(533

)

 

Other income (expense), net

 

347

 

 

 

(35

)

 

 

525

 

 

 

 

 

Total other expense, net

 

(30,688

)

 

 

(25,636

)

 

 

(61,074

)

 

 

(58,376

)

 

Loss before expense (benefit) for income taxes

 

(28,874

)

 

 

(211,303

)

 

 

(186,568

)

 

 

(349,426

)

 

Expense (benefit) for income taxes

 

3,962

 

 

 

(1,767

)

 

 

3,596

 

 

 

(49,320

)

 

Net loss

$

(32,836

)

 

$

(209,536

)

 

$

(190,164

)

 

$

(300,106

)

 

Net loss per ordinary share—basic and diluted

$

(0.20

)

 

$

(1.29

)

 

$

(1.15

)

 

$

(1.85

)

 

Weighted average ordinary shares outstanding—basic and

   diluted

 

165,536,826

 

 

 

162,931,930

 

 

 

164,921,722

 

 

 

162,486,946

 

 

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(897

)

 

 

626

 

 

 

(434

)

 

 

954

 

 

Pension remeasurements

 

289

 

 

 

 

 

 

289

 

 

 

 

 

Other comprehensive (loss) income

 

(608

)

 

 

626

 

 

 

(145

)

 

 

954

 

 

Comprehensive loss

$

(33,444

)

 

$

(208,910

)

 

$

(190,309

)

 

$

(299,152

)

 

 

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 Six Months Ended June 30,

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(190,164

)

 

$

(300,106

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

137,447

 

 

 

143,014

 

Equity-settled share-based compensation

 

58,554

 

 

 

57,960

 

Royalty accretion

 

29,475

 

 

 

25,694

 

Royalty liability remeasurement

 

(2,151

)

 

 

(2,944

)

Impairment of long-lived assets

 

37,853

 

 

 

22,270

 

Amortization of debt discount and deferred financing costs

 

11,185

 

 

 

10,629

 

Deferred income taxes

 

(1,753

)

 

 

(79,486

)

Acquired in-process research and development expense

 

 

 

 

148,609

 

Gain on divestiture

 

 

 

 

(2,635

)

Loss on debt extinguishment

 

 

 

 

533

 

Foreign exchange and other adjustments

 

459

 

 

 

613

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

1,742

 

 

 

(97,267

)

Inventories

 

11,549

 

 

 

67,736

 

Prepaid expenses and other current assets

 

(21,738

)

 

 

2,434

 

Accounts payable

 

(3,592

)

 

 

29,823

 

Accrued trade discounts and rebates

 

(52,138

)

 

 

116,950

 

Accrued expenses and accrued royalties

 

(14,099

)

 

 

(86,235

)

Deferred revenues

 

333

 

 

 

384

 

Other non-current assets and liabilities

 

(1,988

)

 

 

14,755

 

Net cash provided by operating activities

 

974

 

 

 

72,731

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Payment related to license agreement

 

(12,000

)

 

 

 

Payments for acquisitions, net of cash acquired

 

 

 

 

(167,850

)

Proceeds from divestiture, net of cash divested

 

 

 

 

69,072

 

Purchases of property and equipment

 

(762

)

 

 

(2,627

)

Net cash used in investing activities

 

(12,762

)

 

 

(101,405

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repayment of term loans

 

(27,722

)

 

 

(774,875

)

Net proceeds from term loans

 

 

 

 

847,768

 

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

 

 

 

 

11

 

Proceeds from the issuance of ordinary shares through ESPP programs

 

4,734

 

 

 

3,856

 

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

 

3,672

 

 

 

1,297

 

Payment of employee withholding taxes related to share-based awards

 

(9,185

)

 

 

(5,202

)

Repurchase of ordinary shares

 

 

 

 

(992

)

Net cash (used in) provided by financing activities

 

(28,501

)

 

 

71,863

 

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash

 

(1,003

)

 

 

2,196

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(41,292

)

 

 

45,385

 

Cash, cash equivalents and restricted cash, beginning of the period

 

757,897

 

 

 

516,150

 

Cash, cash equivalents and restricted cash, end of the period

$

716,605

 

 

$

561,535

 

 

 

 

 

3

 


SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

55,516

 

 

$

58,396

 

Net cash paid for income taxes

 

 

27,332

 

 

 

1,519

 

Cash paid for debt extinguishment

 

 

 

 

 

145

 

SUPPLEMENTAL NON-CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable and accrued

   expenses

 

 

107

 

 

 

939

 

Purchases of acquired in-process research and development included in accounts

   payable and accrued expenses

 

 

 

 

 

859

 

 

            

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

 

4

 


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 and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  The December 31, 2017 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.            

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

The impairment recorded during the three and six months ended June 30, 2017, of $22.3 million of the asset recognized in connection with the acquisition of certain rights to interferon gamma-1b, as further described in Note 4, was previously included within “selling, general and administrative” expenses.  For prior-period comparisons, the Company now includes this amount in the “impairment of long-lived assets” line item in its condensed consolidated statement of comprehensive loss.

Business Overview

The Company is a biopharmaceutical company focused on researching, developing and commercializing innovative medicines that address unmet treatment needs for rare and rheumatic diseases.  By expanding our pipeline of medicines in development and exploring all potential uses for currently marketed medicines, the Company strives to make a powerful difference for patients, their caregivers and physicians.  The Company has two reportable segments, referred to as the “orphan and rheumatology segment” and the “primary care segment”.  The Company markets eleven medicines in the areas of orphan diseases, rheumatology and primary care.  

The Company’s marketed medicines are:

 

Orphan and Rheumatology

RAVICTI® (glycerol phenylbutyrate) oral liquid

KRYSTEXXA® (pegloticase injection), for intravenous infusion

PROCYSBI® (cysteamine bitartrate) delayed-release capsules, for oral use

ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use

RAYOS® (prednisone) delayed-release tablets; marketed as LODOTRA® outside the United States

BUPHENYL® (sodium phenylbutyrate) Tablets and Powder; marketed as AMMONAPS® in certain European countries and Japan

QUINSAIR™ (levofloxacin) solution for inhalation

 

Primary Care

PENNSAID® (diclofenac sodium topical solution) 2% w/w (“PENNSAID 2%”), for topical use

DUEXIS® (ibuprofen/famotidine) tablets, for oral use

VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use

MIGERGOT® (ergotamine tartrate & caffeine suppositories), for rectal use

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

From time to time, the Company adopts new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies.  


5

 


Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU No. 2014-09”).  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 modified retrospectively with the cumulative effect of initially applying it recognized at the date of initial application.  The Company elected to utilize the modified retrospective method.  The performance obligations identified by the Company under Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts With Customers, are similar to the unit of account and performance obligation determination under ASC Topic 605, Revenue Recognition.  The implementation of this guidance did not have a material impact on the Company’s condensed consolidated financial statements as the timing of revenue recognition for its primary revenue stream, product sales, did not significantly change.  Certain of the Company’s contracts for sales outside the United States include variable consideration that the Company was precluded from recognizing because the amounts were contingent.  The Company concluded that the new standard required a cumulative-effect adjustment of certain deferred revenues under these contracts that were originally expected to be recognized in the future.  Upon adoption on January 1, 2018, the Company reclassified $11.3 million of deferred revenue directly to retained earnings.  Following this reclassification, no amounts remained in deferred revenue relating to these contracts.  In addition, as a result of the adoption of ASU No. 2014-09, the Company now presents all allowances for medicine returns in accrued expenses on the condensed consolidated balance sheet.  This resulted in a reclassification of $37.9 million of allowances for medicine returns from “accounts receivable, net” to “accrued expenses” in the consolidated balance sheet at December 31, 2017, and a reclassification of $11.9 million between the “accounts receivable” and “accrued expenses and accrued royalties” line items within the changes in operating assets and liabilities section of the condensed consolidated statement of cash flow for the six months ended June 30, 2017.

Effective January 1, 2018, the Company adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU No. 2016-16”).  ASU No. 2016-16 was issued to improve the accounting for the income tax consequences of 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 which has resulted in diversity in practice and increased complexity within financial reporting.  ASU No. 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and does not require new disclosures.  Upon adoption, the Company applied the modified retrospective basis through a cumulative-effect adjustment to retained earnings and the Company reclassified $9.3 million of unrecognized deferred charges directly to retained earnings.

Effective January 1, 2018, the Company adopted ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU No. 2017-09”).  The amendment amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC Topic 718, Compensation- Stock Compensation.  Upon adoption, the Company applied the prospective method and will account for future modifications, if any, under this guidance.  The adoption of ASU No. 2017-09 did not have a material impact on the Company’s condensed consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”).  ASU No. 2016-18 addresses diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows.  ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents.  Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  

Effective January 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”).  ASU No. 2016-15 provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.  

 

 

6

 


The following table summarizes the adjustments made to conform prior period classifications as a result of the adoption of ASU No. 2016-18 and ASU No. 2016-15 (in thousands):

 

For the Six Months Ended June 30, 2017

 

 

 

 

 

ASU No. 2016-18

 

ASU No. 2016-15

 

 

 

 

 

As filed

 

Reclassification (2)

 

Reclassification (3)

 

As adjusted

 

Net cash provided by operating activities

$

68,646

 

$

 

$

4,085

 

$

72,731

 

Net cash used in investing activities

 

(101,576

)

 

171

 

 

 

 

(101,405

)

Net cash provided by financing activities

 

75,948

 

 

 

 

(4,085

)

 

71,863

 

Cash, cash equivalents and restricted cash, beginning of the period (1)

 

509,055

 

 

7,095

 

 

 

 

516,150

 

Cash, cash equivalents and restricted cash, end of the period (1)

 

554,269

 

 

7,266

 

 

 

 

561,535

 

 

(1)

Cash, cash equivalents and restricted cash, beginning of the period and end of the period presented in the "As filed" column in the table above excludes restricted cash.

 

(2)

$7.1 million and $7.3 million in the table above represent the Company’s restricted cash balance at December 31, 2016 and June 30, 2017, respectively.

 

(3)

Upon adoption of ASU No. 2016-15, the Company reclassified prepayment penalties and debt extinguishment costs of $3.8 million and $0.3 million, respectively, from operating activities to financing activities.

Effective January 1, 2018, the Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”), to eliminate the second step of the goodwill impairment test.  ASU No. 2017-04 requires an entity to measure a goodwill impairment loss as the amount by which the carrying value of a reporting unit exceeds its fair value.  Additionally, an entity should include the income tax effects from any tax deductible goodwill on the carrying value of the reporting unit when measuring a goodwill impairment loss, if applicable.  The Company will apply ASU No. 2017-04 in future goodwill impairment testing.  The adoption of ASU No. 2017-04 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”).  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.  The Company is currently in the process of evaluating the impact of adoption of ASU No. 2016-02 on its condensed consolidated financial statements and related disclosures.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU No. 2018-07”).  ASU No. 2018-07 largely aligns the accounting for share-based payment awards issued to employees and non-employees.  The Company is required to apply ASU No. 2018-07 to fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.  The Company expects to adopt ASU No. 2018-07 on January 1, 2019, and it does not expect the adoption of ASU No. 2018-07 to have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

In June 2018, the FASB issued ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (“ASU No. 2018-08”).  The new guidance applies to all entities that receive or make contributions, including business entities.  The Company is required to apply ASU No. 2018-08 to contributions received during annual periods beginning after June 15, 2018, including interim periods within those annual periods.  The Company is required to apply ASU No. 2018-08 to contributions provided during annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company will adopt the standard on January 1, 2019, using prospective application to any new agreements entered into after the effective date.  The Company does not expect the adoption of ASU No. 2018-08 to have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not, or are not expected to, have a material impact on the Company’s condensed consolidated financial statements and related disclosures.


7

 


Significant Accounting Policies

As described above, effective January 1, 2018, the Company adopted ASU No. 2014-09.  The Company modified its critical accounting policies related to revenue recognition following the adoption of ASU No. 2014-09, and the Company’s updated policies are described below.

Revenue Recognition

In the United States, the Company sells its medicines primarily to wholesale distributors and specialty pharmacy providers.  In other countries, the Company sells its medicines primarily to wholesale distributors and other third-party distribution partners.  These customers subsequently resell the Company’s medicines to health care providers and patients.  In addition, the Company enters into arrangements with health care providers and payers that provide for government-mandated or privately-negotiated discounts and allowances related to the Company’s medicines.  Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied.  The majority of the Company's contracts have a single performance obligation to transfer medicines.  Accordingly, revenues from medicine sales are recognized when the customer obtains control of the Company’s medicines, which occurs at a point in time, typically upon delivery to the customer.  Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring medicines and is generally based upon a list or fixed price less allowances for medicine returns, rebates and discounts.  The Company sells its medicines to wholesale pharmaceutical distributors and pharmacies under agreements with payment terms typically less than 90 days.  The Company’s process for estimating reserves established for these variable consideration components does not differ materially from the Company’s historical practices.

Medicine Sales Discounts and Allowances

The nature of the Company's contracts gives rise to variable consideration because of allowances for medicine returns, rebates and discounts.  Allowances for medicine returns, rebates and discounts are recorded at the time of sale to wholesale pharmaceutical distributors and pharmacies.  The Company applies significant judgments and estimates in determining some of these allowances.  If actual results differ from its estimates, the Company will be required to make adjustments to these allowances in the future.  The Company’s adjustments to gross sales are discussed further below.

Commercial Rebates

The Company participates in certain commercial rebate programs.  Under these rebate programs, the Company pays a rebate to the commercial entity or third-party administrator of the program.  The Company calculates accrued commercial rebate estimates using the expected value method.  The Company accrues estimated rebates based on contract prices, estimated percentages of medicine sold to qualified patients and estimated levels of inventory in the distribution channel and records the rebate as a reduction of revenue.  Accrued commercial rebates are included in “accrued trade discounts and rebates” on the condensed consolidated balance sheet.

Distribution Service Fees

The Company includes distribution service fees paid to its wholesalers for distribution and inventory management services as a reduction to revenue.  The Company calculates accrued distribution service fee estimates using the most likely amount method.  The Company accrues estimated distribution fees based on contractually determined amounts, typically as a percentage of revenue.  Accrued distribution service fees are included in “accrued trade discounts and rebates” on the condensed consolidated balance sheet.  

Patient Access Programs

The Company offers discount card and other programs such as its HorizonCares program to patients under which the patient receives a discount on his or her prescription.  In certain circumstances when a patient’s prescription is rejected by a managed care vendor, the Company will pay for the full cost of the prescription.  The Company reimburses pharmacies for this discount through third-party vendors.  The Company reduces gross sales by the amount of actual co-pay and other patient assistance in the period based on the invoices received.  The Company also records an accrual to reduce gross sales for estimated co-pay and other patient assistance on units sold to distributors that have not yet been prescribed/dispensed to a patient.  The Company calculates accrued co-pay and other patient assistance fee estimates using the expected value method.  The estimate is based on contract prices, estimated percentages of medicine that will be prescribed to qualified patients, average assistance paid based on reporting from the third-party vendors and estimated levels of inventory in the distribution channel.  Accrued co-pay and other patient assistance fees are included in “accrued trade discounts and rebates” on the condensed consolidated balance sheet.  Patient assistance programs include both co-pay assistance and fully bought down prescriptions.  

 

 

8

 


Sales Returns

Consistent with industry practice, the Company maintains a return policy that allows customers to return medicines within a specified period prior to and subsequent to the medicine expiration date.  Generally, medicines may be returned for a period beginning six months prior to its expiration date and up to one year after its expiration date.  The right of return expires on the earlier of one year after the medicine expiration date or the time that the medicine is dispensed to the patient.  The majority of medicine returns result from medicine dating, which falls within the range set by the Company’s policy, and are settled through the issuance of a credit to the customer.  The Company calculates sales returns using the expected value method.  The estimate of the provision for returns is based upon the Company’s historical experience with actual returns.  This period is known to the Company based on the shelf life of medicines at the time of shipment.  The Company records sales returns in “accrued expenses” and as a reduction of revenue.  

Prompt Pay Discounts

As an incentive for prompt payment, the Company offers a 2% cash discount to customers.  The Company calculates accrued prompt pay discounts using the most likely amount method.  The Company expects that all customers will comply with the contractual terms to earn the discount.  The Company records the discount as an allowance against “accounts receivable, net” and a reduction of revenue.

Government Rebates

The Company participates in certain federal government rebate programs such as Medicare Coverage Gap and Medicaid.  The Company calculates accrued government rebate estimates using the expected value method.  The Company accrues estimated rebates based on percentages of medicine sold to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that are expected to be sold to qualified patients and records the rebates as a reduction of revenue.  Accrued government rebates are included in “accrued trade discounts and rebates” on the condensed consolidated balance sheet.  

Government Chargebacks

The Company provides discounts to federal government qualified entities with whom the Company has contracted.  These federal entities purchase medicines from the wholesale pharmaceutical distributors at a discounted price, and the wholesale pharmaceutical distributors then charge back to the Company the difference between the current retail price and the contracted price that the federal entities paid for the medicines.  The Company calculates accrued government chargeback estimates using the expected value method.  The Company accrues estimated chargebacks based on contract prices and sell-through sales data obtained from third-party information and records the chargeback as a reduction of revenue.  Accrued government chargebacks are included in “accrued trade discounts and rebates” on the condensed consolidated balance sheet.  

Bad Debt Expense

The Company’s medicines are sold to wholesale pharmaceutical distributors and pharmacies.  The Company monitors its accounts receivable balances to determine the impact, if any, of such factors as changes in customer concentration, credit risk and the realizability of its accounts receivable, and records a bad debt reserve when applicable.  

Segment Reporting

Effective as of the second quarter of 2018, management realigned the Company’s reportable segments to reflect changes in the manner in which the chief operating decision maker (“CODM”) assesses financial information for decision-making purposes.  See Note 13 for further details.  The Company’s accounting policy for segment reporting is described below.  

The Company determined that it operates in two reportable segments, an orphan and rheumatology segment and a primary care segment.  The Company’s reportable segments are reported in a manner consistent with the internal reporting provided to the CODM.  The Company’s CODM has been identified as its chief executive officer.  The Company has no transactions between reportable segments.

 


9

 


NOTE 3 – NET LOSS PER SHARE

The following table presents basic and diluted net loss per share for the three and six months ended June 30, 2018 and 2017 (in thousands, except share and per share data):

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Basic and diluted net loss per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(32,836

)

 

$

(209,536

)

 

$

(190,164

)

 

$

(300,106

)

 

Weighted average ordinary shares outstanding

 

 

165,536,826

 

 

 

162,931,930

 

 

 

164,921,722

 

 

 

162,486,946

 

 

Basic and diluted net loss per share

 

$

(0.20

)

 

$

(1.29

)

 

$

(1.15

)

 

$

(1.85

)

 

 

Basic net loss per share is computed by dividing net loss by the weighted-average number of ordinary shares outstanding during the period.  Diluted net loss per share reflects the potential dilution 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 computation of diluted net loss per share excluded 11.0 million and 11.6 million shares subject to equity awards for the three and six months ended June 30, 2018, respectively, and 21.5 million and 18.0 million shares subject to equity awards and warrants for the three and six months ended June 30, 2017, respectively, because their inclusion would have had an anti-dilutive effect on diluted net loss per share.

The potentially dilutive impact of the March 2015 private placement of $400.0 million aggregate principal amount of 2.50% Exchangeable Senior Notes due 2022 (the “Exchangeable Senior Notes”) by Horizon Pharma Investment Limited (“Horizon Investment”), a wholly owned subsidiary of the Company, 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 net (loss) income per share denominator by the variable number of shares that would be issued upon conversion if it settled the conversion spread obligation with shares.  For diluted net (loss) income per share 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 and six months ended June 30, 2018 and 2017.

 

NOTE 4 – ACQUISITIONS, DIVESTITURES AND OTHER ARRANGEMENTS

 

Acquisitions

 

Acquisition of River Vision

On May 8, 2017, the Company acquired 100% of the equity interests in River Vision Development Corp. (“River Vision”) for upfront cash payments totaling approximately $150.3 million, including cash acquired of $6.3 million, with additional potential future milestone and royalty payments contingent on the satisfaction of certain regulatory milestones and sales thresholds.  Pursuant to ASC 805 (as amended by ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU No. 2017-01”)), the Company accounted for the River Vision acquisition as the purchase of an in-process research and development asset and, pursuant to ASC Topic 730, Research and Development, recorded the purchase price as research and development expense during the year ended December 31, 2017.  Further, the Company recognized approximately $13.1 million of federal net operating losses, $2.8 million of state net operating losses and $5.8 million of federal tax credits.  The acquired tax attributes were set up as deferred tax assets for which a comparable amount was recorded as a deferred credit in long-term liabilities.  The deferred tax assets were further netted with the net deferred tax liabilities of the U.S. group.        

 

Under the agreement for the acquisition of River Vision, the Company is required to pay up to $325.0 million upon the attainment of various milestones related to U.S. Food and Drug Administration (“FDA”) approval and net sales thresholds.  The agreement also includes a royalty payment of three percent of the portion of annual worldwide net sales exceeding $300.0 million (if any).  Under a separate agreement, the Company is also required to pay up to CHF103.0 million ($104.0 million when converted using a CHF-to-Dollar exchange rate at June 30, 2018 of 1.0095) upon the attainment of various milestones related to approval, filing and net sales thresholds.  During the year ended December 31, 2017, CHF2.0 million ($2.0 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.0169) was paid in relation to these milestones.  The separate agreement also includes a royalty payment of between nine percent and twelve percent of the portion of annual worldwide net sales.  


10

 


Acquisition and Subsequent Sale of Additional Rights to Interferon Gamma-1b

 

On June 30, 2017, the Company completed its acquisition of certain rights to interferon gamma-1b from Boehringer Ingelheim International GmbH (“Boehringer Ingelheim International”) in all territories outside of the United States, Canada and Japan, as the Company previously held marketing rights to interferon gamma-1b in these territories, and in connection therewith, paid Boehringer Ingelheim International €19.5 million ($22.3 million when converted using a Euro-to-Dollar exchange rate at date of payment of 1.1406).  Boehringer Ingelheim International commercialized interferon gamma-1b as IMUKIN in an estimated thirty countries, primarily in Europe and the Middle East.  Upon closing, during the year ended December 31, 2017, the Company accounted for the €19.5 million payment ($22.3 million when converted using a Euro-to-Dollar exchange rate at date of payment of 1.1406) as the acquisition of an asset which was immediately impaired as projections for future net sales of IMUKIN in these territories did not exceed the related costs, and included the payment in the “impairment of long-lived assets” line item in its condensed consolidated statement of comprehensive loss.  On July 24, 2018, the Company sold its rights to interferon gamma-1b in all territories outside the United States, Canada and Japan to Clinigen Group plc for an upfront payment and a potential additional contingent consideration payment.  The Company continues to market interferon gamma-1b as ACTIMMUNE in the United States.

Divestiture of PROCYSBI and QUINSAIR rights in the EMEA Regions

On June 23, 2017, the Company completed the sale of its European subsidiary that owned the marketing rights to PROCYSBI and QUINSAIR in Europe, the Middle East and Africa (“EMEA”) regions (the “Chiesi divestiture”) to Chiesi Farmaceutici S.p.A. (“Chiesi”) for an upfront payment of $72.5 million, which reflects $3.1 million of cash divested, with additional potential milestone payments based on sales thresholds.

Pursuant to ASU No. 2017-01, the Company accounted for the Chiesi divestiture as a sale of a business.  The Company determined that the sale of the business and its assets in connection with the Chiesi divestiture did not constitute a strategic shift and that it did not and will not have a major effect on its operations and financial results.  Accordingly, the operations associated with the Chiesi divestiture are not reported as discontinued operations.  

The gain on divestiture recorded during the year ended December 31, 2017, was determined as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Cash proceeds

 

$

72,462

 

Add reimbursement of royalties

 

 

27,101

 

Less net assets sold:

 

 

 

 

Developed technology

 

 

(47,261

)

Goodwill

 

 

(16,285

)

Other

 

 

(24,482

)

Transaction and other costs

 

 

(5,268

)

Gain on divestiture

 

$

6,267

 

 

The Company recorded a gain on divestiture of $5.9 million in the condensed consolidated statement of comprehensive loss during the three and six months ended June 30, 2017.  Additionally, during the second half of 2017 the Company recorded adjustments for working capital of $0.4 million and the total gain on divestiture recorded amounted to $6.3 million.

 

Under the terms of its agreement with Chiesi, the Company will continue to pay third parties for the royalties on sales of PROCYSBI and QUINSAIR in the EMEA regions, and Chiesi will reimburse the Company for those royalties.  At the date of divestiture, the Company recorded an asset of $27.1 million to “other assets”, which represented the estimated amounts that are expected to be reimbursed from Chiesi for the PROCYSBI and QUINSAIR royalties.  These estimated royalties are accrued in “accrued expenses” and “other long-term liabilities”.  

Transaction and other costs primarily relate to professional and license fees attributable to the divestiture.


11

 


Other Arrangements

Licensing agreement

On December 12, 2017, the Company entered into an agreement to license HZN-003 (formerly MEDI4945), a potential next-generation biologic for uncontrolled gout, from MedImmune LLC (“MedImmune”), the global biologics research and development arm of the AstraZeneca Group.  HZN-003 is a pre-clinical, genetically engineered uricase derivative with optimized uricase and optimized PEGylation technology that has the potential to improve the response rate to the biologic as well as the potential for subcutaneous dosing.  Under the terms of the agreement, the Company agreed to pay MedImmune an upfront cash payment of $12.0 million with additional potential future milestone payments of up to $153.5 million contingent on the satisfaction of certain development and sales thresholds.  The $12.0 million upfront payment was accounted for as the acquisition of an asset and was recorded as “research and development” expenses in the condensed consolidated statement of comprehensive loss during the year ended December 31, 2017 and included in “accrued expenses” as of December 31, 2017.  The upfront payment was subsequently paid in January 2018.

 

NOTE 5 – 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 of finished goods or the purchase of raw materials and production supplies.  The Company’s inventories include the direct purchase cost of materials and supplies and manufacturing overhead costs.

The components of inventories as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Raw materials

 

$

6,205

 

 

$

4,553

 

Work-in-process

 

 

25,200

 

 

 

27,589

 

Finished goods

 

 

18,700

 

 

 

29,513

 

Inventories, net

 

$

50,105

 

 

$

61,655

 

 

Finished goods at December 31, 2017 included $17.0 million of stepped-up KRYSTEXXA inventory.  During the six months ended June 30, 2018, the Company recorded the remaining $17.0 million of KRYSTEXXA inventory step-up expense to cost of goods sold.  During the three and six months ended June 30, 2017, the Company recorded $19.3 million and $33.7 million, respectively, of KRYSTEXXA and MIGERGOT inventory step-up expense and $14.5 million and $40.8 million, respectively, of PROCYSBI and QUINSAIR inventory step-up expense to cost of goods sold.

KRYSTEXXA inventory step-up was fully expensed by March 31, 2018.  As a result, the costs of goods sold related to KRYSTEXXA have decreased significantly beginning with the second quarter of 2018 to levels consistent with the historical costs of goods sold before the Company’s acquisition of Crealta Holdings LLC.

Because inventory step-up expense is acquisition-related, will not continue indefinitely and has a significant effect on the Company’s gross profit, gross margin percentage and net (loss) income for all affected periods, the Company discloses balance sheet and income statement amounts related to inventory step-up within the notes to the condensed consolidated financial statements.

 

 

NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Deferred charge for taxes on intra-company profit

 

$

10,297

 

 

$

535

 

Prepaid income taxes

 

 

9,806

 

 

 

8

 

Rabbi trust assets

 

 

8,292

 

 

 

6,490

 

Medicine samples inventory

 

 

7,777

 

 

 

11,415

 

Other prepaid expenses and other current assets

 

 

28,059

 

 

 

24,954

 

Prepaid expenses and other current assets

 

$

64,231

 

 

$

43,402

 

 

 

12

 


NOTE 7 – PROPERTY AND EQUIPMENT

Property and equipment as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Software

 

$

14,855

 

 

$

14,956

 

Leasehold improvements

 

 

9,859

 

 

 

9,415

 

Machinery and equipment

 

 

4,800

 

 

 

4,819

 

Computer equipment

 

 

2,226

 

 

 

2,235

 

Other

 

 

2,331

 

 

 

2,508

 

 

 

 

34,071

 

 

 

33,933

 

Less accumulated depreciation

 

 

(16,220

)

 

 

(13,672

)

Construction in process

 

 

219

 

 

 

144

 

Property and equipment, net

 

$

18,070

 

 

$

20,405

 

 

Depreciation expense was $1.6 million and $1.8 million for the three months ended June 30, 2018 and 2017, respectively, and was $3.1 million and $3.6 million for the six months ended June 30, 2018 and 2017, respectively.

 

 

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The gross carrying amount of goodwill as of June 30, 2018 and December 31, 2017 was $426.4 million.

As discussed in Note 13, during the second quarter of 2018, management realigned the Company’s reportable segments to reflect changes in the manner in which the CODM assesses financial information for decision-making purposes.  This resulted in a change in the Company’s operating segments and reporting units.  The Company allocated goodwill to its new reporting units using a relative fair value approach.  In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the allocation and determined that no impairment existed.  The table below presents goodwill for the Company’s reportable segments as of June 30, 2018 (in thousands):

 

 

 

Orphan and Rheumatology

 

Primary Care

 

Total

 

Goodwill

 

$

371,883

 

$

54,558

 

$

426,441

 

 

During the year ended December 31, 2017, in connection with the Chiesi divestiture, the Company recorded a reduction to goodwill of $16.3 million.  See Note 4 for further details.

 

As of June 30, 2018, there were no accumulated goodwill impairment losses.

Intangible Assets

As of June 30, 2018, the Company’s finite-lived intangible assets consisted of developed technology related to ACTIMMUNE, BUPHENYL/AMMONAPS, KRYSTEXXA, LODOTRA, MIGERGOT, PENNSAID 2%, PROCYSBI, RAVICTI, RAYOS and VIMOVO, as well as customer relationships for ACTIMMUNE.

During the three and six months ended June 30, 2017, in connection with the Chiesi divestiture, the Company recorded a reduction in the net book value of developed technology related to PROCYSBI of $47.3 million.  See Note 4 for further details.  

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.  During the six months ended June 30, 2018, the Company recorded an impairment of $37.9 million to fully write off the book value of developed technology related to PROCYSBI in Canada and Latin America due primarily to lower anticipated future net sales based on a Patented Medicine Prices Review Board review.  The fair value of developed technology was determined using an income approach.

13

 


Intangible assets as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Cost Basis

 

Impairment

 

Accumulated

Amortization

 

Net Book

Value

 

 

Cost Basis

 

Accumulated

Amortization

 

Net Book

Value

 

Developed technology

 

$

3,115,695

 

$

(37,853

)

$

(805,688

)

$

2,272,154

 

 

$

3,115,695

 

$

(671,746

)

$

2,443,949

 

Customer relationships

 

 

8,100

 

 

 

 

(3,061

)

 

5,039

 

 

 

8,100

 

 

(2,659

)

 

5,441

 

Total intangible assets

 

$

3,123,795

 

$

(37,853

)

$

(808,749

)

$

2,277,193

 

 

$

3,123,795

 

$

(674,405

)

$

2,449,390

 

 

Amortization expense for the three months ended June 30, 2018 and 2017 was $67.0 million and $69.8 million, respectively, and was $134.3 million and $139.5 million for the six months ended June 2018 and 2017, respectively. As of June 30, 2018, estimated future amortization expense was as follows (in thousands):

 

2018 (July to December)

 

$

135,449

 

2019

 

 

256,658

 

2020

 

 

255,962

 

2021

 

 

248,456

 

2022

 

 

243,872

 

Thereafter

 

 

1,136,796

 

Total

 

$

2,277,193

 

 

 

NOTE 9 - OTHER ASSETS

Included in other assets at June 30, 2018 and December 31, 2017, was $23.9 million and $24.6 million, respectively, which represents the long-term portion of the estimated amounts that are expected to be reimbursed from Chiesi for PROCYSBI and QUINSAIR royalties.  

 

 

NOTE 10 – ACCRUED EXPENSES

Accrued expenses as of June 30, 2018 and December 31, 2017, consisted of the following (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Payroll-related expenses

 

$

52,806

 

 

$

56,338

 

Allowances for returns

 

 

42,214

 

 

 

37,863

 

Consulting and professional services

 

 

35,848

 

 

 

27,542

 

Accrued interest

 

 

13,785

 

 

 

14,127

 

Accrued upfront payment related to license agreement

 

 

 

 

 

12,000

 

Accrued other

 

 

28,966

 

 

 

27,827

 

Accrued expenses

 

$

173,619

 

 

$

175,697

 

 

Accrued other as of June 30, 2018 and December 31, 2017 included $3.7 million and $2.1 million, respectively, related to a loss on inventory purchase commitments.

 

 

NOTE 11 – ACCRUED TRADE DISCOUNTS AND REBATES

Accrued trade discounts and rebates as of June 30, 2018 and December 31, 2017, consisted of the following (in thousands):

 

 

June 30, 2018

 

 

December 31, 2017

 

Accrued wholesaler fees and commercial rebates

$

167,443

 

 

$

190,215

 

Accrued co-pay and other patient assistance

 

179,213

 

 

 

230,533

 

Accrued government rebates and chargebacks

 

103,027

 

 

 

81,005

 

Accrued trade discounts and rebates

$

449,683

 

 

$

501,753

 

Invoiced wholesaler fees and commercial rebates, co-pay

   and other patient assistance, and government rebates and

   chargebacks in accounts payable

 

7,296

 

 

 

15,042

 

Total customer-related accruals and allowances

$

456,979

 

 

$

516,795

 

 

14

 


The following table summarizes changes in the Company’s customer-related accruals and allowances from December 31, 2017 to June 30, 2018 (in thousands):

 

 

 

Wholesaler Fees

 

 

Co-Pay and

 

 

Government

 

 

 

 

 

 

 

and Commercial

 

 

Other Patient

 

 

Rebates and

 

 

 

 

 

 

 

Rebates

 

 

Assistance

 

 

Chargebacks

 

 

Total

 

Balance at December 31, 2017

 

$

190,485

 

 

$

232,325

 

 

$

93,985

 

 

$

516,795

 

Current provisions relating to sales during the six

     months ended June 30, 2018

 

 

301,257

 

 

 

1,027,240

 

 

 

187,469

 

 

 

1,515,966

 

Adjustments relating to prior-year sales

 

 

(667

)

 

 

(374

)

 

 

(12,529

)

 

 

(13,570

)

Payments relating to sales during the six months

    ended June 30, 2018

 

 

(133,639

)

 

 

(848,027

)

 

 

(82,732

)

 

 

(1,064,398

)

Payments relating to prior-year sales

 

 

(189,661

)

 

 

(231,951

)

 

 

(76,202

)

 

 

(497,814

)

Balance at June 30, 2018

 

$

167,775

 

 

$

179,213

 

 

$

109,991

 

 

$

456,979

 

 

 

 

NOTE 12 – ACCRUED ROYALTIES

During the six months ended June 30, 2018, changes to the liability for royalties for medicines acquired through business combinations consisted of the following (in thousands):

 

Balance as of December 31, 2017

 

 

356,513

 

Remeasurement of royalty liabilities

 

 

(2,151

)

Royalty payments

 

 

(24,527

)

Accretion expense

 

 

29,375

 

Other royalty expense

 

 

20

 

Balance as of June 30, 2018

 

 

359,230

 

Accrued royalties - current portion as of June 30, 2018

 

 

65,604

 

Accrued royalties, net of current as of June 30, 2018

 

$

293,626

 

 

 

15

 


NOTE 13 – SEGMENT AND OTHER INFORMATION

 

Effective as of the second quarter of 2018, management realigned the Company’s reportable segments to reflect changes in the manner in which the CODM assesses financial information for decision-making purposes.  All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

 

The Company has two reportable segments, the orphan and rheumatology segment and the primary care segment, and the Company reports net sales and segment operating income for each segment.

 

The orphan and rheumatology segment includes the marketed medicines ACTIMMUNE, BUPHENYL/AMMONAPS, KRYSTEXXA, PROCYSBI, QUINSAIR, RAVICTI and RAYOS/LODOTRA.  The primary care segment consists of four marketed medicines, including DUEXIS, MIGERGOT, PENNSAID 2% and VIMOVO.

 

Management structured the business into two segments to improve operating and resource allocation decisions to align with the Company’s long-term strategic goal of transforming into a leading rare disease medicine company.

 

The Company’s CODM evaluates the financial performance of the Company’s segments based upon segment operating income.  Segment operating income is defined as loss before expense (benefit) for income taxes adjusted for the items set forth in the reconciliation below.  Items below income from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s CODM.  Additionally, certain expenses are not allocated to a segment.  The Company does not report balance sheet information by segment as no balance sheet by segment is reviewed by the Company’s CODM.  The accounting policy for the Company’s segments is described in Note 2.

 

The following table reflects net sales by medicine for the Company’s reportable segments for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

KRYSTEXXA

 

$

58,608

 

 

$

38,301

 

 

$

105,326

 

 

$

69,915

 

RAVICTI

 

 

56,958

 

 

 

47,239

 

 

 

106,051

 

 

 

91,114

 

PROCYSBI

 

 

38,433

 

 

 

36,679

 

 

 

73,367

 

 

 

70,959

 

ACTIMMUNE

 

 

27,382

 

 

 

28,819

 

 

 

52,240

 

 

 

55,021

 

RAYOS

 

 

13,452

 

 

 

11,643

 

 

 

24,142

 

 

 

21,901

 

BUPHENYL

 

 

5,244

 

 

 

6,231

 

 

 

10,986

 

 

 

12,555

 

LODOTRA

 

 

1,535

 

 

 

1,804

 

 

 

1,650

 

 

 

2,672

 

QUINSAIR

 

 

97

 

 

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