| • FORM 10-Q • CERTIFICATION OF THE CEO, UNDER RULE 13A-14(A), PURSUANT TO SECTION 302 • CERTIFICATION OF THE CFO, UNDER RULE 13A-14(A), PURSUANT TO SECTION 302 • CERTIFICATION OF THE CEO AND CFO, UNDER RULE 13A-14(A), PURSUANT TO SECTION 906 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2012 or
For the transition period from to Commission file number 0-53772
WARNER CHILCOTT PUBLIC LIMITED COMPANY (Exact name of registrant as specified in its charter)
1 Grand Canal Square, Docklands Dublin 2, Ireland (Address of principal executive offices) +353.1.897.2000 (Registrant’s telephone number, including area code)
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 ¨ 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 ¨ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x As of July 20, 2012, the registrant had 250,482,397 ordinary shares outstanding.
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Items other than those listed above have been omitted because they are not applicable.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in millions except share amounts) (Unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of ContentsWARNER CHILCOTT PUBLIC LIMITED COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (All amounts in millions except per share amounts) (Unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of ContentsWARNER CHILCOTT PUBLIC LIMITED COMPANY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions) (Unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of ContentsWARNER CHILCOTT PUBLIC LIMITED COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of ContentsWARNER CHILCOTT PUBLIC LIMITED COMPANY Notes to the Condensed Consolidated Financial Statements (unaudited) (All amounts in millions except share amounts, per share amounts or unless otherwise noted) 1. General The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete consolidated financial statements have been condensed or are not included herein. The interim statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”). The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim condensed consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The Company is responsible for the unaudited interim condensed consolidated financial statements included in this report. All intercompany transactions and balances have been eliminated in consolidation. 2. Summary of Significant Accounting Policies The following are interim updates to certain of the policies described in “Note 2” of the notes to the Company’s audited consolidated financial statements for the year ended December 31, 2011 included in the Annual Report. Revenue Recognition Revenue from product sales is recognized when title and risk of loss to the product transfers to the customer, which is based on the transaction shipping terms. Product sales are recorded net of all sales-related deductions including, but not limited to: trade discounts, sales returns and allowances, commercial and government rebates, customer loyalty programs and fee for service arrangements with certain distributors. The Company establishes accruals for its sales-related deductions in the same period that it recognizes the related gross sales based on select criteria for estimating such contra revenues including, but not limited to, contract terms, government regulations, estimated utilization or redemption rates, costs related to the programs and other historical data. These reserves reduce revenues and are included as either a reduction of accounts receivable or as a component of accrued expenses. No revisions were made to the methodology used in determining these reserves during the quarter and six months ended June 30, 2012. As of June 30, 2012 and December 31, 2011, the amounts related to all sales-related deductions included as a reduction of accounts receivable were $33 and $41, respectively. The amounts included in accrued liabilities were $486 (of which $121 related to reserves for product returns) and $542 (of which $131 related to reserves for product returns) as of June 30, 2012 and December 31, 2011, respectively. The provisions recorded to reduce gross sales to net sales were $200 and $221 in the quarters ended June 30, 2012 and 2011, respectively, and $448 and $424 in the six months ended June 30, 2012 and 2011, respectively. Restructuring Costs The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee severance costs are accrued when the restructuring actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period. See “Note 3” for more information. 3. Strategic Initiatives Western European Restructuring In April 2011, the Company announced a plan to restructure its operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring did not impact the Company’s operations at its headquarters in Dublin, Ireland, its facilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or its commercial operations in the United Kingdom. The Company determined to proceed with the restructuring following the completion of a strategic review of its operations in its Western European markets where its product ACTONEL lost exclusivity in late 2010. ACTONEL accounted for approximately 70% of the Company’s Western European revenues in the year ended December 31, 2010. In connection with the restructuring, the Company has moved to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The implementation of the restructuring plan impacted approximately 500 employees in total. Pretax severance costs of $7 and $57 were recorded in the quarter and six months ended June 30, 2012, respectively, and were included as a component of restructuring costs in the condensed consolidated statement of operations. Also included in restructuring costs (and offsetting the severance and other costs) in the condensed consolidated statement of operations were pension-related curtailment gains of $7 and $8 in the quarter and six months ended June 30, 2012, respectively. In the six months ended June 30, 2012, the Company incurred other restructuring costs of $1. Pretax severance costs of $15 and $58 were
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Table of Contentsrecorded in the quarter and six months ended June 30, 2011, respectively, and were included as a component of restructuring costs in the condensed consolidated statement of operations. Also included as restructuring costs in the condensed consolidated statement of operations were certain pretax contract termination expenses of $1 in the quarter and six months ended June 30, 2011. Although the Company does not expect to record any material expenses relating to the Western European restructuring in future periods, as a result of the expected timing of the termination of employees, the Company anticipates recording approximately $4 of additional pension-related curtailment gains during the second half of 2012. The majority of the remaining severance-related costs and other liabilities are expected to be settled in cash within the next twelve months. The Western European restructuring costs were recorded in the Company’s ROW operating segment (as defined in “Note 16”). Manati Facility In April 2011, the Company announced a plan to repurpose its Manati, Puerto Rico manufacturing facility. This facility now serves primarily as a warehouse and distribution center. As a result of the repurposing, the Company recorded charges of $23 for the write-down of certain property, plant and equipment in the six months ended June 30, 2011, of which $2 was recorded in the quarter ended June 30, 2011. Additionally, the Company recorded severance costs of $8 in the six months ended June 30, 2011, of which $1 was recorded in the quarter ended June 30, 2011. The expenses related to the Manati repurposing were recorded in the Company’s North American operating segment (as defined in “Note 16”) as a component of cost of sales. Severance Accruals The following table summarizes the activity in the Company’s aggregate severance accruals during the quarter and six months ended June 30, 2012:
4. ENABLEX Acquisition The Company and Novartis Pharmaceuticals Corporation (“Novartis”) were parties to an agreement to co-promote ENABLEX, developed by Novartis, in the U.S. On October 18, 2010, the Company acquired the U.S. rights to ENABLEX from Novartis for an upfront payment of $400 in cash at closing, plus future contingent milestone payments of up to $20 in the aggregate, subject to the achievement of pre-defined 2011 and 2012 ENABLEX net sales thresholds (the “ENABLEX Acquisition”). At the time of the ENABLEX Acquisition, $420 was recorded as a component of intangible assets and is being amortized on an accelerated basis over the period of the projected cash flows for the product. Concurrent with the closing of the ENABLEX Acquisition, the Company and Novartis terminated their existing co-promotion agreement, and the Company assumed full control of sales and marketing of ENABLEX in the U.S. market. In connection with the ENABLEX Acquisition, Novartis agreed to manufacture ENABLEX for the Company until October 2013. Novartis also currently packages ENABLEX for the Company. In the quarter ended June 30, 2012, the Company concluded that it was no longer probable, as defined by Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 450 “Contingencies”, that the contingent milestone payments to Novartis would be required to be paid. As a result, the Company reversed the related liability and recorded a $20 gain, which reduced selling, general and administrative (“SG&A”) expenses in the quarter and six months ended June 30, 2012. 5. Shareholders’ Equity In November 2011, the Company announced that its Board of Directors had authorized the redemption of up to an aggregate of $250 of its ordinary shares (the “Redemption Program”). Pursuant to the Redemption Program, the Company recorded the redemption of 3.7 million ordinary shares in the year ended December 31, 2011 at an aggregate cost of $56. During the six months ended June 30, 2012, the Company recorded the redemption of 1.9 million ordinary shares at an aggregate cost of $32. Following the settlement of such redemptions, the Company cancelled all shares redeemed. As a result of the redemptions recorded during the six months ended June 30, 2012, in accordance with ASC Topic 505 “Equity”, the Company recorded a decrease in ordinary shares at par value of $0.01 per share, and a decrease in an amount equal to the aggregate purchase price above par value in retained earnings of approximately $32. The Company did not redeem any ordinary shares in the quarter ended June 30, 2012. The Redemption Program does not obligate the
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Table of ContentsCompany to redeem any number of the Company’s ordinary shares or an aggregate of shares equal to the full $250 authorization. The Redemption Program will terminate on the earlier of December 31, 2012 or the redemption by the Company of an aggregate of $250 of its ordinary shares. 6. Earnings Per Share The Company accounts for earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings Per Share” and related guidance, which requires two calculations of EPS to be disclosed: basic and diluted. The numerator in calculating basic and diluted EPS is an amount equal to the consolidated net income for the periods presented. The denominator in calculating basic EPS is the weighted average shares outstanding for the respective periods. The denominator in calculating diluted EPS is the weighted average shares outstanding, plus the dilutive effect of stock option grants and unvested restricted share grants and their equivalent for the respective periods. The following sets forth the basic and diluted calculations of EPS for the quarters and six months ended June 30, 2012 and 2011, respectively:
The Redemption Program decreased each of the weighted average basic shares outstanding and the weighted average diluted shares outstanding by 1.9 million shares and 1.6 million shares during the quarter and six months ended June 30, 2012, respectively. The remaining 0.3 million shares redeemed in the six months ended June 30, 2012 were not included in the calculation of basic or diluted EPS as their impact was anti-dilutive under the treasury stock method. The following represents amounts not included in the above calculation of diluted EPS as their impact was anti-dilutive under the treasury stock method including the implied non-qualified options to purchase ordinary shares, restricted ordinary shares and their equivalent to be repurchased as defined by ASC Topic 260 “Earnings Per Share”:
7. Sanofi Collaboration Agreement The Company and Sanofi-Aventis U.S. LLC (“Sanofi”) are parties to an agreement to co-promote, where approved, ACTONEL and ATELVIA on a global basis, excluding Japan (as amended, the “Collaboration Agreement”). As a result of ACTONEL’s loss of patent exclusivity in Western Europe in late 2010 and as part of the Company’s transition to a wholesale distribution model in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the U.K., the Company and/or Sanofi reduced or discontinued marketing and promotional efforts in certain territories covered by the Collaboration Agreement. The Company’s and Sanofi’s rights and obligations are specified by geographic market. For example, under the Collaboration Agreement, Sanofi generally has the right to elect to participate in the development of ACTONEL-related product improvements, other than product improvements specifically related to the United States and Puerto Rico, where the Company has full control over all product development decisions. Under the Collaboration Agreement, the ongoing global research and development (“R&D”) costs for ACTONEL are shared equally between the parties, except for R&D costs specifically related to the United States and Puerto Rico, which are borne solely by the
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Table of ContentsCompany. In certain geographic markets, the Company and Sanofi share selling and advertising and promotion (“A&P”) costs as well as product profits based on contractual percentages. In the geographic markets where the Company is deemed to be the principal in transactions with customers, the Company recognizes all revenues from sales of the product along with the related product costs. The Company’s share of selling, A&P and contractual profit sharing expenses are recognized in SG&A expenses. In geographic markets where the Company is not the principal in transactions with customers, revenue is recognized on a net basis, as a component of other revenue, for amounts earned based on Sanofi’s sale transactions with its customers. The Company will continue to sell ACTONEL and ATELVIA products with Sanofi in accordance with its obligations under the Collaboration Agreement until the termination of the Collaboration Agreement on January 1, 2015, at which time all of Sanofi’s rights under the Collaboration Agreement will revert to the Company. Thereafter, the Company will have the sole right to market and promote ACTONEL and ATELVIA on a global basis, excluding Japan. For the quarters and six months ended June 30, 2012 and 2011, the Company recognized net sales, other revenue and co-promotion expenses as follows:
8. Inventories Inventories consisted of the following:
Total inventories are net of $16 and $15 related to inventory obsolescence reserves as of June 30, 2012 and December 31, 2011, respectively. Product samples are stated at cost ($10 and $12 as of June 30, 2012 and December 31, 2011, respectively) and are included in prepaid expenses and other current assets.
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Table of Contents9. Goodwill and Intangible Assets The Company’s goodwill and a trademark have been deemed to have indefinite lives and are not amortized. The Company’s acquired intellectual property, licensing agreements and certain trademarks that do not have indefinite lives are being amortized on either an economic benefit model, which typically results in accelerated amortization, or a straight-line basis over their useful lives not to exceed 15 years. The Company’s intangible assets as of June 30, 2012, consisted of the following:
Aggregate amortization expense related to intangible assets was $124 and $147 for the quarters ended June 30, 2012 and 2011, respectively, and was $254 and $295 for the six months ended June 30, 2012 and 2011, respectively. The Company continuously reviews its products’ remaining useful lives based on each product’s estimated future cash flows. The Company may incur impairment charges or accelerate the amortization of certain intangible assets based on triggering events that reduce expected future cash flows, including those events relating to the launch of a generic equivalent of the Company’s product prior to the expiration of the related patent. Based on the Company’s review of future cash flows, the Company recorded an impairment charge in the quarter ended June 30, 2012 of $106, $101 of which was attributable to the impairment of the Company’s DORYX intangible asset following the April 30, 2012 decision of the United States District Court for the District of New Jersey holding that neither Mylan Pharmaceuticals Inc.’s (“Mylan”) nor Impax Laboratories, Inc.’s (Impax”) proposed generic version of DORYX 150 infringed U.S. Patent No. 6,958,161 covering DORYX 150 (the “‘161 Patent”) and Mylan’s subsequent introduction of a generic product in May 2012. For a discussion of the DORYX patent litigation and the Company’s other ongoing patent litigation refer to “Note 14”. Estimated amortization expense based on forecasts as of June 30, 2012 (excluding indefinite-lived intangible assets) for the period from July 1, 2012 to December 31, 2012 and for each of the next five years was as follows:
10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following:
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Table of Contents11. Indebtedness New Senior Secured Credit Facilities On March 17, 2011, Warner Chilcott Holdings Company III, Limited (“Holdings III”), WC Luxco S.à r.l. (the “Luxco Borrower”), Warner Chilcott Corporation (“WCC” or the “US Borrower”) and Warner Chilcott Company, LLC (“WCCL” or the “PR Borrower”, and together with the Luxco Borrower and the US Borrower, the “Borrowers”) entered into a new credit agreement (the “Credit Agreement”) with a syndicate of lenders (the “Lenders”) and Bank of America, N.A. as administrative agent in order to refinance the Company’s Prior Senior Secured Credit Facilities (as defined below). Pursuant to the Credit Agreement, the Lenders provided senior secured credit facilities (the “New Senior Secured Credit Facilities”) in an aggregate amount of $3,250 comprised of (i) $3,000 in aggregate term loan facilities and (ii) a $250 revolving credit facility available to all Borrowers. The term loan facilities were initially comprised of (i) a $1,250 Term A Loan Facility (the “Term A Loan”) and (ii) a $1,750 Term B Loan Facility consisting of an $800 Term B-1 Loan, a $400 Term B-2 Loan and a $550 Term B-3 Loan (together, the “Term B Loans”). The proceeds of these term loans, together with approximately $279 of cash on hand, were used to make an optional prepayment of $250 in aggregate term loans under the Prior Senior Secured Credit Facilities, repay the remaining $2,969 in aggregate term loans outstanding under the Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest. The Term A Loan matures on March 17, 2016 and bears interest at LIBOR plus 3.00%, with a LIBOR floor of 0.75%, and each of the Term B Loans matures on March 15, 2018 and bears interest at LIBOR plus 3.25%, with a LIBOR floor of 1.00%. The revolving credit facility matures on March 17, 2016 and includes a $20 sublimit for swing line loans and a $50 sublimit for the issuance of standby letters of credit. Any swing line loans and letters of credit would reduce the available commitment under the revolving credit facility on a dollar-for-dollar basis. Loans drawn and letters of credit issued under the revolving credit facility bear interest at LIBOR plus 3.00%. The Borrowers are also required to pay a commitment fee on the unused commitments under the revolving credit facility at a rate of 0.75% per annum, subject to a leverage-based step-down. The loans and other obligations under the New Senior Secured Credit Facilities (including in respect of hedging agreements and cash management obligations) are (i) guaranteed by Holdings III and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Borrowers and each guarantor (subject to certain exceptions and limitations). In addition, the New Senior Secured Credit Facilities contain (i) customary provisions related to mandatory prepayment of the loans thereunder with (a) 50% of excess cash flow, as defined, subject to a leverage-based step-down and (b) the proceeds of asset sales or casualty events (subject to certain limitations, exceptions and reinvestment rights) and the incurrence of certain additional indebtedness and (ii) certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, loans and investments, acquisitions, dividends and other restricted payments, transactions with affiliates, asset dispositions, mergers and consolidations, prepayments, redemptions and repurchases of other indebtedness and other matters customarily restricted in such agreements and, in each case, subject to certain exceptions. During the six months ended June 30, 2012, the Company made optional prepayments in an aggregate amount of $350 of term loans under its New Senior Secured Credit Facilities. As of June 30, 2012, there were letters of credit totaling $2 outstanding. As a result, the Company had $248 available under the revolving credit facility as of June 30, 2012. The New Senior Secured Credit Facilities specify certain customary events of default including, without limitation, non-payment of principal or interest, violation of covenants, breaches of representations and warranties in any material respect, cross default or cross acceleration of other material indebtedness, material judgments and liabilities, certain Employee Retirement Income Security Act events and invalidity of guarantees and security documents under the New Senior Secured Credit Facilities. The fair value of the Company’s debt outstanding under its New Senior Secured Credit Facilities as determined in accordance with ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) under Level 2 based upon quoted prices for similar items in active markets, as of June 30, 2012 and December 31, 2011 was approximately $2,194 (book value of $2,196) and $2,601 (book value of $2,604), respectively. Prior Senior Secured Credit Facilities In connection with the Company’s acquisition from The Procter & Gamble Company (“P&G”) on October 30, 2009 of P&G’s global branded pharmaceuticals business (“PGP”) (such acquisition, the “PGP Acquisition”), Holdings III and its subsidiaries, the Luxco Borrower, WCC and WCCL entered into a credit agreement with Credit Suisse AG, Cayman Islands Branch as administrative agent and lender, and the other lenders and parties thereto pursuant to which the lenders provided senior secured credit facilities in an aggregate amount of $3,200 (the “Prior Senior Secured Credit Facilities”). The Prior Senior Secured Credit Facilities initially consisted of $2,600 of term loans, a $250 revolving credit facility and a $350 delayed-draw term loan facility. On December 16, 2009, the Borrowers entered into an amendment pursuant to which the lenders agreed to provide additional term loans of $350, and the delayed-draw term loan facility was terminated. The additional term loans were used to finance, together with cash on hand, the repurchase or redemption of any and all of the Company’s then-outstanding 8.75% senior subordinated notes due 2015. On August 20, 2010, Holdings III and the Borrowers entered into a subsequent amendment pursuant to which the lenders provided additional term
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Table of Contentsloans in an aggregate principal amount of $1,500 which, together with the proceeds from the issuance of $750 aggregate principal amount of the Company’s 7.75% Notes (defined below), were used to fund a special cash dividend to the Company’s shareholders in the amount of $8.50 per share, or $2,144 in the aggregate (the “Special Dividend”), and to pay related fees and expenses. 7.75% Notes On August 20, 2010, the Company and certain of the Company’s subsidiaries entered into an indenture (the “Indenture”) with Wells Fargo Bank, National Association, as trustee, in connection with the issuance by WCCL and Warner Chilcott Finance LLC (together, the “Issuers”) of $750 aggregate principal amount of 7.75% senior notes due 2018 (the “Initial 7.75% Notes”). The Initial 7.75% Notes are unsecured senior obligations of the Issuers, guaranteed on a senior basis by the Company and its subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The Initial 7.75% Notes will mature on September 15, 2018. Interest on the Initial 7.75% Notes is payable on March 15 and September 15 of each year, and the first payment was made on March 15, 2011. On September 29, 2010, the Issuers issued an additional $500 aggregate principal amount of 7.75% senior notes due 2018 at a premium of $10 (the “Additional 7.75% Notes” and, together with the Initial 7.75% Notes, the “7.75% Notes”). The proceeds from the issuance of the Additional 7.75% Notes were used by the Company to fund its $400 upfront payment in connection with the ENABLEX Acquisition, which closed on October 18, 2010, and for general corporate purposes. The Additional 7.75% Notes constitute a part of the same series as the Initial 7.75% Notes. The Issuers’ obligations under the Additional 7.75% Notes are guaranteed by the Company and by its subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The $10 premium received was added to the face value of the 7.75% Notes and is being amortized over the life of the 7.75% Notes as a reduction to reported interest expense. The Indenture contains restrictive covenants that limit, among other things, the ability of each of Holdings III, and certain of Holdings III’s subsidiaries, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repurchase subordinated debt and common and preferred stock, make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. The Indenture also contains customary events of default which would permit the holders of the 7.75% Notes to declare those 7.75% Notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the 7.75% Notes or other material indebtedness, the failure to satisfy covenants, and specified events of bankruptcy and insolvency. As of June 30, 2012 and December 31, 2011, the fair value of the Company’s outstanding 7.75% Notes ($1,250 book value) as determined in accordance with ASC 820 under Level 2 based upon quoted prices for similar items in active markets, was $1,338 and $1,278, respectively. Components of Indebtedness As of June 30, 2012, the Company’s outstanding debt included the following:
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Table of ContentsAs of June 30, 2012, scheduled mandatory principal repayments of long-term debt for the period from July 1, 2012 to December 31, 2012 and in each of the five years ending December 31, 2013 through 2017 and thereafter were as follows:
12. Stock-Based Compensation Plans The Company’s stock-based compensation, including grants of non-qualified time-based vesting options to purchase ordinary shares and grants of time-based and performance-based vesting restricted ordinary shares and their equivalents, is measured at fair value on the date of grant and is recognized in the statement of operations as compensation expense over the applicable vesting periods. For purposes of computing the amount of stock-based compensation attributable to time-based vesting options and time-based vesting restricted ordinary shares (and their equivalents) expensed in any period, the Company treats such equity grants as serial grants with separate vesting dates. This treatment results in accelerated recognition of share-based compensation expense whereby 52% of the compensation is recognized in year one, 27% is recognized in year two, 15% is recognized in year three, and 6% is recognized in the final year of vesting. The Company treats performance-based vesting restricted ordinary share grants and their equivalent as vesting evenly over a four year vesting period, subject to the achievement of annual performance targets. Total stock-based compensation expense recognized for the quarters ended June 30, 2012 and 2011 was $6 and $7, respectively. Total stock-based compensation expense recognized for each of the six months ended June 30, 2012 and 2011 was $12. Unrecognized future stock-based compensation expense was $37 as of June 30, 2012. This amount will be recognized as an expense over a remaining weighted average period of 1.3 years. The Company has granted equity-based incentives to its employees comprised of restricted ordinary shares, and their equivalent, and non-qualified options to purchase ordinary shares. All restricted ordinary shares, and their equivalent (whether time-based vesting or performance-based vesting), are granted and expensed, using the closing market price per share on the applicable grant date, over a four year vesting period. Non-qualified options to purchase ordinary shares are granted to employees at exercise prices per share equal to the closing market price per share on the date of grant. The fair value of options is determined on the applicable grant dates using the Black-Scholes method of valuation and that amount is recognized as an expense over the four year vesting period. In establishing the value of the options on each grant date, the Company uses its actual historical volatility for its ordinary shares to estimate the expected volatility at each grant date. The options have a term of ten years. The Company assumes that the options will be exercised, on average, in six years. Using the Black-Scholes valuation model, the fair value of the options is based on the following assumptions:
The weighted average remaining contractual term of all outstanding options to purchase ordinary shares granted was 7 years as of June 30, 2012.
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Table of ContentsThe following is a summary of equity award activity for unvested restricted ordinary shares, and their equivalent, in the period from December 31, 2011 through June 30, 2012:
The following is a summary of equity award activity for non-qualified options to purchase ordinary shares in the period from December 31, 2011 through June 30, 2012:
The intrinsic value of non-qualified options to purchase ordinary shares is calculated as the difference between the closing price of the Company’s ordinary shares and the exercise price of the non-qualified options to purchase ordinary shares that had a strike price below the closing price. The total intrinsic value for the non-qualified options to purchase ordinary shares that are “in-the-money” as of June 30, 2012 was as follows:
13. Commitments and Contingencies Product Development Agreements In July 2007, the Company entered into an agreement with Paratek Pharmaceuticals Inc. (“Paratek”) under which it acquired certain rights to novel tetracyclines under development for the treatment of acne and rosacea. The Company paid an up-front fee of $4 and agreed to reimburse Paratek for R&D expenses incurred during the term of the agreement. In September 2010, the Company made a $1 milestone payment to Paratek upon the achievement of a developmental milestone. During the quarter ended June 30, 2012, the Company made a $2 milestone payment to Paratek upon the achievement of a developmental milestone, which was included in R&D expenses. The Company may make additional payments to Paratek upon the achievement of certain developmental milestones that could aggregate up to $21. In addition, the Company agreed to pay royalties to Paratek based on the net sales, if any, of the products covered under the agreement. In December 2008, the Company signed an agreement (the “Dong-A Agreement”) with Dong-A PharmTech Co. Ltd. (“Dong-A”), to develop and, if approved, market its orally-administered udenafil product, a PDE5 inhibitor, for the treatment of erectile dysfunction (“ED”) in the United States. The Company paid $2 in connection with signing the Dong-A Agreement. In March 2009, the Company paid $9 to Dong-A upon the achievement of a developmental milestone related to the ED product under the Dong-A Agreement. The Company agreed to pay for all development costs incurred during the term of the Dong-A Agreement with respect to
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Table of Contentsdevelopment of the ED product for the United States and may make additional payments to Dong-A of up to $13 upon the achievement of contractually-defined milestones in relation to the ED product. In addition, the Company agreed to pay a profit-split to Dong-A based on operating profit (as defined in the Dong-A Agreement), if any, resulting from the commercial sale of the ED product. In February 2009, the Company acquired the U.S. rights to Apricus Biosciences, Inc.’s (formerly NexMed, Inc.) (“Apricus”) topically applied alprostadil cream for the treatment of ED and a prior license agreement between the Company and Apricus relating to the product was terminated. Under the terms of the acquisition agreement, the Company paid Apricus an up-front payment of $3. The Company also agreed to make a milestone payment of $2 upon the Food and Drug Administration’s (“FDA”) approval of the product’s New Drug Application. The Company continues to work to prepare its response to the non-approvable letter that the FDA delivered to Apricus in July 2008 with respect to the product. In April 2010, the Company amended the Dong-A Agreement to add the right to develop, and if approved, market in the U.S. and Canada, Dong-A’s udenafil product for the treatment of lower urinary tract symptoms associated with Benign Prostatic Hyperplasia (“BPH”). As a result of this amendment, the Company made an up-front payment to Dong-A of $20 in April 2010. Under the amendment, the Company may make additional payments to Dong-A in an aggregate amount of up to $25 upon the achievement of contractually-defined milestones in relation to the BPH product. These payments would be in addition to the potential milestone payments in relation to the ED product described above. The Company also agreed to pay Dong-A a percentage of net sales of the BPH product in the U.S. and Canada, if any. The Company and Sanofi are parties to the Collaboration Agreement pursuant to which they co-promote, where approved, ACTONEL and ATELVIA on a global basis, excluding Japan. See “Note 7” for additional information related to the Collaboration Agreement. Other Commitments and Contingencies In March 2012, the Company’s Fajardo, Puerto Rico manufacturing facility received a warning letter from the FDA. The warning letter raised certain violations of current Good Manufacturing Practices originally identified in a Form 483 observation letter issued by the FDA after an inspection of the Company’s Fajardo facility in June and July 2011. More specifically, the warning letter indicated that the Company failed to conduct a comprehensive evaluation of its corrective actions to ensure that certain stability issues concerning OVCON 50 were adequately addressed. In addition, the FDA cited the Company’s stability issues with OVCON 50 and the Company’s evaluation of certain other quality data, in expressing its general concerns with respect to the performance of the Company’s Fajardo quality control unit. The Company takes these matters seriously and submitted a written response to the FDA in April 2012. Following its receipt of the Form 483 observation letter, the Company immediately initiated efforts to address the issues identified by the FDA and has been working diligently to resolve the FDA’s concerns. Until the cited issues are resolved, the FDA will likely withhold approval of requests for, among other things, pending drug applications listing the Fajardo facility. At this time, the Company does not expect that the warning letter will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. However, the Company can give no assurances that the FDA will be satisfied with its response to the warning letter or as to the expected date of the resolution of the matters included in the warning letter. 14. Legal Proceedings General Matters The Company is involved in various legal proceedings in the normal course of its business, including product liability litigation, intellectual property litigation, employment litigation, such as unfair dismissal and federal and state fair labor and minimum wage law suits, and other litigation. The outcome of such litigation is uncertain, and the Company may from time to time enter into settlements to resolve such litigation that could result, among other things, in the sale of generic versions of the Company’s products prior to the expiration of its patents. The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable. The Company maintains insurance with respect to potential litigation in the normal course of its business based on its consultation with its insurance consultants and outside legal counsel, and in light of current market conditions, including cost and availability. In addition, the Company self-insures for certain liabilities not covered under its litigation insurance based on estimates of potential claims developed in consultation with its insurance consultants and outside legal counsel. The following discussion is limited to the Company’s material on-going legal proceedings: Product Liability Litigation Hormone Therapy Product Liability Litigation Approximately 721 product liability suits, including some with multiple plaintiffs, have been filed against, or tendered to, the Company related to its hormone therapy (“HT”) products, FEMHRT, ESTRACE, ESTRACE Cream and medroxyprogesterone
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Table of Contentsacetate. Under the purchase and sale agreement pursuant to which the Company acquired FEMHRT from Pfizer Inc. (“Pfizer”) in 2003, the Company agreed to assume certain product liability exposure with respect to claims made against Pfizer after March 5, 2003 and tendered to the Company relating to FEMHRT products. The cases are in the early stages of litigation and the Company is in the process of analyzing and investigating the individual complaints. The lawsuits were likely triggered by the July 2002 and March 2004 announcements by the National Institute of Health (“NIH”) of the terminations of two large-scale randomized controlled clinical trials, which were part of the Women’s Health Initiative (“WHI”), examining the long-term effect of HT on the prevention of coronary heart disease and osteoporotic fractures, and any associated risk for breast cancer in postmenopausal women. In the case of the trial terminated in 2002, which examined combined estrogen and progestogen therapy (the “E&P Arm of the WHI Study”), the safety monitoring board determined that the risks of long-term estrogen and progestogen therapy exceeded the benefits, when compared to a placebo. WHI investigators found that combined estrogen and progestogen therapy did not prevent heart disease in the study subjects and, despite a decrease in the incidence of hip fracture and colorectal cancer, there was an increased risk of invasive breast cancer, coronary heart disease, stroke, blood clots and dementia. In the trial terminated in 2004, which examined estrogen therapy, the trial was ended one year early because the NIH did not believe that the results were likely to change in the time remaining in the trial and that the increased risk of stroke could not be justified for the additional data that could be collected in the remaining time. As in the E&P Arm of the WHI Study, WHI investigators again found that estrogen only therapy did not prevent heart disease and, although study subjects experienced fewer hip fractures and no increase in the incidence of breast cancer compared to subjects randomized to placebo, there was an increased incidence of stroke and blood clots in the legs. The estrogen used in the WHI study was conjugated equine estrogen and the progestin was medroxyprogesterone acetate, the compounds found in Premarin ® and Prempro ®, products marketed by Wyeth (now a part of Pfizer). Numerous lawsuits were filed against Wyeth, as well as against other manufacturers of HT products, after the publication of the summary of the principal results of the E&P Arm of the WHI Study. Approximately 80% of the complaints filed against, or tendered to, the Company did not specify the HT drug alleged to have caused the plaintiff’s injuries. These complaints broadly allege that the plaintiff suffered injury as a result of an HT product. The Company has sought the dismissal of lawsuits that, after further investigation, do not involve any of its products. The Company has successfully reduced the number of HT suits it will have to defend. Of the approximately 721 suits that were filed against, or tendered to, the Company, 523 have been dismissed and 94 involving ESTRACE have been successfully tendered to Bristol-Myers Squibb Company (“Bristol-Myers”) pursuant to an indemnification provision in the asset purchase agreement pursuant to which the Company acquired ESTRACE. The purchase agreement included an indemnification agreement whereby Bristol-Myers indemnified the Company for product liability exposure associated with ESTRACE products that were shipped prior to July 2001. The Company has forwarded an agreed upon dismissal notice in one case to plaintiff’s counsel and filed motions to dismiss 10 other cases involving medroxyprogesterone acetate, a generic HT product formerly sold by the Company. Although it is impossible to predict with certainty the outcome of any litigation, an unfavorable outcome in these proceedings is not anticipated. An estimate of the potential loss, or range of loss, if any, to the Company relating to these proceedings is not possible at this time. ACTONEL Product Liability Litigation The Company is a defendant in approximately 185 cases and a potential defendant with respect to approximately 286 unfiled claims involving a total of approximately 479 plaintiffs and potential plaintiffs relating to the Company’s bisphosphonate prescription drug ACTONEL. The claimants allege, among other things, that ACTONEL caused them to suffer osteonecrosis of the jaw (“ONJ”), a rare but serious condition that involves severe loss or destruction of the jawbone, and/or atypical fractures of the femur. All of the cases have been filed in either federal or state courts in the United States. The Company is in the initial stages of discovery in these litigations. The 286 unfiled claims involve potential plaintiffs that have agreed, pursuant to a tolling agreement, to postpone the filing of their claims against the Company in exchange for the Company’s agreement to suspend the statutes of limitations relating to their potential claims. In addition, the Company is aware of four purported product liability class actions that were brought against the Company in provincial courts in Canada alleging, among other things, that ACTONEL caused the plaintiffs and the proposed class members who ingested ACTONEL to suffer atypical fractures or other side effects. It is expected that these plaintiffs will seek class certification. The Company is reviewing these lawsuits and potential claims and intends to defend these claims vigorously. Sanofi, which co-promotes ACTONEL with the Company on a global basis pursuant to the Collaboration Agreement, is a defendant in many of the Company’s ACTONEL product liability cases. In some of the cases, manufacturers of other bisphosphonate products are also named as defendants. Plaintiffs have typically asked for unspecified monetary and injunctive relief, as well as attorney’s fees. The Company cannot at this time predict the outcome of these lawsuits and claims or their financial impact. Under the Collaboration Agreement, Sanofi has agreed to indemnify the Company, subject to certain limitations, for 50% of the losses from any product liability claims in Canada relating to ACTONEL and for 50% of the losses from any product liability claims in the U.S. and Puerto Rico relating to ACTONEL brought prior to April 1, 2010, which would include approximately 90 claims relating to ONJ and other alleged injuries that were pending as of March 31, 2010 and not subsequently dismissed. Pursuant to the April 2010 amendment to the Collaboration Agreement, the Company will be fully responsible for any product liability claims in the U.S. and Puerto Rico relating to ACTONEL brought on or after April 1, 2010. The Company may be liable for product liability, warranty or similar claims in relation to PGP products, including ONJ-related claims that were pending as of the closing of the PGP Acquisition. The Company’s agreement with P&G provides that P&G will indemnify the Company, subject to certain limits, for 50% of the Company’s losses from any such claims, including approximately 88 claims relating to ONJ and other alleged injuries, pending as of October 30, 2009 and not subsequently dismissed.
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Table of ContentsThe Company currently maintains product liability insurance coverage for claims aggregating between $25 and $170, subject to certain exclusions, and otherwise is self-insured. The Company’s insurance may not apply to, among other things, damages or defense costs related to the above mentioned HT or ACTONEL-related claims, including any claim arising out of HT or ACTONEL products with labeling that does not conform completely to FDA approved labeling. Although it is impossible to predict with certainty the outcome of any litigation, an unfavorable outcome in these proceedings is not anticipated. An estimate of the potential loss, or range of loss, if any, to the Company relating to these proceedings is not possible at this time. Gastroenterology Patent Matters ASACOL 400 In June 2010, the Company and Medeva Pharma Suisse AG (“Medeva”) received a Paragraph IV certification notice letter from Par Pharmaceutical, Inc. (“Par”) indicating that Par had submitted to the FDA an Abbreviated New Drug Application (“ANDA”) seeking approval to manufacture and sell a generic version of the Company’s ASACOL 400 mg product (“ASACOL 400”). The notice letter contended that Medeva’s U.S. Patent No. 5,541,170 (the “‘170 Patent”) and U.S. Patent No. 5,541,171 (the “‘171 Patent”), formulation and method patents which the Company exclusively licenses from Medeva covering ASACOL 400, were invalid and not infringed. In August 2010, the Company and Medeva filed a patent lawsuit against Par and EMET Pharmaceuticals LLC (“EMET”) in the U.S. District Court for the District of New Jersey alleging infringement of the ‘170 Patent. Medeva and the Company elected not to bring an infringement action with respect to the ‘171 Patent. EMET was the original filer of the ANDA according to Par’s notice letter, and assigned and transferred all right, title and interest in the ANDA to Par in June 2010. The lawsuit resulted in a stay of FDA approval of Par’s ANDA for 30 months from the date of the Company’s receipt of Par’s notice letter, or December 2012, subject to prior resolution of the matter before the Court. In October 2011, the Court held a Markman hearing to determine claim construction of the patent claims at issue in the litigation. The Court issued its Markman decision in June 2012, and the parties are currently engaged in discovery. The Company believes that the FDA has not yet granted tentative approval to Par’s ANDA with respect to ASACOL 400. If Par’s ANDA were to receive final approval from the FDA, and Par elected to launch a generic equivalent of ASACOL 400 “at-risk” following the expiration of the 30-month stay in December 2012, a generic equivalent of ASACOL 400 could enter the market prior to the expiration of the ‘170 Patent in 2013. While the Company and Medeva intend to vigorously defend the ‘170 Patent and pursue their legal rights, the Company can offer no assurance as to when the pending litigation will be decided, whether the lawsuit will be successful or that a generic equivalent of ASACOL 400 will not be approved and enter the market prior to the expiration of the ‘170 Patent in 2013. ASACOL HD In September 2011, the Company received a Paragraph IV certification notice letter from Zydus Pharmaceuticals USA, Inc. (together with its affiliates, “Zydus”) indicating that Zydus had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s ASACOL 800 mg product (“ASACOL HD”). Zydus contends that the Company’s U.S. Patent No. 6,893,662, expiring in November 2021 (the “‘662 Patent”), is invalid and/or not infringed. In addition, Zydus indicated that it had submitted a Paragraph III certification with respect to the ‘170 Patent and the ‘171 Patent, consenting to the delay of FDA approval of the ANDA product until the ‘170 Patent and the ‘171 Patent expire. In November 2011, the Company filed a lawsuit against Zydus in the United States District Court for the District of Delaware charging Zydus with infringement of the ‘662 Patent. The lawsuit results in a stay of FDA approval of Zydus’ ANDA for 30 months from the date of the Company’s receipt of the Zydus notice letter, subject to prior resolution of the matter before the court. While the Company intends to vigorously defend the ‘662 Patent and pursue its legal rights, the Company can offer no assurance as to when the pending litigation will be decided, whether the lawsuit will be successful or that a generic equivalent of ASACOL HD will not be approved and enter the market prior to the expiration of the ‘662 Patent in 2021. Osteoporosis Patent Matters ACTONEL ACTONEL Once-a-Week In July 2004, PGP received a Paragraph IV certification notice letter from a subsidiary of Teva Pharmaceutical Industries, Ltd. (together with its subsidiaries “Teva”) indicating that Teva had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of PGP’s ACTONEL 35 mg product (“ACTONEL OaW”). The notice letter contended that PGP’s U.S. Patent No. 5,583,122 (the “‘122 Patent”), a new chemical entity patent expiring in June 2014 (including a 6-month pediatric extension of regulatory exclusivity), was invalid, unenforceable or not infringed. In August 2004, PGP filed a patent lawsuit against Teva in the U.S. District Court for the District of Delaware charging Teva with infringement of the ‘122 Patent. In January 2006, Teva admitted patent infringement but alleged that the ‘122 Patent was invalid and, in February 2008, the District Court decided in favor of PGP and upheld the ‘122 Patent as valid and enforceable. In May 2009, the U.S. Court of Appeals for the Federal Circuit unanimously upheld the decision of the District Court.
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Table of ContentsTeva has received final approval from the FDA for its generic version of ACTONEL OaW and could enter the market as early as June 2014, following the expiration of the ‘122 Patent (including a 6-month pediatric extension of regulatory exclusivity). In addition, several other companies have submitted ANDAs to the FDA seeking approval to manufacture and sell generic versions of ACTONEL OaW, including Aurobindo Pharma Limited (“Aurobindo”), Mylan and Sun Pharma Global, Inc. (“Sun”). None of these additional ANDA filers challenged the validity of the ‘122 Patent, and as a result, the Company does not believe that any of the ANDA filers will be permitted to market their proposed generic versions of ACTONEL OaW prior to the expiration of the patent in June 2014 (including a 6-month pediatric extension of regulatory exclusivity). However, if any of these ANDA filers receive final approval from the FDA with respect to their ANDAs, such filers could also enter the market with a generic version of ACTONEL OaW following the expiration of the ‘122 Patent. ACTONEL Once-a-Month In August 2008, December 2008 and January 2009, PGP and Hoffman-La Roche Inc. (“Roche”) received Paragraph IV certification notice letters from Teva, Sun and Apotex Inc. and Apotex Corp. (together “Apotex”), indicating that each such company had submitted to the FDA an ANDA seeking approval to manufacture and sell generic versions of the ACTONEL 150 mg product (“ACTONEL OaM”). The notice letters contended that Roche’s U.S. Patent No. 7,192,938 (the “‘938 Patent”), a method patent expiring in November 2023 (including a 6-month pediatric extension of regulatory exclusivity) which Roche licensed to PGP with respect to ACTONEL OaM, was invalid, unenforceable or not infringed. PGP and Roche filed patent infringement suits against Teva in September 2008, Sun in January 2009 and Apotex in March 2009 in the U.S. District Court for the District of Delaware charging each with infringement of the ‘938 Patent. The lawsuits resulted in a stay of FDA approval of each defendant’s ANDA for 30 months from the date of PGP’s and Roche’s receipt of notice, subject to the prior resolution of the matters before the court. The stay of approval of each of Teva’s, Sun’s and Apotex’s ANDAs has expired, and the FDA has tentatively approved Teva’s ANDA with respect to ACTONEL OaM. However, none of the defendants challenged the validity of the underlying ‘122 Patent, which covers all of the Company’s ACTONEL products, including ACTONEL OaM, and does not expire until June 2014 (including a 6-month pediatric extension of regulatory exclusivity). As a result, the Company does not believe that any of the defendants will be permitted to market their proposed generic versions of ACTONEL OaM prior to June 2014. On February 24, 2010, the Company and Roche received a Paragraph IV certification notice letter from Mylan indicating that it had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ACTONEL OaM. The notice letter contends that the ‘938 Patent, which expires in November 2023 and covers ACTONEL OaM, is invalid and/or will not be infringed. The Company and Roche filed a patent suit against Mylan in April 2010 in the U.S. District Court for the District of Delaware charging Mylan with infringement of the ‘938 Patent based on its proposed generic version of ACTONEL OaM. The lawsuit results in a stay of FDA approval of Mylan’s ANDA for 30 months from the date of the Company’s and Roche’s receipt of notice, subject to prior resolution of the matter before the court. Additionally, Mylan did not challenge the validity of the underlying ‘122 Patent which expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity) and covers all of the Company’s ACTONEL products. As a result, the Company does not believe that Mylan will be permitted to market its proposed ANDA product prior to the June 2014 expiration of the ‘122 Patent (including a 6-month pediatric extension of regulatory exclusivity). In October, November and December 2010 and February 2011, the Company and Roche received Paragraph IV certification notice letters from Sun, Apotex, Teva and Mylan, respectively, indicating that each such company had amended its existing ANDA covering generic versions of ACTONEL OaM to include Roche’s U.S. Patent No. 7,718,634 (the “‘634 Patent”). The notice letters contended that the ‘634 Patent, a method patent expiring in November 2023 (including a 6-month pediatric extension of regulatory exclusivity) which Roche licensed to the Company with respect to ACTONEL OaM, was invalid, unenforceable or not infringed. The Company and Roche filed patent infringement suits against Sun and Apotex in December 2010, against Teva in January 2011 and against Mylan in March 2011 in the U.S. District Court for the District of Delaware charging each with infringement of the ‘634 Patent. The Company believes that no additional 30-month stay is available in these matters because the ‘634 Patent was listed in the FDA’s Orange Book subsequent to the date on which Sun, Apotex, Teva and Mylan filed their respective ANDAs with respect to ACTONEL OaM. However, the underlying ‘122 Patent, which covers all of the Company’s ACTONEL products, including ACTONEL OaM, does not expire until June 2014 (including a 6-month pediatric extension of regulatory exclusivity). The Company and Roche’s actions against Teva, Apotex, Sun and Mylan for infringement of the ‘938 Patent and the ‘634 Patent arising from each such party’s proposed generic version of ACTONEL OaM were consolidated for all pretrial purposes, and a consolidated trial for those suits was previously expected to be held in July 2012. Following an adverse ruling in Roche’s separate ongoing patent infringement suit before the U.S. District Court for the District of New Jersey relating to its Boniva® product, in which the court held that claims of the ‘634 Patent covering a monthly dosing regimen using ibandronate were invalid as obvious, Teva, Apotex, Sun and Mylan filed a motion for summary judgment in the Company’s ACTONEL OaM patent infringement litigation. In the motion, the defendants have sought to invalidate the asserted claims of the ‘938 Patent and ‘634 Patent, which cover a monthly dosing regimen using risedronate, on similar grounds. The previously scheduled trial has been postponed pending resolution of the new summary judgment motion. A date for the hearing of the motion has not yet been set. To the extent that any ANDA filer also submitted a Paragraph IV certification with respect to U.S. Patent No. 6,165,513 covering ACTONEL OaM, the Company has determined not to pursue an infringement action with respect to this patent. While the Company and Roche intend to vigorously defend the ‘938 Patent and the ‘634 Patent and protect their legal rights, the Company can
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Table of Contentsoffer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful or that a generic equivalent of ACTONEL OaM will not be approved and enter the market prior to the expiration of the ‘938 Patent and the ‘634 Patent in 2023 (including, in each case, a 6-month pediatric extension of regulatory exclusivity). ATELVIA In August and October 2011 and March 2012, the Company received Paragraph IV certification notice letters from Watson Laboratories, Inc.—Florida (together with Watson Pharmaceuticals, Inc. and its subsidiaries, “Watson”), Teva and Ranbaxy Laboratories Ltd. (together with its affiliates, “Ranbaxy”) indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of ATELVIA 35 mg tablets (“ATELVIA”). The notice letters contend that the Company’s U.S. Patent Nos. 7,645,459 (the “‘459 Patent”) and 7,645,460 (the “‘460 Patent”), two formulation and method patents expiring in January 2028, are invalid, unenforceable and/or not infringed. The Company filed a lawsuit against Watson in October 2011, against Teva in November 2011 and against Ranbaxy in April 2012 in the United States District Court for the District of New Jersey charging each with infringement of the ‘459 Patent and ‘460 Patent. The lawsuits result in a stay of FDA approval of each defendant’s ANDA for 30 months from the date of the Company’s receipt of such defendant’s notice letter, subject to prior resolution of the matter before the court. In addition, none of the ANDA filers certified against the ‘122 Patent, which covers all of the Company’s ACTONEL and ATELVIA products and expires in June 2014 (including a 6-month pediatric extension of regulatory exclusivity). While the Company intends to vigorously defend the ‘459 Patent and the ‘460 Patent and pursue its legal rights, the Company can offer no assurance as to when the lawsuits will be decided, whether such lawsuits will be successful or that a generic equivalent of ATELVIA will not be approved and enter the market prior to the expiration of the ‘459 Patent and the ‘460 Patent in 2028. Hormonal Contraceptive Patent Matters LOESTRIN 24 FE In April 2011, the Company received a Paragraph IV certification notice letter from Mylan, as U.S. agent for Famy Care Ltd. (“Famy Care”), indicating that Famy Care had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s oral contraceptive, LOESTRIN 24 FE. The notice letter contends that the Company’s U.S. Patent No. 5,552,394 (the “‘394 Patent”), which covers LOESTRIN 24 FE and expires in 2014, is invalid, unenforceable or not infringed. In June 2011, the Company filed a lawsuit against Famy Care and Mylan in the United States District Court for the District of New Jersey charging each with infringement of the ‘394 Patent. The lawsuit results in a stay of FDA approval of Famy Care’s ANDA for 30 months from the date of the Company’s receipt of the Famy Care notice letter, subject to the prior resolution of the matter before the court. In January 2009, the Company entered into a settlement and license agreement with Watson to resolve patent litigation related to the ‘394 Patent. Under the agreement, Watson agreed, among other things, not to commence marketing its generic equivalent product until the earliest of (i) January 22, 2014, (ii) 180 days prior to a date on which the Company has granted rights to a third party to market a generic version of LOESTRIN 24 FE in the U.S. or (iii) the date on which a third party enters the market with a generic version of LOESTRIN 24 FE in the U.S. without authorization from the Company. In addition, under current law, unless Watson forfeits its “first filer” status, the FDA may not approve later-filed ANDAs until 180 days following the date on which Watson enters the market. However, the Company believes Watson may have forfeited its “first filer” status as a result of its failure to obtain approval by the FDA of its ANDA within the requisite period. In October 2010, the Company also entered into a settlement and license agreement with Lupin Ltd. and its U.S. subsidiary, Lupin Pharmaceuticals, Inc. (collectively “Lupin”), to resolve patent litigation related to the ‘394 Patent. Under that agreement, Lupin and its affiliates agreed, among other things, not to market or sell a generic equivalent product until the earlier of July 22, 2014 or the date of an “at-risk” entry into the U.S. market by a third party generic version of LOESTRIN 24 FE. While the Company intends to vigorously defend the ‘394 Patent and pursue its legal rights, it can offer no assurance that a generic equivalent of LOESTRIN 24 FE will not be approved and enter the market prior to the expiration of the ‘394 Patent in 2014. LO LOESTRIN FE In July 2011 and April 2012, the Company received Paragraph IV certification notice letters from Lupin and Watson indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s oral contraceptive, LO LOESTRIN FE. The notice letters contend that the ‘394 Patent and the Company’s U.S. Patent No. 7,704,984 (the “‘984 Patent”), which cover LO LOESTRIN FE and expire in 2014 and 2029, respectively, are invalid and/or not infringed. The Company filed a lawsuit against Lupin in September 2011 and against Watson in May 2012 in the United States District Court for the District of New Jersey charging each with infringement of the ‘394 Patent and the ‘984 Patent. The lawsuits result in a stay of FDA approval of each defendant’s ANDA for 30 months from the date of the Company’s receipt of such defendant’s notice letter, subject to the prior resolution of the matter before the court. While the Company intends to vigorously defend the ‘394 Patent and the ‘984 Patent and pursue its legal rights, it can offer no assurance as to when the lawsuits will be decided, whether such lawsuits will be successful or that a generic equivalent of LO LOESTRIN FE will not be approved and enter the market prior to the expiration of the ‘394 Patent in 2014 and/or the ‘984 Patent in 2029.
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Table of ContentsDermatology Patent and Other Litigation Matters DORYX Patent Litigation In March 2009, the Company and Mayne Pharma International Pty. Ltd. (“Mayne”) received Paragraph IV certification notice letters from Impax and Mylan indicating that each had submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of DORYX 150. The notice letters contend that Mayne’s ‘161 Patent expiring in 2022 is not infringed. In March and May 2009, the Company and Mayne, which licenses the ‘161 Patent to the Company, filed lawsuits against Impax and Mylan, respectively, in the United States District Court for the District of New Jersey, charging each with infringement of the ‘161 Patent. The resulting 30-month stay of FDA approval of each of Mylan’s and Impax’s ANDAs with respect to DORYX 150 expired in September 2011. In September 2011, the Company received FDA approval for a dual-scored DORYX 150 product, which today accounts for all but a de minimis amount of the Company’s DORYX net sales, and filed a citizen petition requesting that the FDA refrain from granting final approval to any DORYX 150 ANDA unless the ANDA filer’s product also adopts a dual-scored configuration and has the same labeling as the Company’s dual-scored DORYX 150 product. On February 8, 2012, the FDA denied the Company’s citizen petition and granted final approval to Mylan for its generic version of DORYX 150. Impax has not yet received final approval of its ANDA from the FDA with respect to DORYX 150 and has forfeited its “first filer” status. The actions against Mylan and Impax were consolidated and a trial was held in early February 2012. On April 30, 2012, the court issued its opinion upholding the validity of the ‘161 Patent, but determining that neither Mylan’s nor Impax’s proposed generic version of DORYX 150 infringed the ‘161 Patent. The Company is appealing the non-infringement determinations, and Impax and Mylan are appealing the court’s denial of attorney’s fees. As a consequence of the court’s ruling, Mylan has entered the market with its FDA approved generic equivalent of DORYX 150. As a result of Mylan’s entry, under settlement agreements previously entered into with Heritage Pharmaceuticals Inc. (“Heritage”) and Sandoz Inc. (“Sandoz”) in connection with their respective ANDA challenges, each of Heritage and Sandoz can market and sell a generic equivalent of DORYX 150 upon receipt of final FDA approval for its generic product. The Company expects the loss of exclusivity for DORYX 150 will result in significant declines in its future DORYX revenues and have an adverse impact on its results of operations and cash flows in subsequent periods. In addition, the Company recorded an impairment charge of $101 in the quarter ended June 30, 2012 related to its DORYX intangible asset. Mylan has also made a claim for damages resulting from the issuance of the court order prohibiting Mylan from launching a generic version of DORYX 150 until the court rendered its decision. Although the Company has appealed the court’s April 30, 2012 decision and intends to vigorously defend itself from Mylan’s damages claim, it is impossible to predict with certainty the outcome of any litigation. As a result, the Company can offer no assurance as to whether it will be successful in its appeal or in its defense of Mylan’s damages claim, or that an unfavorable outcome on appeal or with respect to Mylan’s damages claim will not have an adverse impact on the Company’s results of operations and cash flows. An estimate of the potential loss, or range of loss, if any, to the Company resulting from Mylan’s claim is not possible at this time. Other DORYX Litigation In July 2012, Mylan filed a complaint against the Company and Mayne in the United States District Court for the Eastern District of Pennsylvania alleging that the Company and Mayne prevented or delayed Mylan’s generic competition to the Company’s DORYX products in violation of U.S. federal antitrust laws and tortiously interfered with Mylan’s prospective economic relationships under Pennsylvania state law. In the complaint, Mylan seeks unspecified treble and punitive damages and attorney’s fees. Following the filing of Mylan’s complaint, three class actions were filed against the Company and Mayne by and on behalf of parties who allege that they paid higher prices for the Company’s DORYX products as a result of the Company’s and Mayne’s actions preventing or delaying generic competition in violation of U.S. federal antitrust laws. These suits were filed in the United States District Court for the Eastern District of Pennsylvania and seek unspecified treble damages and attorney’s fees. The Company is currently reviewing each of these complaints and intends to vigorously defend its rights in the litigations. However, it is impossible to predict with certainty the outcome of any litigation, and the Company can offer no assurance as to when the lawsuits will be decided, whether the Company will be successful in its defense and whether any additional similar suits will be filed. If these claims are successful such claims could adversely affect the Company and could have a material adverse effect on the Company’s business, financial condition, results of operation and cash flows. These proceedings are in the early stages of litigation, and an estimate of the potential loss, or range of loss, if any, to the Company relating to these proceedings is not possible at this time. False Claims Act Litigation In December 2009, the Company was served with a civil complaint brought by an individual plaintiff in the United States District Court for the District of Massachusetts, purportedly on behalf of the United States, alleging that the Company and over 20 other pharmaceutical manufacturers violated the False Claims Act (“FCA”), 31 U.S.C. § 3729(a)(1)(A), (B), by submitting false records or statements to the federal government, thereby causing Medicaid to pay for unapproved or ineffective drugs. The plaintiff’s original complaint was filed under seal in 2002, but was not served on the Company until 2009. The complaint alleges that the Company submitted to the Centers for Medicare and Medicaid Services (“CMS”) false information regarding the safety and effectiveness of certain nitroglycerin transdermal products. The plaintiff alleges that CMS included these products in its list of reimbursable prescription drugs and that, as a consequence, federal Medicaid allegedly reimbursed state Medicaid programs for a
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Table of Contentsportion of the cost of such products. The plaintiff asserts that from 1996 until 2003 the federal Medicaid program paid approximately $10 to reimburse the states for such nitroglycerin transdermal products. The complaint seeks, among other things, treble damages; a civil penalty of up to ten thousand dollars for each alleged false claim; and costs, expenses and attorneys’ fees. The Company intends to defend this action vigorously and currently believes that the complaint lacks merit. The Company has a number of defenses to the allegations in the complaint and has, along with its co-defendants, filed a joint motion to dismiss the action. In addition, the United States has declined to intervene in this action with respect to the Company. Although it is impossible to predict with certainty the outcome of any litigation, an unfavorable outcome in these proceedings is not anticipated. An estimate of the potential loss, or range of loss, if any, to the Company relating to these proceedings is not possible at this time. Fair Labor Standards Act and State Minimum Wage Litigation In August 2010, the Company was served with a complaint in a class and collective action brought under the Fair Labor Standards Act and the Illinois Minimum Wage Law and filed in the United States District Court for the Northern District of Illinois. In January 2012, the Company was served with a complaint in a class action brought under the New York Minimum Wage Act and filed in the United States District Court for the Southern District of New York. These suits were brought by former pharmaceutical sales representatives of the Company, on behalf of themselves and other similarly situated sales representatives, and allege that the Company improperly categorized its pharmaceutical sales representatives as “exempt” rather than “non-exempt” employees and as a result, wrongfully denied them overtime compensation. Plaintiffs have sought injunctive relief as well as damages for unpaid overtime, including back pay, liquidated damages, penalties, interest, and attorneys’ fees. As a result of the recent Supreme Court decision in Christopher v. SmithKline Beecham Corp., the Illinois action was dismissed with prejudice in June 2012. The New York action remains ongoing, and the Company believes it has meritorious defenses and intends to defend this action vigorously. This case is in the early stages of litigation, and an estimate of the potential loss, or range of loss, if any, to the Company relating to this proceeding is not possible at this time. Governmental Investigations Beginning in February 2012, the Company, along with several current and former non-executive employees in its sales organization and certain third parties, received subpoenas from the United States Attorney for the District of Massachusetts. The subpoena received by the Company seeks information and documentation relating to a wide range of matters, including sales and marketing activities, payments to people who are in a position to recommend drugs, medical education, consultancies, prior authorization processes, clinical trials, off-label use and employee training (including with respect to laws and regulations concerning off-label information and physician remuneration), in each case relating to all of the Company’s current key products. The Company is cooperating in responding to the subpoena, but cannot predict or determine the impact of this inquiry on its future financial condition or results of operations. 15. Income Taxes The Company operates in many tax jurisdictions including: Ireland, the U.S., the U.K., Puerto Rico, Germany, Switzerland, Canada and other Western European countries. The Company’s effective tax rate for the quarter and six months ended June 30, 2012 was 41% and 30%, respectively. The Company’s effective tax rate for the quarter and six months ended June 30, 2011 was 23% and 51%, respectively. The effective income tax rate for interim reporting periods reflects the changes in income mix among the various tax jurisdictions in which the Company operates, the impact of discrete items, as well as the overall level of consolidated income before income taxes. For the six months ended June 30, 2012, the discrete items included reserves related to the announced restructuring of certain of the Company’s Western European operations as well as the impairment charge relating to the Company’s DORYX intangible asset. For the six months ended June 30, 2011, the discrete items included valuation allowances related to the announced restructuring of certain of the Company’s Western European operations as well as the repurposing of its Manati facility. The Company’s estimated annual effective tax rate for all periods includes the impact of changes in income tax liabilities related to reserves recorded under ASC Topic 740 “Accounting for Income Taxes”. 16. Segment Information The Company’s business is organized into two reportable segments, North America (which includes the U.S., Canada and Puerto Rico) and the Rest of the World (“ROW”) consistent with how it manages its business and views the markets it serves. The Company manages its businesses separately in North America and ROW as components of an enterprise for which separate information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. In addition to managing the Company’s results of operations in the two reportable segments, the Company manages revenues at a brand level. An operating segment’s performance is primarily evaluated based on segment operating profit, which excludes interest expense, and is used by the chief operating decision maker to evaluate the success of a specific region. The Company believes that segment
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Table of Contentsoperating profit is an appropriate measure for evaluating the operating performance of its segments. However, this measure should be considered in addition to, not a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with U.S. GAAP. The following represents the Company’s segment operating profit and a reconciliation to its consolidated income before taxes for the quarters and six months ended June 30, 2012 and 2011:
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Table of ContentsThe following table presents total revenues by product for the quarters and six months ended June 30, 2012 and 2011:
The following tables present additional segment information for the quarters and six months ended June 30, 2012 and 2011:
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Table of ContentsThe following table presents total revenue by country of domicile for the quarters and six months ended June 30, 2012 and 2011:
17. Reliance on Significant Suppliers In the event that a significant supplier (including a third-party manufacturer, packager or supplier of certain active pharmaceutical ingredients, or “API”) suffers an event that causes it to be unable to manufacture or package the Company’s product or meet the Company’s API requirements for a sustained period and the Company is unable to obtain the product or API from an alternative supplier, the resulting shortages of inventory could have a material adverse effect on the business of the Company. The following table shows revenue generated from products by significant supplier as a percentage of total revenues.
18. Retirement Plans The Company has defined benefit retirement pension plans covering certain employees in Western Europe. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. The net periodic benefit (credit) / cost of the Company’s non-U.S. defined benefit plans amounted to $(7) and $0 for the quarters ended June 30, 2012 and 2011, respectively. Included in the net periodic benefit (credit) for the quarter ended June 30, 2012 was a curtailment gain of $(7) in connection with the Western European restructuring described in “Note 3”. The net periodic benefit (credit) / cost of the Company’s non-U.S. defined benefit plans amounted to $(7) and $1 for the six months ended June 30, 2012 and 2011, respectively. Included in the net periodic benefit (credit) for the six months ended June 30, 2012 was a curtailment gain of $(8) in connection with the Western European restructuring.
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You should read the following discussion together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 (“Annual Report”). This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under “Risk Factors” in our Annual Report and elsewhere in this Form 10-Q. Summary The following are certain significant events that occurred in the six months ended June 30, 2012:
2011 Strategic Transactions During 2011, we announced the following strategic transactions that impacted our results of operations in the quarter and six months ended June 30, 2012 as compared to the prior year periods. Refinancing of Senior Secured Indebtedness On March 17, 2011, our subsidiaries, Warner Chilcott Holdings Company III, Limited (“Holdings III”), WC Luxco S.à r.l. (the “Luxco Borrower”), Warner Chilcott Corporation (“WCC” or the “US Borrower”) and Warner Chilcott Company, LLC (“WCCL” or the “PR Borrower”, and together with the Luxco Borrower and the US Borrower, the “Borrowers”) entered into a new credit agreement (the “Credit Agreement”) with a syndicate of lenders (the “Lenders”) and Bank of America, N.A. as administrative agent, in order to refinance our Prior Senior Secured Credit Facilities (as defined below). Pursuant to the Credit Agreement, the Lenders provided senior secured credit facilities (the “New Senior Secured Credit Facilities”) in an aggregate amount of $3,250 million comprised of $3,000 million in aggregate term loan facilities and a $250 million revolving credit facility available to all Borrowers. At the closing, we borrowed a total of $3,000 million under the term loan facilities and made no borrowings under the revolving credit facility. The proceeds of the term loans, together with approximately $279 million of cash on hand, were used to make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 million in aggregate term loans outstanding under our Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest. Western European Restructuring In April 2011, we announced a plan to restructure our operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring did not impact our operations at our headquarters in Dublin, Ireland, our
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Table of Contentsfacilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or our commercial operations in the United Kingdom. We determined to proceed with the restructuring following the completion of a strategic review of our operations in our Western European markets where our product ACTONEL lost exclusivity in late 2010. ACTONEL accounted for approximately 70% of our Western European revenues in the year ended December 31, 2010. In connection with the restructuring, we moved to a wholesale distribution model in the affected jurisdictions to minimize operational costs going forward. The implementation of the restructuring plan impacted approximately 500 employees in total. For a further discussion of the Western European restructuring, including severance charges recorded as a component of restructuring costs in our condensed consolidated statement of operations, see “Note 3” to the notes to our condensed consolidated financial statements. Manati Facility In April 2011, we announced a plan to repurpose our Manati, Puerto Rico manufacturing facility. This facility now serves primarily as a warehouse and distribution center. As a result of the repurposing, we recorded charges of $23 million for the write-down of certain property, plant and equipment in the six months ended June 30, 2011, of which $2 million was recorded in the quarter ended June 30, 2011. Additionally, severance costs of $8 million were recorded in the six months ended June 30, 2011, of which $1 million was recorded in the quarter ended June 30, 2011. These severance costs relating to the Manati repurposing were settled in cash during the year ended December 31, 2011. The expenses relating to the Manati repurposing were recorded as a component of cost of sales in our condensed consolidated statement of operations. Redemption Program In November 2011, we announced that our Board of Directors authorized the Redemption Program. During the six months ended June 30, 2012, we recorded the redemption of 1.9 million ordinary shares at an aggregate cost of $32 million. In addition, we recorded the redemption of 3.7 million ordinary shares in the quarter ended December 31, 2011 at an aggregate cost of $56 million. Following the settlement of such redemptions, we cancelled all shares redeemed. We did not redeem any ordinary shares in the quarter ended June 30, 2012. The Redemption Program does not obligate us to redeem any number of our ordinary shares or an aggregate of shares equal to the full $250 million authorization. The Redemption Program will terminate on the earlier of December 31, 2012 or the redemption by us of an aggregate of $250 million of our ordinary shares.
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Table of ContentsOperating Results for the quarters and six months ended June 30, 2012 and 2011 Revenue The following table sets forth our revenue for the quarters and six months ended June 30, 2012 and 2011, with the corresponding dollar and percentage changes:
Total revenue in the quarter ended June 30, 2012 was $638 million, a decrease of $32 million, or 5%, compared to the same quarter in the prior year. Total revenue in the six months ended June 30, 2012 was $1,323 million, a decrease of $104 million, or 7%, compared to the same period in the prior year. For the quarter ended June 30, 2012, the decrease in revenues as compared to the prior year quarter was primarily driven by a decline in ACTONEL revenues of $43 million, due in large part to overall declines in the U.S. oral bisphosphonate market as well as the continued declines in ACTONEL rest of world (“ROW”) net sales following the 2010 loss of exclusivity in Western Europe, offset, in part, by net sales growth in certain promoted products, primarily LO LOESTRIN FE, ESTRACE Cream and ATELVIA. For the six months ended June 30, 2012, the decrease was primarily attributable to a decline in ACTONEL revenues of $129 million and a decline in DORYX net sales of $45 million which was offset, in part, by net sales growth in certain promoted products, primarily LO LOESTRIN FE, ESTRACE Cream, ASACOL and ATELVIA, as compared to the prior year period. Period-over-period changes in the net sales of our products are a function of a number of factors, including changes in: market demand, gross selling prices, sales-related deductions from gross sales to arrive at net sales and the levels of pipeline inventories of our products held by our direct and indirect customers. In addition, the launch of new products, the loss of exclusivity for our products and transactions such as product acquisitions and dispositions may also, from time to time, impact our period over period net sales. We use IMS Health, Inc. (“IMS”) estimates of filled prescriptions for our products as a proxy for market demand in the U.S. Although these estimates provide a broad indication of market trends for our products in the U.S., the relationship between IMS estimates of filled prescriptions and actual unit sales can vary, and as a result, such estimates may not always be an accurate predictor of our unit sales.
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Table of ContentsRevenues of our osteoporosis products decreased $35 million, or 17%, in the quarter ended June 30, 2012, and $106 million, or 24%, in the six months ended June 30, 2012, compared with the prior year periods. Total revenues of ACTONEL were $150 million and $296 million, in the quarter and six months ended June 30, 2012, respectively, compared to $193 million and $425 million, respectively, in the prior year periods. Total ACTONEL revenues were comprised of the following components:
In the United States, ACTONEL net sales decreased $16 million, or 15%, in the quarter ended June 30, 2012, and $84 million, or 34%, in the six months ended June 30, 2012, compared with the prior year periods, primarily due to a decrease in filled prescriptions of 37% in the quarter and six months ended June 30, 2012. For the quarter ended June 30, 2012, the decrease in filled prescriptions was offset, in part, by a decrease in sales-related deductions and higher average selling prices as compared to the prior year quarter. For the six months ended June 30, 2012, the decrease in filled prescriptions, coupled with an increase in sales-related deductions, was offset, in part, by higher average selling prices as compared to the prior year period. In the U.S., ACTONEL filled prescriptions continue to decline due primarily to declines in prescriptions within the overall oral bisphosphonate market. ACTONEL ROW net sales were $32 million in the quarter ended June 30, 2012, down 38% from $52 million in the prior year quarter. In the six months ended June 30, 2012, ACTONEL ROW net sales were $73 million, down 30% from $104 million in the prior year period. The decline in ACTONEL ROW net sales in the quarter and six months ended June 30, 2012 was due to the continued declines in ROW net sales following the 2010 loss of exclusivity in Western Europe. While we expect to continue to experience significant declines in total ACTONEL revenues throughout the remainder of 2012 relative to 2011, we expect net sales from our new product ATELVIA will grow and partially offset some of those declines in the U.S. market. ATELVIA, which we began to promote in the U.S. in early 2011, generated net sales of $16 million and $8 million in the quarters ended June 30, 2012 and 2011, respectively, and $32 million and $9 million in the six months ended June 30, 2012 and 2011, respectively. The increase in ATELVIA net sales primarily relates to an increase in filled prescriptions of 120% and 197% in the quarter and six months ended June 30, 2012, respectively, as compared to the prior year periods. Net sales of our oral contraceptive products increased $20 million, or 17%, in the quarter ended June 30, 2012, and $25 million, or 10%, in the six months ended June 30, 2012, compared with the prior year periods. LOESTRIN 24 FE generated net sales of $97 million in the quarter ended June 30, 2012, a decrease of 5%, compared with $102 million in the prior year quarter. During the six months ended June 30, 2012, LOESTRIN 24 FE generated net sales of $205 million, a decrease of 7%, compared with $221 million in the prior year period. The decrease in LOESTRIN 24 FE net sales in the quarter and six months ended June 30, 2012 as compared to the prior year periods was primarily due to a decrease in filled prescriptions of 14% and 17%, respectively, and an increase in sales-related deductions, offset, in part, by an expansion of pipeline inventories and higher average selling prices relative to the prior year periods. LO LOESTRIN FE, which we began to promote in the U.S. in early 2011 and is currently the primary promotional focus of our sales efforts, generated net sales of $34 million and $11 million, in the quarters ended June 30, 2012 and 2011, respectively, an increase of 209%. Additionally, LO LOESTRIN FE generated net sales of $62 million and $19 million in the six months ended June 30, 2012 and 2011, respectively, an increase of 226%. The increase in LO LOESTRIN FE net sales primarily relates to an increase in filled prescriptions of 277% and 477% in the quarter and six months ended June 30, 2012, respectively, as compared to the prior year periods. Net sales of our hormone therapy products increased $4 million, or 8%, in the quarter ended June 30, 2012 and $21 million, or 21%, in the six months ended June 30, 2012, as compared with the prior year periods. Net sales of ESTRACE Cream increased $8 million, or 21%, and $25 million, or 34%, in the quarter and six months ended June 30, 2012, respectively, as compared to the prior year periods. The increase in ESTRACE Cream net sales in the quarter ended June 30, 2012 compared to the prior year quarter was primarily due to an increase in filled prescriptions of 15% and higher average selling prices, offset, in part, by a contraction of pipeline inventories relative to the prior year quarter. The increase in ESTRACE Cream net sales in the six months ended June 30, 2012 compared to the prior year period was due primarily to an increase in filled prescriptions of 15%, a decrease in sales-related deductions and higher average selling prices. Net sales of ASACOL were $187 million in the quarter ended June 30, 2012, a decrease of $1 million, or 1%, compared to the prior year quarter. Net sales of ASACOL were $398 million in the six months ended June 30, 2012, an increase of $23 million, or 6%, compared with the prior year period. ASACOL net sales in North America in the quarters ended June 30, 2012 and 2011 totaled $175 million and $174 million, respectively, including net sales in the United States of $169 million and $168 million, respectively. The increase in ASACOL net sales in the United States of $1 million was due to higher average selling prices and a decrease in sales-related deductions, offset, in part, by a contraction of pipeline inventories and a decrease in filled prescriptions of 3% based on IMS estimates,
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Table of Contentsrelative to the prior year quarter. ASACOL net sales in North America in the six months ended June 30, 2012 and 2011 totaled $374 million and $352 million, respectively, including net sales in the United States of $362 million and $341 million, respectively. The increase in ASACOL net sales in the United States relative to the prior year period was primarily due to higher average selling prices and an expansion of pipeline inventories, offset, in part, by a decrease in filled prescriptions of 3% based on IMS estimates. Our ASACOL 400 mg product accounted for approximately 72% of our total ASACOL net sales in the quarter and six months ended June 30, 2012. See “Note 14” to the notes to our condensed consolidated financial statements included elsewhere in this report for a description of legal proceedings related to ASACOL. Net sales of DORYX decreased $9 million, or 28%, and $45 million, or 46% in the quarter and six months ended June 30, 2012, compared to the prior year periods. The decrease in DORYX net sales in the quarter ended June 30, 2012 relative to the prior year quarter was due primarily to the introduction of generic competition for DORYX 150 mg following the April 30, 2012 decision of the United States District Court for the District of New Jersey holding that neither Mylan’s nor Impax’s proposed generic version of DORYX 150 mg infringed the patent covering DORYX 150 mg, as well as an increase in sales-related deductions, offset, in part, by an expansion of pipeline inventories and higher average selling prices relative to the prior year quarter. The decrease in DORYX net sales in the six months ended June 30, 2012 relative to the prior year period was due primarily to an increase in sales-related deductions relating to changes made to the terms of our loyalty card program and other rebate programs and the introduction of generic competition for DORYX 150 mg, offset, in part, by higher average selling prices relative to the prior year period. We expect generic competition for DORYX 150 mg to result in significant declines in our future DORYX net sales. See “Note 14” to the notes to our condensed consolidated financial statements included elsewhere in this report. Net sales of ENABLEX in the quarter ended June 30, 2012 were $41 million, an increase of 3%, compared to $40 million in the prior year quarter. Net sales of ENABLEX in the six months ended June 30, 2012 of $85 million were flat as compared with the prior year period. The increase in net sales for the quarter ended June 30, 2012 as compared to the prior year quarter was primarily due to higher average selling prices and a decrease in sales-related deductions, offset, in part, by a decrease in filled prescriptions of 17%. ENABLEX net sales in the six months ended June 30, 2012 were impacted by a decrease in filled prescriptions of 15% relative to the prior year period, offset by higher average selling prices and a decrease in sales-related deductions. Cost of Sales (excluding amortization of intangible assets) The table below shows the calculation of cost of sales and cost of sales percentage for the quarters and six months ended June 30, 2012 and 2011:
Cost of sales (excluding amortization) decreased $6 million, or 8%, and $57 million, or 29%, in the quarter and six months ended June 30, 2012, respectively, compared with the prior year periods. The quarter and six months ended June 30, 2011 included $3 million and $31 million, respectively, in costs related to the repurposing of our Manati facility. Excluding the impact of the repurposing, our cost of sales as a percentage of product net sales was 11% in the quarters ended June 30, 2012 and 2011 and was 11% and 12% in the six months ended June 30, 2012 and 2011, respectively. The decrease in the six months ended June 30, 2012 relative to the prior year period was primarily due to the mix of products sold as well as operational savings as a result of the Manati repurposing.
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Table of ContentsSelling, General & Administrative Expenses Our SG&A expenses were comprised of the following for the quarters and six months ended June 30, 2012 and 2011:
SG&A expenses for the quarter ended June 30, 2012 were $173 million, a decrease of $75 million, or 30%, from $248 million in the prior year quarter. SG&A expenses for the six months ended June 30, 2012 were $371 million, a decrease of $130 million, or 26%, from $501 million in the prior year period. A&P expenses decreased $11 million, or 31%, and $37 million, or 43%, in the quarter and six months ended June 30, 2012, respectively, as compared to the prior year periods. The quarter and six months ended June 30, 2011 included A&P expenses attributable to the U.S. launches of LO LOESTRIN FE and ATELVIA, including direct-to-consumer spend, which were not incurred in the quarter and six months ended June 30, 2012. Selling and distribution expenses decreased $29 million, or 22%, and $48 million, or 18%, in the quarter and six months ended June 30, 2012 as compared to the prior year periods. The decrease in the quarter ended June 30, 2012 relative to the prior year quarter was primarily due to a $15 million reduction in expenses resulting from operating savings realized as a result of the Western European restructuring, a reduction in the expenses incurred in the prior year quarter relating to the launches of LO LOESTRIN FE and ATELVIA and higher U.S. personnel costs in the prior year quarter. The decrease in selling and distribution expenses in the six months ended June 30, 2012 relative to the prior year period was primarily due to a $24 million reduction in expenses resulting from operating savings realized as a result of the Western European restructuring and the reduction in expenses in the prior year period relating to the aforementioned personnel costs and product launches. G&A expenses decreased $35 million, or 45%, and $45 million, or 29%, in the quarter and six months ended June 30, 2012, respectively, relative to the prior year periods. Included in G&A expenses in the quarter and six months ended June 30, 2012 was a $20 million gain relating to the reversal of the liability for contingent milestone payments, which have been deemed no longer probable of being paid in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 450 “Contingencies”. Excluding the impact of this gain, G&A decreased by $15 million, or 19%, and $25 million, or 16%, in the quarter and six months ended June 30, 2012 relative to the prior year periods. The decrease in G&A expenses in the quarter ended June 30, 2012 as compared to the prior year quarter was due, in part, to operating savings resulting from the Western European restructuring of $6 million, as well as an increase in foreign currency gains of $8 million. The decrease in G&A expenses in the six months ended June 30, 2012 as compared to the prior year period was due, in part, to operating savings resulting from the Western European restructuring of $13 million as well as an increase in foreign currency gains of $5 million. Restructuring Costs In April 2011, we announced a plan to restructure our operations in Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the United Kingdom. The restructuring did not impact our operations at our headquarters in Dublin, Ireland, our facilities in Dundalk, Ireland, Larne, Northern Ireland or Weiterstadt, Germany or our commercial operations in the United Kingdom. We determined to proceed with the restructuring following the completion of a strategic review of our operations in our Western European markets where our product ACTONEL lost exclusivity in late 2010. Pretax severance costs of $7 million and $15 million were recorded in the quarters ended June 30, 2012 and 2011, respectively, and pretax severance costs of $57 million and $58 million were recorded in the six months ended June 30, 2012 and 2011, respectively, as a component of restructuring costs in our condensed consolidated statement of operations. Included as a component of restructuring costs (and offsetting the severance and other costs) in our condensed consolidated statement of operations for the quarter and six months ended June 30, 2012 were pension-related curtailment gains of $7 million and $8 million, respectively. In addition, in the six months ended June 30, 2012 we incurred $1 million of other contract-related costs and in the quarter and six months ended June 30, 2011 we incurred $1 million of other contract-related costs which are included as a component of restructuring costs in the condensed consolidated statement of operations. Although we do not expect to record any material expenses relating to the Western European restructuring in future periods, as a result of the expected timing of the termination of employees, we anticipate recording approximately $4 million of additional pension-related curtailment gains during the second half of 2012.
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Table of ContentsR&D Our research and development (“R&D”) expenses were comprised of the following for the quarters and six months ended June 30, 2012 and 2011:
Our investment in R&D decreased $2 million, or 8%, and $8 million, or 14%, in the quarter and six months ended June 30, 2012, respectively, as compared to the prior year periods. The decrease in the quarter and six months ended June 30, 2012 relative to the prior year periods was primarily due to the timing and stages of development of our various R&D projects. Our R&D expenses consist of our internal development costs, fees paid to contract development groups and license fees paid to third parties, including a $2 million payment made to Paratek Pharmaceuticals, Inc. in connection with the achievement of a developmental milestone during the quarter ended June 30, 2012. Project-related costs in the quarter and six months ended June 30, 2012 primarily related to project spend within our women’s healthcare, dermatology and gastroenterology therapeutic categories. Project-related costs in the quarter and six months ended June 30, 2011 primarily related to project spend within our urology, women’s healthcare and dermatology therapeutic categories. Amortization and Impairment of Intangible Assets Amortization of intangible assets in the quarters ended June 30, 2012 and 2011 was $124 million and $147 million, respectively. Amortization of intangible assets in the six months ended June 30, 2012 and 2011 was $254 million and $295 million, respectively. Our amortization methodology is calculated on either an economic benefit model or a straight-line basis to match the expected useful life of the asset, with identifiable assets assessed individually or by product family. The economic benefit model is based on expected future cash flows and typically results in accelerated amortization for most of our products. We continuously review the remaining useful lives of our identified intangible assets based on each product family’s estimated future cash flows. In the event that we do not achieve the expected cash flows from any of our products or lose market exclusivity for any of our products as a result of the expiration of a patent, the expiration of FDA exclusivity or the launch of a competing generic product, we may accelerate amortization or record an impairment charge and write-down the value of the related intangible asset. Based on our review of future cash flows, we recorded an impairment charge in the quarter ended June 30, 2012 of $106 million, $101 million of which was attributable to the impairment of our DORYX intangible asset following the April 30, 2012 decision of the United States District Court for the District of New Jersey holding that neither Mylan’s nor Impax’s proposed generic version of DORYX 150 mg infringed the patent covering DORYX 150 mg and Mylan’s subsequent introduction of a generic product in May 2012. We expect our 2012 amortization expense to decline compared to 2011 as most of our intangible assets are amortized on an accelerated basis.
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Table of ContentsNet interest expense Our net interest expense was comprised of the following for the quarters and six months ended June 30, 2012 and 2011:
Net interest expense for the quarter ended June 30, 2012 was $52 million, a decrease of $13 million, or 20%, as compared to the prior year quarter. Included in net interest expense in the quarter ended June 30, 2011 was $4 million relating to the write-off of deferred loan costs associated with $150 million of optional prepayments of term loans under our New Senior Secured Credit Facilities. Excluding the write-off of deferred loan costs in the prior year quarter, net interest expense decreased $9 million in the quarter ended June 30, 2012 relative to the prior year quarter. The decrease was due in large part to a decrease in our average outstanding indebtedness relative to the same quarter in 2011. The decrease in our average outstanding indebtedness relative to the prior year quarter was due to optional prepayments and repayments of debt made during 2011 and in the first quarter of 2012. Net interest expense for the six months ended June 30, 2012 was $114 million, a decrease of $106 million, or 48%, as compared to the prior year period. Included in net interest expense in the six months ended June 30, 2011 was $81 million of deferred loan costs, including $77 million relating to the write-off of deferred loan costs arising from optional prepayments of debt and the repayment of the outstanding balance of our Prior Senior Secured Credit Facilities in March 2011. Included in net interest expense in the six months ended June 30, 2012 was $8 million relating to the write-off of deferred loan costs associated with optional prepayments of $350 million of indebtedness under our New Senior Secured Credit Facilities made in the first quarter of 2012. Excluding the write-off of deferred loan costs, net interest expense decreased $33 million in the six months ended June 30, 2012 relative to the prior year period. The decrease was due in large part to a decrease in our average outstanding indebtedness relative to the same period in 2011, as well as reduced interest rates on our term loan indebtedness as a result of the refinancing of our Prior Senior Secured Credit Facilities. The decrease in our average outstanding indebtedness was due to optional prepayments and repayments of debt made during 2011 and in the first quarter of 2012. Provision for Income Taxes We operate in many tax jurisdictions, including: Ireland, the U.S., the U.K., Puerto Rico, Germany, Switzerland, Canada and other Western European countries. Our effective tax rate for the quarter and six months ended June 30, 2012 was 41% and 30%, respectively. Our effective tax rate for the quarter and six months ended June 30, 2011 was 23% and 51%, respectively. The effective income tax rate for interim reporting periods reflects the changes in income mix among the various tax jurisdictions in which we operate, the impact of discrete items, as well as the overall level of consolidated income before income taxes. For the six months ended June 30, 2012, the discrete items included reserves related to the announced restructuring of certain of our Western European operations as well as the impairment charge relating to our DORYX intangible asset. For the six months ended June 30, 2011, the discrete items included valuation allowances related to the announced restructuring of certain of our Western European operations as well as the repurposing of our Manati facility. Our estimated annual effective tax rate for all periods includes the impact of changes in income tax liabilities related to reserves recorded under ASC Topic 740 “Accounting for Income Taxes”. Net Income Due to the factors described above, we reported net income of $53 million and $72 million in the quarters ended June 30, 2012 and 2011, respectively, and $166 million and $48 million in the six months ended June 30, 2012 and 2011, respectively. Operating Results by Segment Our business is organized into two reportable segments, North America (which includes the U.S., Canada and Puerto Rico) and the ROW consistent with how we manage our business and view the markets we serve. We manage our business separately in North
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Table of ContentsAmerica and ROW as components of an enterprise for which separate information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. In addition to managing our results of operations in the two reportable segments, we manage revenues at a brand level as presented. We measure an operating segment’s performance primarily based on segment operating profit, which excludes interest, and is used by the chief operating decision maker to evaluate the success of a specific region. In the quarters ended June 30, 2012 and 2011, revenues in North America were $1,013 million and $1,001 million, respectively. In the six months ended June 30, 2012 and 2011, revenues in North America were $2,025 and $2,324 million, respectively. In the quarters ended June 30, 2012 and 2011, revenues in ROW were $104 million and $203 million, respectively. In the six months ended June 30, 2012 and 2011, revenues in ROW were $204 and $406 million, respectively. Our revenues by segment fluctuate from period to period primarily due to the timing of our inter-segment revenues. In the quarters ended June 30, 2012 and 2011, segment operating profits in North America were $155 million and $221 million, respectively. In the six months ended June 30, 2012 and 2011, segment operating profits in North America were $381 and $647 million, respectively. In the quarters ended June 30, 2012 and 2011, segment operating profits in ROW were $30 million and $8 million, respectively. In the six months ended June 30, 2012 and 2011, segment operating profits in ROW were $39 and $17 million, respectively. Our segment operating profit in any period as compared to the relevant prior period fluctuates based on many factors, including the timing and amount of our inter-segment revenues and mix of profit by jurisdiction. Financial Condition, Liquidity and Capital Resources Cash At June 30, 2012, our cash on hand was $530 million, as compared to $616 million at December 31, 2011. As of June 30, 2012, our total outstanding debt was $3,454 million and consisted of $2,196 million of term loan borrowings under our New Senior Secured Credit Facilities, $1,250 million aggregate principal amount of 7.75% Notes (as defined below), and $8 million of unamortized premium attributable to the 7.75% Notes. The following table summarizes our net change in cash and cash equivalents for the periods presented:
We reported net income of $166 million in the six months ended June 30, 2012 as compared to $48 million for the prior year period. Net income in both periods was negatively impacted by certain non-cash expenses. The primary reasons for the decline in our net cash provided by operating activities in the six months ended June 30, 2012 relative to the prior year period were the changes in certain working capital components. We paid approximately $44 million in cash for severance in the six months ended June 30, 2012 as compared to $9 million in the prior year period. Also reducing net cash from operating activities in the six months ended June 30, 2012 relative to the prior year period was the timing of our (i) ACTONEL co-promotion liability payments which reduced cash by $97 million as compared to a reduction of $58 million in the prior year period and (ii) cash payments for income taxes. In addition, our trade accounts receivable increased and our accrued expenses decreased in the six months ended June 30, 2012 relative to the prior year period as a result of timing. We have no liabilities for unrecognized tax benefits (including interest) under ASC Topic 740 expected to settle within the next twelve months. Our liability for unrecognized tax benefits (including interest) which is expected to settle after twelve months is $76 million. Our net cash used in investing activities during the six months ended June 30, 2012 and 2011 totaled $17 million and $28 million, respectively, and consisted of capital expenditures in each period. Our net cash used in financing activities in the six months ended June 30, 2012 totaled $433 million and principally consisted of optional prepayments and repayments in an aggregate principal amount of $409 million of term debt under our New Senior Secured Credit Facilities. We also paid $32 million in the six months ended June 30, 2012 to redeem ordinary shares under our Redemption Program. We did not make any optional prepayments of term debt under our New Senior Secured Credit Facilities or redeem any ordinary shares under our Redemption Program in the quarter ended June 30, 2012. Our net cash used in financing activities in the six months ended June 30, 2011 principally consisted of $3,000 million of borrowings under our New Senior Secured Credit Facilities, offset by optional prepayments and repayments in an aggregate principal amount of $3,419 million of term debt under our Prior Senior Secured Credit Facilities, optional prepayments and repayments in an aggregate principal amount of $186 million of term debt under our New Senior Secured Credit Facilities and the payment of loan costs of $51 million.
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Table of ContentsNew Senior Secured Credit Facilities On March 17, 2011, the Borrowers entered into the Credit Agreement with the Lenders and Bank of America, N.A. as administrative agent in order to refinance our Prior Senior Secured Credit Facilities. Pursuant to the Credit Agreement, the Lenders provided the New Senior Secured Credit Facilities in an aggregate amount of $3,250 million comprised of (i) $3,000 million in aggregate term loan facilities and (ii) a $250 million revolving credit facility available to all Borrowers. The term loan facilities were initially comprised of (i) a $1,250 million Term A Loan Facility (the “Term A Loan”) and (ii) a $1,750 million Term B Loan Facility consisting of an $800 million Term B-1 Loan, a $400 million Term B-2 Loan and a $550 million Term B-3 Loan (together, the “Term B Loans”). The proceeds of these term loans, together with approximately $279 million of cash on hand, were used to make an optional prepayment of $250 million in aggregate term loans under our Prior Senior Secured Credit Facilities, repay the remaining $2,969 million in aggregate term loans outstanding under the Prior Senior Secured Credit Facilities, terminate the Prior Senior Secured Credit Facilities and pay certain related fees, expenses and accrued interest. The Term A Loan matures on March 17, 2016 and bears interest at LIBOR plus 3.00%, with a LIBOR floor of 0.75%, and each of the Term B Loans matures on March 15, 2018 and bears interest at LIBOR plus 3.25%, with a LIBOR floor of 1.00%. The revolving credit facility matures on March 17, 2016 and includes a $20 million sublimit for swing line loans and a $50 million sublimit for the issuance of standby letters of credit. Any swing line loans and letters of credit would reduce the available commitment under the revolving credit facility on a dollar-for-dollar basis. Loans drawn and letters of credit issued under the revolving credit facility bear interest at LIBOR plus 3.00%. The Borrowers are also required to pay a commitment fee on the unused commitments under the revolving credit facility at a rate of 0.75% per annum, subject to a leverage-based step-down. The loans and other obligations under the New Senior Secured Credit Facilities (including in respect of hedging agreements and cash management obligations) are (i) guaranteed by Holdings III and substantially all of its subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of the Borrowers and each guarantor (subject to certain exceptions and limitations). In addition, the New Senior Secured Credit Facilities contain (i) customary provisions related to mandatory prepayment of the loans thereunder with (a) 50% of excess cash flow, as defined, subject to a leverage-based step-down and (b) the proceeds of asset sales or casualty events (subject to certain limitations, exceptions and reinvestment rights) and the incurrence of certain additional indebtedness and (ii) certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, loans and investments, acquisitions, dividends and other restricted payments, transactions with affiliates, asset dispositions, mergers and consolidations, prepayments, redemptions and repurchases of other indebtedness and other matters customarily restricted in such agreements and, in each case, subject to certain exceptions. We made optional prepayments in an aggregate principal amount of $350 million during the six months ended June 30, 2012, of term loans under our New Senior Secured Credit Facilities. As of June 30, 2012, there were letters of credit totaling $2 million outstanding. As a result, we had $248 million available under the revolving credit facility as of June 30, 2012. The New Senior Secured Credit Facilities specify certain customary events of default including, without limitation, non-payment of principal or interest, violation of covenants, breaches of representations and warranties in any material respect, cross default or cross acceleration of other material indebtedness, material judgments and liabilities, certain Employee Retirement Income Security Act events and invalidity of guarantees and security documents under the New Senior Secured Credit Facilities The fair value of our debt outstanding under our New Senior Secured Credit Facilities as of June 30, 2012 and December 31, 2011, as determined in accordance with ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) under Level 2 based upon quoted prices for similar items in active markets, was approximately $2,194 million (book value of $2,196 million) and $2,601 million (book value of $2,604 million), respectively. Prior Senior Secured Credit Facilities On October 30, 2009 in connection with the acquisition of The Procter & Gamble Company’s global branded pharmaceuticals business, Holdings III and its subsidiaries, Luxco Borrower, WCC and WCCL, entered into a credit agreement with Credit Suisse AG, Cayman Islands Branch as administrative agent and lender, and the other lenders and parties thereto, pursuant to which the lenders provided senior secured credit facilities in an aggregate amount of $3,200 million (the “Prior Senior Secured Credit Facilities”). The Prior Senior Secured Credit Facilities initially consisted of $2,600 million of term loans, a $250 million revolving credit facility and a $350 million delayed-draw term loan facility. On December 16, 2009, the Borrowers entered into an amendment pursuant to which the lenders agreed to provide additional term loans of $350 million, and the delayed-draw term loan facility was terminated. The additional term loans were used to finance, together with cash on hand, the repurchase or redemption of any and all of our then-outstanding 8.75% senior subordinated notes due 2015. On August 20, 2010, Holdings III and the Borrowers entered into a second amendment pursuant to which the lenders provided additional term loans in an aggregate principal amount of $1,500 million which, together with the proceeds from the issuance of $750 million aggregate principal amount of the 7.75% Notes, were used to fund a special cash dividend to our shareholders in the amount of $8.50 per share, or $2,144 million in the aggregate, and to pay related fees and expenses.
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Table of Contents7.75% Notes On August 20, 2010, we and certain of our subsidiaries entered into an indenture (the “Indenture”) with Wells Fargo Bank, National Association, as trustee, in connection with the issuance by WCCL and Warner Chilcott Finance LLC (together, the “Issuers”) of $750 million aggregate principal amount of 7.75% senior notes due 2018 (the “Initial 7.75% Notes”). The Initial 7.75% Notes are unsecured senior obligations of the Issuers, guaranteed on a senior basis by us and our subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The Initial 7.75% Notes will mature on September 15, 2018. Interest on the Initial 7.75% Notes is payable on March 15 and September 15 of each year, with the first payment made on March 15, 2011. On September 29, 2010, the Issuers issued an additional $500 million aggregate principal amount of 7.75% senior notes due 2018 at a premium of $10 million (the “Additional 7.75% Notes” and, together with the Initial 7.75% Notes, the “7.75% Notes”). The proceeds from the issuance of the Additional 7.75% Notes were used by us to fund our $400 million upfront payment in connection with the ENABLEX Acquisition, and for general corporate purposes. The Additional 7.75% Notes constitute a part of the same series as the Initial 7.75% Notes. The Issuers’ obligations under the Additional 7.75% Notes are guaranteed by us and by our subsidiaries that guarantee obligations under the New Senior Secured Credit Facilities, subject to certain exceptions. The $10 million premium received was added to the face value of the 7.75% Notes and is being amortized over the life of the 7.75% Notes as a reduction to reported interest expense. The Indenture contains restrictive covenants that limit, among other things, the ability of each of Holdings III, and certain of Holdings III’s subsidiaries, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock, repurchase subordinated debt and common and preferred stock, make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. The Indenture also contains customary events of default which would permit the holders of the 7.75% Notes to declare those 7.75% Notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the 7.75% Notes or other material indebtedness, the failure to satisfy covenants, and specified events of bankruptcy and insolvency. As of June 30, 2012 and December 31, 2011, the fair value of our outstanding 7.75% Notes ($1,250 million book value), as determined in accordance with ASC 820 under Level 2 based upon quoted prices for similar items in active markets, was $1,338 million and $1,278 million, respectively. Components of Indebtedness As of June 30, 2012, our outstanding debt included the following:
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Table of ContentsAs of June 30, 2012, scheduled mandatory principal repayments of long-term debt in the period from July 1, 2012 to December 31, 2012 and in each of the five years ending December 31, 2013 through 2017 and thereafter were as follows:
Our ability to make scheduled payments of principal, or to pay the interest or additional interest on, or to refinance our indebtedness, or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on the current level of operations, we believe that cash flows from the operations for each of our significant subsidiaries, available cash and short-term investments, together with borrowings available under our New Senior Secured Credit Facilities, will be adequate to meet our future liquidity needs for the next twelve months. We note that future cash flows from operating activities may be adversely impacted by the settlement of contingent liabilities and could fluctuate significantly from quarter-to-quarter based on the timing of certain working capital components and capital expenditures. In addition, our cash flows from operating activities will be significantly impacted by the total cash required for the restructuring of our Western European operations and the timing of payments for product rebates and other sales-related deductions. We continue to explore ways to enhance shareholder value. To the extent we generate excess cash flow from operations, net of cash flows from investing activities, we may make optional prepayments of our long-term debt or purchases of such debt in privately negotiated or open market transactions, return capital to our shareholders or pursue compelling strategic alternatives. As a result of the above mentioned prepayments of long-term debt, if any, we may recognize non-cash expenses for the write-off of applicable deferred loan costs which is a component of interest expense. Our assumptions with respect to future costs may not be correct, and funds available to us from the sources discussed above may not be sufficient to enable us to service our indebtedness under the New Senior Secured Credit Facilities and 7.75% Notes or to cover any shortfall in funding for any unanticipated expenses. In addition, to the extent we engage in strategic business transactions in the future such as acquisitions or joint ventures or pay a special dividend, we may require new sources of funding including additional debt, or equity financing or some combination thereof. We may not be able to secure additional sources of funding on favorable terms or at all. We also regularly evaluate our capital structure and, when we deem prudent, will take steps to reduce our cost of capital through refinancings of our existing debt, equity issuances or repricing amendments to our existing facilities.
The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are interest rates on debt and movements in exchange rates among foreign currencies. We had neither foreign currency option contracts nor any interest rate hedges as of June 30, 2012. The following risk management discussion and the estimated amounts generated from analytical techniques are forward-looking statements of market risk assuming certain market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. Interest Rate Risk We manage debt and overall financing strategies centrally using a combination of short- and long-term loans with either fixed or variable rates. Based on variable rate debt levels of $2,196 million as of June 30, 2012, a 1.0% increase in interest rates above our LIBOR floors which we are currently below, would impact net interest expense by approximately $5 million per quarter. Foreign Currency Risk A portion of our earnings and net assets are in foreign jurisdictions where transactions are denominated in currencies other than the U.S. dollar (primarily the Euro and British pound). In addition we have intercompany financing arrangements between our entities and cash on hand, certain of which may be denominated in a currency other than the entities’ functional currency. Depending on the direction of change relative to the U.S. dollar, foreign currency values can increase or decrease the reported dollar value of our net assets and impact our results of operations. Our international-based revenues, as well as our international net assets, expose our revenues and earnings to foreign currency exchange rate fluctuations.
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Table of ContentsWe may enter into hedging and other foreign exchange management arrangements to reduce the risk of foreign currency exchange rate fluctuations to the extent that cost-effective derivative financial instruments or other non-derivative financial instrument approaches are available. As of June 30, 2012, the Company had no derivative financial instruments. Derivative financial instruments are not expected to be used for speculative purposes. The intent of gains and losses on hedging transactions is to offset the respective gains and losses on the underlying exposures being hedged. Although we may decide to mitigate some of this risk with hedging and other activities, our business will remain subject to foreign exchange risk from foreign currency transaction and translation exposures that we may not be able to manage through effective hedging or the use of other financial instruments. Inflation Inflation did not have a material impact on our operations during the quarters and six months ended June 30, 2012 and 2011.
Evaluation of Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2012. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2012 at the reasonable assurance level. Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
We are involved in various legal proceedings of a nature considered normal to our business, including product liability litigation, intellectual property litigation, employment litigation, such as unfair dismissal and federal and state fair labor and minimum wage law suits, and other litigation and contingencies. The outcome of such litigation is uncertain, and we may from time to time enter into settlements to resolve such litigation that could result, among other things, in the sale of generic versions of our products prior to the expiration of our patents. We record reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable. We maintain insurance with respect to potential litigation in the normal course of our business based on our consultation with our insurance consultants and outside legal counsel, and in light of current market conditions, including cost and availability. In addition, we self-insure for certain liabilities not covered under our litigation insurance based on estimates of potential claims developed in consultation with our insurance consultants and outside legal counsel. See “Note 14” to our notes to the condensed consolidated financial statements for the quarter ended June 30, 2012 included in this Quarterly Report on Form 10-Q for a description of our significant legal proceedings.
In addition to the other information in this report on Form 10-Q, the factors discussed in “Risk Factors” in our periodic filings, including our Annual Report, should be carefully considered in evaluating the Company and its businesses. The risks and uncertainties described in our periodic reports are not the only ones facing the Company and its subsidiaries. Additional risks and uncertainties, not presently known to us or otherwise, may also impair our business operations. If any of the risks described in our periodic filings or such other risks actually occur, our business, financial condition or results of operations could be materially and adversely affected.
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Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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